伊士曼化學 (EMN) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Co. first quarter earnings conference call. Today's conference is being recorded. The call is being broadcast live on the Eastman website at www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Co. Investor Relations. Mr. Riddle, please go ahead, sir.

Okay. Thanks, Rufus, and 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 CFO.

Before we begin, let me remind you that during this call you will hear certain forward-looking statements concerning our plans, and expectations for the second 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 first quarter 2005 financial results new release on our website and our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2004 and the Form 10-Q to be filed for first quarter 2005.

With that, let me turn it over to Brian.

Well Good morning, everybody, and welcome to you. With all the chatter that's been going on about the chemical industry the last three or four weeks, you can imagine we've been waiting anxiously to have this call with you. So I'm very glad to be here with you this morning. As usual, I'm going to follow a pattern here. I want to give some corporate highlights, then talk about our segments and then our regions, give you a second quarter outlook and wrap up with a corporate strategy update before I hand it off to Rich.

Starting with very happy corporate highlights, last night we reported the best earnings per share in any quarter of the company's history. Those best-ever earnings were driven by our best-ever sales revenue in any quarter of the company's history, topping the second quarter of last year. Now, I hope you've had a chance to see that these results are very broad-based, reflecting improvement in all parts of our company. As I've said in the past and said a few weeks ago in our pre-announcement of higher earnings, we are firing on all cylinders, and we continue to have that good momentum going forward.

This earnings improvement really starts with what I've described before as our strong base of stable earnings, our fibers, CASPI, and specialty plastics segments, which, in the first quarter, contributed over 50% of our earnings. For any of you who tend to be single-mindedly focused on PET as the principle driver of our valuation, I want to make a comment that even without any earnings from PET, we would have made the same pre-announcement in March about higher earnings guidance. More importantly, after you revised analyst's estimates up to $1.24, we still would have outperformed the revised analyst's estimates without any earnings from PET. Now don't misunderstand me. We love the PET business. It's the proportionality of the discussion that goes there is the issue I'm trying to address.

Let me take a minute to remind everyone of the actions we have taken over the last several years that brought us to this much stronger financial position. We've talked a good bit about CASPI in the past. We consolidated our manufacturing capacities, we shut down some facilities, we sold our underperforming businesses, and we are just now seeing the full year benefits of all the actions that we have taken in CASPI over the years with all the overhang gone. We've gone forward with two joint ventures in China to expand our geographical presence in coatings and adhesives. In the performance chemical and intermediates area, we've de-bottlenecked our olefin production in Longview, Texas. We entered into a variety of long-term supply arrangements with key customers to improve the economics of some of our key olefin derivatives. And we've taken numerous other actions to substantially reduce costs in this business.

In specialty plastics we sold our crystalline plastics and polyethylene color concentrates in 2003 and in 2004 we shut down a copolyester manufacturing facility in England to strengthen our global manufacturing structure. Last year in our polymers section we streamlined the management structure and took numerous actions in a continuous effort to reduce costs and, of course, we're going forward with a new state of the art IntegRex process in South Carolina to make us even stronger in the future.

Throughout all of this change, our strong cultural values and traditions in manufacturing excellence have enabled us to operate at very high utilization rates across the company. And I cannot give too much credit to the folks in manufacturing and all those who support them. Every day thousands of Eastman employees work very hard to maintain this high level of performance because they understand it is our key to continued success. And I also want to point out that this great performance confirms that we're spending the necessary capital and maintenance to maintain and run our facility at these very high levels of efficiency.

With all of the actions I've mentioned and literally hundreds of others, the company is very well positioned to take maximum benefit of the ongoing upturn in the chemical cycle that we foresee for the next several years.

Now, looking at our segments, when we had this call in January I talked about continued volatility in our key raw material and energy costs, and everyone talks about that. That is most certainly still the case today. Our raw material and energy costs increased by approximately $160 million in the first quarter of '05 compared with '04. I also talked about improving our spread over raw materials and energy costs as a point of emphasis for the company. In the first quarter we had broad-based success improving our spread over raw materials and energy costs, and this will continue to be a central focus for us as we confront volatile raw materials and energy costs.

Looking at operating earnings by segment, excluding asset impairments and restructuring charges, for fibers, the first quarter earnings were the best since 1997. Fibers continues to be a very strong bedrock performer of our company. We're benefiting from positive changes in industry structure, both for acetate tow and acetate yarn, and we are benefiting from the lengthening of the filters in China, Brazil and Europe and that's a trend that will continue.

CASPI. CASPI's first quarter operating earnings improved over 50% year over year due to a volume growth of 4% in the continuing product lines, increases in selling prices to offset raw materials and energy costs, particularly propane, which has been up almost 25% year over year, and as I said earlier, this is really the first quarter over the last few years where the benefits of all the hard work are completely visible to you. CASPI's first quarter operating margin, by the way, was over 20%.

Specialty plastics first quarter earnings declined slightly year over year. Price increases and volume gains were more than offset by the higher raw material and energy costs, particularly paraxylene and ethylene glycol, which are all very visible to you. However, sequentially, specialty plastics made significant improvement in restoring their margins. As we told you previously, the fourth quarter results for specialty plastics were a blip. They were not indicative of the strength of this segment. Specialty plastics continues on track to have a better year in 2005 than they had in 2004.

Performance chemicals and intermediates also had their best quarterly earnings since 1997 due to implementation of price increases to offset energy and raws, sales volume growth due to strong end market demand and the implementation of long term supply agreements with key customers. These results confirm that this segment is leveraged to an olefin up-cycle, but importantly, there's also a very important supply/demand equation in our particular set of olefin derivatives and that provides additional financial strength of this segment for several years.

Polymer segment earnings improved substantially year over year. Their improvement is primarily due to higher selling prices, which more than offset higher raw material and energy costs. The higher selling prices are a reflection of continued demand growth for PET globally. The improvement is also due to our ability to operate capacity utilization at -- high capacity utilization, enabling us to leverage our integrated raw material position and enhance our earnings.

Now, I should comment that there has been a lot of speculation recently about the effect of the International Trade Commission decision to reject antidumping duties on the Asian PET producers who export to this country. First, of course, we're disappointed in the decision because we truly believe there was dumping by those importers. But I want to reassure those who have concerns about the effect on our company's earnings. We expect the impact of that decision on our full year 2005 PET operating earnings to be somewhere between a nickel and a dime on an EPS basis. So in the context of the bigger picture for our company this year, in other words, not meaningful.

And one comment on polyethylene. Although demand was softer, consistent with the overall industry story, polyethylene was a meaningful contributor to the improvement in the polymer segment results in the first quarter.

Looking at our regions, the first quarter North America revenues increased by 17% due to price and higher volume. The percent of our revenue that is in North America increased slightly compared with the first quarter of '04 mainly due to prices. Our profitability in North America improved substantially throughout the company, due to higher selling prices, improved sales volume and, of course, our many cost reduction efforts.

In Europe, revenue declined 10% as the sales volume declined 25%. That's almost entirely driven by the CASPI divestitures and the comparison before and after. Our profitability in Europe, however, improved, primarily due to prices, and particularly in the polymer segment.

Asia Pacific revenue increased by 19% year over year. The increase in revenue is due mainly to higher prices. Volumes declined deliberately as we reduced the amount of spot acid sales and continued in a story that we've told you before to value up our product portfolio in Asia Pacific. And, as a result, our profitability in Asia continued to improve with operating earnings doubling compared with the year ago period. The largest contribution to the improvement in profitability in Asia was in the fibers segment.

Latin America revenue grew by almost 20% year over year, driven by higher prices, particularly in the polymers segment.

Now, turning to the second quarter outlook, when we talked in January about fourth quarter results, one of the points I made was that our specialty businesses would work to recapture the spread over raw materials and energy that had been compressed in the fourth quarter. As you can see, we made very good progress despite the year over year increases in raw materials and energy of $160 million. Maintaining our spread over raw material and energy will continue to be a central focus as we deal with the ongoing volatility in raws and energy.

We anticipate that our strong volumes will hold up and we will continue to benefit from the actions we have taken to improve the company's profitability. Let me remind you again why it's difficult for us to give precise earnings guidance. One penny of margin per pound in a quarter will move our earnings per share in the quarter by roughly $0.25. So, all that said, we expect second quarter earnings to be similar to our first quarter earnings and '05 is going to be a great year throughout the company.

Now, on to corporate strategy. As usual, I want to make some comments about that. In January, when discussing our corporate strategy, I talked about this company evolving to the point where we can sustain our operating margins at a 10% level and grow slightly above GDP. Our first quarter results validate that we're on track to do just that. The first quarter operating margin was 14% and we are seeing very good growth. Our success in valuing up the current portfolio of products and customers is a contributor, a significant contributor to this earnings growth in the short term and the strategic initiatives that are underway, such as the new IntegRex PET facility in South Carolina, will contribute to significant earnings growth in the long run. We have also, by the way, improved our balance sheet dramatically and the success of our Genencor stake to Danisco, which Rich is going to talk about in a minute, provides even more strength to position us for the future.

As we promised you, we're maintaining our financial discipline as we invest in our targeted growth initiatives. Our overhead and R&D expenditures are well within the boundaries that we laid out for you earlier this year. And we're making great progress on our long-term growth plans for the company. Now, today's not the day for me to share any specifics with you because we're going to do that in our 2005 Investor Day which is now scheduled for September 7 in New York. So, you should expect to receive a note pretty soon about saving that day and we look forward to talking a lot about our future with you when you come to that day.

And lastly, I want to take up an issue that I've never taken up before with you and that's the issue of recent market analysis and valuation. When I compare our reported performance along with the outlook that I've given to you, and I'll compare that with our current stock price, we're currently trading at a 2005 price earnings ratio that is probably a 7 point something. In my view, looking at our dividend yield, the outlook that we've given you, the fact that we think 2006 is going to be a better year than 2005, I view this as a truly nutty place for our valuation to be. If I was a stockholder who sold Eastman stock in the low 50s or the high 40s, I'd be kicking myself right now. But more importantly, I'd be kicking my advisors even harder. If you were on the buying end of that transaction, by the way, congratulations, I think it's going to be a very good time for you.

We've seen an abundance of market volatility recently in our industry. In our particular industry, this is often driven by a broad brush or superficial analysis of one product or another, concluding that the sky is falling or that somehow the laws of supply and demand have been repealed. This information is often incorrectly applied to an individual company situation and then the market can overreact. For us, this example is more likely to happen in PET, but we've even seen examples of this affecting us through the PE chain, which is a bit of a stretch, I have to say. I'm very aware now that we live in a different world. We live in a world where some hedge funds and those who align with them benefit from the volatility. I'm also very aware that there are fewer dedicated resources to analyze the chemical industry than in past years.

But if I put aside the personal therapeutic value of me whining about this publicly, I have a point and my point is this. We know that we are a complex company that is very difficult to completely understand. And we know that we have made a lot of fundamental changes in the past three-plus years that make it even harder to keep up with how we are improving ourselves. I've talked at various investor conferences, and on this call, about the broad base of solid earnings that we have now and we will have in the future, which is well beyond any one product line. Our recent performance continues to validate our view, and we're going to put up good numbers in the future.

So for any of you who want to engage with us, we invite you to call Greg Riddle, work with us so that you can understand us better, and so you can avoid being adversely affected by a superficial or misleading line of reasoning. I think that will produce results for everyone that are more indicative of the great performance of our overall company.

So with that, let me turn it over to Rich.

Thanks very much, Brian, and good morning everyone. I'm also very pleased to be on this call this morning and if it was a videoconference, I think you could see some smiling faces here.

Anyway, this morning I'm going to talk about the completion of the sale of our interest in Genencor, hit the highlights on our first quarter 2005 cash flow and where that puts our net debt right now, and I do want to add a little color around our tax rate.

First, Genencor. Last week we reported to you that we successfully completed the sale of our Genencor interest to Danisco for about $420 million in cash and that's been received. As we've stated previously, we are very pleased to complete the transaction, and we feel it's at a fair value for all the shareholders. The proceeds from the sale will be used as we've previously committed for debt reduction. I'm not prepared this morning to go into all the details about how the debt reduction will take place, but you can be assured it will be completed as soon as it is intelligent, and in a manner that maximizes the value for all the shareholders.

Onto cash flow. Looking at it, our cash flow from operations for the quarter was $102 million. This is a fantastic cash generation for the company during the first quarter, which generally is a quarter where we build working capital in preparation for seasonal increases in demand and usually use cash. In fact, as you analyze our cash flow, you can see we did build working capital by over $130 million, particularly inventory. But I fully expect that much or all of this will be worked off as we go through the year. The real story is the underlying improvement in net earnings, and it's a great sign that we're going to continue to have good cash generation all year. Depreciation and amortization is at $76 million for the quarter, and that's in line with our expectations, and we continue to expect depreciation and amortization to be about $310 million for the year.

Moving down the cash flow statement, our capital expenditures totaled $50 million during the first quarter. I caution you not to annualize this number, as our CapEx usually starts out a little light in the first quarter and then picks up steam. Also, we'll be spending on growth initiatives during the year, including the construction of our new IntegRex PET facility in South Carolina. And, as we've said, we expect that to start up in the fourth quarter of '06, with full run rates really being into early '07.

In terms of total year CapEx, I continue to expect the expenditures to be between 340 and 360 million for the year.

Net debt is in a great place. In 2004 we reduced net debt by almost $300 million. We ended the year with a net debt of about 1.75 billion. Right here in the first quarter we've continued to reduce that, and we now have a net debt of 1.68 billion with a reduction of just under 100.

Now, if you add to that the over 400 million in cash from the sale of our Genencor interest, our net debt would currently the below $1.3 billion, and we will generate more cash during the remainder of 2005.

From that, you can expect that our net interest expense is going to decline in 2005, and the 2004 level was $115 million, and we expect the decline to be between 10 and 20 percent. I'd like to be more specific than that this morning, but there's a lot of variables in our debt reduction process and we want to take the right steps and we want to take them carefully.

Just as a reminder, recently Moody's joined S&P and Fitch in affirming our senior unsecured rating at B double A2, and revising the outlook to stable from developing. Moody's also increased our commercial paper rating to prime two, from prime three.

The ability of our company to generate cash and our ability to execute on these key strategic transactions has given us a lot of flexibility as we consider our corporate strategies. Just as a final reminder, again, our priorities for uses of cash continue to be funding the dividend, debt reduction, and investing in targeted growth initiatives.

All these decisions we'll make regarding uses of cash will be grounded in the same discipline we've demonstrated in improving the Company's profitability and in strengthening our balance sheet.

Lastly I'd like to make a few comments on our tax rate. Our effective tax rate for the first quarter was 25 percent, but this overall rate included a net deferred tax asset of $12 million, resulting from the expected utilization of capital loss carry forwards related to the sale of our Genencor interest. This is not included in our pro forma EPS of $1.92 per share.

Excluding the net deferred tax asset, our effective tax rate for the first quarter of this year was about 31 percent. This rate is just slightly higher than our previous expectations, and that's driven by higher earnings in the U.S. And as we look forward into full year at the tax rate, our base assumptions haven't changed to any magnitude, and we anticipate that the full year 2005 effective tax rate will be approximately 30 percent.With that, over to you, Greg.

OK, thanks Rich, and that includes our prepared remarks this morning. Rufus, we're ready for questions.

Thank you, Mr. Ribble. Ladies and gentlemen, our question-and-answer session will be conducted electronically. [Operator Instructions]. And for our first question we go to Frank Mitsch, with Fulcrum Global Partners.

Good morning guys.

Good morning, Frank, how are you?

You know, obviously a nice result here. I'm curious as to -- on the raw material front, you talk about the year over year Delta. Can you talk about the raw material headwind you faced sequentially forced quarter into first quarter and then offer an outlook in terms of raw materials into the second quarter?

I can talk generally, Frank, that we, as always, were expecting much worse than the first quarter. We actually had some downward movement through the quarter on some of the raw materials. We judged that that is a temporary thing, and that its -- and in the case of polyester for an example, it was driven by a pause in the manufacture of polyester fibers in China, and their making of fabrics and exporting those, that's going to pick backup again, and when it does, that will swing that the other way. We've seen propane -- propane dropped early in the first quarter, it's already back up to higher numbers, and therefore the pricing momentum that the focus -- the central focus on pricing is still with us. Again, the outlook that we gave you for the second quarter means that we believe that we are compensating for those kinds of downward and then back upward swings.

All right, so you are already baking in more of a headwind in Q2 versus 1Q?

Absolutely, yes. And we think -- we need to make sure that message goes clearly to all of our constituencies. We think this is a temporary spike in raw materials.

And Brian, you talked about the ITC decision, and you know, a negative impact of a nickel or a dime on a $6.00 or so number this year. What -- you know, your crystal ball, does that move up materially in 2006?

No, it really doesn't, Frank. If I had to look at the way the world is changing for everyone, I'd say that the raw material positioning globally is the first principle issue everybody has to get their arms around, and that drives a whole lot of the behavior about how far you know -- how well-positioned you are, but interesting, we're seeing a world there now where conversion costs are smaller than logistics. In fact, in some cases, in some commodities, logistics are becoming multiples of the conversion costs. That tends to drive some of these lower-priced bulky commodities to have more regional approaches, makes it very hard to move things 12,000 miles. So no, I'd say the bigger factors are the basic raw issues of raw materials and logistics, and I don't see that has some big looming issue that I've got to worry about later on.

All right, terrific. And Rich, you mentioned your priorities uses of cash, and I was just curious as to -- now that you've got your debt down to 1.3 or below 1.3, what is your targeted debt level? At what point does paying down debt you know full by the wayside in terms of your use of cash?

Well, right now we're -- you know, we're very pleased to be able to get it down -- get the debt down to -- long-term debt down to around the 1.5 that we targeted. And we're still looking through our strategic initiatives and want to keep our powder dry as we go through this year, and bring that information to you guys in September, and you know, we'll just judge it you know after that.

You don't see a compelling need to drop your debt level materially below where it is right now?

Not a compelling need, no.

All right, terrific. It's really a pleasure not to start out the call asking what's going on with Genencor and Cendian.

We enjoy that too, Frank.

All right, thanks a lot.

And we go next to P.J. Juvekar with Citigroup.

Good morning Brian.

Good morning, P.J.

In PCI your volumes were up 17 percent, which was good because we've not seen good volumes this quarter from anybody. So now in oxides (ph) and acetyls, your customers aren't seeing great volumes in paint and coatings, so you know, is there a disconnect there that you're seeing good volumes but customers aren't?

The P.J., in our industrial intermediates, a lot of our customers are not in paint and coatings, first of all. The growth in volume has something to do with the fact that we, on our acid peel side of the house, we have a coal classification base, and what a great place to be during a time of high oil costs. And so our ability to compete and our ability to sell into a broad set of markets where the competitor has a different raw material positioning, has a good bit to do with that. We have a tightness in the oxo derivatives, the alcohols, but not just the alcohols, we also have ketones, we have hydrides, we have acids. There's a tightness all across that oxo chain. That oxo chain goes well beyond the paint and coatings business, and it's the tightness of that whole supply chain for them that allows them to pick up both volume and price. So they are connected the way you're thinking, but not maybe as tightly as you're thinking.

OK. You mentioned this long-term contract with customers. Can you just explain what that is?

Yes. You know, this business tends to have a whole lot of cyclicality to it, and we're ironing a little bit of that out by arranging some arrangements that we've not made public, that stretch out for multiple years, years beyond the cycle, and we have those arrangements built into our numbers now, and they carry us beyond you know a 2006 timeframe or a 2007 timeframe. We've done several of those in some of our key derivatives, and the time to do that of course is when things get short, and that's when we negotiated those. So that takes a little bit -- irons out some of the wrinkles in the cyclicality of this business.

So these are volume based contracts and prices subject to market price?

Don't want to give any details on that, P.J., but their intention is to give us some ironing out of the wrinkles, as I said. We haven't published today are with, what the products are, what the terms are, but the intention is to flatten out some of the cyclicality we normally seeing that business.

OK. And just one more quick question. Brian, you've divested cash be Genencor, you've done two rounds of restructuring. The company is in good shape. At what point to you think you will underwrite to grow through acquisitions?

We believe we've earned the right to grow. We are seeking the most attractive way to grow, and I'm not trying to rule anything out, but I've told people in the past acquisitions have not surfaced as the highest priority on our radar screen, and the reason for that, P.J., is as we surveyed opportunity, just how do you make money and how you not make money in a company like ours?

We continue to see a bundle of underexploited technologies, and underexploited derivatives, and that's some of the valuing up that you're seeing happening right now, and we put our first attention there. I don't want you to think we're ruling anything out. This is the year of corporate strategy for Eastman. Our Board is deeply involved. All of our executive team is deeply involved, we're getting the best advice we know how, and we're going to put together a coordinated view of how we want to grow. Again, we bring the most that we can bring to you in September, most of that we'll bring in September, but again, I'm not ruling anything out, but our first choice so far has been a technology driven approach and a market-driven approach on extensions, and growth in the areas where we are today.

Great, thank you.

We go next to Sergey Vasnetsov with Lehman Brothers with Sergey Vasnetsov

Good morning.

Good morning.

I want to ask you a question about debt reduction from Genencor this year. Clearly, the divestiture took a long time to get done, and it wasn't easy, I understand this, I think you've done it very well. Paying debt should be easy, and while appreciate assurances it will be done wisely, I'm wondering what's the reason for delay.

Sergey, you know, we're not delaying, we're -- you know, the market you know has it's difficult is and its intricacies, and we just want to be sure we're taking the steps as intelligently as we can. We've got the usual financial advisers retained, and we're taking a step-by-step.

OK, and do you think you will be done this year?

Yes.

OK, and also a related question, with the improvements in balance sheet and cash available, could you comment on share buybacks and dividend increase, if it's a possibility?

OK, yes, we are of course focused on overall shareholder value. We think we've got the dividend part of that more than right. We think the yield you know for the owners is very good, so on the dividend side I think we are set. Share buybacks is, you know, to us at this point, more of the last item on the list for shareholder value creation. We'd like to focus on our strategic investment alternatives, you know, first, second, and third. And any share buybacks concerns would be later.

Yes, supporting what Rich said, we do ask ourselves -- you know, we do compare our choices to share buyback. And we convince ourselves -- we have to be convinced that the choices we're making are better than share buyback. That's the hurdle against which the people that come to us have to justify their ideas. If we don't think that they have ideas that reach that hurdle, then that's when share buyback starts to come into view.

OK, thank you.

We go next to Chris Willis (ph), with Impella Fund (ph).

Good morning, I've got a couple of questions. Did you accrue for any incentive comp in your SG&A in this particular quarter? And can you give us any rough guidance on what you think incentive comp might be given your sort of view of the world at the moment for the full year?

Chris, the short answer is yes, you know, we accrue our incentive comp in line with our expectations for earnings. At this point, you know, I don't think it's appropriate to you know go into detail on it, but I'll assure you that it's baked into our first quarter actuals, and in our forward-looking thinking.

OK. And then on the propylene front, I mean propylene prices look like they're about to collapse, and you know, a lot of the weakness coming from Poly propylene itself, and I'm just curious have you packed up your utilization rates at any of your propylene derivative plants or you're still running pretty, you know, flat out as we move into the second quarter?

No, Chris, we're running at high rates. Our propylene derivatives are not Poly propylene, as you know ...

Right.

... and when you talk about supply demand equations, you've got to look at the derivative that we're talking about, and out of derivatives, they stay in pretty tight balance. So we're still cranking.

OK. And then one last question for Brian, have you got and the call from George Steinbrenner and Brian Cashman yet?

I'm very happy play in the game here, thanks anyway.

Any run for Ferguson? Anyways, thanks, I'm all set.

We go next to Dave Silver, with J.P. Morgan

Yes hi. I have a couple questions. I guess first, Brian, in looking at the CASPI results I mean you noted where the EBIT margins were, and when I think back to maybe a year or so ago, when the major restructuring effort was well underway, you kind of provided some guidance maybe one billion, a billion one of revenues and a 15 percent kind of operating margin. I was wondering you know in light of the passage of time and how things have been worked out there, what kind of guidance would you think in terms of how we should look at the performance of that business?

I would look at the business that you see right now, and think of it as a steady performer at the snapshot that you would take at this point, with the growth that you would expect in a paint industry. I don't think we're going to have 10 percent growth in this business it was that would imply that we're displacing other technologies and other materials faster than economic growth. I would think that we're going to grow faster in the developing parts of the world that use these technologies, so in places like Latin America, Asia, Eastern Europe, you can look at those -- those are going to be the highest growth rates, but we have some very good proprietary products. This is the CASPI, frankly, Dave, that was buried inside all the time and the results were obscured by the RIM businesses that we divested. So we have a lot of confidence -- actually, a lot of track record on this business, track record that was hard for you to see until we had restated. This kind of performance that you're seeing right now should be pretty indicative of what they're going to do. There is some tightness in the solvents area that's giving them a little bit extra punch, so they may not always be at a 20, but they're going to be high teens pretty much most of their lives.

OK. And then maybe a similar question or similar type of question about your fibers group. You know, the results seem to persistently kind of outperform the prior year and expectations, could you may be just comment on this quarter, in terms of was there any unusual either lumpiness or an unusual amount of co-producer sales? And then maybe more broadly, if we're looking out next couple of years, what type of fundamental underlying growth rate in that business should we be thinking about?

I'm glad you asked about fibers because our view of fibers has been evolving significantly here over the last year or so. Two years ago if you asked that question I would have said that we think of this as a flat to slightly down business, stable owner, but you know not growing. We have a slightly different view today. We think there is upside to this business and some growth in this business. It has to do with industry structure, it has to do with what's happening in the world with the lengthening of filters, in some cases as much as 20 percent over time. Our costs position and our unique costs position here for instance in our flake we have people lining up outside the plant trying to get flake because we have a very good costs position on flake. This is a business where we are evolving our view, and I would look at the quarter that you see now and think of that has the model for how we're going to perform this year, but thinking forward in your question, we see upside here, and that is a relatively new statement for us, and we'll say again more about that as we get to the investor day time, but that's as far as I'm willing to go now.

All right, and then one other question. I guess you've done an awful lot of restructuring, as some callers have mentioned, I guess one area that may be still remains to be addressed a little bit would be the developing business area. So I was just wondering if you could update us on, you know, what your view is for I guess completing the program that you began about a year ago.

Yes, also a good question. There has been a lot of developments or restructuring in the DV business that you can't -- it's not visible to you. What's not visible to you is what was about 20 projects is now about four. We're disproportionately investing in those, and they are undergoing their own special beauty contest that gets decided sometime around the middle of this year. You should think of this developing business area as more out of and R&D shop for the moment. And if you combine those DV costs together with our R&D costs you'll see something in the neighborhood of three percent of sales for the company. When you think about it that way it should not be a troubling view for you that the DB plus R&D is a three percent investment in growth and we're going to be making some decisions about the things we're going to disproportionately invest in and things we're going to invest less in. I would expect a profit of investment there to change later on this year but that's something we ought to tell you later on this year.

One comment I should make is that a big chunk of the money that was going out the door was Sindian related and we have very successfully moved the logistics back in-house without a blip. The Sindian expenditures are trailing down to the last bit that's going to happen this quarter and then it should be gone and that's one of those big outflows that has disappeared but right question I'll be able to give you more color on that in September.

Okay thanks very much.

We do next to Kevin McCarthy with Bank of America Securities.

Good morning Brian. Congratulations on great results. It strikes me that your outlook on volumes is far more sanguine than we've heard elsewhere in the chemical industry and I was wondering if you could comment on the sequential trend that you witnessed throughout the quarter on volumes and also whether or not you believe you've gained any meaningful amount of market share in your businesses or do you think there's just simply a fundamental disconnect between what the stock market outlook is for the macro environment and what you believe is the reality here.

Yes. I don't want you to misunderstand my comments about forward-looking volumes. The major story as complex as we are that complexity makes us hard to understand but it also gives us really interesting opportunities to optimize what we have. We have been able to share shift our volumes to the higher value derivatives and find opportunities to sell those especially globally. Some of that global growth that you see is related to those higher value derivatives. In the aggregate the company's running a pretty high operating factors and we're not trying to tell you that we have some kind of a great huge volume growth story going forward. The big story for us is going to me more about upgrading the product mix.

Remember we had a 12 percent volume increase last year and so we're maybe catching our breath a little bit from the 12 percent volume increase that we had last year and getting to high operating factors. In January we had a little bit of what we thought was going to happen in December kind of rolled over into January so we had a really good January and that made it a tough comparison for February and March.

But I've got to tell you April's looking really strong. We feel May and June are going to be very strong. So we're not worried as we sit here now about volumes going off some kind of a cliff, but if you're thinking about translating all that comment into earnings strength do not underestimate the earnings power of us valuing up this portfolio. That's where we have a lot of our focus.

Okay that's helpful. Then I thought I heard you say in SPBO Bryan that you think that business is going to be up year over year was not the case in the first quarter as far as I can tell and a similar worries about the macro environment. What's going on in that business that gives you confidence that it's going to be better this year than last?

Okay just so we're on the same page here. I think last year SPBO was 66. Does that sound right? And we had a 21 in the first quarter so if you did four times 21 you'd have a better year than 2004.

Right, but I mean the first quarter versus the first quarter of -

Of last year-

Of '04 was flattish to slightly down it looks like and yet you saying it's going to be up for the year and can you give us a little bit more visibility on the trajectory there?

Yeah, I got you. A couple of things going on there. In our cellulostic plastics Amanda, Kodak and one other customer were off this quarter due to their troubles. That is going to in part reconcile itself. Remember last year we had a zero in the fourth quarter that was due to a variety of shutdowns and very high material costs and there's a time delay in the pricing that is really still an issue I've got to say. The development in R&D that's going on and especially co-polyesters is still showing great promise with great double digit growth in those areas. We think the combination of the R&D, the momentum that they have and the fact that we don't expect to repeat a fourth quarter situation like we had last year tells us we're going to have a better year this year.

That makes sense. Thanks very much.

We go next to Jeffrey Cianci with UBS.

Hey Bryan let me give you a softball pitch on evaluation discussion you talked about. I'll frame it and then get your response. Now clearly people look backwards at your earnings cycles and say last cycle we had a certain peak and we had a certain trough and it's very clear now that none of us right now are faster at getting toward a peak condition than that perhaps those peak earnings are somewhere north of $7.00 is all this man's going to imply. I think you might have passed that test. The next test is how far down does the down cycle have to be? You make a good point and said that that is just a small part of the SP-- so how much of that (inaudible) and performance and specialty business maybe sustainable so that the next trough is not like the dollar a share we saw a couple of years ago. So I'll set you up that way and hear your response.

You know if I was Dennis Miller this would be a rant. Yeah that is the softball. You're teeing me up for the story that I want to tell over and over again-

But my point being it's hard for us to quantify. If we don't know the story it's you know what kind of numbers do we get.

Let me lead back into your answer. Let me start re-emphasizing kind of a bumper sticker that I've been pitching you guys here for the last two or three times. Think about a company that's got a 10 percent operating margin and is growing something greater than GDP and then I start building that up segment by segment. How do I get to that? You start with the fibrous segment where I express not flatness but maybe some north side movements. You've got a twenty something operating margin for the fibrous guides.

Next you go to the CASPI guys also growing also with a high teens or a twenty something kind of a operating margin. The specialty plastics guys also growing, also steady with at 15ish kind of operating margin. So then your question on cyclical to getting to that is goes to two segments. Goes to the PCIBO segment and the polymer segment. When we do the math on how do we flatten out some of those wrinkles, I mentioned about the way we are trying to lengthen our muscles on the PCIBO business through some of these contractual and business and commercial techniques.

Also the way we are loading up derivatives. Again the valuing up piece of this putting our aldehydes for instance, and the oxo into the derivatives that are less cyclical have more strength that's a piece of what's going on in this valuing up story. That's the way we start to stretch out some of that so it doesn't dip as much.

Going to polymers. Again I want to mentioned the IntegRex breakthrough technology. This is not just about costs it's also about what this product can do and that's the story you have to be told. That puts us - the positioning that that gives us when you live at the best spot in a supply curve the positioning that it gives you for something like PET is that you operate at higher rates and you have higher sustained margins and we can do this mathematically. You don't have to wonder. We can build this up.

We've used our famous mountain charts to try to build these up. We're going to use that same kind of famous mountain chart for earnings to illustrate these points when we get around to talking in September, but that's how we built - I would start with the over arching argument of the ten percent operating margin roughly six billion plus company growing at some greater than GDP number and then me justifying that statement by building it up segment by segment and explaining each piece.

I'll get you there and in the meantime as we go to investor conferences whether it's myself or Rich they can get you there either in public comments or private comments - private conversations. So we look - this is probably the wrong place but if you want to bet into the private conversation of how we build that up and the public disclosure that we've made around that kind of putting color on that we can do that.

Fair enough and then the CASPI and the performance - you're not going to imply here that there can't be a weak economy hurting the numbers there right? You're just saying the amount of cyclical down turn in the specialty business would be much less? I'm just curious. Is there since '03 a certain number of permanent costs perhaps that have gone away?

Oh yeah. There's a bunch of permanent costs and I-

But we can only put numbers on it?

Hundreds, hundreds, and hundreds of million of dollars again-I'd rather have Greg just talk to you about that one just because I don't want to give you some kind of a bad number but in one of the divisions we have the number - but I don't have it is for the whole corporation but it's a big number.

Thank you and unless we can throw in more mundane quick question on PET the price. It doesn't appear to have moved a whole lot in March but April we've got an increase of ten. Can you talk about - you know this is kind of the last guess for the season. Can we get some pricing in the second quarter?

Depends on what the raws do because this whole things about margin above raws and it's going to be the kind of game of chicken between the raw material suppliers and us and our customers. Too early to say, but we're in a margin - we believe we're in a position to preserve our margins and we're still trying to expand them.

Okay great thanks Brian.

We go next to Frank Deno (ph) with Attage Capital (ph).

I just want to follow-up on that conversation. If I go back to your turtle charts-

Yeah.

How many turtles do you still have that are under water and how many are in the logs sunning themselves?

The turtle charts were a very useful tool Frank for illustrating where you made money and where you don't. It became very visible to everybody to use a focal point. Most of the way we drew them before they turned from turtles to Niche swooches they just kind of went up and stopped. Now we're having to redraw them and now if you were drawing them by businesses before then we started drawing them by products, they we draw them by customers then we draw them by order sizes. You can always draw a turtle. We continue to segment ourselves in a lot of different ways to find out where are we underperforming. We still have a few turtles. The way we drew them before there aren't a lot left and some of that is cyclical. We expect some of those would return in 2007 so we're not blind to that. We are anticipating that some of those are having some pretty good days that could drift away in '07 especially in the two cyclical businesses around polymers and PCI. But it's what's important. You don't get contentious because they stopped okay we're done. You redraw them. You segment them different ways and you continue to find opportunity.

The reason I asked or one reason is given what you just reported people may have to rethink what you are as a company because if I did the numbers right - if I just took your polymers division in the first quarter and put it to zero you still earn a buck thirty and if I start annualizing that sort of stuff because I don't want to do, but you get a number roughly near five and like a lot of the diversify how do we say not so special specialty chemical companies are selling at 13 multiples on this years earnings and if I start doing that you know I get like 65 without even considering polymer. So trying to figure out-

There you get somebody's sense of righteous indignation that I was spewing forth on earlier in the call here Frank. If you back into the ten percent EFO kind of thought that I was giving you pretty quickly back into the normalized earnings number that's a four something at least and that's the message that we're trying to convey and we will work as hard as we can with everybody so that they have a better understanding of that. We truly are a different company that's due to the work of good people of Eastman the thousands of them working everyday for the last three and a half years. Convincing you of the reality of what we are is what we're all about this year and we'll continue to try to help you understand that.

Okay thanks.

We go next to Bob Refus (ph) with Bear Stearns.

Hello.

Hello.

Yeah hi. Brian or Rich could you just give us some unused markets that you see are stronger than you expected or maybe weaker and then kind of an outlook - kind of walk us through like what you're seeing in your markets.

If I think about big markets there is always a steadiness in the consumables in terms of demand so the consumables being like packaging. There's a pretty steady demand in those pretty much all the time. It's all about margins and supply demand on the supply side but the steadiness there is good. When I think about things like building and construction those have been very strong and since we're not completely tied to like new home building or new building building it's more about BIY stuff on the weekend because the sun came out and you know the house looks bad. We see a lot of strengths there. We are tied in some respects to OEM businesses - OEM auto businesses in our coatings. But again a significant percentage of our profitability at least is tied to repaint more than it is - so we would be stronger than you would anticipate in supplying an OEM automobile because it's smaller fraction that is our OEMs first time painting and a lot of it is other repaint.

Asia, Latin America are stronger I think than people anticipate when they just kind of look at the general trends. They've been stronger for us at least. Asia and Latin America have been strong. I guess I stop there. Rich do you have-

Wouldn't have anything-

And according to fibers the fibers market is very strong for us.

Let me just fill in one thing. I forget who asked it. I think Jeff asked it. When you're looking at your cost cutting in terms of you're looking for incremental - I know you don't know the exact dollar and all buy my question is that when you're looking at the earnings gains for this year or relative to a year ago how much is kind of top of the head would you say, not dollars but a lot of fifty percent of the game was due to costs cutting, permanent cost cutting. Being able to keep it or actually it was due to price increase and I'm just kind of like get a flavor of what you guys think in terms of what lead to this earnings explosion?

Cost cutting was meaningful but the big horse here was pricing. It's hard to say it any other way. I got to say though that the pricing was to get this to a basic level of profitability where we need to be to be able to sustain the company, but the pricing was meaningful. It was a minor fraction. It was less than 25 percent. The big horse was pricing.

Okay I appreciate that. Thanks.

And we go next to Gregg Goodnight with UBS.

Good morning Brian.

Hey good morning.

A question. There's been quite a bit in the news about coal gasification in possible inclusion of that technology and some of the energy bills in the national legislation going forward. Would you comment on where you see opportunities specifically for your company be it licensing or taking say more substantial position in this technology?

Yeah this is the question that the R&D guys are always worried I'm going to answer on a conference call so right now they're on the edge of their seats.

Well I'm glad I asked it.

This continent and maybe not only this continent other parts of the world are facing some interesting choices about raw materials as the world unfolds it continues to demand more oil. China the rest of the developing economies. I think we all see a discontinuity in petroleum and all of its derivatives happening because of global demand and so it brings up the question of how will the people that do something besides transportation fuels react to all of this. There's a great deal of effort going on by companies and us to evaluate that question of how will we react to a changing world where petroleum becomes very expensive and how will you fit other choices into your future. Coal is in that conversation. Coal gasification is in that conversation. The way that that plays out is still unclear.

We have a number of ideas that are very interesting ideas for how that can play out but it's just too early. But it's fair to say that strategically in a general direction we view a higher reliability on coal as a raw in our future and it's probably a good thing. The question is how and when do we do that and what derivatives. What is the right way to think about that and it's just too early to make comments about that. But in terms of us immediately participating in some kind of a deal some place to enable a power manufacturer that would have to some how fit into these longer range plans. There's only so much of this opportunistic we'll help you build it power plant stuff that we can do that makes sense. Ultimately how are we participate in the near term and has to figure into that longer term game plan.

Could you give a brief update on the legislative initiative? Don't you have a senator for Tennessee that's very active in this area?

We do. Lamar Alexander's on the energy committee. He and Senator Frisk of course are very close. They understand the dilemma that I talked about globally in terms of energy security for our country and the fact that we are the Saudi Arabia of coal and that it's in the national interests to understand the technologies and develop the technologies that cleanly and economically deliver energy and other benefits to our economy. So he is understanding and working on it.

Vis-à-vis ethanol it seems like a no brainer.

This is certainly not a case where we're seeking some kind of subsidized position. We're expecting these things to stand on their own two legs without a whole lot of help. Getting them started sometimes needs a little help but after they get started they can stand on their own two legs.

That's all I have. Thank you Brian.

Let's make the next question the last one please.

Ladies and gentlemen we have no further questions on our roster at this time therefore Mr. Riddle I'll turn the conference over to you for any closing remarks.

Okay thanks again everybody for joining us this morning. Please feel free to call me at 423-229-8692 for any additional questions. A replay of this conference call will be available this afternoon through Friday May 6th. Have a great day.

And ladies gentlemen this does conclude today's Eastman Chemical Company First Quarter Earnings Conference Call. We do appreciate your participation and you may disconnect at this time.