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Cytec Industries Inc. (NYSE:CYT)

Q1 FY08 Earnings Call

April 18, 2008, 11:00 AM ET

Executives

Jodi Allen - Director, IR

David Lilley - Chairman, President and CEO

David M. Drillock - VP and CFO

Analysts

David Begleiter - Deutsche Bank Securities

Michael Judd - Greenwich Consultants

Robert Koort - Goldman Sachs

Steve Schuman - New Vernon Associates

John McNulty - Credit Suisse First Boston

Robert Reitzes - Bear Stearns

Operator

Good day, everyone, and welcome to the Cytec Industries Inc. First Quarter Earnings announcement. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen - Director, Investor Relations

Thank you, Felicia, and good morning everyone. We appreciate your participation in our conference call. For our call today, David Lilley, Chairman, President and Chief Executive Officer, will provide an overview of operations; and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results and the special items noted in our press release. David will then finish with some commentary on our outlook for the remainder of 2008. This call is also being webcast in listen-only mode, and it will be archived in audio format on our website for three weeks.

During the course of this presentation and in responses to your questions, you will hear certain forward-looking statements. Our actual results may differ materially. Please read our commentary on forward-looking statements at the end of our news release or the statements in our quarterly and annual SEC filings.

In addition, our discussion includes certain non-GAAP financial measurements as defined under SEC rules. We have provided a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP measure at the end of our press release. A copy of our press is available on our Investor Relation's website.

With that, let me turn over the call to David.

David Lilley - Chairman, President and Chief Executive Officer

Thank you, Jodi. Good morning, everyone, and thank you for taking the time to call in for our first quarter earnings conference call. The first quarter had its fair share of challenges, while we made significant progress in many of our major initiative to improve Cytec and continue our earnings growth.

Overall for the quarter, our diluted earnings per share after excluding special item were $1.08 per share and this compared to $0.76 per share in the same period a year ago. Cytec Performance Chemicals sales were $183 million in the first quarter. This represents overall selling volume is down by 4%. Let me remind you that in 2007, we still had some agency sales of water treatment products for Kemira, but now they have taken the full ownership. This impacts the segment sales comparisons unfavorably by about 4%, but has minimal impact on earnings. Put in another way, sales of continuing product lines were up modestly.

Price and currency exchange benefited sales by 2% and 4% respectively compared to quarter one of 2007. Mining and Phosphine Chemicals have solid growth, although with a less profitable product mix. Pressure sensitive adhesive sales were essentially flat as growth in new product sales was offset by a slowdown in demand in the label sector.

We continued with our plan to discontinue marketing of thin polymer additive low-margin commodity products, and we expect their manufacturing to cease by the end of the second quarter. And this reduced segment sales by about 1%. We are pleased with the continued growth of our specialty UV light stabilizers and the improvement in profitability. Manufacturing ran well during the quarter with tight supplies of phosphorus being a challenge, which are supply staff resolved. Operating earnings were $14.2 million for the quarter, up from the $13 million, which is in the same quarter a year ago.

Cytec Surface Specialties sales were $449 million in the quarter and this compares to $405 million in Q1 of 2007. This represents the essentially flat volume and the benefits of product price increases and currency exchange of 1% and 10% respectively compared to the same period a year ago.

On the volume aspects, let me make some comments about the various product line and then talk about demand by geography. Product sales volume were below prior year levels driven by low volumes held in China and in the United States of America, partially offset by improved European sales. RADCURE volumes improved, particularly with our monomer products, although we did experience some competitive price pressure. Liquid coating resin volumes were essentially flat when you consider the impact of discontinued solvent alkyds from the closed Dijon facility.

Overall in the US, there was weaker demand than we expected with some customers reducing capacity through shift reductions. And in Europe, there was some softening in the latter part of the quarter, but Asian demand continued strongly. I will come back to these issues when we discuss our full-year expectations.

Raw material cost pressures eased a little in the quarter with methanol trending downwards, but the prices of propylene and its derivatives remained persistently high as the price of gasoline impacted propylene supply economics. Included in the reported segment results is accelerated depreciation of $1.4 million related to our RADCRE manufacturing site in the U.S. that we will exit. We'll discuss this more... later in the presentation. Finally, all the plants are running well. And for the quarter, and excluding the accelerated depreciation, operating earnings were $21.5 million, up about $6 million compared to the same quarter a year ago.

Building Block Chemicals had sales in the quarter of $141 million compared to $117 million in Q1 of 2007. Volumes were down 10%. As you will recall, we had excess sales in early 2007 due to delayed shipments from 2006. Higher selling prices increased sales by 31%, more than covering the increased cost of propylene, ammonia, sulfur and natural gas. We experienced a three-day shutdown due to maintenance issues in our sulfuric acid plant, which [inaudible] our customer base at the Fortier site, but we have now recovered. Operating earnings were $5.9 million compared to $2.6 million in the first quarter of 2007.

Cytec Engineered Materials continued along its growth trajectory with sales of $200 million, which represents a volume increase of just over 20% and price increase adding another 2% point to sales. Sales of the military and the high-performance sectors were flat as expected, while we saw a significant growth into all other sectors such as large commercial aircraft, regional business jet, rotorcraft, and also engine applications which support all these platforms. Our plants continue to successfully service this growth and deliver record output in a cost-effective way on our investments in additional production engineers and the like are accelerated to stretch capacity as we've done successfully in our prepreg and carbon fiber units. The increase in sales volumes was translated into operating earnings growth, and we achieved $44.4 million compared to $33 million in the same period a year ago.

Now, let me hand over to our Chief Financial Officer, Dave Drillock.

David M. Drillock - Vice President and Chief Financial Officer

Thank you, David, and good morning everyone. I will begin with the review of our gross margin followed by an overview of our operating expenses and some cash flow highlights.

Our gross margin, after adjusting for the special items in both the years, increased almost 2% over the prior-year period with improvements across all our segments. The improved gross margin reflects the benefit of higher selling prices, which more than covered the impact from higher raw material cost and the benefits from our operational excellence initiatives. In these uncertain times, this is the key combination for profit growth and reflects the contribution from all our employees.

Concerning our special items, we had restructuring expenses of $1.9 million, primarily related to our previously announced improvement initiatives at our Willow Island, West Virginia and Wallingford, Connecticut facilities, both of which are on track and should be completed in the next quarter or two. We also took action on another initiative to reduce cost further in Specialty Chemicals, which involved the reduction of 12 positions and a charge of $1.5 million, mostly severance related. Our special items also included a pre-tax charge of $1.4 million for accelerated depreciation in relation to our decision to exit RADCURE resins manufacturing at our leased Pampa, Texas facility and rationalize U.S. manufacturing of RADCURE products.

Most of the assets cannot be economically transferred and as a result, we are accelerating depreciation to bring those assets to zero for the remaining production period, which we expect to be the end of this year. While we expect to see benefits from this manufacture and rationalization in future years, the impact of the additional depreciation expense for the full-year 2008 is expected to be $5.6 million.

After adjusting for special items, operating expenses are up about 14% year-on-year and as a percent of sales are flat. Unfavorable exchange rate changes account for 8% of the increase in operating expenses, but the remainder of the increase was primarily due to increased spending in our growth businesses for selling and research and development efforts.

Interest expense was down to the lower debt balances and our outstanding debt balance was $800 million. At mid-March, we paid down $100 million of outstanding debt, which carried an interest rate of 6.75%. Half was paid from existing cash and the remainder utilizing our revolver.

Our income tax provision for the quarter was 31% of our net before tax earnings versus 29.75% in the first quarter of 2007, with the increase primarily due to an earnings mix towards higher tax jurisdictions and the expiration of the U.S. R&D tax credit effective December 31st, 2007.

Moving on to cash flow for the quarter, cash flow from operations was $38 million, up from the prior year's $24 million. Our trade accounts receivable dollars increased due to higher selling prices in volumes, but days declined slightly to 58. Our inventory days are down slightly, but the dollars increased primarily due to the higher raw material cost. Accrued expenses show a use of cash. This was principally due to our payments for incentive compensation and profit growth sharing, which is typical for our first quarter.

Capital spending for the quarter was $27 million, up from $15 million in the first quarter of 2007. Our expectation for the full year remains at $180 million to $200 million. Like I said last quarter, in 2008 we will be significantly ramping up capital spending. We will continue to fund safety and environmental projects to further improve the performance of all our plants, and we are investing in new capacity to support our growth businesses.

In Engineered Materials, we approved the full project for the new carbon fiber line at our existing location in Greenville, South Carolina and our prepreg plant in China. Specialty Chemicals will be completing the capacity expansions for our RADCURE products in China and waterborne resins in the U.S. Due to the strong demand for the waterborne products, we have approved construction for a Phase II capacity expansion at the Connecticut site. David will talk more about these in a few moments.

During the quarter, we had repurchased 100,000 shares of our common stock for $5.4 million and have $86 million left on our current authorization. One should expect us to be in the mark [ph] with share repurchases for the remainder of the year with the modest goal of keeping our diluted share count flat to declining slightly.

We had a good start to 2008, but we are mindful of the uncertainties in the global economy. While 2008 has its share of uncertainties and challenges, we have a great team of people at Cytec, a strong balance sheet, and we continue to have a good long-term outlook for most of our markets.

With that, let me turn over the discussion to David.

David Lilley - Chairman, President and Chief Executive Officer

Thanks, Dave. Now, let me spend a few moments talking about the business conditions impacting the various segments for the balance of the year on the various initiatives we are working on to improve Cytec and enhance shareholder value.

For Building Block Chemicals, we must continue to focus on operational excellence in terms of safety and environmental performance and operating the Fortier plant at high levels of reliability, so we can meet the continuing demand for our products. We continue to expect snug [ph] supply and demand in the acrylonitrile market for the balance of the year. And we've raised our melamine price in April to ensure we get value for this product.

I'll remind you that we have started a 24-day maintenance turnaround of our acrylonitrile plant. As a consequence, we expect to be just over a break-even situation in operating earnings for the second quarter, but we continue to have strong expectations for the full year.

For Cytec Performance Chemicals, we would expect continuing the strong performance and profitable sales growth from mining chemicals, enhanced earnings contribution from polymer additives given the focus on differentiated products, and the benefits from the Willow Island restructuring. Pressure sensitive adhesives is impacted by slowing economic demand. We are trying to offset this through sales of new products. Raw material costs continue to trend upward. So we have to be agile in getting price increases to effectively offset that.

For Surface Specialties, we’ve based our expectations for the full year on the assumptions that the demand for our coating chemical customers in the United States will get no worse or better, but growth in Europe would slow down, but then Asia driven by China will continue to have strong growth. As I mentioned earlier, the USA demand has weakened further and this poses a risk to our plan, as well a further slowdown in Europe.

On the raw materials side, it really is unclear whether or not we will see some reduction in raw material costs for the balance of the year as some commentators predict. We remain alert and agile to changes in the markets for our raw materials, but still expect that we can maintain our variable margins. We continue to promote our higher margin products and we have made good progress on increasing capacity. The [inaudible] project in Shanghai is mechanically complete and commissioning will shortly start with sales and earnings benefit in the second half.

The first phase of waterborne investment in the US is a stage where chemical commissioning is complete and we are carrying out product qualifications with our customers. We have approved the second phase investment for about $12 million, which will manufacture waterborne alkyd products for the gloss trim market, with sales expected in 2009. We have had good reaction from our customers to these products and expect to build on this excellent base.

Our product rationalization and asset optimization efforts continue across all product lines in Surface Specialties, but with a heavy focus on solvent-borne systems. However, for RADCURE manufacturing in the United States, there is an opportunity to optimize production now that Celanese have sold their Pampa site on which we manufacture RADCURE monomers. We have decided in conjunction with the new owner to leave the site, and we will take a charge in the form of accelerated depreciation to write off all the assets by the end of this year. We have to complete a full review of all alternatives as we seek to rationalize U.S. RADCURE production, or we will maintain product continuity for our customers. So we continue with our comprehensive program to improve the earnings performance of the Surface Specialties segment despite the present difficult market conditions.

For Cytec Engineered Materials, we have different challenges such as meeting the growth and demand from our customers in the short, medium, and long-term. As I mentioned previously, we are bringing onboard engineering talent in our plant to enhance our operational excellence initiatives to increase capacity through lean manufacturing techniques and added capital investments. We have now received Board approval for the expansion of carbon fiber capacity at Greenville, South Carolina. The approved initial phase will utilize existing technology to manufacture existing carbon fiber grades and we are considering a further second phase, which will produce both existing grades and those presently under development. The first phase of investment will be a range of $220 million to $250 million, including new independent precursor, oxidation and carbonization line and some infrastructure to support the second phase. We expect to complete the first phase in 2010, so that we can support our growth with our customers.

We're also looking hard at prepreg capacity, so that we can meet our rate [inaudible] commitments, and we've probably [ph] made capital investments in 2009. Good progress has been made on the increase in adhesive capacity in Maryland and we have just completed the piling and frac preparation for the prepreg investment in Shanghai, which is expected to come on stream in late 2009. The only disappointment is the delay in the Boeing 787 program, well, this will have limited impact on our 2008 expectations.

Dave has covered all the financial topics such as reduced interest expense and the likely effective tax rate. And the net result of all of [ph] is that we are reaffirming our prior guidance that fully diluted earnings per share after special items for 2008 are expected to be in a range of $4.15 to $4.35.

The Surface Specialties segment is under pressure from weaker demand, but we expect to present that any potential adverse earnings impact will be offset by stronger performance from our other segments. We certainly live and work in challenging and volatile times, and I trust that you appreciate that the Cytec team remains committed and dedicated to enhancing shareholder value, but all of us [inaudible] innovation and new initiatives to improve our performance.

Now, let me hand you back to our moderator, Felicia, so that we can respond to any questions you may have.

Question and Answer

Operator

Thank you. [Operator Instructions]. We'll go to David Begleiter of Deutsche Bank.

David Begleiter - Deutsche Bank Securities

Good morning, David.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, Dave.

David Begleiter - Deutsche Bank Securities

On Engineered Materials, the $45 million of operating profit, can you talk about the sustainability of that number going forward versus a high watermark for the year, anything unusual in the quarter that boosted profitability?

David Lilley - Chairman, President and Chief Executive Officer

Certainly, the [inaudible] going forward are really more difficult to achieve, Dave, and I think what we described this quarter was we certainly had strong demand, as I indicated in our prepared remarks, from the commercial area. We saw also a couple of new programs kick in, which we got benefit from. And also, our operational excellence initiatives really paid off. Some good work here actually reduced our backlogs a little bit. So we got some sales in a sense that were go-forward. So I think the manufacturing team deserves some great accolades for that performance. So if we look at the top line I think, Dave, which drives the earnings to the bottom, I think at the 20% plus level, that is not sustainable going forward because we'll see some difficult comparisons going... moving along the year. And therefore, we'll see that then cascade down to the bottom, offset to a minor degree as well by some investments in terms of more R&D personnel to fuel the medium to long-term program.

David Begleiter - Deutsche Bank Securities

And given the strong Q1 performance, would you expect that that 10% bogie for profit growth in '08 is now too low in this segment?

David Lilley - Chairman, President and Chief Executive Officer

The issue to… really, David, is demand that impacts Surface Specialties. The risk to our plan remains economic factors. So as we said in our prepared remarks, the U.S. is worse than we expected and we're seeing some concerning signs in Europe. So for example, there is construction woes in the U.K., Spain and Italy, which impacts our business. On the positive side though, liquid coatings are going well for industrial applications in Europe. So maybe we saw 3% growth last year from demand, now it's 2%, the numbers. So I think at this early stage of the year, David, it's too soon the call. All I’m pointing out to you is there is a risk on the downside on Surface Specialties, maybe we’ve got some upsides probably in CEM and possibly Building Block.

David Begleiter - Deutsche Bank Securities

And just lastly, on Surface Specialties, how much of the operating profit gain was from FX?

David Lilley - Chairman, President and Chief Executive Officer

Marginal, I would say maybe $1 million.

David Begleiter - Deutsche Bank Securities

Thank you very much.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We will go next to Mike Judd of Greenwich Consultants.

Michael Judd - Greenwich Consultants

Yes. Thanks for taking my question. On Surface Specialties, if I look at the year-over-year volume performance or volume/mix, the last... this quarter was basically flat year-over-year, but the last four quarters, it was roughly down 3% year-over-year. So that actually looks to be a little bit of an improvement. I see that a lot of the revenue growth was due to foreign exchange. I just wonder if you could provide a little bit more detail on your outlook for volumes in that business as well as pricing, please.

David Lilley - Chairman, President and Chief Executive Officer

Sure. I think you may recollect that last year we decided we really have to get value for our products. So the big issue for us was getting our prices up. And in so doing, we knew we are going to sacrifice some volume because we would be punished by our customers and some competitors might take advantage of that situation. So, I think that was to be expected last year. So now when we look at, as you say, flat volumes for the first quarter, that's just showing, as we indicated previously, slow demand in the United States, aggressive positive demand in Asia, and modest 2% or 3% type demand in Europe. And as I said to David Begleiter on the previous question, we hope that level of demand will be sustained for the balance of the year, but clearly there are risks to that.

Michael Judd - Greenwich Consultants

Okay. And then with Engineering Materials, I understand the sales and obviously you've got the new programs and things like that, but the sales in that business can be somewhat lumpy on a quarterly basis. As we think about the June quarter in particular, is it possible to think that maybe some revenues fell into the first quarter that might have fallen into the second quarter last year, or is it really just the new programs? Can you provide a little bit of an update in terms of how seasonality or any other types of factors might impact that business other than new businesses or campaigns?

David Lilley - Chairman, President and Chief Executive Officer

Right. There is really no seasonality in this business anymore because what we are dealing with is a growth scenario for our major designers for aircraft and their subprime contractors. What we are seeing though, of course, is various stages of programs. They want to build a high number in the initial stage. So, for example one of the programs was linked to the 747-8, which helped us in the first quarter. But we have a good perspective on our order books and our expectations for deliveries in the second quarter, three months out. So, I think… our previous response was, okay, we probably won't be hitting these high numbers in terms of growth in the second quarter, but we will have sustained growth over this year and we believe we are going to sustain that in the medium-term, '09 and '10.

Michael Judd - Greenwich Consultants

Okay, so if I look at again the other 20% year-over-year volume performance, last year in the March quarter or first quarter the volumes were up on a year-over-year basis by 15%. So… I mean that's terrific, but then if you got into the June, September and December quarters, the year-over-year volume performance was around 7%, 5% and 9%. Are you basically just sort of indicating that that type of patent is a more reasonable one?

David Lilley - Chairman, President and Chief Executive Officer

Yes, but there is always some exceptions. So I can't give you a standard formula. As you said, there are some new programs, there are some things like that happening. But what we saw last year sequentially was relatively flat volume for the first three quarter. We think that will probably be the top of our mark this year.

Michael Judd - Greenwich Consultants

Thanks for the help.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll go next to Robert Koort of Goldman Sachs.

Robert Koort - Goldman Sachs

Thanks. Good morning, David.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, Bob.

Robert Koort - Goldman Sachs

Couple of quick questions. One, on Surface Specialties, I guess you are going to start encountering greater resistance or bigger challenge to raise prices as demand weakens. So can you just give us some sort of sense on how price increases would look from here and how that margin march to the hopefully Promised Land of 10% some day would progress?

David Lilley - Chairman, President and Chief Executive Officer

I think what we see at the moment for the year is that prices should cover raw materials. That is our basic assumption and our people have done an excellent job in executing to that plan. There is some view as we said in our prior remarks that raws might decline down and we are going to hang on our value products... our differentiated products to the price that we have got now because we have demonstrated real value to our customers. While there may be some competitive pressures on things like... more commodity like products like monomers and RADCURE, we saw that pressure even in the first quarter of this year. So I think it's the prediction we have at the moment, Bob, is that… is it is relatively flat in terms of raws and prices for the balance of the year. But as I have said previously, we've got to be really vigilant to make sure nothing surprises us here.

Robert Koort - Goldman Sachs

And then, I think you mentioned you were able to source some phosphorus effectively that would seem to have a magical touch in this market. So can you talk a little bit about where you went through and why, given what we're seeing in some of the ag markets that won't continue to be a big challenge?

David Lilley - Chairman, President and Chief Executive Officer

Well, I think it was easy and again I would complement our supply chains folks in working long and diligently to get that sorted out. What really... the surprising factor that happened, first of all Chinese supply dried up because the government truncated electricity supplies to those units. Then as you’ve hinted that in your question, the high demand for phosphates or fertilizer made it worth a while to take elemental phosphorus and burn it to make acid. But I think our supplies appreciate that when the glory days for fertilizer passes, they will basically need to have good relationships with a solid procurer of phosphorus like ourselves. So I think we've got back in that situation now, albeit, we’re paying a very high price now… market price for phosphorus.

Robert Koort - Goldman Sachs

Terrific. Thanks, David.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We’ll go to Steve Schuman of New Vernon Associates.

Steve Schuman - New Vernon Associates

Good morning, guys.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, Steve.

Steve Schuman - New Vernon Associates

Looking at Engineered Materials, your carbon fiber has got a huge growth potential obviously first in aerospace. And while the first few projects are obviously taking a little longer than expected, it's pretty typical for new efforts, but really, all new aircrafts is going to be carbon fiber at some point. Then you have got wind turbines, which I know you are not in right now. Is there a point where you decide that you want to be considerably larger in this business than you are right now? So my question I guess is, how much time you are spending maybe rationalizing some of the other businesses to get bigger in this area?

David Lilley - Chairman, President and Chief Executive Officer

Well, I think we want to be considerably larger anyway. So if you look at our indications, well, we are looking for above 10% sales growth here. The question is, when do we get to be a $1 billion segment, and that's what our management are driving towards. So, Dave and I and [inaudible] and looked at our strategy for aerospace and Engineered Materials and the high level of excitement of a lot of people was easily transmitted to us because we need an opportunity of rich environment. Unfortunately although, we are drawing a bright line on our project list, a lot of which we can't work on because we haven't got the staff, hence our recruitment for R&D scientists and engineers. So we see a tremendous opportunity in the aerospace segment we participate today, and we must not be distracted from that high margin business by the low margins that typically an automotive application would give. Having said that, clearly from a strategic level, our corporate and business development folks are making sure doing proper market research that we don't pass on any opportunities outside of aerospace, and then to your point we could perhaps find other resources to dedicate to that activity, but we’ve got no solid plans in place at present.

Steve Schuman - New Vernon Associates

I mean, you would have more manpower, et cetera, if you would sort of defocus on some of the other areas, whether it be Building Block Chemicals or certain product lines within Surface Specialties, you can move people over, is there any interest in doing that?

David Lilley - Chairman, President and Chief Executive Officer

Well, clearly no. We have a corporate talent resource plan where we do move people across, but we have to think about skill set. So, obviously we are looking, for example, material scientists for Engineered Materials, and yes, we can bring some chemists in and some engineers in and then we can train them up. But we need a balance of skill sets there. So it is not easy just to translate a guy who is really, really effective at one end at chemistry… organic chemistry, and translate them to materials. [inaudible], but your question as it relates to the portfolio is incredibly important and we as an organization are looking how do we maximize, how do we improve return on invested capital, so where do we put our resources.

So, we do frankly discriminate between cash businesses and growth businesses. And we have put in our money, Cytec money, shareholder money, where it’s going to make the maximum effort, maximum impacts on [inaudible] Engineered Materials and places like that such as waterborne and RADCURE technologies in Surface Specialties. So I think I have obviously answered your question, but I would emphasize above all, we again remain very agile as we look at our portfolio, so we can continue earnings per share growth and get to good levels of return on invested capital.

Steve Schuman - New Vernon Associates

All right, thank you.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We will go next to John McNulty of Credit Suisse.

John McNulty - Credit Suisse First Boston

Yes. Good morning, guys.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, John.

John McNulty - Credit Suisse First Boston

Just a few quick questions, in the Performance materials business, the margins dipped down to…. well… or year-over-year they were up, but they were certainly a little bit below your 10% target. Is that still a reasonable target at this point? Is it just a lumpiness of kind order patterns and mix or should we be thinking that the economy is putting maybe more pressure on that business than you have thought originally?

David Lilley - Chairman, President and Chief Executive Officer

There’s a very reasonable assumption to believe that we're going to hit our expectations for full year. We had both a product mix, which impacted our profitability in the quarter, and also some delivery scheduling issues with our customers.

John McNulty - Credit Suisse First Boston

Okay, great. And then, in the Engineered Materials business, I know it’s a little bit difficult to tell, but do you have a rough idea of how many planes you were delivering for… of the 787 or… for the 787 platform in the quarter?

David Lilley - Chairman, President and Chief Executive Officer

No, I have no idea at this present time, so… because we're delivering parts, which are doing some trail work, demonstrators as well as planes, which we will fly. So I don't know and I don't think our business knows because some will be tested through destruction so to speak.

John McNulty - Credit Suisse First Boston

Okay. I mean do you have a rough idea, because of this slowdown how much you might see in terms of deliveries or revenues coming down in that business relative to the first quarter levels tied to the 787 delays? I mean I would imagine that's got to be at a trickle right now in terms of deliveries for you.

David Lilley - Chairman, President and Chief Executive Officer

[inaudible] immaterial, John, to the overall CEM results, and I really don't give any sort of... I can't give any information really on 787 deliveries or expectations there. I’ve got to really refer you to Boeing.

John McNulty - Credit Suisse First Boston

Okay, that's certainly fair enough. On the closing of the RADCURE plant the in U.S, where it should be… this year it's going to cost you a bit, but in the future it's going to help out, can you give us a rough idea in terms of what we might be able to think about in terms of margin improvement with that business down? Does it moved the needle at all towards your kind of 10% target in Surface Specialties or is it more of a rounding err [ph]?

David Lilley - Chairman, President and Chief Executive Officer

I think it moves the needle, [inaudible] won't be bothering to do it. But it doesn't move the needle a large amount. So I think what we've described is relating all these symbols you have in terms of productivity, rationalization. So, there is not one single event or activity or project, which drives that improvement, but I think you need a step in the right direction. And we've not as yet landed on how we're best going to deal with this. We've got some alternative and we're going to come to a rapid decision this quarter on what to do.

John McNulty - Credit Suisse First Boston

Okay. Two... just two last questions. With regard to the new waterborne resin line that you're ramping up in the U.S, at a time when right now it looks like the economy is clearly softening and you highlighted concerns on that before, in terms of the utilization that you're going to see in that facility right off the bat are you close to full utilization when you're ramped up? Is there... is this going to be an asset that that really runs at kind of half staff for a while? How should we think about the ramp-up in that business and the cost… or is it cost saves that you may get from it?

David Lilley - Chairman, President and Chief Executive Officer

Well, it’s not a ramp-up per se, John, because remember, we were supplying the U.S. market from Austria, and we did this project because of our customers' requirements to have a shorter supply chain. And also it made significant savings in freight and also duties. So, we believe this first phase will be running flat out by the end of the year.

John McNulty - Credit Suisse First Boston

Okay, great. And then just the last question. You had highlighted earlier that you're putting all your money toward these better growth, better return opportunities in terms of all the cash that you're generating right now. Are there some assets out there, whether it’s plastic additives, pressure sensitive, what have you, that may make sense as a source of funds at some point just because the growth opportunities in other areas are that much better? Have you looked at that and can you give us an update on it if you have?

David Lilley - Chairman, President and Chief Executive Officer

Well, I think what we’ve at when we looked to the portfolio and we really believe at the present time we've got the portfolio we want to keep, but we have to keep making sure that we perform well and we have to watch the competitive marketplace as consolidations take place so we're not disadvantaged. So, we feel very good about the pressure sensitive adhesives' performance over the last two years. They have got a great strategic plan in place to grow the business to the new technology. I think on life stabilizers, obviously we are getting improvements this year from rationalization. So the challenge there is how fast we develop new products for the future. So maybe in two, three years time, we will be looking for even more growth from new molecules coming into that marketplace and if not then we would have to look at alternatives, but we have got nothing on the blocks at the present time.

John McNulty - Credit Suisse First Boston

Great. Thanks a lot for taking my question.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We will go next to Lucy Watson [ph] of Jefferies.

Unidentified Analyst - Jefferies & Co.

Hi, I just had a question on raw materials. I am wondering if you think this pressure will peak in the first half of this year or when you see, I guess it's trending downward?

David Lilley - Chairman, President and Chief Executive Officer

That's a great question, and I wish I knew with a high degree of probability the answer. Our expectation at moment is that we're going to see a gradual drift of, let's say, propylene and propylene derivatives coming down with, yes. So… but not a very a big assumption, and we've got to watch that carefully. And that’s our biggest area to be observant [ph] all. What's going to happen on oil will take to some degree propylene, but I think what we've seen over the last 12 months is predictability is although impossible. So, I am giving you the latest estimates and telling you that we’ll walk through the work very, very closely.

Unidentified Analyst - Jefferies & Co.

Okay, thanks. And on Engineered Materials, I'm just wondering, was the margin improvement this quarter partly due to timing of qualification process?

David Lilley - Chairman, President and Chief Executive Officer

No, it's also due to the volume. It's all topline driven.

Unidentified Analyst - Jefferies & Co.

Thank you.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. We will go to Robert Reitzes of Bear Stearns.

Robert Reitzes - Bear Stearns

Yes, hi.

David Lilley - Chairman, President and Chief Executive Officer

Hi, Bob.

Robert Reitzes - Bear Stearns

I unfortunately came on a little bit late. So, you may have answered this question, you may not have, but let me ask it anyway. Regarding the carbon fiber, or in the composite business, do you guys see that business improving throughout the rest of the year from the current levels or was it lumpy? I just… again I apologize, you’ve probably been… answered that. But I’m just… just get the feeling how you see that business unfolding the rest of the year and maybe next year?

David Lilley - Chairman, President and Chief Executive Officer

Yes, I think [inaudible], Bob, were about 10% volume growth over the year. So clearly, with a 20% plus growth in the first quarter, we are expecting something of lower sales, should we say, sequentially going forward. But what we are seeing of course is tremendous growth in demand from more unit deliveries of planes. Those planes are containing more carbon composites. And of course, the planes under design for the fusion of the 787 are going to [inaudible] in higher levels. So, I think it's all positive news [inaudible] great start.

Robert Reitzes - Bear Stearns

Right.

David Lilley - Chairman, President and Chief Executive Officer

In the first quarter.

Robert Reitzes - Bear Stearns

Would you expect next year to be… again we're not even finished with this year, but would expect next year, just say if I was someone doing a model, up 10% volume-wise next year as a starting place, is that… from this year is that reasonable?

David Lilley - Chairman, President and Chief Executive Officer

Yes. I think with all puts… all the puts and takes, what we’ve indicated really is or [ph] likely or not on average the next five years, 15% EBIT growth is well within our [inaudible] on an annualized basis.

Robert Reitzes - Bear Stearns

Okay, I appreciate that. Thank you.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll go next to John McNulty of Credit Suisse.

John McNulty - Credit Suisse First Boston

Yes sorry, one last follow-up. With regard to some of the platform demand that you saw in the Engineered Materials business, has the A380 ramp-up started to come through again? Can you just give us an update on that program?

David Lilley - Chairman, President and Chief Executive Officer

Not really yet, John. We are not seeing any great impact there. And unfortunately, we're not a great provider of large volumes of that program any way. So no, it's too soon to call that one.

John McNulty - Credit Suisse First Boston

Okay, great. Thanks for the update.

Operator

At this time, there are no further questions in the queue. I will turn the conference back to Ms. Allen for any additional remarks.

Jodi Allen - Director, Investor Relations

Thank you all for your participation in today's conference call. And if you do have further questions, you can call me directly at 973-357-3283. Thank you very much, and have a nice weekend.

Operator

That concludes today's conference call. We thank you for your participation.

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Source: Cytec Industries, Inc. Q1 2008 Earnings Call Transcript

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