伊士曼化學 (EMN) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company's fourth-quarter and year-end 2004 financial results conference call. Today's call is being recorded. This call is also being broadcast live on Eastman's Web site at www.Eastman.com.

I would now like to turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Mr. Riddle, please go ahead, sir.

Good morning, everyone, and thank you for joining us. With me today are Brian Ferguson, Chairman and CEO, and Rich Lorraine, Senior Vice President and Chief Financial Officer.

Before we begin, as usual, let me remind you that, during this call, you will hear certain forward-looking statements concerning our plans and expectations for first quarter and full year 2005. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are, or will be, detailed in the Company's fourth-quarter and full-year 2004 financial results news release on our Web site and in our filings with the Securities and Exchange Commission, including the Form 10-K to be filed for full year 2004.

Now, let me turn the call over to Brian.

(technical difficulty) -- everybody and welcome. Thanks for joining us today.

I have several things I'd like to go over this morning before I turn it over to Rich, so I ask for your patience as I walk through a couple of things.

I'd like to make a comment on Genencor. Of course, I want to hit the corporate highlights for the year and the quarter and then the segment highlights as well. I'd like to talk a minute about the regions before we get through today and then of course give a first-quarter outlook and then close with some comments on the corporate strategy.

First off, the divestiture of Genencor -- you will note that, in past meetings when questions and the concerns were a little more tense than -- and there were harder questions to answer, I always asked Rich Lorraine to handle those. Today, I'm talking you about it, so that should tell you something about how we feel.

Yesterday, we announced an agreement to divest our interest in Genencor to Danisco for a total of $419 million. You've been asking routinely about this, and we've routinely answered that, when the time was right, we would give you the answer. That time finally came yesterday with the announcement that we reached this agreement with Danisco.

We're very pleased with this outcome. The agreement provides us a fair value, and it gives us another resource for achieving the successes we are seeking. This is the best financial outcome of all the choices that were in front of us to monetize this asset.

I know you want a lot of details about this agreement. We can give you some additional color in the Q&A, but we have to be careful not to jump ahead of the disclosures that will come with Danisco's tender offer for the public shares, so we'll need to wait for the tender offer before I can give you all the color that you're looking for on the details behind all of this. Bottom line, though, this is a great outcome for Eastman Chemical Company.

Now onto our corporate financial highlights for '04 and for the quarter, and the headline on this is we feel like we had a great year. In 2004, Eastman employees made tremendous progress improving the Company's profitability. Our earnings per share are the best since the year 2000 by a wide margin. Our revenues of almost 6.6 billion are the best in the Company's history, and about 800 million above 2003. Our sales volume is the best in the Company's history. Our gross profit improved by $168 million over 2003, and we accomplished this despite -- despite an increase in raw material and energy costs of about $600 million and the resulting margin compression between price and raw materials on the order of $100 million. As you know, $100 million on margin for us is about $1 a share, so that was a big impact.

In 2004, we returned to earning our cost of capital. This took 1 year longer than I had originally hoped in talking with your over the years here, but better late than never.

2004 was also a great year for our stockholders. Their total shareholder return in 2004 was 50 percent -- 5-0 percent. I want to take a moment to thank all the stockholders on this call who took a chance on this Eastman turnaround story. We are very glad that you were rewarded for that and we have many more thoughts on how to keep you happy for more years in the future. More on that later. I was not as persuasive in convincing some others who did not enjoy this progress, but I will endeavor to be more persuasive to them in the coming year.

With that said, we are focused on continuing to improve our profitability in '05 with a particular emphasis on recovering our margins over raw material costs -- in other words, pricing. As you all know, we've taken a number of actions to improve profitability over the last several years, including divesting the underperforming product lines in CASPI, reducing our employee numbers to under 12,000 compared to the 15,000 we had at the beginning of '04, shutting down assets and divesting product lines in our Specialty Plastics segment and many, many other cost reduction actions too numerous to list here.

What we have not been able to do is fully recover our spread over raw materials and energy costs, and we believe we deserve to. I mentioned that raw material and energy costs increased by about $600 million for us in 2004 compared with '03. In the fourth quarter alone, raw material and energy costs increased by approximately $250 million on a year-over-year basis. This was on top of a $150 million increase year-over-year in the third quarter. We are seeing not only escalation but also high volatility in costs for many of our key raw materials, including Paraxylene, ethylene glycol and propane.

Fourth-quarter earnings per share significantly improved, compared with a year ago, but came up a bit short of the standards we have set for ourselves. Both the higher raw material costs and pricing contributed to this. As you all know, Eastman has both specialty and commodity businesses. With the type of volatility that is occurring in our costs, the commodity businesses were better able to raise prices to catch up with the higher raw material and energy costs. We expect our specialty businesses to make significant progress in this area in the first quarter and during the full year 2005. As I said earlier, a major focal point for the Company in '05 is to get the prices we deserve to recover our margins over raw material and energy costs.

Now, turning to the segment highlights, as you might expect, given these corporate numbers, all of our segments had increased revenues and volumes for the full year and the fourth quarter of 2004, except for CASPI. If you exclude the businesses we divested earlier this year from the comparisons, the revenues and volumes for CASPI are up double digits.

Looking at operating earnings by segment, CASPI full-year and fourth-quarter operating earnings are higher due to a number of factors, including the divestitures of underperforming businesses and volume growth in the continuing businesses. The fourth-quarter earnings for CASPI were somewhat lower than we anticipated as we worked to offset the higher raw material and energy costs they were facing, particularly propane for them.

Performance Chemicals and Intermediates full-year and fourth-quarter earnings improved, as they had strong volume growth. They are benefiting from the upturn in the olefins cycle and as we announced earlier this year, they completed the debottleneck at our Longview, Texas facility to increase capacity, which has better positioned them for the upturn.

Specialty Plastics' full-year earnings improved 50 percent compared to 2003, but their fourth-quarter earnings declined versus the year-ago period. On a full-year basis, earnings improved primarily due to increased volumes. They are seeing increased demand for their products in a number of new applications, including eyewear and housewares and cosmetics packaging. But in the fourth quarter, their earnings were heavily impacted, about 50 percent, by high raw materials and energy costs, particularly Paraxylene, and about 50 percent by other costs, including costs associated with planned maintenance that happens about once every 3 or 4 years.

Specialty Plastics is catching up to their raw material and energy costs through their price increases, and most of the other costs that we were faced with in the fourth quarter are not expected to repeat. So I need to tell you that fourth-quarter earnings for Specialty Plastics were a blip and are not indicative of what we expect from Specialty Plastics. They will make significant progress in the first quarter and in '05 and '05 will be a better year for Specialty Plastics than '04 was.

The Polymers segment -- the Polymers segment earnings declined for the full year 2004, compared with '03, but they increased in the fourth quarter on a year-over-year basis. The full-year decline is mainly the result of the historic rise in Paraxylene and ethylene glycol costs. In the fourth quarter, we started to make some good progress had some momentum, and I expect this to continue. I should also mention that both for the fourth quarter and the full year, polyethylene had good results, benefiting from the overall strengths in their markets.

Lastly, Fibers -- Fibers' earnings improved for the year and in the fourth quarter on a year-over-year basis. This continues to be a very profitable, steady business for us. They've seen strong volumes for acetyl chemicals in the U.S. and for acetate tow in Asia. We expect they will continue to have strong volumes and earnings in 2005.

Let me turn my comments now to the regions. I don't usually comment on them. I will begin with North America. North American revenues in 2004 increased by 13 percent due to price increases and sales volumes. The percent of our revenue that is in North America stayed about the same at about just under 60 percent. Our profitability in North America improved due to higher selling prices and increased sales volume.

In Europe, our revenue was up 7 percent while our volume declined 4 percent. The decline in volume in Europe is mainly due to the CASPI divestitures. The revenue and volume growth were concentrated in the Voridian division, particularly PET. Our profitability in Europe improved, partly due to the CASPI divestiture and then partly due to the movement of the dollar/euro exchange rate.

Asia-Pacific is an interesting story for us this year. Their revenue increased 22 percent in '04 compared with '03. Our Asia-Pacific revenue is now about 12 percent of our total Company revenue. More impressive is the improvement in their profitability. In 2004, we doubled our operating earnings in Asia, compared with '03, and our operating margin there is now approaching 10 percent. We expect to continue our growth in Asia disproportionately faster than other regions. Asia should become a larger percentage of our sales over time, maybe 15 percent, and we need to continue progress in improving the overall level of profitability.

Lastly, Latin America revenue grew by almost 25 percent for the year, driven by higher volume and prices in the Polymers segment.

Now, I'm going to turn to the outlook for the first quarter. We anticipate that the volume strength we had in '04 will carry forward into this year. We also anticipate that raw material and energy costs, which have declined somewhat in January, will again escalate through the remainder of this quarter. As I indicated to you earlier, attaining pricing to recover our margins over raw material and energy costs is a central focus for us in 2005, and we have a number of price increases being implemented in January and throughout the first quarter.

Let me give you one example. PET successfully implemented a 9-cent price increase in December for North America, very unusual at this time of year. With our expectations that Paraxylene and ethylene glycol prices will continue rising in the first quarter, we have PET price increase announcements in Europe effective February 1, and we are announcing a PET price increase in North America today, to be effective March 1.

Considering all these key variables, we anticipate that our quarter earnings per share in the first quarter of '05 will be similar to the current First Call analyst mean estimate of 83 cents.

Now, let me give you some insight into why making this forecast is so darn difficult and why we had trouble in the fourth quarter. As you know, our key raw materials increased anywhere from 10 to 25 percent in 1 quarter, in that fourth quarter, and we expect continued volatility in the first quarter and generally as a way of life from now on. A reference point for you -- 1 penny of margin over raw materials, 1 penny per pound of margin over raw materials in a quarter will move our EPS by roughly 25 cents, plus or minus. So in an environment where raw materials can move 10 to 20 cents per pound in a month or two, it is -- (technical difficulty) -- possible to predict short-term margins within a tight range, so precision is the problem, but given what we're looking at today, we expect our EPS will be similar to the current mean estimate.

Finally, some comments on corporate strategy. We've been talking to you for several months now about our transition from having exclusive focus on a turnaround story to a more balanced focus that includes some profitable growth opportunities. As we all look forward to 2005, I would like to make a few observations. In 2005, our first priority is to continue the growth in earnings. Ongoing profit growth from '04 to '05 is a necessary condition for us to even consider any wider focus that includes growth opportunities. The growth opportunities that are most attractive to us enable us to grow profitability through the cycle -- in other words, beyond 2007. Ultimately achieving this success also depends on improving selected capabilities within our workforce. I think I've said previously we have great strengths in our workforce, including expertise in manufacturing and in the unique chemistries that we practice. Where we need to improve is in our marketing and commercial skill sets. We've been very active in those areas and that work will continue this year and beyond.

We're managing all of our growth work through a rigorous stage-gate (ph) process. We've narrowed the scope of this work to fewer than 10 areas across the Company, versus the dozens we were managing early last year. I would add a comment that our developing businesses segment is an important component of this work. When I think about developing businesses, I think of it as an extension of our R&D efforts. When I add SG&A into that equation, I think of that as the pot of money together with R&D and marketing -- as the money that we invest in growing the Company. When we combine those, we expect -- when we combine R&D with the DB, the combined spend will be about 3 percent of sales revenue. If I add together the SG&A numbers for the Company together with R&D, together with DB, that looks more 10 percent of sales. Frankly, we think this is a modest number when you think about what companies typically invest to grow, and that means we have to be very deliberate in how we put this money to work for us.

Throughout 2005, I expect to be talking to you more about this exciting work, including a 2005 investor day, which will take place in the fall. We will be coming to you with more information on that shortly.

The next financial milestone that we have our eye on as a company is to become a company that generates 10 percent operating margins and which is growing a bit more than GDP. At that level of financial success, we can generate a great outcome for our customers, for our employees and for our shareholders alike. I feel very good that we're making steady progress toward those goals. And you can be confident that, in all of those actions we take, we are grounded in the same discipline that we demonstrated in turning the Company around.

With that, let me turn it over to Rich.

Thanks, Brian. Good morning, everybody.

This morning, I'm going to cover cash flow, talk about our net debt situation, give a little bit of color around the tax rate, which I think it needs, and finish up on what our expectations are for pension. Of course, I would have liked to have a few comments about our Genencor transaction but as Brian said, he has already filled you in on that.

Okay. Starting with cash flow, our cash from operations for the full year '04 was almost $500 million, and that's about twice that of 2003. In the fourth quarter, we generated 193 million of cash flow, and that's similar to the level we generated in the fourth quarter of last year. The key, of course, is improved net earnings, and I would also like to point out that working capital management is a very high priority here at Eastman, and I think the finance and business teams working together did and will continue to do a great job.

Our receivables have increased and as Brian indicated, our sales revenue year-to-year was up significantly, and that drove that receivable increase. But this is a good sign. It's the strong growth in our most liquid asset next to cash, and we do an excellent job on collections and our overdues are always at very low levels.

On the inventory front, they've been stable, managed very closely and of course, with the strong volume growth situation, we keep our eye on that very consistently.

Operating liabilities, they are up, but that's in line with the growth in the business and fits well.

Depreciation and amortization declined by $45 million in 2004, down to 322 million. That's in line with what we expected, and we do expect depreciation to continue to decline in '05 and be approximately 310 million for the full year.

Moving down the cash flow statement, our Capital Expenditures came in just below 250 million in the year, and that was pretty much in line with the guidance we've given you previously.

Looking at 2005, which I'm sure would be a question if I didn't cover it now, we do expect this to increase above depreciation and amortization, and we are estimating right now that that will be between 340 and 360 million. One of the key items that's going to be in there is the capital expenditure to fund our growth initiatives and specifically the IntegRex PET facility we're building in South Carolina, among other things.

Moving to the bottom of the cash flow statement, I would like to remind you that, in January of 2004, we repaid $500 million bonds that had come due with the cash that we had on hand at the end of 2003. Lastly, of course, we continue to have our dividend as a priority for use of cash.

That brings me to the net debt. We began the year 2004 with net debt of just over $2 billion, and now, at the end -- as we close the year, it's approximately 1.75 billion, a reduction of about $300 million.

We have a sizable amount of cash on the balance sheet, as you can see. We have not put all of that to work yet, but we will be doing that in a thoughtful way when appropriate. Our ability to reduce debt to this extent, of course, is a function of continued strong cash generation for the Company and completion of the strategic transactions through the year, not the least of which is the Genencor.

Looking forward, as Brian talked about earlier, the agreement with Danisco to sell our interest in Genencor will give us a significant amount of flexibility here, and you know, we are looking forward to that. As a reminder, our priorities for uses of cash continue to the fund the dividend, reduce debt, and position ourselves as a strong triple-B company, and to fund targeted growth initiatives.

Now I will turn to the tax rate, and that's -- as I said does need a little bit of explanation. First, during the quarter, we received news from the IRS of a favorable resolution of a prior-year capital loss carryback claim. The net impact of that is a $26 million benefit, which impacted our income statement in the fourth quarter of 2004. We will enjoy the positive cash flow impact of this in 2005. I am sure that our tax department is listening on the call. I just want to pat them on the back and thank them for working this issue, over a number of years, to a favorable conclusion.

In addition to that one-time resolution of that $26 million item, our normal effective tax rate declined from the third-quarter rate. The primary driver of that was the higher income in the lower tax jurisdictions outside the United States. Our final effective tax rate, on an overall basis, was 26 percent.

Looking forward at 2005, we really haven't changed our base assumptions on earnings mix and the like, so for now, we are anticipating a full-year 2005 effective tax rate of about 30 percent.

Moving over to the pension side, you may recall, in 2003, we contributed nearly 240 million to our U.S. defined benefit pension plans. In '04, the contribution was only $3 million, so a major swing '03 to '04. For 2005, we currently project that we will be contributing somewhere between 40 and 60 million to the U.S. defined benefit plan. Lastly, regarding pension and other post-employment benefit expense levels, we anticipate that, overall, that will be similar to 2004 levels; we don't see a major change.

With that, I will turn it back over to you, Greg.

Thanks, Rich. That concludes our prepared remarks. Rufus, we're ready for questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Sergey Vasnetsov with Lehman Brothers.

Good morning. I want to ask you about your priority (indiscernible) use of cash from the Genencor divestiture. You did (ph) mention the (indiscernible) looking to reduce debt. What kind of interest savings we should expect on a full-year basis from this (indiscernible)?

Sergey, this is Rich. We're going to be using a bulk of those proceeds to reduce debt. You know, we look at 2005 as another strong cash-generation year, and we do have, as we talked about, some specific investments we will be making, so we will have increased CapEx, as I guided you, and the majority of the remainder will be used to pay down debt.

On a interest-rate side, we're mostly loaded up with bonds, Sergey, so we have to think about how we bring bonds in intelligently. You can look at our bond array and probably guess for yourself about how we might tackle that, but that's really what you're taking down.

Right. Brian, I've done this. I just was hoping to get some total number instead of -- or at least the details of the strategy that you're working on. Is 16 cents a year a reasonable number for you, in terms of EPS (indiscernible) of lower interest?

You know, I think there's a lot of variables in that, Sergey, and I don't think that we are prepared to speak to each of those variables today to get to the number that you are suggesting.

I was just looking at the aggregate number, not the details.

Yes, I think you can guess that about as well as anybody can, Sergey. I'd say you just trust your instincts on the way you guess. You can think about how we go about doing this. You take out your most expensive debt as much as possible. The math that you're doing would reflect something like that, and then we have to think about how we structure things between commercial paper and other things. There will be all kinds of things that go on during the year. We really haven't sorted it out completely, so we feel a little uncomfortable. I would say your instincts though are probably as good as anything to guide you on that.

The second question is about improvements of operating profit (indiscernible) 10 percent level. Your Fibers division has done spectacularly for the past few years and obviously has been a very strong contributor; about 40 percent of operating income came from it. If we take out Fibers, which have done just greatly, your operating profitability at this time, let's say for 2005, is about 6 percent. What type of measures will allow you to bring profitability from 6 percent level to about 10 percent?

That's a great question, Sergey. I'd break up the Company into segments one at a time to look at that. I start with a totally different place; I start with CASPI, SPEEBO (ph) and Fibers, all three being in great shape relative to that 10 percent number. In fact, in the aggregate, they're much above it.

PCI, moving up with the cyclical thing and then needing some time of a longer-term fix to contribute. I can't expect PCI to be a 10 percent through their whole life. They send a lot of things at cost to the rest of the organization to keep it going. They may end up being at half that number.

Then we have to turn to our polymers group, PET. That's the story about IntegRex, the technology driven story there, and frankly some growth in the other three that are the horses (ph), SPEEBO (ph) and Fibers and CASPI have more room to grow as a percentage of the Company and in their margins overall. So you put all of that together, and we don't -- we see a very realistic scenario for a 10 percent operating margin company.

Jeff Zekauskas with JP Morgan.

Good morning. A few questions -- did PET make any money in 2004?

A bit.

So there was some positive EBIT?

Actually, the more interesting part was their momentum in the latter quarter but yes, they were chasing a mountain all year long. Every time they got to the top, the mountain moved, but they made a bit. This year's going to be a much better year.

So basically I think there is about 9 or 10 cents a pound in pricing increases in United States on the table. Can you sort of analyze the dynamics, as to why you think that those prices will probably pass through, if that's what you believe? That is, what's fundamentally changed about the PET business over the past 3 months or so that makes it much better quality than it was before?

Is, that's the fair question, Jeff. The dynamic we faced 12 months ago was that we were absorbing capacity that came into the market. Somebody put about 18 months worth of growth into the market and this is market where if there's a little bit of looseness, it has a high gain knob on supply/demand. If the supply/demand gets tight, the gain knob goes up quite quickly; if it gets a little bit loose, it goes down real quickly. I would say, coming into '05, there's no new capacity coming in, growth continues; we have that going for us. There are some trade-related things that are going on in the world where there are some anti-dumping restrictions. That limits market access in certain places where we operate and that creates a slightly different market structure -- temporary, but market structure in '05. I guess, just looking at the overall tightness of the marketplace, that's what we have as well.

I guess there's also a limit to how far these raw materials can go. I think us chasing a rising mountain is a dynamic that we expect at some point to get behind us, and that also has an impact on us being able to catch up and expand the margins. So I guess I'd put those together. It is a better situation.

So now we are toward the end of January. Did you get the 9 cents in December and January?

Yes, we did. We usually don't comment on that, but this time, we do. We got the 9 cents, and that's unusual. I mean, your fourth quarter is usually -- you're scrambling. 9 cents was achieved and there are more price increases. I guess I just announced one here a few minutes ago.

Okay, I don't think you said how many cents a pound it was.

No, I didn't, Jeff and that's because I don't want to get in the habit of making our business price increase announcements on the conference call, but they are out there, I think, today. With that, it will be public.

Okay, a last question is in -- the fibers business is running way above trend, and I think, in your analyst day, your sort of long-term expectations for that business were that (indiscernible) profitability of the business would be lower over time. Can you give us a clearer idea of why 2004 was such a good year and why you expect 2005 to be a good year, and then why you expect things to get worse in the future, if that's what you expect?

Yes, you know, our view on that whole business is starting to migrate a little bit. The world has changed a little bit since we talked last. I would say the industry structure is one of the features there. I think there were some announcements by one of our competitors of closing a plant in North America, up in Canada. That changed the supply/demand economics both for fiber and for yarn, by the way. The China situation -- yes, they are adding capacity but they are also growing faster because they're lengthening the filters.

We also have a very strong flake and acetyl chemicals business, selling our flake to other people for various purposes, because we -- I mentioned many times we have the world's lowest cost position on flake. That's pretty well recognized and we have become a source for other people. I put all of those together, all of those dynamics, all of those pluses and minuses going on, and we really view those as a positive, not only for '04 but a positive for '05 relative to our views that we gave you maybe 6 months ago. So this is moving story and it's a moving story in a more positive position.

P.J. Juvekar with Citigroup.

Good morning, Brian. Intermediates -- you're prices are going up, but margins are not going up yet. Can you talk about operating rates in (indiscernible) and acetyls? What's going on there?

Our operating rates are very, very high. The margins -- you're looking at a mix of business that has dozens of dozens of products, and if you shift the mix a little bit, it's kind of hard to see what's going on, just looking at the whole business. In the aggregate, that business is in a rising trend. We have some things in the mix, especially on the performance chemicals side, that aren't always doing as well but the intermediates that are in that group are doing quite well and rising. Their story continues to improve, going into '05.

Then going back on fibers, you got revenue growth of 15 percent in '04. Can you divide that growth between the acetyls in the U.S. and the (indiscernible) in Asia?

I won't do the math for you on that but you picked the two places where most of it happened. We had a good year in China, and we had growth in our acetyl chemicals here as well and we are running that at pretty high rates, so it was both of the two. You could talk to Greg about how much more color he can give on that after the call but I don't think I can divide it up for you here.

Talking about China, one of your competitors is expanding there aggressively. How does that impact you in the future?

There are countervailing things going on in that one. We have the growth in China with the expansion there, but offsetting the world supply/demand is -- there are the shutdowns that were announced by Celanese. That makes it less of an impact. Also, the growth rate in the world is a little higher than we had anticipated, so we are not losing sleep over that, I've got to tell you.

Do you expect similar growth in '05?

I expect that these things are positive. That's as far as I'm willing to go. These impacts in the aggregate are positive. I think it's going to be a good year in '05 but I'm not going to make a comparison to, you know, it's going to grow as fast in '05 as '04 or anything like that. It's going to be a good year.

Chris Willis (ph) with Impala (ph).

A couple of quick questions on the polymer side of the house -- how much of the 9 cents that you achieved in December did you actually realize? I'm just trying to get a sense of how much of a lag you've got on pricing from a contractual standpoint.

Then maybe you can talk a little bit about your raw material situation in terms of -- I mean, is there anything more than, say, a 30-day delay in terms of running raw materials to your plants? How should we think about sort of the lead lag in terms of the flow-through of some of these volatile raw materials?

You're asking a good question, Chris, because you are asking a question about inertia. What is the inertia of the raw material movement and does our pricing inertia match it? That's kind of the sense of what I'm hearing there.

The inertia in our raw material is that our major raw materials can move, at least on a monthly basis, some of them move even faster than monthly. Historically, we had a business that moved pricing on a kind of a quarterly inertia, and we have been rolling that back to become more like the raws but we haven't got gotten it matched up and synced up. The majority of our prices in the polymers area can move on a month's notice. Getting that fully implemented in a month sometimes is harder than -- you know, it may take another month, it may take another 6 weeks sometime before we implement something that you announce or change in a month's time. So we don't have a completely matching inertia. These two signways have different periods on them. That's one of the problems that we work on as a company. That means we have to have systems and processes and people they can react quickly to see what's happening. We've been working on that. We've got to have good insights into the raw material positions and then we've got to the systems on the other side, the ability to move the prices. We are working on all of those and we're working on trying to reduce the volatility of raws through physical and financial hedges, the way we buy, a number of things.

That was a long answer. To give you the short answer, which is that the two are still not synced up the way we would like. It still takes a little longer to push the prices than it does to get the raws.

But from an inventory standpoint, how much (indiscernible) you hold? Obviously propane is probably coming in daily but do you carry like 2 to 3 to 4 weeks of inventory? I'm trying just to get a sense of more of an inventory flow-through than the actual month-to-month spreads.

The inventory flow-through -- and that gets to something like a LIFO question. I'm going to get Greg to answer that one for you later on because I'm afraid I'll give you a bad answer on this one, Chris.

That's fine (indiscernible) answer it , thank you. Then on the timing on the PET, 9 cents was achieved but can you give us any sense of how much of that was actually realized in the fourth quarter?

You would see more of it realized in January, Chris, than you would in December.

Okay. I assume that most of your guys are (indiscernible) at least 30-day production?

Yes.

Kevin McCarthy with Banc of America Securities.

It sounds like you expect the margin pressure in Specialty Plastics to be transitory. Could you talk about your typical contract terms there? Do you have a lot more flexibility with the rollover to the new calendar year? What are typical terms for your larger customers of copolyesters and cellulosic plastics?

A couple of dynamics there -- first of all, you're in a material substitution war, so you have to always keep an eye on what's going on in the materials you are trying to substitute against -- polycarbonate, acrylic, PVC and others. Each of them has their own kind of inertia and since we are the small guy playing in a bigger world, we have to adjust our business practices to match whichever one of those materials we're trying to substitute for. So the answer is it depends. It depends on which one of those kinds of customers you're dealing with. Frequently, these more specialty customers are not -- I mean, they are buying a value proposition that's about functionality. They are not buying a margin over raw materials, so there is a much slower inertia in moving those prices along and they sometimes go quarters and quarters without seeing anything. When we do make changes, they take longer to push through. So those could be -- we've been moving the targets to shorter times on those but they have been as long as 60, 90 days in some cases, moving to shorter increments, but remember, specialty businesses behaved differently. You don't want to set up a dynamic where the price is jerking around constantly every time the raws move because you're selling a different value proposition, so you have to sometimes take the bad with the good on that.

I understand. That's helpful. On the regional breakdown that you gave, Brian, I thought I heard some noise in there related to the CASPI divestitures. I was just wondering if you could give us a clearer sense of what your volumes would look like in North America, Europe, Asia, etc., ex-the CASPI noise?

On the regions, Kevin, really the impact that Brian alluded to was more in Europe. I don't have a number in front of me as to what Europe would have looked like on a volume basis if you backed out the divestitures from CASPI, but clearly they would have been higher.

Europe was up 7 percent revenue, down 4 percent volume, and that was due to -- that was a story that included the CASPI divestitures. I think, if you back out the CASPI divestitures, Europe looks pretty darn good. But I think Greg can help you with that.

Then finally, on the Genencor deal, Brian, could you address the subject of your $15 level for the common versus 19.25 for the public shareholders?

Yes. I guess I'm going to wait to give you more color when the tender is out there. What I said was that we have -- and what the press release said is we've been investigating, as you might guess, a number of ways of monetizing this. We've gone through a number of processes to investigate that. This was the best financial outcome of all, and we got paid for a combination of our common shares and for preferred shares. The preferred shares have some special features. I'm just going to be talking in circles. I've got to wait until I get the tender out there to give you the kind of color. I intend to give that kind of color but I have got to what about a week, Kevin, basically. I think you'll say, oh yes, it makes sense.

Frank Dunau with Adage Capital.

Yes, on the tax rate, I think you said you had a 26 percent tax -- (indiscernible) line rate for the year. Am I correct in doing about a 0 percent when you ex-out all the unusuals for the quarter?

That would be correct. The quarter, when you ex-out the unusuals, we had close to 0. That was because the effective rate went down for the year in the fourth quarter, so we apply that back over the previous quarters.

That's the only question I had. Thanks.

Gregg Goodnight with UBS.

Good morning, gentlemen. Could you comment on what the actual growth rate of PET was in NAFTA in '04? Then looking forward in '05, what is your anticipation? Is growth still on a pretty good track? Are you expecting operating rates to be firm all year?

Yes, the growth rates have been good. We typically say that the growth rates in NAFTA are 6 to 8 percent. I think this was probably on the North end of that. It was a good year on growth and we expect this growth to continue.

It's not just about carbonated soft drinks. Water continues to grow. I think maybe the more exciting thing that's happening in PET is the broader use of it in substituting and other things, like cooking oil and peanut butter and just so many other containers that you never thought about before. A lot of material substitution still in front of us, so that allows it to grow at these high rates relative to a GDP that may be growing 3 percent. We don't see any horizon where that's going to slow down for us anytime, so that growth rate continues.

Yes, I understood that the growth rate in '04 was upwards of 8.5 percent or so, but I assume some of that is due to the import situation you mentioned?

Some of that is due to that, but there's just a lot of other things going on in the world. We had 4 hurricanes. Guess what happens during a hurricane? There's a whole lot of water business. There are exports going to the tsunami regions. There are just a number, number of things that are going on in the container business that go beyond the anti-dumping things that are going on.

Okay, so another good year, then?

Yes.

Could you comment on the -- you said that the 9 cents is going to be realized between the fourth quarter and the first quarter of this year. Could you comment on the previous price increases in the third and earlier, which I have here at 3 cent September, 6 in October?

Yes, I think the answer is we got most of that. I'm trying to remember and I'm probably going to do this wrong and Greg will have to correct me after the call but I think we got -- how many cents in the year, Greg? It was like 15, 20 cents, something like that? 20 cents? We kind of look back on the year and think that we got about 20 cents of price increase. I don't think I ever remember any time in our history where we pulled out 20 cents of price increase on a commodity that used to sell for 50 cents in one year. That's a lot.

Okay, 20 cents realized out of what was announced?

Yes, I think, over the year '04, I think that's roughly right.

That's not an exact number, Gregg, but it's close.

Okay. Last question -- I guess you've broken ground now on your IntegRex facility in South Carolina?

Very soon. We're going to have a celebration down there in March and will do that then.

Are you still on track for your announced timing?

Absolutely. Yes, this thing is scooting along. Our folks have done a great job. We did a great engineering package to the folks that are going to do that. They've been informed. I'm not going to say anything more about that, but everyone is cranking up in a hurry here.

Kunal Bannerjee with Morgan Stanley.

Yes, good morning. Just three questions -- first, on -- you know, if you could at least attempt to contrast your downstream or midstream portfolio with that of Dow, because yesterday, Dow reported pretty good numbers out of its mid and downstream. Now, I do recognize that some of that is coming out of their performance plastics business, which is a mishmash of some differentiated commodities like epoxies and polyurethanes, which are in pretty good positions in their respective cycles, but if you would just contrast or compare your CASPI business with Dow's performance chemicals business, do you see similar end markets and market dynamics? Could you help us out there?

Okay. If I think about Dow, now that they have acquired Union Carbide and think about that broader list of things, there is a lot of similarity. Our customers in CASPI are the big pink guys. It's Sherwin Williams; it's Behr; it's PPG; and it's hundreds of others. It's the automotive guys in Europe and Asia and the U.S. for some of the OEMs paints. It's architectural coatings, a lot of solvents that were in the Carbide portfolio that Dow acquired, so there is a lot of similarity between those.

If I look at the full -- I didn't know if you were asking a full portfolio question. The full portfolio question that makes us different is polyester and the dynamics of the polyester supply chain, which is different from Dow. They are working more on olefin drivers, primarily olefin drivers, and we have kind of a big driver of polyester and they have different cycles and different peaks and valleys. That is a not insignificant difference between us.

Okay. Then on this -- you know, I liked your analogy on the gain knob on PET. If you were to basically take that into '06, when there is some capacity coming on, should we infer that the gain knob then turns down or do you think there's sufficient growth in your forecast to absorb the amount of capacity that's coming on in '06?

Yes, that's a great question. The gain knob does get affected by the PET capacity; it always will every time you do that. We're coming on; the other people will be coming on. The difference is, I think, that this is turning into a business that starts to look a like polyethylene maybe 2 decades ago, where the growth was driving the industry down and experience curve on cost position and efficiency, and the people that had their nose out in front on technology driving that experience curve ran at higher rates and variability was taken up by the people who had the higher cost positions. So as an industry, you are spot-on. The question will be, does everybody run at the same operating factor or are there different operating factors for the players?

We've had a history where we have a very flat cost curve. Everybody's using the same technology, basically the same raw material positions, very flat cost curve, and so everybody kind of gained up and gained down together.

The changing features that should start happening in the time frame you're talking about is that the cost curve should steepen somewhat and the folks at the lower end of that cost curve get a better operating factor than the folks at the high end. That's going to look more like the olefins have established over a couple of decades here (sic) with their profile of cost positions. Does that make sense?

That will be beyond '06?

Yes, I think '06 might be a year where you're still adjusting, but beyond '06, you are right.

Then lastly, you commented on (indiscernible) your position, cost position. Are you the lowest cost, even on a landed-cost basis, in China, versus Celanese that's already there with their joint ventures?

I'm not willing to comment on that. I just know that we are globally very competitive. Otherwise, we wouldn't have the customer base that we have moving this flake around. Then you know, I hate to get in some kind of a contest between my comment and Celanese's comment and other people's comment, but -- (Multiple Speakers) -- the lowest cost. I can tell you this is a very global product for us. We are able to sell it pretty much anywhere in the world to a lot of very cost-conscious people. That gives us some insight, so we do pretty well.

Rosemarie Morbelli with Ingalls & Snyder.

Good morning, all. You said that you got approximately 20 cents per pound on price increases for PET in 2004. How much did you get on the raw material cost side?

Oh, gosh! Probably about that much or more. But the one comment I would make to you is, you know, we had margin compression in PET in '04. As a company, we had margin compression in '04 on a spread of raws over -- pricing over raws. So this was a year where we improved our earnings pretty substantially, even though we had $100 million of raw material over price or price over raw material margin compression. PET was a part of that compression story, so again, we were chasing the raws all year long.

So even -- if I understood correctly, you said that you probably got the same 20 cents or maybe more. Wouldn't it be fair to assume that you got a lot more than the 20 cents you received on the price increase?

That's why -- yes, so that's why we had the margin -- it doesn't have to be a lot more. Again, remember we talked about -- this is a company where just a penny of spread over raws can move us 25 cents a share in 1 quarter, or $1 per year. So it doesn't take a lot of compression to have a pretty big impact.

Okay. Then still on the PET, could you talk of the timing of your shutting down the old line that you have? Are you waiting for the new plant in South Carolina to come onstream at the end of '06, or are you planning to shut all the line earlier?

I guess I need to correct the conception that you have. We don't intend to -- we intend to redeploy that line. What is happening in Voridian is they are building the IntegRex facility that's going to be their shiny new low-cost facility and very efficient facility. The facilities that they are going to hand-off then to the Specialty Plastics business -- and the Specialty Plastics business is aggressively working on their plans about how they will put those lines to work. That's one of the benefits of this integration that we have. We have a range of polyesters, from the commodity average market price kinds of commodities to some pretty special things, and it allows us to use the assets in different ways. So Big Brother is going to give his line to Little Brother, and Little Brother is going to put it to work.

Is Big Brother giving it away before the plant in South Carolina comes onstream, or the timing would be such that all the line goes away? I mean -- (multiple speakers) -- time or before?

Big Brother is not giving up his line until he gets his new plant! (LAUGHTER).

This is what I thought -- (multiple speakers) -- there is not necessarily that.

Then, when you look at past behavior on that PET business, when capacity comes on stream, customers play games, the new capacity of course, the new companies want to get that capacity out the door. Are we expecting pricing pressure on the PET side regardless of what raw materials do by the middle of 2006, when it becomes clear that you are coming onstream, that may be adding some capacity as well?

This reminds me of the conversations we were having about fibers about a year ago when we were estimating the Chinese impact. We were estimating some concern about the Chinese impact and then, in a very short time, those concerns changed. I guess that's my way of saying it's too early for me to say, Rosemarie.

You always have a situation where, when you add supply -- nobody has repealed the laws of supply and demand, and the laws of supply and demand will play out. In terms of how that supply and demand math actually works out, it's really a little bit early to say because people's schedules change, the market conditions change, the world trade situation changes, and it's just too early for me to comment on that.

The only thing I would add to that is there's estimate out there and we talked about this at investor day last year, that the North American market grows on the order of 250,000 net tons each year, annually. So that's the amount of additional demand that needs to be supplied in the North American market each year.

That's about roughly a plant. Somebody has to build a plant ever year to keep up with the growth.

Okay, which brings me to -- I had a last question derived from that, and I just wanted confirmation. Between Wellman (ph), DAC, if they add their 300 million pounds and you (ph), you are actually only feeding the demand through 2007. Is that correct?

That sounds about right, Rosemarie. Your math is roughly right. I mean, again, we need growth in North America and if we don't, we are going to choke -- we're going to choke this industry. So you are right. That was roughly a year, maybe a little more than a year's worth of demand that was coming on.

Could we make this the last question please?

Jim Chen with Fulcrum Global Partners.

Actually, this is Frank Mitsch. Good morning, guys. Brian, congratulations on taking care of the (indiscernible) and Genencor issues.

My pleasure! Go Jets!

Well, we got a terrific offensive coordinator, courtesy of Tennessee.

I don't think you talked much about the coal gasification business. Can you give us an update on what you're doing there and what your expectations are for that business?

Yes, I will be glad to. That's one of the critters that we have in the developing business area. We continue to have very fruitful conversations with people that are considering this technology as a power-generating technology. We have not announced any kind of a relationship that we have with anybody to work on those, but some people have announced that they are -- I think AAP (ph) has announced that they're going to go ahead and build one of those.

There's a secondary piece of this that's very interesting to us -- is how do we integrate that into our chemicals from coal. Some of that work is going on in R&D and some of it is going on in DB.

I guess where I would leave you with that, Frank, is we are very encouraged about the possibilities there. It's not fully hatched. We have more work to do, but we're very encouraged about the potential of that one and it's a high-priority piece of work that we're doing. You should not put any math in your models to reflect anything happening in '05. We will be more explicit in the fall investor day about our outlook on that, so basically don't put anything in the math for this year and we will give you a much more robust conversation on that in the September investor day.

Okay, terrific. Your business in Asia is picking up a bit. You obviously did some rearranging there in terms of high-volume commodities. You said that you had discontinued -- (multiple speakers).

You've got a good memory.

(Multiple Speakers) -- business is picking up there. It's about 13.5 percent of sales in the quarter. Where do you see that going to? I'm asking the question because -- in part because I think your 30 percent guidance or 30 percent tax rate guidance is awfully high, given what you've done recently here. So what do you think is going on with your Asian business as a percent of your overall total?

Yes, we said it's gotten to 12. It used to be more like 10. It's more like 12 now. The next milestone is 15. We put a couple of very talented people to work for us in Asia and have given them some aggressive goals and we're giving them the resources to chase those goals. The next milestone is 15 percent. Any good forecaster either gives the change without the time or it gives the time without the change. I'm not going to give both, so moving towards 15 percent of the Company would be the next milestone.

Profitability -- we told you that the profitability was improving and we are moving towards that double-digit kind of a line. I keep on coming to that as a measure for success. You hear me keep on referring to the operating margin of 10 percent as sort of the definition of success. Then that gets you the right to grow and we give you resources, so they are clearly in that territory.

Frank, this is Rich. Let me just add a little color on the effective tax rate assumption for '05. Obviously, the United States is the highest tax jurisdiction we have and as we've discussed over the last hour, PET plays a major role for us. We talked about the price increases that we've pushed through and the supply demand, and we certainly see a stronger year ahead. A lot of that's going to be in North America, so again, it's not an exact science at this point, in terms of the effective tax rate, but for now, I'm standing on 30 percent.

So I guess we could view that as a positive that you are particularly bullish on your business in North America staying stronger or getting stronger. That's fair to say, I guess?

That is fair to say.

Lastly, Brian, here we are on January 28. Are there any surprises, as you look at your 5 major segments? Are there any surprises quarter-to-date in terms of volumes?

We are off to a good start now?! We are off to a good start this year, Frank.

Across all of the segments?

Yes.

Terrific. Thank you.

With that, Mr. Riddle, I will turn the conference back over to you for any closing remarks.

Yes, thank you. If there are any additional questions, please feel free to call me directly at 423-229-8692. An audio replay of this conference call will be available through Friday, February 4. Thank you again for your interest in Eastman.

Ladies and gentlemen, that does conclude today's Eastman Chemical Company fourth-quarter and year-end 2004 financial results conference call. We do appreciate your participation and you may disconnect at this time.