伊士曼化學 (EMN) 2005 Q4 法說會逐字稿

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

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

Okay, thanks, Rufus, and good morning, everyone, and thank you for joining us. On the call with me today are Brian Ferguson, Chairman and CEO, and Rich Lorraine, Senior Vice President and Chief Financial Officer.

Before we begin, 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 2006. 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 2005 financial results new release on our Web site and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2005 and the Form 10-K to be filed for 2005.

With that, I will turn the call over to Brian.

Well, good morning, everyone. Thanks for joining us.

My agenda of comments will start with some corporate highlights for the year and the quarter, talk about the segments as well in the same timeframes, some comments about the regions, the first-quarter 2006 outlook and as always, I'd like to wrap up with a few comments on corporate strategy.

Now, turning to the corporate highlights, last night, we announced full-year 2005 earnings per share that are the best in ten years, and they are the second-best in our company's history. We also announced fourth-quarter earnings per share that were the best in ten years. The pattern of our earnings matched what we told you in our second-quarter 2005 earnings release. About 60% of our earnings for the year came in the first half, while about 40% came in the second half of the year, and that's our customary pattern. Our full-year 2005 sales revenue was the best in our company's history, topping the record we set last year. We were able to maintain our sales volume right at the record level we set in 2004. You may remember that, in 2004, we set a company record for sales volume with a 12% year-over-year increase, excluding the divested CASPI businesses.

On this call last year, I talked about 2005 as a year where we were focused on recovering our margins over raw materials and energy costs. There were certainly challenges in making this happen, like for instance the worst natural disasters in our nation's history that drove raw material and energy costs up approximately $500 million in 2005. Just so you know, that was on top of a $600 million increase in 2004, meaning that we've seen more than $1 billion of higher costs in the last two years. But despite all of that, we made great progress on those challenges.

In 2005, we increase our gross profit by over $400 million and our gross margin increased by 500 basis points to just under 20%. This drop to our earnings line -- and increased over $400 million on operating earnings, excluding items. Our operating margin improved by over 500 basis points to 11%.

I want to take this opportunity to say thanks to all of the Eastman employees for a truly great year. Their dedication and ingenuity and ability to focus in the face of significant challenges are the reason we are reporting such great results. Later, I will talk about how we're going to build on these great results.

Now, I want to transition to some segment highlights for both the full year and the fourth quarter. If you are familiar with Eastman and you had a chance to attend our 2005 investor day or review the slides on our Web site, then you are familiar with what we call our strong base of earnings. This refers to our Fibers, CASPI, and Specialty Plastics segments. They delivered truly great results in 2005. Their combined operating margin was over 17%, a 240 basis point improvement over 2004. Their $500 million of operating earnings accounted for almost two-thirds of our corporate operating earnings despite their revenue being about 40% of the overall corporate revenue.

Now, looking at them by segment, starting with Fibers, the Fibers operating earnings were $207 million in 2005, about a $60 million improvement over 2004. Their 2005 operating margin was 24%, about a 400 basis point improvement year-over-year. The increase is due primarily to structural changes in their key markets, including lengthening of cigarette filters outside the U.S., substitute of acetate tow for polypropylene, primarily in China, and the exit of a large competitor from the acetate yarn market. We also continued to benefit from our use of coal as the key raw material in this segment.

Next is CASPI, where 2005 operating earnings improved by almost $70 million compared with 2004, excluding some results from the divested businesses. Fourth-quarter earnings for CASPI also improved year-over-year, although they were impacted by differences in seasonal buying patterns and difficulties in sourcing some raw materials after the hurricanes. This segment benefited throughout the year from their ability to raise prices, particularly in their cyclical commodity product lines. They also continue to benefit from the many actions we have taken over the last several years to upgrade their product mix and reduce costs. I look at 2005 as a year when CASPI returns to their historical profitability levels with an 18% operating margin, and we continue to expect they will have strong results going forward.

Also in our strong base of earnings is the Specialty Plastics segment. Despite some challenges in 2005, Specialty Plastics reported an operating margin of 9%. Something that is not visible to you is that they actually grew their gross profit by $23 million or 14%, compared to 2004, but we plowed those gains back into some growth investments for Specialty Plastics, and we will continue to do some of that again this year.

Raw material and energy costs were especially hard on Specialty Plastics in 2005. Remember that they make and sell a lot of polyesters and paraxylene is a key raw material for them. The paraxylene price increased by 50% between August and September, and that's difficult for any business and particularly a specialty business to recover in a short period. You might recall that this segment faced a similar challenge in the fourth quarter of 2004, but they were able to improve their fourth-quarter 2005 operating earnings compared with last year. We continue to have good volume growth in copolyester, in the 6 to 8% range annually, and we had a capital project to support this growth that Rich will talk about in his remarks. In recent years, our copolyester growth has been offset by declining acetate usage in photographic films, and we expect, over time, that acetate usage in the photographic markets will bottom out and we will again grow acetates in the non-photographic applications.

Now, transitioning to our more cyclical segments, Performance Chemicals and Intermediates had a great year with operating earnings of $172 million, yielding an operating margin of 11%. This is an improvement of about $120 million over 2004. This segment benefited throughout the year from their ability to increase prices in the face of ever-higher raw material and energy costs. They also benefited from long-term supply arrangements with key customers and from a $10 million acetyl technology licensing fee. In the fourth quarter, their volumes did trend down for a few reasons. First, we had an operational disruption in our Texas crackers that reduced some volumes in this segment, and we also experienced lower volumes and margins in some propylene derivatives due to increased competition in their market. We expect these will continue in 2006.

Turning now to the Polymers segment, for full year 2005, polymers' operating earnings were the best since 1995, which, you will recall, was the best-ever year for the PET industry. Their 2005 sales revenue also set a record, topping the record they set in 2004. A key contributor to the strong results was polyethylene, which had a good year due primarily to the up-cycle for the ethylene and polyethylene segments.

A quick comment on the fourth quarter -- the operational disruption in Texas that I just mentioned required that we purchased expensive ethylene, which hurt our polyethylene margins, but despite that, polyethylene still had a good fourth quarter.

Next, on PET, I'd like to speak about that in two parts. I'd like to separate my comments on North American PET, where we are investing, from the overall PET results elsewhere. We had another strong year in North American PET because we are vertically integrated back to paraxylene. Our North American PET business has now earned above the cost of capital five out of the last six years. Our high capital efficiency generates a relatively high ratio of annual sales dollars to invested capital dollars, and that allows us to create strong returns on invested capital despite relatively low operating margins. This only gets better when we add our new IntegRex facility to the asset mix later this year.

Regarding the fourth quarter for North American PET, on our conference call on October, I talked about more headwinds than tailwinds in North America, and that turned out to be exactly the case. At that conference call, we were a few weeks after the hurricanes. Paraxylene, ethylene glycol and PET capacities were down across the entire Gulf Coast and of course, costs were skyrocketing. We implemented a surcharge to offset these high costs, and we encouraged customers to destock their inventories and to find other sources until our suppliers could come back online. As you might expect, our customers took this advice and Asian producers took advantage of the arbitrage opportunity to significantly increase their imports to North America. Our fourth-quarter PET volumes were down dramatically as a result, and the overhang from Asia will affect our first-quarter volumes as well. I really don't think there was a full appreciation in the industry or in the investor community for how much the hurricanes would impact PET. But the Asian arbitrage opportunity is drying up now, and we will again be above the cost of capital for North America PET in 2006.

The second part of the conversation -- where we did not have good performance for PET, both in the fourth quarter and in all of 2005, was in our non-integrated assets, particularly in Europe. During the year, additional capacity came onstream in Europe, reducing the regional operating rates to the mid 80s for the year. In addition, end market demand was below normal, primarily due to colder temperatures throughout the year.

We are taking strategic actions to increase the value creation of our PET assets and businesses. In other words, we recognize that everyone has to carry their share of the value-creation job in our company, and our actions will reflect this. But the short-term perspective is that PET only contributed about 10% of our total corporate operating earnings in 2005. The message there is that PET is not a significant short-term lever to our earning story either positively or negatively, until we get farther down our strategic road.

Now, some comments on the regions, beginning with North America. Full-year North American revenues increased by 10%, as higher selling prices more than offset a 4% decline in volumes, which was due to the divestiture of underperforming CASPI product lines. The percent of our revenue in North America stayed constant at just under 60% of the total Company's revenues. Our profitability in North America, however, increased by more than 150%, excluding certain items, due to higher selling prices and cost-reduction efforts. The increase is also a reflection of our vertical integration and our use of coal as a key raw material at our North American facilities.

In Europe, our revenue was down 8%, primarily due to a 17% reduction in volumes. As was the case in North America, the lower volume is mainly due to the CASPI divestiture. Our profitability in Europe also declined, primarily due to the performance of PET in Europe that I mentioned earlier.

Asia-Pacific revenue increased by 18% in 2005 compared with 2004, driven by higher prices and volumes, and we continue to improve our profitability in Asia. In 2005, we increased our operating earnings in Asia-Pacific by 50%, and this is on top of doubling our operating earnings in 2004 compared with 2003. We expect to continue to grow in Asia and to continue the progress we are making on improving the profitability.

Lastly, Latin America revenue grew by 14% for the year, driven by higher selling prices, primarily in the polymers segment.

Now, some comments on the first quarter -- looking at our first-quarter forecasts, we are off to a strong start in all our businesses with just a couple of exceptions. We will have the lingering Asian overhang in PET that I discussed, and we are a bit soft in some propylene derivatives that we sell from the PCI segment. All the other businesses are expected to do well. We also expect continued high and volatile raw material energy costs; I don't think that's a surprise. As a result, we believe the current range of first-quarter 2006 analyst estimates on First Call, which is currently $1.29 to $1.54, reasonably reflects the variability in the quarter, but our current expectation is that earnings will be toward the lower end of that range.

Looking at the full year, we expect that our strong base of earnings will not deteriorate, but that we will have to manage through the challenges in our more cyclical segments. Barring a significant change in the overall economic environment, we continue to feel good about the outlook for 2006.

Now, I want to conclude with some comments on corporate strategy. But before doing that, I want to look back for just a minute. In 2004, we were focused on turnaround actions and we were successful in those efforts. 2004 earnings doubled in comparison with '03. We completed the divestiture of underperforming CASPI businesses and product lines. We strengthened our global polyester manufacturing structure and we completed the sale of our interest in Genencor in early 2005.

At the beginning of 2005, I commented that we were transitioning from focusing solely on turnaround actions to also focusing on growth initiatives. But we said we would not lose our focus on improving our margins and we made great progress on that in 2005, more than doubling our earnings compared with '04. We also said we would use the same discipline in growing the Company that we used in turning it around, and that discipline is reflected in our strong financial profile which Rich will talk about in a minute.

Now looking forward at 2006, we have a lot on our plate again, including our journey to increase our use of coal as a raw material, continued progress on our integrated polyester strategy, leveraging our IntegRex technology in PET and copolyester technology in Specialty Plastics, completing the construction of our IntegRex facility in Columbia, South Carolina, which is by the way on budget and on schedule for the fourth quarter of 2006, when we will start up. We also have growth options in Europe and Asia, for instance acetate tow to take advantage of their industry and market trends.

Later this year, I will give you additional insight into the progress we are making in these areas and perhaps in some others, but let me sum up by saying that I am very optimistic about the prospects for our company. I expect 2006 to be another strong year for Eastman.

With that, I will turn it over to Rich.

Thanks, Brian. Good morning, everyone.

I'm going to cover, this morning, our cash flow and bring that to life a little bit, roll down to our net debt position and wrap it up with some overall financial metrics.

Starting with cash flow, our cash from operations for the full year 2005 was $764 million; 390 million of that was generated during the fourth quarter. Included in that, our depreciation and amortization declined by about 18 million in 2005 to 304 million, and that's about in line with expectations. We also expect to be pretty close to the 2005 level at between 305 and 310 million going forward.

On working capital, our fourth quarter was positive. Our receivables declined by about 100 million as revenues trended down toward the end of the year. As a result, the receivables declined by a net of about 60 million during the year.

Our Days Sales Outstanding continues to be in great shape, and we are just under 50 days there. Inventories came down in the fourth quarter. That's our normal seasonal pattern, but as you can see, they're up a little over 100 million for the year, primarily driven by higher raw material costs, but also we had to rebuild certain product areas to more normal levels, where we were very low coming into 2005. Overall, working capital declined by about $20 million.

Another item included in our cash from operations is our pension contribution. In 2005, we contributed $165 million to the U.S. defined benefit pension plan, compared to a nominal contribution in 2004 of $3 million. You see the effect of this in the liabilities for employee benefits line change. For 2006, we anticipate contributing approximately $75 million to the U.S. defined benefit pension plan, and that will keep us at about a 90% funded level, which is our target.

There were a number of other one-time-type items in our cash flow, and I want to -- we've talked about them in the past but I want to remind you of them again. We incurred a debt-extinguishment cost of $44 million related to the redemption of 500 million in bonds. We also had some positives -- help from some one-time items. We received payment of a $50 million note related to the divestiture of the CASPI businesses and product lines. We enjoyed the proceeds of $417 million from the divestiture of our interest in Genencor, and stock option exercises during the year were a $100 million source of cash.

On uses of cash, our capital expenditures totaled $343 million in 2005. That's within the range we've been talking about all year and a little bit at the lower end of that range.

Looking forward at 2006, I expect this to increase to about $450 million.

Some of the highlights in that -- we are continuing to fund our IntegRex PET facility in South Carolina, which Brian indicated is on budget and on schedule for fourth-quarter 2006 start up. We are also funding a project to increase our CHDM capacity, along with some supporting infrastructure, in support of the growth of copolyester in our Specialty Plastics segment. We do expect the copolyester to grow between 6% to 8% annually over the next several years, and CHDM is a key modifier used to provide improved functionality to polyester in a broad variety of applications. We are also funding a variety of smaller-growth projects intended to increase our manufacturing capacity and efficiency in key areas of the Company. We also continue to have our dividend of course as a priority use of cash, and we've now paid a dividend 48 straight quarters as a public company.

Also during the fourth quarter, we made an intercompany loan of $125 million to [Primusthere], our joint venture with [Rodea], which they used to repay a third-party loan which had been previously guaranteed by Eastman.

I'm sure there's a question forming again on the potential for the repurchase of shares. As we've said previously, we are continuing to make progress on our strategic growth initiatives, and that's a key priority for funding. We will revisit the question of repurchase of shares in the second half of 2006 and give you a more substantive comment at that time.

Looking at net debt, this is a very solid picture. We ended the year with net debt of about $1 billion, a decline of over $600 million from the beginning of the year. Since the end of 2003, we've reduced our net debt by almost $1 billion. The impact of this on our interest rate -- interest expense is a decline in 2005 by about $15 million. We can see about that much of a decline again in 2006 as we see the full-year impacts of the changes.

Also during the fourth quarter, we did complete the repatriation of $321 million under the provisions of the American Jobs Creation Act. This is consistent with the remarks we made during the third-quarter call when we discussed that we were evaluating this transaction. The amount we've repatriated is just slightly below the low end of the range I gave you at that time. Related to that transaction, we've borrowed about 190 million under a new European credit facility and took a tax charge in the quarter specifically related to that repatriation of $12 million.

To round out the tax discussion and our effective tax rate, the tax rate, excluding items, was about 30%, which is in line with our previous guidance. If you look at -- and just make a straight calculation off our table, it's about 29%. We had -- a lot of true-ups are in there, as we closed out several audit years in the fourth quarter. Looking forward, due to the increase in earnings in North America, as Brian mentioned earlier, our tax rate is expected to trend up in 2006 to approximately 33%. I will keep you apprized on this as we go through the year.

I'd like to close with a few comments on key overall financial metrics. During our investor day in September, I showed a number of charts detailing our expectations for return on invested capital and our goal of generating evaluating spread about the cost of capital through the cycle. I am very pleased with our return on capital for 2005, which was almost 19%; that compares with about 9% in 2004, excluding items for both periods. This is terrific performance, and our ROIC is obviously well above the cost of capital for 2005.

With all of the actions we've taken over the last few years, obviously we are on pretty firm financial footing now and we've created a lot of flexibility for various strategic actions in the future. As I mentioned previously, we reduced our net debt by over 600 million in 2005 and by almost $1 billion since 2004. We also made great progress on improving stockholders equity during the year, which increased by $400 million. It's up $600 million since 2004, now standing at $1.6 billion. When you add this all up, we are rated a solid triple-B, B-double-A-2 by all three of the rating agencies. Looking forward, our outlook is for generating cash over the next several years continues to be solid.

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

Okay, thanks. Rufus, we are now ready for questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). P.J. Juvekar, Citigroup.

Congratulations on a $6 EPS number.

Thank you, sir.

If I look at this quarter, almost half of the money was made in Fiber, and that ratio was more 20 to 25% in the first three quarters. So, were there any extra shipments in the quarter? I know this is a lumpy business. Then what do you expect going forward? What could that ratio be?

This wasn't an especially lumpy quarter for the fourth quarter for Fibers. You're just seeing the effect of those structural changes kind of chugging along. This is the kind of year you should have of Fibers -- they had a growth spurt, pretty strong growth spurt in 2005, and that is a growth spurt that's beyond how we characterize this business as sort of a 3% grower over time, but they are strong and they will continue to be strong going into next year.

So you are saying this could contribute as much as 50% of earnings going forward (inaudible)?

No, no, no. I wouldn't -- you'll have to look at the year to characterize it, and I think the strength that they had this year is going to be looking like 2006 as well, P.J. I didn't mean to over-emphasize.

Okay, I got it. Then in polymers, you know, we had some imports; those imports are drying up now. Net/net in 2006, do you expect the U.S. to be net importer of PET?

A net importer of PET, yes, there will be a bit. I mean, we expect it to return to the more traditional levels that we've had in prior years. This was the most remarkable year; we've had the most significant supply disruption in the history of our company, basically, in that fourth quarter. It caused the most dramatic drop in volumes because we just couldn't get the raw materials. That attracted a lot of imports. That is returning back to its more normal levels, and we see that happening right now.

Okay. Is there any need to restructure the European piece of your businesses?

The comments you heard me make are that we do best in our vertically integrated sites. Those are Rotterdam and Colombia. We are doing the least well on our nonintegrated sites, and my comments reflected that we really need for everybody to carry their part of the load. So we have that question very much on our mind about what are we going to do about that, P.J.

Okay, thank you.

Mike Judd, Greenwich Consultants.

On the operational problem in Longview with the cracker, could you just sort of describe what the issue was, how long it lasted?

Sure. We had a compressor failure in the fourth quarter that led to some other equipment issues in the site there. That meant we had one of our crackers down for a while, bad timing on that because you had to buy a bunch of expensive ethylene as a result. The worst part of it was in the fourth quarter. I think the characterization we gave you was that it was roughly $12 million, which is in the neighborhood of $0.10 a share; we probably gave up $0.10 a share from that one event right there in that quarter. There's a bit of overhang coming into the first quarter with that. It's exponentially improving. We are probably going to be affected all the way into the middle of the year a bit, but we think we're going to be running in the 90% range in our crackers. We would rather be running at 100% or over but probably able to run at the 90% level until we get everything fixed.

Okay. Is this some sort of a seal problem or what is it?

It was, as I said -- I would be saying more than I either ought to our know if I got into details there, but I think it was a compressor failure. It's something that we can easily repair. It just takes some time.

Okay. Then with PET, where are inventory levels currently, both at the producer level and your sense at least where things are at the converter level?

I'm not sure I've got a good comment for you on the inventory level. I guess I would get Greg to get back with whenever we can say about that.

What we see is that the raw materials are returning to more normal levels -- rising in Asia. Our raw materials are dropping here and that is reducing the arbitrage that existed, the raw materials arbitrage. Pricing has been floating around. I would guess that, you know, you are seeing rising prices in the marketplace. We may have over-corrected in North America a bit rising prices in North America at this point, which would indicate that we believe we inventories are at reasonable levels.

Okay. Then just a couple of quick things on the balance sheet -- you mentioned that net debt was around 1 billion. That implies cash of around 625 million. Is that right?

That's a little bit high, but yes, we are looking at cash about 525 million.

Okay. Then you talked about the inventory number, but unfortunately it's not included on your balance sheet Table 10. What is the actual inventory number, please?

Yes, we don't have that today; it will be available in our K, when we file it.

Just it looks like, doing the math here, that to get to -- you reported -- the clean number was $0.80, right? Or was it $0.90?

$0.81 is the GAAP number.

90 is the pro forma.

Okay, right, so the 90 number, doesn't that imply a tax rate of like 22% and not 30%?

For the quarter as an individual quarter, all-in, obviously the short answer is yes. We had quite a few true-ups of some closed tax years that we of course had to deal with in the fourth quarter and we also the ability to use some foreign tax credits to a greater extent than we felt we were able to with this repatriation. But again, excluding items, it's back close to 30%, and on a full-year basis, it's pretty close to where we've been guiding.

We've been guiding all year long toward 30 in 2005. It hit pretty close to 30. As you might guess -- well, you are making estimates as to how things are going to go at the end of the year. You take conservative positions during the year and then you look at the reality of what actually happened in the fourth quarter and it can go either way for you. But the 30 is the number we guided toward and it's what we got for the year.

Frank Mitsch, BB&T Capital Markets.

Good morning and nice year, guys. As we look at 2005 and looking at where we are starting 2006, and you know, you did a good job of talking about the various headwinds here, so I mean it would be easy to presume that perhaps '06 is going to be below '05. Should we be thinking about '05 as kind of a peak year for Eastman Chemical?

We characterized '05 as a year where we were picking up margins through mix and pricing, if you remember that, Frank. There's only so far you can go with that at the end of the day. We have done a good job of that in 2005; we are in good shape going into 2006. But eventually, you've got to have more juice. So, yes, I mean when you hear us announcing that we are doing a project to pick up our capacities in the Specialty Plastics area, the IntegRex work, the fibers, those are all about providing some more juice that we can sell.

We don't have, during this year, much more volume or any volume besides capacity creep coming into the system, so the environment is just a bit softer, not a lot softer but a bit softer than it was last year and we have pretty much the volumes we had to work with last year. So, I hate to characterize it as a peak year because when we look out, we see a much better outlook for the Company in the future as we get down the road. But working with what we have right now, it's just a little bit softer than it was last year.

Okay, great. Then, could you spend some time talking about your business over in Asia? I know that, from a volume basis, there were some -- there was a major mix effect so your level of business in Asia was being masked by the discontinuation of poor profitable -- poor-profit business. When do we anniversary those sorts of decisions so we can see what your topline growth and your volume growth in that part of the world will really be?

We've probably gotten most of that done. Probably from this point forward, the more dramatic actions we were taking -- just so everybody knows what Frank's saying here, over the last year or two, we have said that we are picking up our product mix in Asia and as a result, you'll see the earnings line grow faster than the sales line, and that has exactly been the case. The businesses that have been growing in Asia, Frank, are the strong base. It's the Fibers, CASPI, Specialty Plastics family that's been growing in Asia.

The earnings growth rate is high because they displaced things like bulk listings from performance chemicals and other kinds of things that were heading to Asia that had much lower volumes -- or much lower margins. You should expect double-digit, good double-digit growth rates in the topline in Asia, just like any company in our business would have. At some point, the earnings growth has to start moving in that direction as well. We're getting close to that time, I think.

Terrific. Thank you.

Jeffrey Zekauskas, JP Morgan.

Good morning. The CASPI business' volume for 2005 for the year looks like it's done 1%. Maybe there are some subtleties having to do with divested businesses, but I think that that's the number?

That sounds close.

All right. If that's the case, I would assume that the coatings market probably grew relatively well in the United States and less-well in other regions. So, who is the competitor? Who are the competitors that seem to be gaining share, even if that share is less profitable than the business that you've achieved?

The places where we participate in the coatings market is in functional additives that -- things like coalescing aids and additives in automotive paints and electronics paints. There really, in some cases, are not competitors there. We had some proprietary products, or we had very few -- we have 90-plus marketshares. Those businesses are very, very steady. We have some more cyclical things in resins and solvents that rise and fall over time as new supply comes in. Our competitors are folks like Celanese, like Dow, like BASF and others.

One of our volume-related issues in CASPI, again, is that we haven't added any capacity in North America; we have added some capacity in Asia, and that capacity is starting to fill out.

The CASPI story you should view as sort of GDP growth story. If I look at it over time, that's what it is. I would expect it to continue that way over time. Year-to-year, it could vary a little bit with the share shifting that's going on in the market.

Secondly, can you talk about the competitive issues in PCI? That is, is the Asian capacity that's come on something that perhaps depresses margins for a shorter period of time, or is it for a longer period of time? How do you view that strategic situation?

A couple of ways of viewing PCI -- and thanks for asking the question. Our Performance Chemicals and Intermediates is a confusing piece; it has big engine blocks that feed the entire company and they transfer a lot of the materials at cost. Then they have things they can sell, and that's the P&L that you see.

Of the things that they sell, they are about a 60% propylene engine and about a 40% coal products engine, so the 40% and that they make from coal is very steady, not an Asia influence. Year-in/year-out, they do very well. The 60% that is derived from propylene derivatives is really more directly affected by how propane and propylene are traveling with each other. If propane gets cheaper and propylene gets more expensive, our margins go up. If propane gets expensive and propylene gets cheaper, our margins go down. That's what happened in the fourth quarter. They don't have much of an ethylene picture. All of the ethylene goes over to the polyethylene guys mostly, and so they don't travel on an ethylene cycle the way some people expect.

Asia, getting more directly to your question, there are certain low-value propylene derivatives that ebb and flow and when they get long and they stay long for two or three years at a time.

Just the I guess the last question is prices in PET seem to really be coming down, and in part that's an attempt to offset some of the import volumes that's coming in. I would imagine that that there's a fair amount of polymer that's, as they say, already on the water. So all things being equal, when does that level of imported material began to fall to reflect the decrease in price? What was your utilization rate in PET in the fourth quarter?

The Asian material is already falling right now. The evidence of that is that there is a $0.05 price increase announced broadly by a number of the competitors for February 1, and I think there's another one that either has been made or is -- there may be another one on the way. That would indicate that we believe it's drying up already.

Our utilization rates -- I didn't come armed with that information but it was probably pretty low, because our raw material suppliers were just down. I'm not sure that utilization factor is indicative of business levels, if that's where you're trying to go, because it was not constrained by demand; it was --.

No, it was constrained by raw materials.

Yes.

Kevin McCarthy, Banc of America.

To the extent you are volume-constrained at this juncture in the cycle, it seems as though you need to look to the cost side in order to enhance margins. You alluded at your investor day to a strategic review of performance chemicals; I haven't heard much about that today. What is your timeframe there and your latest thoughts on options to enhance profitability there?

Good memory, Kevin; we did say that. It's still a very active topic. We have some more concrete thoughts; we are actually acting on some of those thoughts. They are a little green for me to talk about. I'm thinking after the second-quarter conference call, somewhere in that timeframe.

There are some coordinated thoughts I want to get out on the table at the same time so that I don't just kind of put out little pieces and parts. I'd like to have a whole conversation instead of just a piece of a conversation with you. So I have some definite thoughts; we are moving down the road on those definite thoughts but are really a little green to talk about. Let's think in July sometime.

Okay. Then, if we look at your PET business and consider the profitability differential between North America and your international business, how would you characterize that delta over the past, say, three years? Might it make sense to divest your international PET business or find a joint venture partner like Dow did?

You could almost back into it, but if you think about us saying that North America has achieved above the cost of capital five out of six years, you could estimate what that kind of number looks like. You could look at the whole business and recognize that the averages have been pulled down from that level.

You're going to a good question. I mentioned -- I used the key phrase "strategic actions" and I think that's why you are responding here. Strategic actions means a lot of things. Transitioning from our old technologies to a more efficient new technology with IntegRex is a strategic action. We've announced some rationalizations in North Carolina -- excuse me, in South Carolina -- as that facility comes on. I've said, in this conference call, that there is a meaningful difference between integrated and nonintegrated and we like the results from the integrated; the nonintegrated are more troublesome. That's on our minds.

I really have gone about as far as I want to go in that conversation. Again, I think that's more of a midyear kind of thing.

Okay. Then last one, for Rich, maybe -- can you elaborate a little bit on the $125 million loan with your joint venture with [Rodea] and maybe explain a little bit about why that was necessary?

Sure. First of all, it wasn't necessary. Start with we borrowed some money in Europe to fund that repatriation dividend, and that takes our net debt up. Bringing the money back here to North America and looked at the fact that [Primasphere], which is an off-balance-sheet business for us, had $125 million third-party loan paying interest. Also, S&P and Moody's and Fitch all consider that in our debt, even though it's not on our parent-company balance sheet. So it was simply a pay-down of debt that was guaranteed by Eastman and a net reduction in interest.

Okay, thanks very much, guys.

Frank Dunau, Adage Capital.

I will not even ask about share repurchase. I know everything is happening in the second half of the year! (LAUGHTER). And we're going to learn all that stuff. But I do have a conceptual question. Okay, a few years back, there was a proposal to split the Company, and I didn't like that proposal because I thought you were splitting it along the wrong lines. But now, you've got these three businesses in your company that have, like, 17% operating margins when you put them together. They did about two-thirds of your operating income, so lets just assign that to (indiscernible) I don't know, roughly $4 a share, maybe, if they was just them, and yet your stock is selling at $50 a share. Does it make sense to split those three off? (multiple speakers) -- the other two? I don't know. I mean, how do you recognize the value of those businesses, just conceptually?

I hear your pain here, Frank, because what you're saying is there's something missing in the recognition of the value, I think is what I hear in your voice.

We have thought about these questions more carefully than anything I've ever done in my life. What you suggest is not in our best interest because the power of what we do to generate money is along some certain technology and asset streams, and those technology and asset streams, for instance, cross between PET and Specialty Plastics. There's huge power that we have yet completely to talk about of keeping those two aligned to each other and working with together. The same thing in the acetyl. The same stuff from goal; there's stuff from coal in both sides of the line which we grew there.

But, I understand what you're saying. You're saying that, gee, we are a huge cash machine, we had 19% ROIC and we are trading at four or five times cash. That is frustrating to all of us. We will work harder this year to help everybody to understand how we are wired together and where we are going. But no -- the short answer to your question -- that kind of a strategic action is definitely not on our minds.

Okay, because we -- also it's just blue sky and the thing. If you buy some bolt-ons to your specialty businesses and you are paying like seven times EBITDA, which may be a pretty good price to pay for them, and it's additive to your return on capital and it's additive to earnings, but if it then gets capitalized, you know, in the marketplace in your stock, it's something just north of 5, 5.5 times (indiscernible) to EBITDA. I mean, am I destroying or creating shareholder value doing that?

We've had both kinds of experiences there, Frank and a lot depends on what happens after you get done with bolting something on it. In fact, it depends entirely on what happens after you bolt it back on.

So far, we have been concentrating on a more technology-driven approach as opposed to an M&A approach. We're not opposed to bolting on things that support the pursuit of those goals. But we do not -- I do not have a big acquisitive (indiscernible) right now and do not have any -- I'm not holding out on some kind of an acquisition thing that I'm going to lay out for you later on. That is not the path that we are on right now. We haven't found anything that really matches.

We have a really unique situation here, Frank. We are here in North America deriving our strongest profitability from the vertical integration we have using North America raw materials like coal. There's not a lot of other places where you can bundle something up and reinforce that, so it hasn't risen as a high-nail for what we need to go do.

All right, that it. Thanks.

Gregg Goodnight, UBS.

Good morning, gentlemen. I want to explore a little bit the Asian imports. By some estimates, in November, the quantity of material was perhaps 150 million pounds which, if true, would be surprising because the Asians were always typified as smaller players that couldn't meet the U.S. quality requirements, etc., etc. A couple of questions in that regard -- number one, have you quantified the amount of imports that actually came in?

Yes, we estimate that, just through November, the imports were probably 240,000 tons, maybe in the neighborhood of 300,000 tons for the year. That compares to numbers like 110,000 tons in '04 or maybe 200,000 tons in '03. So it is between -- it's about twice what you would expect in any year.

You can always overcome your hurdles if you have enough money involved, so overcoming the adjustments to machines to run the materials and logistics issues. The main thing is our customers didn't run out. The issues that you talked about, logistic issues and quality issues, where there in the fourth quarter; they continue to be there. That has something to do with our ability to displace them as things return to a more normal situation.

I don't foresee -- I think the root of your question is, is there some kind of a structural shift here you should be aware of? At the end of the day when we do the math of people's cash costs and where they are willing to sell, we do not see a structural change. When we think about the Asians, we always assume they're going to be on our borders at their cash cost with no duties, and that's what we have to compete against. That's the basis we use to invest, you know, infinite supply of Asians at our borders, at their cash costs, no duties. When we look at that picture, we don't see a structural shift. The Asian participation should drop to its more normal levels here shortly.

Okay, that answers that question. In terms of PET demand growth, NAFTA PET demand growth in '05 and expectations for '06 and '07, what is your assumption?

We typically view that as a 6 to 8, no change in that, maybe closer to the 8. But worldwide, it looks more 10 -- a little slower here, because our base is so big, but 6 to 8 would be a good guess and that's a fairly steady number.

Vis-à-vis the announced capacity additions, that demand growth would seem to be inadequate to absorb the new capacity, which is perhaps 20% or so.

Yes, good that you got to that question. Again, our view of this market is that, because the raw materials are freely available, because the technologies are freely available, we view this as an eternally oversupplied market. So when we view both our operating plans and our investment plans, we assume an eternally oversupplied market that lives in a cost curve. You are familiar with how commodity cost curves work; you have the array of producers with their cash costs performing some kind of a sloping curve, and the price is set by the cash costs of the most expensive producer. That's the view that we have. That is what we have faced, for instance, for the last five or six years -- not a terribly different picture. As I said, we have generated above cost-of-capital returns in North America five out of the last six years, and we had some of the situations that you are describing in the last five or six years, and we still found a way to make money.

That's what we start from and as we take our technology and transition over time to the IntegRex technology, we see that situation even getting better for us. If you live in a commodity environment, you better be at the left side of that cost curve. If we need to draw that for you to show you what we're talking sometime, Greg, we would be happy to do it.

Certainly, I've seen the curve before, and it just appears to me we are going from a relatively balanced situation to increasing oversupply in the next two years. That 20% was a two-year number, which seems to be in excess of even the high side of demand growth. If the demand growth doesn't maintain the 8% or the high range, it could even be more seriously oversupplied.

You've also got to put, in the math, though, some rationalization. Again, the commodity market situation is you have this steepening cost curve; you have people putting in capacities. We have announced we're taking out I think it is 100,000 tons, so you have to net out the math of that.

You might also think about what do the net trade flows look like in that kind of an environment? Do the trade flows stay where they are, or do some of the other importers have to start backing out? So you need to put that math in there as well.

But one way of thinking about this is, again, it's (indiscernible) a lot of extra capacity. We assume there's infinite capacity out there all the time. We look at the Asians as being the infinite source of capacity. So every day of your life, there is infinite capacity to supply this market. You just have to live at the low end of the cost curve to be okay with it.

Are there any other notable rationalizations other than the one you announced?

Not announced.

I haven't heard of anyone else announcing it, but I can look at the cash cost curve and make some assumptions.

Okay, thank you very much, Brian.

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

Nancy Traub, Credit Suisse.

Good morning. You did mention how your raw material costs were up 500 million versus '04.

Yes.

and yet, you were able to have such strong performance.

Yes.

A lot of that was due to your cost-cutting -- well, the divestitures, the cost-cutting and restructuring. How much of an impact did that have on your manpower expense?

Our manpower expense has been flat. We went through a dramatic change. First of all, a comment -- we had about $1 billion of pricing in 2005, as well. I mean, we had a bunch of pricing going on in 2005. It wasn't just about cost-cutting. But directly to your question, we are pretty flat on manpower. The challenge with manpower now are two things, trying to redeploy it to higher-value-creating things. There's a product mix issue with people as well, so we are upgrading the mix of the work that we work gone. We have a demographic turnover that we are replenishing our workforce as people retire out. But, it's pretty flat.

Okay. To the share buyback, I know you're not going to talk about it until the second half, but there is a share creep. Would you at least consider keeping the share count flat?

Yes, I'm going to again defer that question until later. I've heard that argument before. Frankly, I want somebody to show you some research about why that does a great job for shareholders, because I haven't got a case study for why that has done a great job for shareholders, but I mean, I don't want to start that argument in the last two minutes of a conference call. I would prefer to defer that conversation to a later time. Again, I'm trying to have a complete conversation with our investors about all of the pieces and parts, so that we are talking about music from an orchestra instead of just talking about one instrument at a time.

Okay. The last thing, these propylene derivatives that are more of a problem, could you be more specific about the capacity expansion?

Sure. The capacity expansions were in some resins, specifically neopentyl glycol in Asia; I think it was Korea. NPG is a resin, unsaturated resin that is used in a variety of applications. The other is plasticizers, where there has been a good slugging match on plasticizers between the big guys and us.

Okay. That should continue for the next year or two, or --?

It's going to continue into 2006 but you know, that is a relatively -- it is not a huge, huge piece of PCI, but it's significant.

Thank you.

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

Okay, great. Thanks again, everyone, for joining us this morning. An audio replay of this conference call will be available this afternoon through Friday of next week. Thanks again and have a great day.

Ladies and gentlemen, this does conclude the Eastman Chemical Company fourth-quarter year-end earnings conference call. We do appreciate your participation, and you may disconnect at this time.