伊士曼化學 (EMN) 2009 Q4 法說會逐字稿

Good day and welcome to the Eastman Chemical Company fourth quarter and year-end 2009 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.Eastman.com.

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

Okay, thank you, Kelly and good morning everyone, and thank you for joining us. On the call with me today are Jim Rogers, President and CEO, and Curt Espeland, Senior Vice President and Chief Financial Officer.

Before we begin I'll cover three items: First, during this call you will hear certain forward-looking statements concerning our plans and expectations for first quarter and full year 2010. 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 2009 financial results news release, on our website, and in our filings with the Securities and Exchange Commission including the third quarter 2009 Form 10-Q and the Form 10-K to be filed for 2009.

Second, except when otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures such as sales revenue, operating earnings, and earnings per share, that exclude restructuring-related items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures including a description of the restructuring related items are available in our fourth quarter and full year 2009 financial results news release and the tables accompanying the news release. Lastly, we posted slides that accompany our remarks for this morning's call on our website at www.Investors.Eastman.com.

With that, I'll turn the call over to Jim.

Thanks, Greg, and good morning everyone. Thanks for joining us. I'm going to start out on slide three. We're going to begin this morning by taking a minute to review a few of our major accomplishments in 2009 if I could, and 2009 was a difficult year in many respects with a lot of volatility, but across our Company, I think we really did an outstanding job of handling that volatility to deliver solid results.

Cash generation was a priority for us, as we mentioned throughout the year and we generated over $300 million of free cash flow. This is our best free cash flow generation since the year 2000 and Curt will give you more details in just a few minutes. Our flexible cost structure enabled us to respond quickly to the recession, and we reduced our costs by $200 million and this is reflected in our earnings both for the year and the fourth quarter. We made progress on our growth initiatives. We entered into a JV with SK for adding acetate tow capacity in Korea to serve the growing demand in Asia, and a new capacity will be up and running by the end of this quarter. We've added both new monomer and polymer capacity for our Triton co-polyester, and we're pleased with the start up there, and we're able to meet the growing demand we're seeing, and we also continued to expand our Regalite adhesive facility in the Netherlands, increasing capacity by 30% in 2009 to keep up with that demand.

Despite the difficult global economic environment, our Fibers segment delivered a record earnings year, topping the previous record they set in 2008 and we did a great job on safety, something you all don't get to see that much of, but in 2009, we had our best ever OSHA recordable injuries rate, reducing injuries by 40% from 2008, building on our reputation for excellence in safety, so we are well positioned to continue generating strong cash flow and to grow our core businesses. Next is an update on how we did against the corporate outlook statements we gave you both on our last call in October and during our investor day in November. This is something I do on each call, and my intent is to hold us accountable for the expectations we give you.

First, on full year EPS, we told you in November we expected it to be approximately $3.50 and this implied EPS for the fourth quarter of just over $1. Excluding asset impairment and restructuring charges in both periods and other operating income in 2008, we were slightly above expectations, and I'll talk more about that in a minute. We also said that the cost reduction actions we've taken would be evident in our results and they are, and on cash, we told you we would build on the free cash flow we had generated through nine months, including generating more than $100 million in cash from working capital for the year and we did that in the fourth quarter.

Now on to the financial results for the fourth quarter. Revenue was up slightly as higher volumes more than offset lower selling prices. This is the first quarter we've seen positive year-over-year volume comparisons in two years, since the fourth quarter of 2007. It's a sign that we are beginning to see a rebound in volume which we expect will continue in 2010. Selling prices were down due to the global recession and the decline in raw material and energy cost. Operating earnings increased significantly mainly due to the higher volume that I mentioned, lower cost for raw materials and energy and the cost reduction actions that I've talked about.

Moving on to the full year comparison, sales revenue was down due both to lower prices and volumes. Prices fell largely due to lower raw material and engine costs, volumes were down due to the recession. Earnings declined, but given the severity of the recession I would say they remain pretty solid. EPS declined just under 20%, which when compared with previous recessions, is a significant improvement. For example,, from 2000 to 2001, our EPS declined by over 70%. The portfolio actions we have taken to strengthen our core businesses along with the cost reduction actions we took in 2008 and 2009 lead to much improved earnings in this recession compared with the last one.

Now, to the segments, beginning with Fibers. As many of you know, Rick Johnson has lead Fibers since 1996 and so he's seen the impact that recessions can have on this business. He calls Fibers recession-resistant, but not recession-proof, and then in 2009, Fibers recession-resistance lead to new annual record of operating earnings topping last year's record so it kind of begs the question, what's it take to be called recession-proof. Higher selling prices were offset by lower sales volumes and the volume decline coming in the acetyl chemicals and acetate tow product lines. For tow, the decline was more in the second half of the year due to the recession and the cigarette tax increases that were implemented in the US and Europe. Looking ahead to 2010, Fibers is well positioned for another strong year, demand should begin to rebound as the global economy recovers. We also expect our acetate tow JV with SK in Korea to start up this quarter and there will be costs associated with that as we qualify material with our customers, so we roll it altogether we expect 2010 earnings to be somewhat below 2009, but remain very solid.

Next up is CASPI. This is another business setting records in a very difficult economic environment. Fourth quarter with earnings of $77 million was their best fourth quarter ever and this follows a record earnings reported in the third quarter. Volume was up 15% in the fourth quarter due to the demand recovery while prices declined as I discussed earlier. For the year, operating earnings increased as lower raw material and energy costs and cost reductions more than offset lower volumes and prices. Looking forward to 2010, they have a chance to set a new record for operating earnings above the $242 million they reported in 2007. Their biggest headwind is the higher raw material and energy cost with more than 50% of the revenue and specialty product lines, a higher cost will impact their margins, improving volume is the biggest tail wind, and we think we are in the early stages with seeing that improvement. Assuming the economic recovery continues, CASPI is set up for another strong year.

Performance chemicals intermediates is next, PCI. Operating earnings improved in the fourth quarter due to lower raw material and energy costs, higher volumes, and lower cost per unit due to higher capacity utilization. For the year, operating earnings declined, primarily due to lower prices and costs related to reconfiguration of our Texas facility during the second quarter. I would also point out that for the full year, PCI earned their cost of capital, and this is much different from their results in the last recession, wherein 2001, their operating earnings were only $13 million for the year. We've talked about the actions we've taken to lift the trough in this business, and 2009 is evidence that we've been successful in this effort. Looking forward in 2010, we expect raw material and energy costs to increase pressuring margins, but we also expect sales volume to increase as the global economy improves, so as a result we expect PCI operating earnings to be up versus 2009 approaching $100 million.

Next is Specialty Plastics. With their results in the fourth quarter, they've now posted two successive quarters with double digit operating earnings. Fourth quarter earnings improved primarily due to higher sales volume and we've consistently said the key to improvement in this business is higher volumes. Fourth quarter was the third successive quarter of volume improvement for Specialty Plastics. While demand growth is still slow for the industry overall, remember co-polyester is growing faster than the poly carbon at acrylic and PVC to name a few of the things we compete against and the things we're displacing. For the full year operating earnings declined mainly due to lower volumes and prices driven by the recession.

Looking forward to 2010, as I mentioned earlier the Triton monomer and resin facilities are up and running and we are pleased with the start up and with the facilities now up and running, Specialty Plastics will have additional fixed costs though, of more than $7 million per quarter, about $30 million for full year 2010. Some of that new from outside the Company, some of that just reallocated within the Company, but this all occurs as they ramp up their volumes, and despite these costs, we expect operating earnings for Specialty Plastics to be around $40 million for the year, and there we'll position the growth from there going forward.

Finally, performance polymers. In October ,I said the fourth quarter was going to be ugly for performance polymers and it was. Loss in the quarter was due to the operational challenges we've had in South Carolina and the shut down we took to address them as well as depressed demand due to continued difficult market conditions. The full year loss was also due to the operational issues in Carolina as well as lower selling prices. Clearly, we aren't happy with the results in this business, and we are taking no-regret actions to improve their performance.

To remind you, we said we have two issues, operational performance and upgrading our commercial footprint in the markets we serve. I think we can check the box for the operational. The shut down in Carolina during the fourth quarter went well and we've now demonstrated that it can run at full rates with Class I material. That's good news. Now, with the progress on that we can now address our commercial footprint and improve our mix of customers. We expect these actions will lead to a much smaller loss sequentially and for the full year in this business.

That brings me to our guidance. We're coming into 2010 with positive momentum given our results over the last couple of quarters. We are in the early stages of volume improvement and expect that will continue as the global economy improves. While we have a head wind of about $40 million year-over-year from the reversal of extraordinary measures to reduce costs in 2009, namely the across-the-board 5% pay reduction that we then restored in December, we will continue to benefit from the over $150 million of cost reduction actions we've taken in other areas and I would add that by year-end, our headcount was down 2% from our Spring restructuring levels and for 2010, we expect attrition to continue to run ahead of hiring. The headwind that we are already seeing here in January is higher raw material and energy cost and we expect on average through the year these costs will be higher than they were in 2009.

Adding all that up, we expect our first quarter EPS to be slightly above our first quarter EPS of $1.14 and we expect our full year 2010 EPS to be 20% above our 2009 EPS of $3.63. On top of that, we expect revenue from an acetyl license for PCI in the first half of the year could be first or second quarter, we'll see, and we estimate it will have about a $0.07 per share impact positive. One last point, at our Investor Day in November we made the case for why we can achieve a 20% compound annual growth rate for our EPS from 2009 through a recovery which we estimate would be in 2012.

Given the results we reported in '09 and our expectations for 2010, we believe we are on track to deliver that growth. Employees throughout our Company are clear on the role in delivering that EPS growth and we are committed to making it happen. And now before I turn it over to Curt, I'd like to continue my practice of taking a minute to highlight one of Eastman's executives, and this quarter I choose Norris Sneed, our Chief Administrative Officer who has been with the Company for 31 years. Norris heads our Human Resource function, our Information Technology Group as well as Manufacturing Support worldwide. He and his people are instrumental in the swift actions we've took to mitigate the recession's impact over this past year. He is supported by Parker Smith in manufacturing, Keith Sturgill in IT, and Ed McKenna in HR, and together they accomplished a lot. So if you like the cost savings we achieved in 2009, Norris is just one of the leaders who deserves the tip of our collective hat and now I'll turn it over to Curt.

Thanks, Jim and good morning everyone and thanks for your interest in Eastman Chemical Company. I'm going to start by looking at our financial highlights for the year on slide 14.

Our cash from operations of $758 million represents a terrific result in a difficult environment. Working capital was a source of cash, having been reduced by $118 million and this is in line with our projections from earlier in the year. We also generated about $125 million in positive cash flow through a change in tax accounting method to accelerate the timing of deductions for manufacturing repairs expense which we discussed in the third quarter. Our cash from operations also reflected $181 million use of cash of our pension contributions, of which $150 million was made in the fourth quarter.

Moving next to capital expenditures in 2009 we cut our CapEx by more than half compared with 2008. Second half 2009 capital expenditures were at a significantly lower run rate than first half due to the completion of several growth projects. After also splitting our dividend of $128 million, our free cash flow was $320 million in 2009. As Jim mentioned, this is the best annual free cash flow we've generated since 2000 and is a testament to our focus on cash throughout the year. The result is that we are in a solid financial position, having reduced net debt by $256 million, and our net debt-to-cap ratio is at 35%.

Turning to slide 15, as we continue to generate cash, we remain committed to returning cash to stockholders. In 2009, our dividend was $128 million or $1.76 per share and the Euro continues to be in the top quartile of pure companies. We paid a dividend every year, we have been a public Company and Management remains committed to it. In addition during the fourth quarter we repurchased $21 million of shares. As a result, our shares outstanding at the end of 2009 was the same as it was at the end of 2008. Going into 2010, we have $96 million remaining on our current stock authorization and remain committed to repurchasing shares over the coming quarters, primarily as a means to offset dilution.

We are also focused on our debt structure which remains attractive as shown on slide 16. In the fourth quarter we improved our position with a $250 million, 10 year bond at a 5.5% rate. The 5.5% rate is the best we've achieved with this tender. The order book was six times over subscribed and the quality of the order book was outstanding. With the success of the bond offering, we decided to put a similar amount of cash to work in the quarter making a $150 million pension contribution, and paying down our European credit facility. With this transaction, we've added a nice 2019 layer to our already attractive debt ladder and we have funded debt or debt like obligations that we otherwise have to address over the coming next few years.

Looking next at cash we put to work in our organic investments. We beginning to see the returns from these investments we've made over the past few years. As Jim mentioned earlier, in 2009 we expanded our [redelect] capacity and we'll see the benefit of that in the CASPI segment starting in 2010. In the fourth quarter 2008, we added acetate tow capacity in the UK and our Fiber segment continues to benefit from that investment which is reflected in their record 2009 results.

We have taken a number of actions to transform our South Carolina PET facility, and with the improved operation of the facility we expect to see their results improve significantly in 2010. And our Triton monomer and resin manufacturing facilities are up and running as of the beginning of the year and we have an aggressive schedule for filling out that resin facility over the next two years. This will be one of the key components that will lead to improved performance of Specialty Plastics, particularly in 2011.

In 2010, we're also looking at M & A opportunities with a focus on the four areas of emphasis you see listed on slide 18. One example of how we look at these opportunities is the venture we have with SK in South Korea to acquire SK tow's and other manufacturing assets and then expand the tow capacity to a total of 20,000 met tons which is about a 15% capacity addition for Eastman. This expands a footprint in a differentiated product line in a growing region and we expect the acquisition to be completed and the capacity online by the end of First Quarter.

Another example that combines two of these focus areas is the acquisition we completed a few weeks ago. We acquired a small specialty polymers manufacturing facility located near Shanghai. This is right in our sweet spot. It will support our Ensure product line in our CASPI segment. Ensure is a sustainably advantaged cellulose ester used in the coatings for the packaging and consumables markets. We continue to explore other opportunities that also provide differentiated products and advantage feedstocks to compliment our existing sustainably advantaged product lines.

Turning to some corporate items to assist with expectations for 2010. Starting with depreciation and amortization which I expect to increase to just under $290 million in 2010, as we have added some new manufacturing facilities that come on line. Pension expense should be slightly higher due to the lower discount rate and historical performance of our assets mostly offset by the benefit of the pension contributions in 2009. And if we do make a pension contribution in 2010, at this point, I expect it will be less than $25 million.

Our interest expense is expected to be higher. This is a combination of the lower capitalized interest as manufacturing facilities have come on line and thus reduced our Capital Expenditures and the new debt issue that I mentioned. The tax rate is expected to come down in 2010 to approximately 33% which is about normal for us. Remember, the rate was higher in 2009 primarily because of the change during the second quarter in the tax accounting method to accelerate the timing of reductions for manufacturing repairs expense that I mentioned earlier and the reversal of the tax credit related to the Beaumont Texas facility, the project which we discussed in the third quarter.

Our capital expenditures for 2010 are planned to be between $250 million and $275 million. Our maintenance level is now around $200 million and we plan to spend $50 million to $75 million on targeted growth initiatives. This growth spending will be staged relative to the underlying economic recovery and target markets. And we remain focused on optimizing maintenance capital much like we did in 2009. When I consider our expectations for earnings growth in 2010 plus these items, I expect our free cash flow in 2010 will be above $100 million. This includes a building working capital due to our expectations for higher raw material and energy cost and higher sales revenue. We also expect to see a more normal working capital pattern for the year including a build in working capital in the first quarter.

In conclusion, Eastman is well positioned for growth in 2010 and beyond, where we are validating all options for creating value, organic adjustments, M & A, share repurchases and our debt profile. We'll continue to be disciplined as we approach growth as we've been demonstrating. Thanks again for your attention and with that I'll turn it back over to Greg.

Okay, thanks very much, Curt and this concludes our prepared remarks. Kelly, we're ready for questions.

Thank you, (Operator Instructions). We will take our first question from Frank Mitsch with BB&T Capital Markets.

Good morning, gentlemen.

Good morning.

Nice end to the year. Jim, you mentioned that you were pleased with how the PET facility was operating at the end of the year. I don't think that it was at that sort of level when you had the Analyst day. Can you tell us how long that facility has been running smoothly and why you're very confident that you're not going to have this sort of operational issues that you had in 2009 there?

Yes, and maybe I'm going out on a limb because it's not like it's been running for months at that level but it has just recently, Frank, come up and demonstrated the full rate that we expected, so all the way up to the level we wanted that I think we've talked in the past, about the 525,000-ton level and we're pretty confident the plant can do that. It felt good too that the first pass quality of the product we were getting out was very very high, so we think we've got it. The comfort level will be even higher two or three months from now when we've demonstrated we can do that when we need to do it and I realize all this stuff about the operations running well, that doesn't change anything about the underlying PET market and how doggy that looks but we said we're going to take things in order. The first one was operational and yes, I said we got the X in the box there.

All right, great and I think I just wanted to clarify, did you say that you were expecting a smaller loss in that business for 2010 so still red ink?

Yes, I think that's probably the best guess right now and if you think about how that business usually plays out over the year, your second quarter is your best quarter and I think that's been traditional almost every year but we know that first quarter is going to be in the red again. You know what's going on in that market. You know we had a big competitor just bring on additional capacity and we've still got a lot of work to do, upgrading that commercial footprint so if you think we got pushed down into some of the lower value-added segments of the market when we were having operational issues, on the flip side that's an opportunity now that we can try and upgrade that mix.

Okay, great and then I'd like to give you the opportunity to address the decision-making between share buyback more than just offsetting dilution versus M & A opportunities out there. How are you weighing both right now to current marketplace?

Well, I mean we're doing a little share buyback. What you'd like to do is give your acquisition program a chance to see if you can latch on to some good opportunities out there and the long term that's the best way, in fact the only way to really grow your Company is the organic and inorganic growth. Buying back stock doesn't really grow your Company, and if you think about long term value creation, that's probably your highest path and so you would say that's a higher priority to try and make acquisitions happen as well as, can we drive some more product launches like this Triton product.

The issue is we're going to be very disciplined. Curt can comment on this too if he wants but we're not seeing as many opportunities. We are looking at a few things that are not sizeable but we're going to be patient. We don't have to do an acquisition. We don't have to spend the money. We would like to do that, but it's got to look really good to us if we're going to let go of some of the money.

All right, terrific. Thank you.

Yes.

We'll take our next question from Kevin McCarthy with Banc of America Merrill Lynch.

Yes, good morning.

Good morning, Kevin.

Jim, CASPI continues to post very strong results here. I think you'd commented that you expect higher volumes but possibly some margin pressure due to costs there, so netting that out what should we expect for the trend in CASPI operating income through 2010?

You have to love that business. We have to admit it's even surprised us some types here just how strong it's been. What an excellent product line both coatings, solvents, adhesives. I said in the remarks that they got a shot and I think a pretty good shot of beating the $242 million record year they had before but it's just logical to expect a little pressure on the margins. Whenever you have a specialty business, you don't really price off of raws directly so you got a little help in the past when the raws came off and now you're getting squeezed a little bit on the margins as raws and energy head back up so that's kind of why we throw out there, that's just a logical expectation but we do still see volume growth particularly around the world and the regions and if I look at how it plays off I imagine it will still have a pretty strong start to the year and we'll just see how those two forces play out, the volumes that are back and pressure on spreads.

Okay, and then a financial question if I may. Your net debt ticked up only $38 million having injected 150 million into the pension plan and with the improvement in EBITDA, your net debt to EBITDA is just about one-time right now and Jim, I know earlier in your career, you're used to running much different balance sheets. I'm not suggesting you want to return to that territory, but perhaps you could comment on what you would view as the optimal leverage for Eastman's balance sheet over the next year or two, assuming an expansionary economy.

You know, I used to be a CFO, but I moved to the second guesser role now so my primary guesser is Curt so let me let Curt start off on that one.

Well given, as you know, the way we're looking at it is the key that we want to maintain as investment grade and that investment grade status has served us well during the last 12 to 18 months so as we look at the cash flow expectations that we have and as we sized the type of investments we could make whether that's organic or inorganic, that's going to continue to be a boundary condition and yes can we increase that leverage over that time period? Definitely but it's still constrained by that investment grade credit rating.

Thank you.

We'll take our next question from Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning.

A couple of things. In the cash flow statement, you had a benefit from deferred income taxes of 185 for the 12 months.

Correct.

Do you have to pay that out relatively soon or do you hold on to some of that?

Yes, we'll hold on to some of that. What that really says is two things. One is that tax project that I mentioned earlier and what you get is you get the benefit of that program going forward. Now, over time, that lowers your depreciation expense for tax purposes but you continue to use that same philosophy as you look at your maintenance costs in 2010 and beyond, and then the second factor is just the impact of your pension contribution, and so right now we don't expect a large pension contribution in 2010, so you wouldn't get that benefit in 2010, but you will have future pension contributions that as you know are very tax efficient use of cash.

And so will you have a deferred tax use of cash next year and if you do how much?

Right now what I've challenged our tax department is to continue to see a slight tax deferred tax benefit in 2010. We'll see how successful they are but our target is not to have any significant cash flow out flow of that deferred tax item.

Okay, and in terms of the asset impairment charge, the $179 million, so does that reflect spending that was done in the past that's for $179 million worth that's now written down?

That's correct. That represents cash that was spent in 2009 and prior to this decision.

And what was that exactly spent on?

Well it's a combination, what we spent it on was a combination, we purchased some land, we purchased some assets from Terra, ethanol assets and ammonia assets that relates to some feed work that we've been working on to design that and engineering work and the like so it's those kinds of items and now we have a team looking at trying to monetize as best we can those investments. There's been a variety of people who express interest in it so we'll run a diligent process to do what we can with that asset.

And then lastly in CASPI, I think you guys were up $45 million in EBIT. So if you had to break that up into two pieces, say raw materials and cost reduction, how would you do that?

I don't know if I want to get into that business by business, Jeff. I mean we kind of sized the cost reductions for you across the whole Company. I think at investors day, we said we would expect to hold on to 100 pretty much in the bank and that there's another 50 to 60 that probably moves up and down with volume. We're probably going to do a little bit better than that hundred in terms of what we hold on to mainly because we've been able to let attrition run ahead of hiring so labor cost will be a little better than maybe we thought when we said that. CASPI gets its fair share of that in terms of cost improvement on a typical allocation basis and then the rest would really be spread.

Okay, thanks very much.

We'll take our next question from Jason Miner with Deutsche Bank.

Thank you, good morning.

Good morning.

On the PET and the IntegRex, now that you've seen it run even if for a short time, I wonder if you guys would mind revisiting the economic advantages that you think it has where it sits on the cost curve and what your expectations are, even though the Markets tough.

Yes, none of that has changed. We are over there on the left side of the cost curve, the advantaged side of the cost curve and it's mainly driven not just by the lower capital to get the capacity which was significant but also just the lower energy it takes to make the product. It's advantaged in a number of ways that build up to a nice sustainability story so this ParaStar product, it comes out of the IntegRex process is just an excellent product in terms of the sustainability story, admittedly selling into a really doggy market so I'll give you one example. We recently gotten into the Wal-Mart Supply Chain for some of their private label product with this ParaStar and one of the main reasons is it very much supports their sustainability story so yes it's delivering what we would want. The market's easily as bad or worse than we ever thought it would be.

Sure, just if I can press I think back in 2006 we discussed maybe half the cash costs. Do you guys have any estimate of what sort of difference between conventional PET and IntegRex cash costs are?

Curt's my numbers guy. Curt would you confirm?

Yes, I think we're still in that same ballpark of what we expected several years ago no doubt.

That's helpful and just a little bigger picture at the Investor Day we talked I think you guys suggested EPS in recovery could be $6 plus and gave some details of the pieces. The comments you've made this morning suggest a stronger outlook for 2010 and possibly 2012 so has your view of recovery EPS improved and could you just touch on maybe what elements have improved?

Yes, that's a little tricky because what we said when we tried to ballpark it for folks so they could look a little longer than one year is expectation is $6 off the core business when you're back to the rates pre-recession rates, so that implied a volume level and implied capacity utilization in the low 90s and so part of what's going through my mind is how much of this is the volume coming back a little faster than maybe we were thinking in terms of fourth quarter stayed a little bit stronger, et cetera, and how much of it is the businesses are just performing better and in particular, the mix of products in places like CASPI and just the acceptance of some of our specialty products and how well they're doing competing with other materials so I guess that's really hard for me to break out. I wouldn't want people to go wildly optimistic and start moving well north of $6 just on the back of one quarter that came in but yes, we raised guidance slightly didn't we? Just November we were saying 20% higher than $3.50 and now we're saying 20% higher than $3.63 so it seems to me like we're holding on to the gains we're getting, I would call them more marginal though in terms of the $6 if you were going to move North of $6 it would be in terms of that. The big upside is remember that it's how wise you spend that cash we're sitting on plus the free cash flow generation we'll have off of these businesses. That's what can push you well above $6 but that's what we still have to prove.

Okay, that's very helpful, thanks.

(Operator Instructions). We'll go ahead and take our next question from PJ Juvekar with Citigroup.

Yes, hi, good morning.

Good morning.

Jim, Fiber prices headed up quite well in the recession. Do you think that's because of the oligopoly of the industry that allowed you to hold pricing or is there something else going on?

Quality of our products and market position and growth, being positioned in the right parts of the world, taking advantage of the Asia growth market. We sell to some very very savvy customers so they're looking at everything, they're looking at the currency movement, remember our costs are pretty much based in dollars, others can be in other costs around the world so it's not so simple just as a handful of suppliers because it's also just a handful of big buyers and yes, it's a good marketplace but we sell at quality product, we compete very well and we compete on things other than price, PJ. We don't often get to talk much about it but I've got to believe we have some of the best customer service, technical service. We help our customers plants run very very well and we work very closely with them to give them exactly what they need. I mean they're in a big cash business, and little things make a huge difference to them, so just us helping them run their plants well making the product work and their machines, that's really key to us holding on to the value we create in that business.

Okay, thank you for that. And in PET, is there anything going on in that business that leads you to believe the secular growth of the PET market has slowed down?

Yes. I think that's what we say up there. I mean I'm positive because I'm thinking I remember with such confidence eight to 10 years ago we talked about how fast the PET marketplace was growing, it was growing double digit and then high single digits and mid single digits and now recently in this downturn, I think we saw it flat or maybe even off a little bit so yes, I think the high growth days are behind us unless there's some other breakthrough use for the product, I think it's going to start slowing down, but still one of the I think it's safe to say if you look longer term it has as good a growth trajectory as most of the major chemicals. The issue is that the barriers to entry are so low that the margins will always stay under pressure.

If you take out the recession impact, what do you think is the secular growth rate now for PET?

And I don't spend a lot of time thinking about it honestly. I'm interested in North America. I'm interested a specific product we make, mainly ParaStar. We have a sustainability story and all I'm thinking about right now is not the underlying market growth. I'm thinking about how do we upgrade our position in the market because that's going to have a huge impact versus whether the underlying market growth grows at 3% or 5% or 6% and it's going to be some kind of, there will be people that know better than me but it's going to be some kind of mid single digit type rate for the foreseeable future I think when you think globally but again, where our head is, our head is we got to upgrade our commercial footprint, the market segments we sell into and that's the best way to create value and that's the next step in the path we're on with our PET business.

And any thoughts, Jim, on disposing of the US PET business?

Any thoughts of disposing of the PET business?

North American PET?

Yes, well, I mean what we've said PJ, I think it really hasn't changed. We're fairly consistent. We have a game plan. The number one game plan was to get the operational issues behind us. I mean I'm all about creating the value in that we've got there in this PET business, so I feel like that one, we're pretty much done on. I mean you could always get surprised but right now it feels pretty good on the operations.

The next one, I don't want to underestimate the challenge of upgrading into better segments within the PET world so instead of being in sheets you want to be more in carbonated soft drinks for example, with your new products and that, there's some work involved in there and there's some time and I think the real test PJ, is going to come in the second quarter to see just how much our guys have been able to do about demonstrating to the markets that we've got our act together now and we deserve our fair piece of those higher segment, higher value segments so we're going to look at the second quarter and get through the second quarter and see how we do and then we'll take a look and what we said all along is what we should do for frankly any business is make sure you're the highest and best owner of the business and but right now our heads all around creating value and what can we do to improve that commercial footprint.

Great. Thank you.

We'll take our next question from Amy Zhang with Goldman Sachs.

Thank you, good morning.

Good morning, Amy.

My first question is one of your major competitors signed an MOU with China to expand acetate tow capacity and hopefully in the next several years, so you're expanding capacity in South Korea and supplying tow to China so what's your view on the market supply and demand balance in the medium term and any potential impact from that potential capacity expansion from your competitors and margin profile going forward?

Yes, it's a good question, and I guess I'd start off by saying we aren't surprised. I think we understand this marketplace extremely well. We know the history of expansions, we know the history of growth in the market in Asia and we think it's fairly well thought out, fairly disciplined marketplace so we've added capacity to Korea, not just China but to serve Asia so selling the capacity in China again, they've done it before, expected. We don't see major disruption in the marketplace. We think the market will absorb that and it may or may not be the last expansion so there maybe more to come from various players including ourselves in terms of meeting the demand and the growing parts of the world.

Thank you, and then my second question is do you expect raw materials cost inflation in 2010 and can you provide a little bit more color on the magnitude of the cost increase for major and also you have announced a series of broad based pricing actions since last July and August but the channel checks showed some of your major customers particularly on the coating side expect a very modest input of cost pressure on their side in the coming quarters. Can you comment on the progress you have made on the pricing front and what's your confidence level for the pricing traction going forward with the major customers?

And that's what we were referring to when we said we expect to have some pressure on margins so when you look at some specialty products like the things that go into coatings there may be some margin compression and that's where we think we're going to more than makeup for it in volume and that's why we think CASPI can have a record year this year in 2010 but there's no doubt that the more special the product, the more likely you are to not be able to pass along raw material increases in price just as you can be a little sticky when it goes the other way.

When you get to the more commodity products, that's where the best way to handle that is with price, and that's what the market expects. They have transparency and they look through to your raw materials so you kind of have to take it specialty versus commodity when it comes to the magnitude of the moves, I'll just give you let me give you an anecdotal example as to why it's so hard to call so we start the year propane a $1.10 and you know we use propane feedstock for our stream particularly down in Texas.

We seen as high, this is just in the month of January now. We seen as high as $1.45, I think last time I looked it was $1.35 and January can be a volatile month because of the winter, but it's logical to expect raw materials and energy to move off and it's logical to expect a little bit of a squeeze which is what you're implying Amy on the specialty products like in the coatings on the margins but overall, we kind of gave our guidance balancing volumes as well as that expected squeeze because of the raw materials moving up but I can't say several hundred million or something like that 2009 to 2010. We'll just have to see how volatility gets.

Thank you, very helpful.

We'll take our next question with Andrew Feinman with Iridian Asset Management.

Thanks.

Andrew.

Yes. So could you tell me how much pension expense was this year?

Pension expense this year I think is going to be around low 40s so I think 42 or 43 Andrew.

Okay, what I meant I'm sorry when I said this year, I'm still a little bit behind, was 2009, what was it for the year that it was $181 million in funding what was the expense number?

The expense in 2009 is going to be roughly $42 million I think.

Oh, okay. And can you please repeat what you said about the license you expect to sign this year because--

Yes, yes, thanks, Andy because it's not signed this year. What it is, it's a license that we wrote earlier. It's actually the Sipchem license that we wrote earlier and this would be the final payment as their plant gets up and running but it refers to a license that was signed a few years ago. It's just the final payment will come in. We haven't had the revenue recognition event yet and that's when we'll see what happens in the first or second quarter depending on when they meet all their test.

So there's still the possibility for you to sign some licenses this year, you're working on it?

Yeah, we're always working on the licensing. I mean if you think about it, the market tends to look at stuff like that as a one off and it's kind of like well just a one-time thing but year in and year out, we have these one-time licensing deals either on the oxo side or the acetyl side and yeah, I look at it as a source of revenue.

It's not huge. We've got a small licensing group. They more than pay their way. It's a well run shop and just kind of count on the little things to come in when they do so in the first half of this year we're looking at probably an extra $0.07 on top of the numbers we told you from licensing.

Okay, and I have one more thing. You said that, regarding the $6, the extent to which you get above that depends on the free cash flow and what you do with it, but I just want to review real quickly, when you gave that outlook, that target for 2012, for the segments, you gave a range for each one, so for instance, CASPI was 250 to 300 and PCI was 100 to 150 and I can tell you the rest of them so when you add up those ranges at the low end, you get $6. At the high end you get $7.60 earnings per share, so I understand that it's very unusual for all businesses to hit on all cylinders in exactly the same year but in the unlikely event that that was to occur and you get to the high end of the range in each business then the potential earnings that exists is more like $7.50, not $6, am I doing the math right?

Well the math is what the math is so we gave you an EFO range if everything could come out. We were just trying to be realistic, Andy. And you said it, what's the odds everything clicks at the same time and for how long does it do it so we did our best shot, we took our best shot at giving you ranges and if things really click for them what would the high end be, maybe what's a more expected level would be what gets you to the $6.

Okay, well I just wanted to make sure that all my--

No you're not missing anything.

All of the other analysts were doing the math.

Right.

Thanks.

We'll go ahead and take a follow-up question from Amy Zhang with Goldman Sachs.

Thanks for taking my follow-up question, one very quick one. So the 2012, the EPS numbers, whether that $6 or $7.50, do you think that's peak earnings power or more like recovery year earnings power?

No, I would not call it peak. I mean for example, that didn't imply, that didn't have PCI hitting the peak of its cycle. I guess when I say I wouldn't call it peak I'm working off the $6 so I love the way Andy looks at the math but again, we tried to be realistic on how we see things all coming together and what's likely to come together at the same time, so but I certainly wouldn't call it the peak. I mean if I'm working off a trough and what most would say was a pretty rough year unless you go back to the 30s if I'm working off a trough in the 360s, and we can fill up those core businesses and then I really do expect to create quite a bit of value off the hundreds of millions we have in our balance sheet plus the free cash flow we should generate between now and then, it shouldn't stop at $6 but we just tried to pick a point in time that would have some credibility. If I start talking about 2015 or whatever, I don't think that's going to be all that credible, but I don't see any reason why it just peaks out at six.

Got you, I think that's a very helpful answer because I think the market has some misperception about your 2012 EPS. A lot of people I heard talk about that's the year for your peak earning power which I personally don't agree. Thanks for the clarification.

Oh, yeah. I agree with you, Amy, 2012 is probably not going to be the peak for us. Thank you.

Thank you.

There are no further questions in queue at this time. I'd like to turn the conference back over to Mr. Greg Riddle for any additional or closing remarks.

Okay thanks Kelly and thank you everyone for joining us this morning. An audio replay of this conference call will be available on our website this afternoon and available through February 8. Have a great day.

This does conclude today's conference. We thank you for your participation.