Q2 2013 Earnings Call Transcript
Transcript Call Date 07/19/2013

Operator: Good day and welcome to the Cytec Industries' 2013 Second Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen - IR: Thank you, Janelle, and good morning, everyone. We appreciate your participation in our conference call. For our call today, Shane Fleming, Chairman, President and Chief Executive Officer will provide an overview of continuing operations; and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results and special items. Shane will then finish with some commentary on our outlook for 2013.

This call is being webcast in listen-only mode, and it will be archived in audio format on our website for three weeks. Throughout the call, we will be referencing the supporting materials, which can be downloaded from our Investor Relations website under Calendar of Events, or you may follow the slides accompanying the webcast today which are also available through our website.

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 in slide number two of our supporting materials or 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 release is available on our website.

Please note that all earnings and forecasted earnings for all periods have been adjusted to include the favorable impact of the change in pension and other post-retirement benefit accounting. We realized we've made a number of changes this quarter, and to assist you we have included a transition schedule to walk you through the changes in our guidance as part of our quarterly schedules on our website. It is on Slide 12 and 13.

Now, let me turn over the call to Shane.

Shane D. Fleming - Chairman, President and CEO: Thanks Jodi, and good morning everyone. I appreciate you joining on the second quarter call.

Beginning with Slide 3 in our supporting materials let me start by saying that I am extremely pleased with our results in the second quarter with the growth platforms delivering strong sales and earnings performance. Revenues in the quarter were $514 million versus $404 million in the prior year quarter. Sales growth was led by Aerospace Materials and In Process Separation which delivered solid result versus the tough comparison period.

Operating earnings for the quarter were $62.6 million, demonstrating significant growth versus $38.1 million in the second quarter 2012. This equates to $1.51 per diluted share, 86% increase over the prior year period EPS of $0.81.

The Aerospace Materials segment delivered sales of $250 million, 15% increase versus the prior year period with 4% coming from volume growth, 3% due to selling price increases and 8% due to acquisition related volumes. The volume growth was mainly driven by higher build rates in the large commercial transport sector as the 787 program continue this ramp up. We also showed some modest growth in single aisle programs. Growth in large commercial transport was slightly offset by some destocking in the military sector. Operating earnings in the quarter were $54.6 million, up 35% versus the prior year quarter. Excluding the acquisition volumes, earnings were up over 30% versus the prior year period.

The Industrial Materials segment delivered sales of $85 million in the quarter, which includes $12 million related to the distribution business that has now been sold. We continue to see softer demand across the high-performance automotive and motorsports markets our largest sectors in the Structural Materials product line. In addition, we experienced weaker demand in the wind energy market in Americas which further pressured our topline performance. The segment delivered 5 million in operating earnings for the quarter, which is close to double the first quarter performance. This is a result of selling price increases and favorable product mix. Despite low volumes due to the weak European demand, the business is successfully sustaining good contribution margin, which will support profitable growth, when the economy improves and volumes return in our core industrial markets.

The In Process Separation business performed well, delivering sales of $106 million in the quarter, a 6% increase versus Q2 2012. Strong demand in our metal extracting and mineral processing product lines was a primary growth driver as we achieved healthy volume from existing copper and base metal customers and a small fill order in Europe. The growth is supported by a modest increase in alumina sales.

I'm sure many of you read about shutdowns and production curtailments at the Freeport Indonesia and Kennecott Utah Copper operations due to mine (caving) problems. These are two of our key customers and the resulting full-year loss revenue is expected to be $45 million with the majority of the impact in the second quarter, but some continuing into the second half of the year.

The strong volumes in mining were slightly offset by softer phosphine sales, where we're experiencing a slowdown in the fumigation market in North America as a result of weather conditions impacting the grain harvest. We're also aware of some inventory destocking in Asia related to electronics market, which further reduced phosphine sales. We believe the impact of both of these issues will be short-term as the underlying demand for these products, technologies continues to grow.

Operating earnings in the quarter were $28.4 million, up slightly versus the strong second quarter performance last year, due primarily to the increased mining volumes. Additive Technologies performed well in a challenging market environment, delivering sales of $73 million, slightly below last year second quarter. We executed a plan product rationalization with the specialty additives product line, which is the primary reason for the sales decline. Sales in the second quarter were up 6% sequentially from the first quarter this year due to volume growth and polymer additives were re-benefitted from a rebound in agricultural film market in Europe and general demand improvement in the U.S. markets.

The business continues to consistently deliver solid margins with operating earnings of $12.2 million driven by higher volumes in value added polymer additives products leading to favorable mix in the segment.

Now let me turn the call over to Dave who will review the financial results in the quarter.

David M. Drillock - VP and CFO: Thank you, Shane, and good morning, everyone. As Jodi mentioned earlier, our prior year results have been restated for the change in pension and other postretirement benefit accounting and also mark-to-market adjustments are treated as a special item. Also a summary of the financial commentary is shown on Slide 8 through 11 in the supporting materials available on our website.

First, let me review the major special items for the quarter. Included in corporate and unallocated, in manufacturing cost of sales, is a pre-tax charge of $2.9 million related to an asset write-off at our manufacturing facility in India. After a full engineering review, we determined certain assets could not be our standards. We expect to invest up to $20 million to upgrade the facility and improve safety and environmental standards and expect the project to be completed by mid-year 2014. This site, when operational, will improve the supply chain for a mining chemical customers in that part of the world and reduce our cost too.

Our total cash cost are slightly higher than our original estimate when we purchased the property as we did anticipate capital upgrades would be necessary. It has however taken us longer than we would have liked to complete our engineering review and to ultimately get the plant operational, but we feel we have a solid path forward to improve this important manufacturing site.

Thanks to our existing facilities for funding the incremental volumes, so we can ensure supply to our customers as a business continues to grow.

Also in corporate and unallocated, manufacturing process sales, is a pretax net benefit of $8.2 million from a mark-to-market adjustment related to re-measurement of our pension and other post-retirement benefit plan. This is related to our U.S. plans which did not go with the sale of coatings.

The reduction the plan population triggered every measurement in the quarter and our no accounting and claims that have gained losses from mark-to-market re-measurements in corporate and unallocated.

Included in other expenses, a pretax charge of $3.2 million related to the shutdown of our process materials joint venture in China, which is acquired as part of the 2012 Umeco acquisition. The joint venture produced vacuum bagging materials for wind energy market. The venture is generating operating losses and our annual share was approximately $600,000. After review of the market and operations, it was decided by both partners to shut down the venture.

Also included in other expenses, a pretax charge of $2.2 million most all related to an increase in environmental liability and an inactive international site due to revisions to existing local policies which resulted in more studies and additions to our remediation cost estimates.

In discontinued operations, we recorded an after-tax loss on a sale of the coating resins business of $15.5 million. Remember that the sale was completed on April 3 for a total value of $1.1 billion. This is exclusive of any final working capital adjustment. Also reflected in discontinued operations is a loss of $12.5 million after-tax on the sale of the distribution business acquired as part of the 2012 Umeco acquisition. This business had revenues of $24 million in the first six months of 2013 and was barely profitable. It was not strategic to our growth platform and hence our decision to sell it and not let it be distraction to the Industrial Materials business. The cash received in July was $8.6 million.

Now let me move on to our results for continuing operations. As a reminder, all amounts I discuss will exclude special items unless specifically mentioned otherwise. Our gross margin percentage of 35% is 1% higher compared with the prior year period and I'll highlight the major items impacting the consolidated gross margin. We had higher selling volumes and prices in Aerospace Materials that more than offset the higher manufacturing and operating expenses. This improved its gross margin percentage a bit more than 2 percentage points versus the prior year quarter. This net favorable impact was partially offset by the In Process Separation segment. The segment has a benefit of higher selling volumes and a favorable mix within the mining chemicals product lines, while it is more than offset by the lower selling volumes in phosphine chemicals, higher raw material costs and higher plant operating cost. As a result its gross margin percentage was about 1.5 percentage points lower compared with the prior year period.

We continue to see the benefits of increasing cost leverage from the higher sales. Our total operating expenses are down by more than 1.5 percentage points as a percent of sales as commercial, R&D and administrative costs are all down as a percent of sales. This is mainly driven by the lower stranded cost from coating resins versus the prior year quarter as a result of actions taken during the last 12 months.

Let me remind you that with the sale of coating resins completed on April 3rd, we are no longer reporting stranded cost separately in corporate unallocated as we are now allocating these costs to our operating segment as is our normal business practice.

While we are on to subject of stranded cost, let me provide an update. We had essentially successfully achieved our original goal of reducing two thirds of total stranded cost totaling 45 million within a quarter after coating sales. However, our original target for stranded cost reduction has now been impacted by the early termination of certain transition services provided to the divested coatings business. The impact in our guidance for 2013 is approximately $9 million pre-tax and 2014 annualized is $13.5 million. While it will be difficult to make a meaningful impact to 2013 amount, plans were already in place to reduce the 2014 impact by approximately 60% and we're in the process of reviewing all areas of the Company to find offsets for the remaining amount. We are confident we can offset the remainder for 2014.

As for the total 2013 corporate and unallocated it is now expected to be about $34 million for the year, which include the $10 million benefit related to the change in pension and other post-retirement benefit accounting.

Overall, it is up about $2 million most all due to higher spinning on the design phase of our recently launched single ERP project. We believe the higher upfront investing in the design phase will benefit the implementation timing of the project. We expect it will be significant savings from the (indiscernible) Europe implementation and the sooner we implement, the faster we will see those savings.

Interest expense net is down about $3.5 million, mostly due to higher capitalized interest in our major capital projects and lower interest expense in our public data as a result of our refinancing in March of this year.

Our net interest expense is expected to be about $17 million this year, which is slightly higher from our previous guidance due to our updated capitalized interest analysis. As for the cash flows, as it was in the case of prior quarters we will need some additional time to prepare the statement of cash flows reflecting the Coating Resins segment as a discontinued operation. The statement of cash flows will be available in our quarterly 10-Q filing, which is expected to be filed on or about August 2, 2013.

Our net working capital days at the end of the quarter were up 3 to 83 days compared to the end of the first quarter of 2013. At quarter-end, inventory and accounts receivable days of 81 and 49 days were down 1 and 2 days respectively. Offsetting those improvements were account stable days, which were down 6, compared to the first quarter of 2013. But the majority of this change is due to timing of purchases and our efforts to improve inventory level.

Our capital spending for the second quarter was $78 million, approximately 32% of the spending is related to our In Process Separation segment, about 53% related to Aerospace Materials. A 5 percentage split between Industrial Materials and additives technologies, which is just typical maintenance of business capital spending and the remainder is mostly related to our single ERP project.

Our outlook for 2013 full year capital spending remains at $300 million, with about 80% to 85% of the spending related to those recently announced investments in Aerospace Materials and the In Process Separation segment. During the quarter, we repurchased 552 million or 7.6 million shares of our stock. This includes the 1.2 million shares we repurchased from our U.S. pension plans on April 29.

Our total share repurchase in the first half of 2013 is approximately 642 million or 8,777,000 shares. We have 108 million left in our current authorization and we expect to complete this program by the end of August through open market purchases with timing depending on market conditions and other corporate considerations.

I'm also pleased to note that we made the 65 million contribution to U.S. pension funds in early May, resulting in an essentially 100% fully funded U.S. pension plan status. In addition, to all I've discussed, we manage to squeeze in an amendment and restatement of our existing five-year credit agreement on June 28. We extended the revolver two years to June 20, 2018 with improved terms; two important ones being a lower borrowing rate and lower undrawn commitment fees.

It has been a very busy quarter, in fact a very busy first half of 2013 with a lot of transactions and will ultimately improve Cytec. I'm really proud to be part of the Cytec team that continues to achieve so much and I'm optimistic about the Cytec's future opportunities. With a healthy balance sheet and improving cash flow from operations as a strong base. I'm confident in our ability to create value and return capital to our shareholders.

That completes my prepared remarks, so I'll turn the floor back over to Shane.

Shane D. Fleming - Chairman, President and CEO: Thanks, Dave. I would now like to update you on our outlook for the remainder of 2013. Let me remind you that the earnings numbers I will discuss including both prior and current outlook guidance have been adjusted for the recent pension accounting change to mark-to-market method.

For your reference, the table on Slide 12 details our prior guidance restated to include the impact of the pension changes. Slide 13 contains our updated guidance, detail in the impact of changes in sales, operating earnings and stranded cost from the cancellation of the transition services agreement with the former Coating Resins business.

The outlook for the Aerospace Materials business remains solid with growth rest of this year, driven by 787 rate increases as Boeing progresses to the year-end target build rate. We have previously shared our view that the business jet market could also contribute to growth in the second half of this year. Our updated forecast reflects announced delays, a new program introduction and pushes growth in this sector beyond 2013. We also expect our military business to remain flat in the second half of the year as we believe subcontractors adjusting inventories to a slower F35 ramp-up schedule.

From an operations perspective, we've scheduled maintenance shutdown of our existing carbon fiber plant in the fourth quarter of this year. The impact of this event will have an unfavorable impact to earnings estimated to be $6 million. This has been previously factored into our full-year estimate. The updated forecast for Aerospace Materials as revenues in a range of $970 million to $980 million which is our prior forecast of $980 million to $990 million.

Operating earnings are estimated to be in a range between $179 million and $184 million which includes a $13.6 million benefit from the pension accounting change and an additional $4.7 million in stranded costs. This compares to our prior pension adjusted forecast of $184 million to $189 million. So, despite the $10 million of lower revenues versus our earlier forecast, the business has been able to hold operating earnings flat net of the additional stranded cost, primarily through productivity measures and operations.

I am also pleased to highlight Cytec selection as the preferred advanced material supplier for the LEAP-1 Engine Program which will utilize Cytec's CYCOM resin system for it fan blade and containment cases. The use of composite technology in jet engines provides a compelling value proposition and creates an opportunity for Cytec to significantly increase (indiscernible) revenue on legacy commercial jet programs as they adopt these new next generation high efficiency engines.

The Industrial Materials market remains challenged by weak economic conditions in Europe which continue to impact sales in the high performance automotive and motorsport sectors which are our highest value markets. In motorsports, we have not seen nor do we anticipate seeing, typical seasonal demand improvement as sponsorships are limited in this economic environment. In high performance automotive key customers are now indicating that new programs that were previously expected to generate significant sales revenue this year are being pushed back due to program delays and softer demand and we do not anticipate realizing meaningful sales from these programs until 2014. Additionally, we have seen a recent and significant drop in sales to one of our largest customers supplying turbine blades to the Americas wind energy market and do not expect a turnaround in the short term. As a result, we expect Industrial Material sales in the second half of this year to weaken even further and now estimate full year revenues in a range between $270 million and $285 million and operating earnings to be in the range of $10 million to $12 million, down from our prior estimate of $18 million to $22 million with minimal pension accounting change impacting this segment.

Please note that earlier this week, we completed the sale of the former Umeco distribution business to Cathay Investments. First half sales related to distribution were $24 million. Along with pursuing new sales growth opportunities, we are also aggressively looking at cost reduction and productivity measures to improve the performance of this segment and expect to see meaningful financial impact from this work in 2014. We continue to sustain good contribution margin in this business and this will translate into profitable earnings growth as we develop new business and volumes returned in the high-end automotive and motorsports markets. Although this business is the most challenged in our portfolio in the short-term, I continue to remain optimistic about the longer term opportunities in high-performance luxury automotive applications where the value proposition of composite technology provides significant weight reduction and fuel efficiency improvements, while maintaining the superior performance required in this class of vehicles. Cytec is actively working with the OEMs on this opportunity and we remain well-positioned to capture growth as these markets develop.

Moving onto In Process Separation, we remain very positive about the growth in this segment, despite the less than positive headline news in the global mining industry. Our innovative separation technologies provide better metallurgical performance as ore quality declines and our customers operations require more sophisticated and energy intensive processes and complex reagent schemes to effectively extract the desired minerals. We expect solid demand from our copper and base metal customers for the second half of the year.

I mentioned earlier, the impact on our business from the two large mine outages, our full year forecast have been adjusted to reflect those lost revenues. We expect three additional customer start-ups in the second half year the ranging value from 2 million to 5 million each. Phosphine sales will be life of the second half as we expect a reduction in fumigation sales in North America and Australia due to a lower-than-expected grain harvest impacting fumigation usage. We're also forecasting the inventory correction in Asia related to electronics markets to carry into the third quarter.

We do expect volumes to pick-up later this year due to positive secular demand trends across each major phosphine market and our plant remains in a sold out position. Taking all these factors into account our revised revenues are in a range between $405 million and $425 million.

Operating earnings are now estimated to be in the range of $93 million to $97 million with $2.7 million benefit from the pension accounting change offset by $2 million in additional standard cost. This compares with the prior guidance range of $99 million to $103 million.

In Additive Technologies, we estimate modest sales growth with differentiated polymer additive products to be the primary growth driver. As I mentioned previously, we began a plan rationalization of one product line in our specialty additives area that is impacting sales this year. In polymer additives, we expect steady demand in our U.S. markets, but remain cautious given the global economic uncertainty, which is putting pressure on our Asia Pacific markets.

We believe the opportunities in polymer additives will continue to offset the weakness in the rest of the portfolio and our full-year revenue forecast remained in the range of $275 million to $285 million. Guidance for operating earnings in the segment are in a range of $39 million to $41 million, which includes a $3.1 million benefit from the pension accounting change and $2 million in additional standard cost versus our prior estimate of $41 million to $43 million.

Following our portfolio transformation, we have delivered a strong quarter and despite some of the short-term challenges that I've discussed, we expect to deliver good sales and earnings growth for full year 2013.

Dave already walked you through our guidance for corporate and unallocated interest expense and tax and this information is included in the supporting materials on Slide 13.

Our consolidated outlook for revenues of approximately $1.95 billion and operating earnings are now in a range between $289 million and $300 million for the full-year 2013 with approximately $30 million and benefit from the pension accounting change offsetting $9 million in additional stranded cost.

Taking into account our share buyback, this translates to a new estimate for 2013 adjusted diluted earnings per share in a range of $4.70 to $4.90 which is our prior guidance of $4.97 to $5.22 which includes the change in pension accounting. We remain committed to executing our strategy with an improved portfolio of businesses and this creates significant value for our shareholders.

Now let me turn the call over to our moderator Janelle so we can respond to your question.

Transcript Call Date 07/19/2013

Operator: David Begleiter, Deutsche Bank.

David Begleiter - Deutsche Bank: Shane, just on Aerospace Materials, can you discuss how are you thinking about 2014 in terms of the growth year-over-year in that business, perhaps little bit slower given the lack of any A350 exposure?

Shane D. Fleming - Chairman, President and CEO: Dave, I'm not going to be able to give you a number at this point in time, we are still developing our forecast for 2014, but we are clearly in a transition period where over the last couple of years, the bulk of our growth has been driven from ramp-up in legacy programs and as those ramp-ups start to slow now, we are going to see growth transition to new programs. And as I believe, we got a number of new programs out there, so our growth in 2014 to some degree has been dictated by the speed at which those new programs do come forward. We got Business Jet opportunities with Honda, HondaJet, Learjet 85 we expect some ramp up on the Joint Strike Fighter. So, there are some programs out there that will drive growth but the balance now with legacy dropping off is not determined, but it is something that we are obviously paying close attention to.

David Begleiter - Deutsche Bank: And just last thing on Industrial Materials. I know it is early for 2014, but absent improvement in Europe any recent large business which shows market improvement in earnings 2014 versus '13?

Shane D. Fleming - Chairman, President and CEO: Yeah, I think the actions we are taking now to drive productivity and cost reduction will have some impact on the business performance and the earnings performance. We would certainly benefit more from improved revenue and we do expect to see some come – even if we don't see some of the market demand drivers pick up, some of the new program delays were less related to the market and more related to just some technical issues. So, we do expect to see some recovery in Europe even without a strong push from the market itself.

Operator: Michael Sison, KeyBanc.

Michael Sison - KeyBanc: In terms of Industrial Materials heading into the second half of the year the outlook would suggest operating income is going to be near that breakeven area. Is there anything that could cause that to get significantly worse? Is this a forecast? Maybe give us an idea what the volumes declines are going to underpin the weaker second half and sort of frame up where you think you are is this kind of trough-ish outlook, could it get better?

Shane D. Fleming - Chairman, President and CEO: Mike, I will try and give you a little color there. I would say we've really kind of done bottoms-up look at this business in the second half and what we put forth as an estimate is, what we consider to be our best guess. But also I think a relatively conservative view. I would be surprised, if we see things deteriorate much from where we are right now, because as I said we've been quite conservative. And you're right. We're not expecting a lot of income in the second half of the year, as a result of that conservative view on the top line.

Michael Sison - KeyBanc: Then for Aerospace Materials, how much – what percent of that business is represented by these the ramp up of the newer programs as you had into '14 and then when you think about the second half of the year basically your sales growth outlook it's kind of sluggish, I get that to some degree. How much is the turnaround going to hit you in terms of sales growth in the fourth quarter and maybe give us a feel for income per quarter given that hit?

Shane D. Fleming - Chairman, President and CEO: I don't think I've got income by quarter in front of me. The turnaround though that you referenced is primarily going to be a fourth quarter impact and that's not going to have a significant impact on our volume, that's going to be more of a cost related issue. We build inventories. So, we're not assuring customers. So, the turnaround is really more of a cost, no revenue issue. But as we move out of '13 into '14, as I mentioned when I responded to David's question a second ago, we're going to see this transition from the bulk of the growth coming from the legacy programs, two growth coming from new programs. Today, we've enjoyed growth from ramp ups pretty much across the board, by Boeing and Airbus. We're still seeing some of that that's not going to entirely go away. We'll still see some single-aisle growth as those programs reach full production – projected production, but there is not a lot beyond that legacy single-aisle growth. As you look out into '14 and beyond, it's going to be hopefully some modest growth still on the 787 as the supply chain gets fully set up to supply at the higher rates and then those business jet programs I talked about LearJet85 and the HondaJet. I didn't mention that the C-Series program for Bombardier, but that and the Joint Strike Fighter I would say would be the primary program to drive growth in '14.

Michael Sison - KeyBanc: All this is a third of the business, maybe bigger lower?

Shane D. Fleming - Chairman, President and CEO: You mean in terms of revenue today or…

Michael Sison - KeyBanc: Yeah for Aerospace Materials, through this newer area.

Shane D. Fleming - Chairman, President and CEO: So the new programs that I just talked about with the exception of the 787 there is not a lot of volume there. JSF is running at a rate of say 35, 40 planes a year, but most of the business that I'm talking about from the new platforms is business to come, not existing based business with the exception of the 87.

Operator: Robert Koort, Goldman Sachs & Co.

Robert Koort - Goldman Sachs & Co.: Shane or Dave, was there any cash or compensation for the early termination of that services contract?

David M. Drillock - VP and CFO: No Bob, there wasn't anything of that. Termination just like for everybody out there was mainly related to IT services.

Robert Koort - Goldman Sachs & Co.: As you look at the carbon fiber ramp up in production and plugging that into your captive needs what does that do to your margin structure in that business.

Shane D. Fleming - Chairman, President and CEO: That will improve our margin because our cost to produce is lower than our cost to buy, but we won't see that ramp up for another couple of years. So we'll be completing the mechanical completion of our plant in 2014 and then there is something like 18 months to get that material fully qualified. So, I'm not going to see the beneficial impact of that lower carbon fiber cost hitting their financials until end of 2016.

Robert Koort - Goldman Sachs & Co.: How about the benefit from a cash flow standpoint, as the CapEx ramp down as you finished those capacity additions. What does it sort of look like as we go over the next two or three years?

Shane D. Fleming - Chairman, President and CEO: I don't know that we have got that fully scheduled right now, I can just give you some color that, the high years were last year, and this year we will see it ramp down as the phosphine project and GP3 fiber expansion project reached completion early next year. David, we haven't given really any guidance here on the '14 or '15 spend are we?

David M. Drillock - VP and CFO: No, but just in general though, we ramped down from a 300 level this year to maybe a 2-ish number next year, something a bit higher than that and depending on what talk about the outlook after that, it depends on what’s going on.

Shane D. Fleming - Chairman, President and CEO: Yes, the spent as you get out into '15 or '16 is dependent on the ramp up rates for some of these new programs we have referenced. So, hopefully as we are spending, that means these programs are moving forward.

David M. Drillock - VP and CFO: But, you are right, you will see a pickup in cash flow from the reduced capital, that’s for sure.

Robert Koort - Goldman Sachs & Co.: Last thing if I may, if you look at Umeco and maybe audit the performance in the year, so you owned it. How much do you attribute it to just macro uncontrollable problems and how much of it might have been self-inflicted. And then can you update us on the synergy targets, achievements and expectations now that you are putting to some more cost programs?

Shane D. Fleming - Chairman, President and CEO: Yes, let me start with the second piece of that. I think we have already exceeded the synergy targets that we have set for the business and with the announced productivity and cost takeout actions I talked about earlier, we expect to significantly go beyond those target levels. So, we will be providing more detail on that in the weeks to come. In terms of the business performance versus our earlier expectations, I'd like to believe that the bulk of it is related to the market. We have seen the turn down in Europe really impact our two most profitable segment fee, the Structural Materials that go into the automotive industry has really been hit hardest and that’s where we make the most money. So, that’s been a big impact. We also had programmed into the second half of this year and I referenced in my prepared remarks some new programs, the new super car programs that were scheduled to start production and they have been delayed, some of that's been due to market condition but some of it also been due to technical issues where the OEMs are just not been able to keep the improvement on schedule. So, again I like to believe that the bulk of disappointment here is related to what has happened in the market rather than any significant missteps on our part.

Operator: John McNulty, Credit Suisse.

John McNulty - Credit Suisse: Just a couple of quick questions. Even adjusting for, I guess, a pension tailwind that you've gotten in the business. It looks like your Aerospace Materials margins are at least in this last quarter were 200 basis points above kind of the normal level. I guess, how should we think about the sustainability of this if this is something that's maybe a step change now that some of the developmental programs are – you are kind of deeper through them or is this just kind of a one-off. How should we think about it?

Shane D. Fleming - Chairman, President and CEO: There is a little bit of lumpiness in those operating margins, as you know. Quarter-to-quarter it depends on R&D spend and it depends on where they were adding operators and trying to ramp up rates, but you did hit on a point and that is that as we've added volume we've been able to better leverage our fixed cost. So, I think as we guided earlier this year, we do expect to see expansion in the operating margins in the business, but not to the level that we saw this quarter. I think this quarter was driven by very high sales relative to the cost base that we got in place and couple of, if you will, favorable one-time events where costs are maybe lower than we expected. So, I don't think you want to establish that as a new baseline, but it is certainly a level that we can reach quarter-to-quarter depending on how things flow within the quarter just the normal sort of variability. But again, John, we are still trying to expand operating margins roughly 100 basis points a year based on leveraging the volume growth that we get in this business.

John McNulty - Credit Suisse: Then a housekeeping question. I think you said there was a $6 million hit tied to the turnaround was that on the revenue side or was that actually on the earnings side?

Shane D. Fleming - Chairman, President and CEO: That's on the earning side. The cost impact of that turnaround, loss production credits.

John McNulty - Credit Suisse: Then just one last question. So, your balance sheet despite all the share repurchases, it still looks pretty strong, one of your earlier points your CapEx is going to start dialing down. So, I guess, can you walk us through, how you're thinking about uses of your balance sheet strength and that cash going forward, if there is potentially even more share repurchases to come or if this M&A that you're looking and interested in and maybe give us an update on that that would be great?

Shane D. Fleming - Chairman, President and CEO: Our view on, our uses of cash haven't changed. We're still looking at both on opportunities to our growth platforms. I don't think there is anything significant out there or I don't expect anything to be a large use of cash over the next year or two. Given that and given in fact as you noted, we do expect to see some slowdown in our capital spend. We probably are going to be end up with some excess cash on the balance sheet beyond what we would typically like to carry in. That being the case, we would look for ways to return that to shareholders and I think we would look at both potentially new repurchase plans, as well as the possibility of change in our dividend policy. But if things play out the way that we expect them to I think there is going to be an opportunity for us to return some cash to shareholders.

Operator: Mike Harrison, First Analysis.

Michael Harrison - First Analysis: I had a couple questions on the IPS business. First of all it sounds like you expect three new mine fills during the second half. Is that in line with your previous expectations and have you seen some delays there given some of the weakness in some of the metal prices.

David M. Drillock - VP and CFO: No that's pretty much right in line with what we've said. I think we projected four for the year, we've seen one already in the first half. So with the three that are planned to come we should be right on line with our target. We are really seeing the impact of the weak metal prices over the last several months having any significant impact on the schedule for some of these new projects. If metal prices stay low, I'm just providing some additional color around your question, but if metal prices stay low for the longer-term you'd likely see project scheduled more for the 2015 2016 timeframe, but these projects are so close to completion that the mining companies finish them up and get them running.

Michael Harrison - First Analysis: Then in terms of some of the higher production costs you mentioned in IPS, you mentioned planned cost, you mentioned raw material cost. How temporary do you view those issues and would you expect to see some higher pricing, I see that pricing was flat in the second quarter. Should we expect you to make that up in the second half?

Shane D. Fleming - Chairman, President and CEO: I would say that going into the second half that at a moderate down we had – it's kind of spread out throughout, it could be (Indiscernible) there was nothing in your data unusual that we wanting to see until throughout the rest of the year.

David M. Drillock - VP and CFO: But just Mike to give some color on the raw material side, our expectations with this business and our other growth platforms are that they will offset any raw material increase, so if we get behind a little bit in one quarter our intent would certainly to be catch up. We want to maintain our contribution margin percentages in these businesses.

Michael Harrison - First Analysis: Then within the Industrial Materials business based on your new guidance, it doesn't sound like we're going to get to that double-digit operating margin number any time this year. Do you still have confidence that you can get there and is it internal actions that get you there or do you really need the market pickup to give you some leverage in order to hit that double-digits margin target?

Shane D. Fleming - Chairman, President and CEO: Yes, to the first part of your question, absolutely our expectations either this business will get to double-digit earnings and we can see a path to get there and it does take a little of both. We are going to need some volume. We have seen volumes actually decline in our highest margin markets and our expectations are that those will bounce back. So, with the help from the increased revenue and the additional cost takeout's that we have planned, again we see a path to double-digits earnings. The hard thing here is to predict it because what we don't control is some of the market demand, but that’s clearly operation expectations and that’s how we will manage the business going forward.

Michael Harrison - First Analysis: Last question I had is on the SOIL write-off in India. It sounds like the review of that plant and the actions you need to take there, is taking a little bit longer and maybe costing you a little bit more than you initially thought. At this point do you feel like you have a good handle on the timing and cost there or is that something that every time you tear down another law, you find another issue, that you have to deal with that’s going to cost you more money?

Shane D. Fleming - Chairman, President and CEO: Your first analysis is correct, it has taken us longer and it's more expensive than we expected. But I think we have turned down the (indiscernible) line. We have now completed a thorough engineering review with multi-national engineering company. We have got cost and schedule estimates now. We are running this like a large capital project and we feel confident in both our schedule and the cost numbers that we shared. But we were disappointed, we found something as we dug into the plant, they were disappointing in terms of some of the safety environmental standards as Dave referenced.

Operator: PJ Juvekar, Citi.

Jonathan Herd - Citi: This is (Jon Herd) sitting in for PJ. Can you address the stock buyback and specifically address you appetite to leverage your balance sheet a little bit more and continue buying back stock after this program finishes at the end of August?

David M. Drillock - VP and CFO: I think as Shane just said earlier on deployment of cash, I think we will look at ways to return cash to shareholder on our normal review whether that's dividend or stock buyback and that includes some times where our balance sheet is but right now I think we like our balance sheet where it is and we are going to have some good cash flow going forward. So, we will work with that, but like Shane said, everything is on the table when it comes to our excess cash.

Jonathan Herd - Citi: Would you be comfortable adding more leverage to the balance sheet or are you saying you are pretty comfortable with where it is?

David M. Drillock - VP and CFO: We are comfortable where it is right now and that depends on view of what the other opportunities are. But always those things change, so does our mindset on that.

Jonathan Herd - Citi: And then on IPS, can you talk about how much visibility you typically have on the timing of new mine fields?

Shane D. Fleming - Chairman, President and CEO: It is easily three-plus years from the time we are first approached by a company that's planning new project until they are into production. So, what changes over time is they may run into political issues like we have seen in Mongolia with some of the new production there and may run into technical problems. So, those schedules always tend to drift a little bit. But we easily know well in advance when the project is starting, we know well in advance that we've been awarded the business but it gets a little difficult for us to predict is whether it is going to come in the first half of the year versus the second and sometimes that will work with the mine expecting big order in the fourth quarter of one year and it slips into the first quarter the next. So, it gets a little bit difficult to predict exact timing at the end of the process, but we do have very good visibility into the investments.

Jonathan Herd - Citi: I guess this year, if everything goes as plan you'll have four new mine fields for the full year. As you look out into 2014, do you see more mine fields, fewer mine fields or something close to four next year?

Shane D. Fleming - Chairman, President and CEO: I think it's probably in that neighborhood maybe slightly smaller, but there are some new projects still to come in 2014. As I mentioned in my comments earlier – to an earlier question, if we continue to see metal pricing depressed some of these projects may slowdown, even if they've got the project started they may put them on slow burn a little bit. But I do expect some new start-ups next year.

Jonathan Herd - Citi: Then just lastly, in a typical year, do you have a sense of how much top line growth in IPS you might get from new product introductions?

Shane D. Fleming - Chairman, President and CEO: Our vitality index, which is a percentage of sales it come from product that have introduced in the last five years and that business across the IPS portfolio tends to be about 20%. So, we are constantly churning new business. Now, some of this is converting existing sales to new products that are higher margin or higher performance, as well as capturing new accounts with these new products. So, it's going to be highly variable, but it's a significant number. It's a big part of the growth in this business. I would say typically if we look back 30, 40 maybe even as much as half of our growth year-to-year growth has come from new products.

Operator: Laurence Alexander, Jefferies.

Laurence Alexander - Jefferies: Two quick questions. First, as you look at the industrial business are there any longer term projects with potential customers waiting in the wings that may entail qualification costs or a significant chunk of CapEx well before the actual project launch, I mean I'm thinking similar to what you see in the aerospace.

Shane D. Fleming - Chairman, President and CEO: The cell cycle is much shorter and the qualification requirements are much shorter for the automotive type applications versus aerospace. So I think that to some degree to answer a portion of your question. The other question on capital requirements, we have a lot of excess capacity. One of the things that we really liked about the Umeco acquisition was they had just installed a brand-new high-speed tape line that's similar equipment to what we use for our aerospace manufacturing and that line is – it got a lot of spare capacity and it's the type of equipment you need for these new application. So, I don't feel like we've got any major capital requirements. There may be a little bit of co-funding of some of the development activity, but it's a fraction of what you would see us spend to win business on a major new aerospace platform.

Laurence Alexander - Jefferies: Can we expect you to be layering in some of those projects in the near term, even while the underlying end markets remain weak, so that should be…

Shane D. Fleming - Chairman, President and CEO: Yeah, we've already done that. My reference to a couple of program delays earlier and my comments was really two programs where we had one business expected to see some volume growth in the second half of this year that were delayed either because of technical problems with the program start-up or just program slowdowns as a result of weaker end market demand. But we're continuing to pursue and win business. It tends to be more the supercar category at this point in time, but we're also pursuing a and working closely with OEMs on more of the luxury performance automotive sector in that sort of 10,000 to 50,000 unit per year target market that will be significantly more revenue than what you'll get from, say a Lamborghini or a Ferrari type program.

Laurence Alexander - Jefferies: Then in the mining chemical business is there any latitude to kick-start or accelerate the R&D innovation process, so that product launches become more important than minefields for driving growth?

Shane D. Fleming - Chairman, President and CEO: I think you know this Laurence, we've spent a lot of time and effort across our portfolio, really improving and driving speed and quality in our new product introduction process. So, I feel quite good about our ability to go from bench to production. But to try and accelerate that process, so one area that we feel like we could compress the timelines a little bit is once we got a product through manufacturing and we start to try and capture new business, there is usually a little bit of induction period there, if you get the first and second and third customers to use a new technology. So, what we are doing is taking some of our people that have experienced brining brand new technologies to market and putting those folks full time and (swap) teams to try and accelerate those product introductions. I think that’s the one area where we can speed up the process, and so that is the area that we are spending more time. But if you look at our portfolio of new projects right now and the net present value of those projects, it's as high now or higher than it's even been. We have a lot of good stuff in the pipeline. It's got to go all the way through the pipeline, get ramped up and then to my earlier point we've got to get really good at making sure we get in those products, commercialized at target customers as quickly as possible and that’s the piece that we are working the hardest right now.

Operator: Rosemarie Morbelli, Gabelli & Company.

Rosemarie Morbelli - Gabelli & Company: When you look at the content of composites for aircraft and for car, what is it today and what do you expect it to be over the next five years for example?

Shane D. Fleming - Chairman, President and CEO: It's not a simple question to answer, but if you look at the latest generation, military or large transport planes, so I am talking about the Joint Strike Fighter, and the 787, and the Airbus 350. Those planes have content on the 75% sort of range. If you look at the supercar market so the very highest stand for every Lamborghini, Bugatti Veyron type vehicles they have similar levels. If you go down a level to say there are luxury sports car market content today is much lower. You will see content on certain high end BMWs, Mercedes etcetera but it tends to be more in the 5% to 10% range. The market that we are pursuing right now is that luxury performance automotive sector, as I said earlier, in that sort of 10,000 to 50,000 units per year. I don't know that ultimately where the content is going to settle there but it is certainly going to be significantly higher than the 5% to 10% kind of a cosmetic application. We are talking about frames, chassis etcetera. So, significant body weight probably approaching 50% in that ballpark.

Rosemarie Morbelli - Gabelli & Company: As there is requirement for more fuel efficiencies we, obviously, need lower weight cars. So, wouldn't that also helps you under regular kind of car categories. However, many cars are being bought 10 million a year or thereabout?

Shane D. Fleming - Chairman, President and CEO: I think ultimately there will be probably a fairly substantial market for larger mass production type vehicles but I do believe that's some time out. There needs to be a lot of processing technology develop to not necessarily lower the cost of the materials, but to lower the production cost to make car parts and very high volumes serial production at the lower cost required. If you go step back again to that target market that we are looking at that's about 10,000 to 50,000 unit per year market those are cars that are selling for upwards of $100,000. They can afford $5,000 to $10,000 of incremental cost coming from composites and still have a good value proposition. Performance really matters there. They can bear that extra cost because they are getting fuel efficiency and they are maintaining the performance. If you start talking about family sedans to bear and additional 5,000 to 10,000 in cost it is just too much. So, there is got to be work done to take that cost down further to make that a meaningful market.

Rosemarie Morbelli - Gabelli & Company: When do you think that, I mean, will it require five years, 10 years do you have a feel for when those composites pause can be more efficiently manufactured?

Shane D. Fleming - Chairman, President and CEO: It's not a market that we're actually targeting right now. I think there needs to be some fundamental technology development to make that worthwhile. I would only be guessing, your guess maybe as good as mine, but I think you're talking more like 10 years and beyond before you would see in a typical family sedan having any significant content of carbon fiber, and it maybe even longer than that.

Rosemarie Morbelli - Gabelli & Company: If I may ask one last question. 2013 results were very strong and obviously, helped by the share repurchase program and you have more coming down the road. If you exclude share repurchase going forward what kind of bottom-line growth do you anticipate from your operations on an organic way?

Shane D. Fleming - Chairman, President and CEO: I think from a growth platforms our expectations are that we would see 10% to 15% per year operating profit growth that's without any headwind from – sorry, it was tailwind, I meant to say any tailwind from share repurchase.

Operator: Richard O'Reilly, Revere Associates.

Richard O'Reilly - Revere Associates: Two quick questions. The first is just a math question. What are you assuming as your average share count for the year or do you have that number what is your outstanding shares now?

Shane D. Fleming - Chairman, President and CEO: We've got those numbers. I think the average share count for the year and our estimate is 40.1 million. I think the…

David M. Drillock - VP and CFO: Yes. And the share count at the end of this quarter was 41.5.

Richard O'Reilly - Revere Associates: Second question is the comments for the Industrial Materials segment the margin improvement sequentially second quarter for first quarter. That just doesn't seem to jibe with the comments of how the high vehicles slowed down. I guess I'm just asking you try to explain where the margin improvement came from?

Shane D. Fleming - Chairman, President and CEO: I think we did have some favorable product mix in the quarter. But I think it's more related to just some cost take out initiatives being fully executed, pricing probably is the other major driver. I think a lot of the comments you heard us make around the impact of the slowdown in the supercar and the motorsports market is more related to the second half of the year rather than the second quarter.

Richard O'Reilly - Revere Associates: So what was the improvement in – was there an improvement in the mix…

Shane D. Fleming - Chairman, President and CEO: Yeah I think it refers to slight mix improvement. We also had pricing as well.

Operator: Neal Sangani, Goldman Sachs.

Neal Sangani - Goldman Sachs: Just looking to better understand the mix effects in IPS as you're getting more incremental growth near term from copper versus aluminum, and then maybe over the medium term what happens with the current sluggishness in phosphine and then maybe your recovery in 2014.

Shane D. Fleming - Chairman, President and CEO: Let me just kind of (rank-in) for you. They are not hugely different. All the sectors, all the product lines within IPS are quite profitable, but the phosphine business has the highest operating profit followed by alumina, followed by MEP, followed by mineral processing, if you want (rank them).

Operator: John McNulty, Credit Suisse.

John McNulty - Credit Suisse: Just two quick follow-ups. On the phosphine expansion that I believe is; well, I guess, could you give us an update as to when it comes on. I think you had said it was going to in 2Q, when you're getting that facility up. Can you also give us a feel for if there's any incremental cost that you are seeing this year or will see in the first half of next year just in ramping that facility up?

Shane D. Fleming - Chairman, President and CEO: John, mechanical completion will be done around the end of this year and we're expecting to be in production in April of 2014. We will see some incremental start-up cost next year. But I don't think there is probably much of a creep into 2013, most of that is being capitalized, but we typically do see some incremental start-up cost, when we start the new facility like this and that should be in the first 3 or 4 months of next year.

John McNulty - Credit Suisse: Just one clarification. I think you had said 2Q and share count was 41.5. What was the actual – what was at the very end of the quarter? So, I think, that was actually average. So, we're trying to figure out in terms of timing of buybacks I am kind of – how to think about it, how it progress the rest of the year?

David M. Drillock - VP and CFO: John, we'll get the fact, I just don't have the exact number in front of me.

Operator: Presenters, there are no additional questions. I'll do turn the call back over to you for closing remarks.

Jodi Allen - IR: Thank you to everyone for your participation in our call today, and if you would like to ask any follow-up questions please contact me directly at 9733573283. Thank you.

Operator: Ladies and gentlemen, that does conclude today's call. You may now disconnect.