Cytec Industries Earnings Call Nuggets: Umeco Weaknesses and Volume Growth in Engineered Materials
Cytec Industries (NYSE:CYT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Michael Sison – KeyBanc: In terms of the weakness you saw in Umeco is that primarily in the businesses that you are looking to – looking for strategic options, and can you sort of maybe talk about a little bit more specific where those businesses are going into?
Shane D. Fleming – Chairman, President and CEO: Yeah, I’d be happy to do that Mike. No, I think the short answer is that’s not the case. The softness that we saw relative to expectations was primarily in Europe and mostly in the, as I said, motorsport sector, so that’s Formula One and LeMons series and in the high-end automotive where we saw some orders push into 2013. So I would say, from a revenues standpoint, that’s where the biggest gap came. The business that I talked about considering strategic options for, which is the distribution business, is kind of a remnant of the supply chain business that Umeco had divested prior to the Cytec acquisition. So this is a small business, roughly $50 million self-contained and it’s effectively a distribution or resell business. We knew going into the acquisition that was a business that we would likely not want to retain.
Michael Sison – KeyBanc: Then, in terms of the integration synergy for Umeco, it sounds like everything is going fairly well. Any potential upside or can you sort of give us a feel for what’s been accomplished thus far?
Shane D. Fleming – Chairman, President and CEO: Yeah. You’re right, and Coating Resins is going well. I think we are at or above schedule in terms of delivering the cost savings pretty much across the board, so we feel good about what we’ve done to date. There are some additional cost saving opportunities I referenced a little bit in my speech, and I’m not going to be able to quantify those for you right now, but we do expect to be able to get some additional cost savings as we further the integration process. But we really want to turn our focus on that business to growth now and we’ve – despite some of the challenges we’ve talked about, we still believe there are lot of exciting growth opportunities and we don’t want to limit the ability of the business to capture that growth.
Michael Sison – KeyBanc: Last question, if you do close Coating Resins or the sale of Coating Resins toward the end of the quarter, if you think about sort of resuming the stock buyback will that be more heavily in the second and the third quarter and finish it up this year and then I guess the stranded costs reductions would probably start closer to the second quarter as well.
Shane D. Fleming – Chairman, President and CEO: Yeah, let me give you a little bit more clarity there. If you assumed end of Q1 close for Coatings, we’re saying we’ll have the buyback appreciably complete by the end of the first half of the year. So we expect to get most of that done in the 90 days following the close. As far as the reduction in stranded costs, I would say a similar sort of schedule. We’ve targeted to take out about two-thirds of that $66 million that Dave referenced earlier and we expect to have that complete within 90 to 120 days of the close. So, we should be in pretty good shape by mid-year with hitting that stranded cost.
Volume Growth in Engineered Materials
PJ Juvekar – Citi: Shane, if I look at your volume growth in Engineered Materials in the fourth quarter, it slowed down to 5% and your sales growth expectation for 2013 at 10% seems to be sort of at the low end of what you’ve talked about in the past. I think you’ve mentioned at least double-digit growth. So are you just being a little bit cautious there given some of the challenges you are seeing in some of those markets or are you seeing some of this inventory adjustments continue into 2013?
Shane D. Fleming – Chairman, President and CEO: I don’t think I would say that I any more inventory adjustment moving into ’13 and at least for the last or I would say 12 months or so I think I have been pretty consistent in talking about double-digit growth, 10% growth. So the trajectory right now for the growth going forward is pretty much what we have planned. There’s always puts and takes with some programs moving a little faster than others, but I feel – as I look forward over to 2013 right now I feel pretty much as positive and optimistic as I did 12 months ago when I looked at the business. It’s going to be a solid year for us.
PJ Juvekar – Citi: So is it fair to say that you sort of think volume growth begins to pick up as we move into 2013? Is that fair to assume?
Shane D. Fleming – Chairman, President and CEO: Yeah, there’s clearly some ramp up and as programs ramp up – now there are some new programs in here as well and I’m not going to get into a much of detail on the 787 at this point in time, but plans with that program are to increase build rates and if those rates are achieved, that’s going to pick up the volume in the second half of the year versus first half of the year. Another big question mark for us, and then we’re probably playing into a little bit conservative is what’s going on in the defense sector. There’s still some more questions about funding levels for some major programs and that could have an impact on us as well in 2013 and I think we’ve taken a reasonable position there, maybe slightly conservative position on the defense side.
PJ Juvekar – Citi: If I look at IPS margins, it took a big step down in the fourth quarter and you explained some of the puts and takes there. Can you just quantify for us the impact of the phosphine plant turnaround as well as the inventory reductions as it relates to that segment?
Shane D. Fleming – Chairman, President and CEO: I don’t know Dave, if you’ve got that much granularity.
David M. Drillock – VP and CFO: I think in terms of margin, we would have been in the low 20s had those events not occurred in the quarter.
Shane D. Fleming – Chairman, President and CEO: Maybe just to provide a little bit of context. The business end of the year at 24%, which was significantly higher than we targeted. And as I said in my comments also on record, I don’t see this business as being a 24%, 25% operating profit business. I do see this being a 22%, 23% operating profit business and that it’s going to be made up of quarters at 17% and 18% and other quarters at 24% and 25% depending on volume and other issues. So the level of lumpiness we saw in the fourth quarter not really that surprising, although we did take a pretty big hit from the phosphine’s turnaround as Dave just referenced.
PJ Juvekar – Citi: Is that turnaround complete at this point?
Shane D. Fleming – Chairman, President and CEO: Yes it is.