伊士曼化學 (EMN) 2010 Q1 法說會逐字稿

Good day, everyone and welcome to the Eastman Chemical Company first quarter 2010 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, Angel 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 CFO. 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 second 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 companies first quarter 2010 financial results news release on our website and in our filings with the Securities and Exchange Commission including the Form 10-K filed for 2009, and the Form 10-Q to be filed for first quarter 2010.

Second, except when otherwise indicated, operating earnings, earnings per share, and cash flows from operating activities referenced in the call and in the slides accompanying the call exclude restructuring charges and the impact of the adoption of amended accounting guidance for transfers of financial assets. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring charges and the impact of adoption of amended accounting guidance for transfers of financial assets, are available in our first quarter 2010 financial results news release and the tables accompanying the news release.

Lastly, we have posted the slides accompanying our remarks for this mornings call on our website at www.investors.eastman.com and you'll find them in the presentations and events section. With that I'll turn the call over to Jim.

Okay, thanks, Greg and good morning everybody. Thanks for joining us. I'm going to begin on slide three. Beginning with an update on some of the outlook statements we made on the call back in January. For first quarter EPS, we told you we expected to be slightly above the $1.14 we reported in the fourth quarter, and since then we had an outage at our Longview Texas site which negatively impacted our results, but we were able to more than offset the impact of the out age with strong volume and improved mix and a strong March. I'll talk more about the quarter in a minute.

Next, we told you that we projected our full year 2010 EPS would be 20% higher than our 2009 EPS of $3.63. I'll talk more about our expectations for 2010 EPS when I get to the outlook, but given our strong start in the first quarter, we expect to be well above this projection. We also told you that we expect to generate more than $100 million of free cash flow in 2010. This is on top of the $320 million of free cash we generated in 2009. Although we used cash in the first quarter due to a working capital build, which is reflective of our strong revenues, given our expectations for strong earnings performance we expect to more than meet this objective. Curt will walk you through this in more detail in his section. We told you that we expected to recognize earnings from an acetyl license in the first half of 2010 and this happened in March. This license, along with the license we have with Chang Chun Petrochemical in Taiwan is a recognition of the value of our acetyl co-production technology. Now, we've told you that we expect to make progress on joint ventures and acquisitions in 2010 and we have. In March we announced the completion of an acetate tow manufacturing plant in Korea that is owned by our joint venture with SK, in which we have a controlling interest. Also in March, we announced we entered a definitive agreement to acquire Genovique Specialties Corporation, which will strengthen our non-phthalate plasticizer business in the PCI segment.

Next is a review of our financial results for first quarter 2010, and as I mentioned we were more than able to offset the impact of the outage at our Longview, Texas facility. Revenue increased 39% year-over-year. Volumes increased 22%. Part of the increase is a comparison to depressed demand in first quarter 2009 obviously, but it also reflects the benefit of growth initiatives in areas like Specialty Plastics. Our operating margin increased to 12%, up substantially year-over-year and up 1% sequentially. The increased earnings reflected the higher volumes, improved capacity utilization and the resulting lower unit cost, and a positive shift in product mix. The net impact of both the acetyl license revenue and the outage at the Longview facility is about negative $0.15 per share. That's the net. I'd also add we had good momentum in the quarter with March being our strongest month.

Turning to the segments starting with Fibers. What a great business. Fibers operating earnings in the quarter tied their quarterly record set in third quarter 2009 and they have now set a record in four of the last five quarters. Revenue, volume, and pricing were all similar to first quarter 2009 levels. Operating earnings increased due to the slight increase in prices and higher acetate yarn utilization, and first quarter 2009 acetate yarn capacity utilization was around 30% and first quarter 2010 it was in the mid 80s. As I mentioned the 27,000 net ton acetate tow facility in Korea started up in the first quarter and we're making good progress qualifying material with customers, but there will be somewhat of a headwind from the new capacity in 2010 as we fill it out. We expect this will be offset with the stronger acetate yarn volumes, and as a result we expect 2010 operating earnings to be similar to the $300 million they reported in 2009.

Next up is CASPI, another great business. The biggest story for CASPI is the rebound in volume, up 34% year-over-year. The volume increase is due to the comparison against depressed volume in first quarter 2009 and some inventory restocking. They also upgraded their mix mainly due to an increase in volumes for their specialty coalescents and specialty polymers, particularly in Asia Pacific. Operating earnings increased substantially year-over-year, but were down $11 million sequentially. The sequential decline was due to the negative $10 million impact of the Longview outage and some margin compression. Operating margin was 18% and excluding the impact of the outage would have been 20%. Looking forward, given their strong start to the year and expected continued strong results in the second quarter, they have a good chance to set a new operating earnings record in 2010 above the $242 million they reported in 2006.

PCI is next. Revenue increased substantially up 58% year-over-year. Volume was up due to the comparison against depressed levels in first quarter 2009. We're also benefiting from tightness caused by planned maintenance and competitor outage in ethylene and peroxide in Asia. Selling prices increased to offset higher raw material and energy cost, and product mix improved due to increased volumes of higher priced olefin derivatives and sales revenue from the acetyl license. Operating earnings improved substantially year-over-year due to the higher volume in price and improved product mix and the sales revenue from the acetyl license. The negative impact of the Longview outage and the revenue from the acetyl license mostly netted out to zero for PCI.

Looking forward we expect tightness to continue in a number of olefin derivatives and for sales volume to remain strong. As a result we expect our full year operating earnings to be above $125 million, more than double their 2009 operating earnings of $54 million. I'd also like to make a comment about all of the hard work our employees in Longview did to limit the impact of the outage we experienced in the quarter. Of course you never like to have an outage like this but when you do it's great to know there's an experienced group that limits the impact and gets us back to serving our customers, and it's why we have such a great reputation for reliability.

Specialty Plastics is next, and their story is very straightforward. Volume has recovered with the economy and our growth initiatives are beginning to pay off. Sales revenue increased 59% year-over-year due to higher sales volume and improved product mix. Volume was up 50% year-over-year and 20% sequentially and set a new quarterly record for the segment. For reference, year-over-year volume increases for competitive material, such as polycarbonate, acrylic ABS and others were probably between 5% and 20% according to CMAI. We're starting to see the benefit of growth initiatives in core-co polyesters in areas such as shrink film and handled food packaging and adoption of our new Tritan co-polyester is ahead of schedule due to the product properties, including a higher temperature resistance and the fact that it is BPA free. Product mix improved as we had higher volumes for our cellulose plastics for LCD screens and we are now benefiting from the recovery in this market. Operating earnings improved substantially due to the higher volume, higher capacity utilization and the improved product mix. Looking at the full year, we now expect operating earnings to be above $60 million for the year, and I remind you that this includes about $7 million of cost a quarter, $30 million a year of fixed costs for the new Tritan capacity.

Turning next to Performance Polymers, operating results for the quarter were a loss of $13 million compared with a loss of $14 million in the first quarter 2009. The slight improvement in operating results was due to higher selling prices and the improved operation of the IntegRex facility, which were mostly offset by higher raw material and energy costs. Looking forward to the second quarter, we are continuing to focus on upgrading our commercial footprint and improving our mix of customers. We made good progress in the first quarter and we expect this progress will be reflected in our results in the second quarter. At the same time, the PET market in North America continues to be difficult with lackluster demand and capacity being added. Taking us together we expect results in second quarter will approach breakeven.

Most of you have probably seen a news release we issued before the call this morning announcing that we are reviewing strategic actions for our Performance Polymers business. We've hired Banc of America Merrill Lynch for the strategic review and you've heard me say on many occasions that we have taken no regrets actions to improve the performance of this business. These include improving our operational performance and upgrading our commercial footprint. We've made good progress in these areas and as a result, I believe this is the right time to determine whether or not Eastman is the highest and best owner for this business, and we're targeting completing this effort by the end of this year.

Turning next to regional performance. Given our very strong corporate results it's probably not a surprise that we have strong regional results. You'll see that our revenue and volume growth year-over-year was strongest outside North America. Asia revenue was up 60% with a 34% increase in volume. A favorable shift in product mix also contributed 16% to the revenue growth. The biggest contributor to the revenue growth was Specialty Plastics and this is a combination of cellulosic plastics for LCDs and higher volumes for Tritan co-polyester. CASPI was also much stronger, particularly in their specialty polymers and specialty coalescents product lines. Revenue in our European region was up 55% with volume up 28%. Strength was particularly good in the CASPI, PCI, and Specialty Plastics segments. The improvement in product mix was due in part to revenue from the acetyl license here. Latin America revenue increased 66%, off a smaller base, of course and with this improvement largely in Performance Polymers.

That brings me to our guidance for the second quarter and the full year. We're seeing clear signs of a global recovery in our volumes. We've seen it in our first quarter results and we expect it will continue in the second quarter. I'd also mention that our visibility, while still limited, has improved slightly. A result of the higher volumes is that our capacity utilization has improved leading to lower unit cost. We also expect volatility in raw material and energy costs to continue, so looking at the second quarter, we expect EPS will be between $1.50 and $1.60. This outlook includes approximately another $5 million to $10 million of residual cost for the Texas outage that will fall in the second quarter, so for the year, given our first quarter results and our expectation for a strong second quarter, we expect full year earnings per share to be between $5 and $5.25.

Now before I turn it over to Curt, let me take one minute for the executive spotlight and my choice this quarter is heavily influenced by two trips I've recently taken. The first trip was to Brazil where I went to Sao Paulo and Camacari, and the second trip went around the world through Rotterdam, Zurich, Switzerland, Dubai, Riyad, Singapore, Shanghai and yes, I'm still a little jet lagged. On both of these trips I was very impressed with, and proud of our regional leaders. Those of you who attended our investors day will remember Juan Carlos Perodi, Godefroy Motte and Michael Chung.

These three leaders are not only quite talented but have a depth of experience in their region. Juan Carlos has responsibility for Mexico and everything South and many of the opportunities he and his team are working on are in Brazil, a country of tremendous potential for Eastman. Our Europe, Middle East and Africa region just turned in a fantastic quarter and Godefroy's team is focussed on continuing that success by pursuing opportunities in Eastern Europe and the Middle East, and of course they will work on integrating the Genovique acquisition in Astonia. Finally I take a great deal of comfort that we have someone with Michael Chung's abilities and customer contacts to head the important region of Asia. Supported by strong teams in Singapore and Shanghai, we expect continued strong growth in this region as well. So typically I pick only one executive for the spotlight, but given our international results this quarter I hope you can understand how I thought it appropriate to recognize our three regional leaders. And now I'd turn it over to Curt.

Thanks, Jim and good morning everyone. I'm going to start by reviewing our first quarter 2010 financial highlights on slide 13. In the first quarter we used $25 million of cash in operations. This excludes the impact of adopting amended accounting guidance for the transfer of financial assets. The result for Eastman of adopting this accounting change is that $200 million of receivables, previously accounted for is sold and removed from the balance sheet when transferred under our receivable securitization program, our now included in the balance sheet in the first quarter as trade receivables. As a result, receivables were increased in the first quarter 2010 cash flow statement reducing cash from operations by $200 million. Aside from the adoption of this accounting guidance, receivables increased $214 million due to increased sales revenue. Free cash flow for the quarter was a negative $88 million, excluding the impact of the adoption of the accounting guidance, reflecting increase in working capital during the quarter. Our net debt-to-capital now stands at 42%, up from the end of the year mainly due to adoption of amended accounting guidance.

Turning next to growth. As the global economy recovers and our volumes and capacity utilization increases, we have a number of capacity additions that have and will contribute to our growth. One example is our 2009 Regalite expansion in Middelburg, the Netherlands. Regalite is used in a wide variety of hot melt adhesives, polymer compounds and plastic modifications, which are used in end markets such as disposable diapers. We expanded capacity by approximately 30% in 2009 alone and have increased capacity by 65% since 2006. This expanded facility is running at a high rate due to strong customer demand for this product and we are considering additional expansions.

Another example is the 30,000 metric ton Tritan co-polyester resin facility that was completed at the end of 2009. You may recall that in addition to the resin capacity, we built monomer capacity for Tritan to support 60,000 metric tons of resin capacity. You heard from Jim that adoption of Tritan is happening quicker than anticipated. As we fill out the resin -- first resin facility we will consider when to add a second 30,000-ton metric ton resin mine to meet growing market demand for Tritan.

A third example is the 27,000 metric tons of acetate tow capacity in Korea completed this quarter to meet growing demand in the Asia Pacific region. We have a controlling interest in the JV that owns this facility. It represents about 15% increase to our acetate tow capacity, and while we won't see much of the benefit of 2010 as we qualify product with our customers, we are well positioned for growth in 2011. Another capacity addition for Eastman not on the slide is the acetic anhydride capacity we will market as a result of our acetyl license with Sipchem. In addition to completing the license with Sipchem in March, we will now market up to 50,000 metric tons of acetic anhydride from their facility in the Middle East.

In addition to these capacity additions we're looking at a number of other opportunities for organic growth throughout the Company. For example, we're evaluating an expansion of our CTA capacity for the LCD market that was postponed in 2009 due to the recession. And we have a history of finding low cost to bottleneck opportunities with our manufacturing streams. Eastman's fortunate to have multiple opportunities for organic growth.

In addition to the Korean acetate tow joint venture, we're also looking to grow through acquisitions. In mid March, we announced that we're entering into a definitive agreement to acquire Genovique Specialties shown here on slide 15, a leading producer of non-phthalate plasticizers. Our current plasticizer product lines in the PCI segment is expected to generate approximately $300 million in revenue in 2010, with roughly double digit operating margins. As a reminder, our current general purpose plasticizers are used in flexible PVC applications. The Genovique acquisition is expected to add more than 50% to our existing revenue base with complimentary specialty plasticizer product lines and is expected to have operating margins above those of our existing business. The transaction is expected to be accretive in 2010 including transaction costs.

Looking forward, the compound annual growth rate for non-phthalate plasticizers in North America and Europe is expected to be approximately 7% over the next five years, and our expanded geographic footprint with manufacturing sites in Astonia and China will provide growth opportunities in emerging markets. That transaction is expected to close any time now and we'll provide more details after the close.

As we have discussed in the past, we are focused on four areas of emphasis with our joint venture and acquisition activities as summarized on slide 16. The Genovique acquisition is an example of how we can achieve multiple aspects of these areas of emphasis in a transaction. It has manufacturing locations in emerging geographies, non-phthalate plasticizers are differentiated products and viewed as green and sustainable by the marketplace, and it benefits from some backward integration to basic raw materials. As we look at additional JVA opportunities, we remain focused on these four areas of emphasis, and I would add that the market looks more attractive to us today than it did six months ago.

Turning next to slide 17, we remain committed to returning cash to stockholders. Our last dividend payment was the 64th consecutive dividend we have paid to stockholders. In addition, in the first quarter we repurchased $20 million of shares. Our remaining authorization is $75 million and we expect to repurchase shares over the coming quarters primarily as a means to offset dilution.

Turning next to an update on our expectations for free cash flow. First, consistent with our guidance, we are expecting strong business performance. We are also expecting working capital for the year to increase, but consistent with our seasonal pattern it will be a source of cash in the second half of the year. Although first quarter capital expenditures were low on a historical basis, we continue to expect they will be in the $250 million to $275 million range as expenditures ramp up for the remainder of the year. This includes spending on growth initiatives and incremental capacity additions. As you know, we remain committed to our solid dividend. The net result is that we expect to generate between $200 million and $300 million of free cash flow in 2010.

In conclusion, Eastman continues to be well positioned for growth in 2010 and beyond. You see us taking action to create value from our balance sheet with organic growth initiatives, joint ventures and acquisitions and share repurchases, and we'll continue to be disciplined as we implement growth initiatives to create value for stockholders. Thanks for your attention and your interest in Eastman Chemical Company. With that I'll turn it back over to Greg.

Okay, thanks, Curt. This concludes our prepared remarks. Angel we are ready for questions.

Thank you. (Operator Instructions) We'll go first to Kevin McCarthy, Banc of America Merrill Lynch.

Good morning, how are you?

Good, Kevin.

Congratulations on a nice quarter here and a good start to the year. Specialty Plastics, Jim, looked like best earnings since the first half of 2005. Can you talk a little bit about how much Tritan is contributing to that, if at all given the start up cost and also how large is the cellulosic plastic business these days for LCDs and what is your outlook there?

Yes, thanks for giving me the opportunity to talk about Specialty Plastics, because I've said before I love this business and you're finally getting to see what I get to see all along. I'll take it in order. So Tritan, really doing well for us, exceeding our expectations in terms of the demand out there and it's driven by its performance characteristics, as well as of course its BPA free. We're getting good traction, particularly in Asia where a lot of the products are molded, so you see that in our Asia results. You're not really seeing a positive impact on earnings. In fact the cost, as we ballparked for you around $7 million $7.5 million of fixed cost a quarter, the way we look at our volume ramp up, it's probably not until some time next year that Tritan actually has a positive EFO impact. So you're seeing results are still overcoming negative numbers for Tritan as it ramps up, so that means the rest of the business is actually better than the net number you see.

One of the things in the rest of that business that's doing quite well now is displays and we're a little bit up the value chain from some of the other players that report who are closer to the actual flat screen maker, but now it's catching up with us so we see that continuing as well. I will say that with Specialty Plastics, we know of certain cases where some volume was pulled forward into the first half of the year, so that's why I didn't just take four times the 20 and say the year would be 80. I think we ballparked it around 60. We know some of that volume got forward, but overall a great story in Specialty Plastics.

Okay, and then Jim, I think you made a comment that you experienced some strengthen the month of March. Can you comment on what you're seeing so far in April, and I know the subject of utilization rates is sometimes a difficult one to address, but maybe you can talk about where you're seeing the highest utilization or the highest variances, maybe would be a better way for me to phrase it across the portfolio relative to your prior expectations?

Yes, I can talk a little bit about monthly and then also utilization rates. And just on the utilization rates, we started doing that when the world fell apart because we wanted to give everyone some kind of benchmark, some kind of thumbnail sketch or something they could use to just get a grasp of where we are and we even based our kind of 2012 projection of $6, we said that was based upon getting back to full utilization rates, which could be recovery rates. So it's not ideal as we talk about utilization rates. I just want to make that clear to people. One of the things that you miss is as our utilization rates go up, we always have the opportunity to start upgrading our mix and that's what we typically will do as the utilization rates get higher we'll start upgrading our mix and then start adding capacity. So that's kind of what you ought to be expecting out of Eastman.

If you just look across our streams though to give you an answer on utilization rate, acetyl is highest as you might expect, the olefin stream of course, was, you might say artificially low in the first quarter, because that's where the cracker outage was, polyester would be in between overall for the Corporation, we were mid 80s in the first quarter. If I look at the months and we really -- it's not a good practice to start giving monthly results. We like to do it by quarter, but we thought it was worthwhile for investors to know that the quarter ended on a strong note and I can just say that is continuing into the second quarter, which is what we said in our remarks.

Great, and then finally, if I may just a clarification on the Longview outage and the acetyl license, I think you said it was about $0.15 per share on a net basis. Am I correct in understanding that it would be about $0.20 on a gross basis at Longview and positive $0.05 for acetyl, is that about right?

Kevin the way to look at it just to break the $0.15 impact, you had about 25 million associated in cost with the Texas facility, an additional 5 to 10 you'll see in the second quarter and then revenue from the license was $12 million benefit.

$12 million, great. Thank you.

We'll go next to Jason Miner, Deutsche Bank.

Thank you, good morning.

Good morning, Jason.

As you look at some of the mix improvements that happened this quarter as demand came back, I wonder if further growth might come from lower margin products, I know, Jim, you spoke about upgrading the mix as time goes on, but is there a chance that some of the higher margin stuff snapped back and that might be a headwind to the incremental margin over the coming quarters?

Yes, I guess, Jason, that's always a chance. We'll see. I think the bigger driving force will be how successful are we in being able to upgrade the mix, so if you just take your choices, you're running your acetyl stream hard, your fly wheel is selling asset into the North American market, but to the extent you can upgrade that into other derivatives you will. That's going to have a more powerful impact. If you get over to say the olefin stream there maybe more the case you're talking about, where there may be a fly up in more of the commodity side, but overall, we're pretty optimistic, pretty bullish that we've got a good mix story going.

If anything I'd say there's a little more risk on the margin compression in terms of just following the raws and the pricing. That's what we're really paying a lot of attention and that's what we're going to be focusing on. Assuming the volumes stay strong and keep coming back with the economy, which of course is a big assumption, then we're really going to have our work cut out for us to make sure we can do our best having pricing following raws and energy, maintain that margin and I'm a little less worried about a negative mix effect because, like I say historically, typically we'll be able to work on the mix and improve the mix as the volumes come back.

And since you touched on pricing, given that we've seen raws run up somewhat early in the year, do you see a headwind to margins going forward or do you think you can stay ahead of raw material increases with pricing power in the next quarter?

Yes, we'll see. We already had some of that pressure in the first quarter. So people like CASPI, we got it squeezed a little bit on the margins there because of that. Of course, we don't typically get into individual price increases, but not just us, the whole industry is trying to be fairly aggressive not to get burned this time as raws move. So putting polyester aside for a second because that's always a whole other story with the PET world and paraxylene, I think the rest of our businesses are probably going to be able to do pretty well pricing versus raws and energy.

That's encouraging. Well lastly, I appreciate the walk through of the organic growth and CapEx opportunities, but given the faster growth in Asia, I wonder if there's not an opportunity to deploy the balance sheet that supports more organic growth there. Could you just talk about is there further opportunity to delve into Asia?

Oh, yes. I just got back from Singapore and Shanghai and it's just -- I don't know how to describe it but there is a multitude of opportunities there and things like our Tritan product really just getting traction there. I can only imagine how good the demand and the growth for that is going to be there, our Specialty Products in CASPI the exact same thing and you know what's going on. Eastman has got products that give certain performance characteristics, a lot of times they save labor or higher quality and therefore as the middle class grows and they can afford to buy, say a better paint, for example, they are going to do that because labor costs more to paint in three years versus five years, seven years whatever. So they are going to use our products for a better product to save labor and you can just see that happening. The same thing switching to disposable diapers from cloth diapers, et cetera. I can give you a bunch of examples, but I can only see good things coming for our business in Asia.

Would you be interested serving that from outside of the region or actually building out assets in the region?

We are and I took that as the jist of your question. I tried to duck it but if you're going to nail me down exactly. No, we want to do both, but yes, we would be comfortable having more assets there. The acquisitions, we've done two acquisitions that have assets in China and we would like to do more.

Thank you very much.

Yes.

We'll go next to PJ Juvekar Citigroup.

Yes, good morning.

Good morning.

Jim, currently natural gas and resin prices are relatively low and oil prices are high, so based on that, how is the profitability of your coal based production compared with that and also talk about your propane based propylene.

Yes, well you're kind of seeing it aren't you, PJ. That is the way it was in the first quarter and you're seeing profitability. We're very competitive being coal based in Tennessee and I don't care if natural gas is $4 or $8. We're still quite competitive where we are with our Tennessee operation being coal based. I guess I'd have to say the same thing about propylene and you know what's going on in the world with ethylene, propylene, propylene being made on demand, all that kind of stuff. And that is not a negative for us I guess is really all I want to say about that, but I think the proof is in the pudding and you're seeing it in our results .

Is there a way to quantify this advantage?

I'd probably -- I would not want to even if I could. It is an advantage. I think we demonstrate that over the years. There's probably some way you could do R squared PJ, going back on our results versus someone else's results, but we have not tried to.

Okay and then you received the $12 million in license on acetyls. Are you trying to sign more acetyl licenses like Sipchem, can you give us your thoughts there?

Yes and we do have another one right now, as I think I mentioned in my remarks, CCP in Taiwan where we would expect an additional payment, either into this year or beginning of next year I think for that one, and we're trying to be very strategic about it. We're not just licensing anybody and everybody. We're trying to be intelligent about it. We have a game plan. We look to do one typically every couple years, but that's not a commitment or a guarantee and that's just on the acetyl side. Of course we have a licensing effort in the oxos and we have a licensing effort with IntegRex as well. So I think about the licensing stream of income, it's starting to become fairly steady. You can count on a little each year but it's frankly not big enough. It's an effort that's very worthwhile to do, but it's not big enough that most analysts try and focus on it.

And just lastly, Jim, your volumes in CASPI, PCI were up like 40%. I'm just trying to figure out how much of that was easy comps versus sort of inventory build in this quarter.

Yes, and a lot of it was easy comps. I don't know how you kind of nail it down exactly, but just look back at what you're comparing it to. I never would have thought they would be as low as they were first quarter last year, so part of the huge percentage increases have to be that. I can also tell you we're trying to be very up front that some of the performance this first quarter has to be some inventory rebuild. Now, it's hard to know how much because frankly, demand came on so strong, I think a lot of people are having trouble building their inventories. There's places where we want more inventory and we just can't catch up and get to the inventory level we want. So while I know what's going on, I don't think it was a huge part of the performance this quarter.

Thank you.

Yes.

We'll go next to Jeff Zekauskas, JPMorgan.

Hi, good morning.

Good morning.

Your free cash flow estimate of $200 million to $300 million, is that before dividends or after dividends, and does that include the Genevique acquisition?

Jeff our definition of free cash flow is just our operating cash flow less capital expenditures and less our dividend, so yes it does include a dividend. It does not include if we put that cash to work on acquisitions like Genevique.

Okay, is the capacity -- thank you very much, is the capacity utilization at Tritan, I don't know, 30% or below or is it above or where is the utilization of that?

Yes, it's quite low right now, so without an exact number, just to remind you we have a monomer plant with 60,000 tons, we did our first polymer plant that's 30,000 tons and it's that first polymer plant that we would expect that we would fill that up some time next year. Originally it would take two years to fill it up and now we're saying it will probably get filled up some time during 2011. So that gives you a sense of how the polymer line is running, as well as you see that the monomer plants, the big one that's running at a very low utilization rate right now.

So if I wanted to buy say a pound of Tritan polymer from you --

We'll sign you up.

Right, and I offered you $0.75 for a pound of polymer, is that -- would you sell it to me?

I doubt that.

Because I've offered you too high or too low?

That's because we don't know you. If you're asking what price we're selling the Tritan for, I guess you could just call up the customer service desk and do it. I don't have a quote and it probably depends on where you are in the world and what kind of customer you are, but I can tell you the demand is great right now, Jeff. It's exceeding our expectations and we're very pleased.

And then lastly, with acetate tow, all things being equal, once you get your Korean facility working right, should the operating returns of that facility or that product be similar to the operating returns of your other acetate tow operations?

I would say similar. The tradeoffs -- what's going through my mind right now is the tradeoffs are the logistics of where that plant will sell, so it's going to sell in Asia so it will have an advantage logistically to say an North America an asset or working asset for serving Asia, it won't have the scale that we do back here in Tennessee. The flake comes from Tennessee, so it's a little hard to trace through but it's going to have a good return on the asset. I would assume it's not quite as good as what we do here in Tennessee, but it will be just fine and in particular it will serve our customers in Asia and that's what we want to do is keep them happy.

And then lastly in PCI, your number for the year is, I don't know, around $125 million and if you annualized your first quarter results, I guess you'd get somewhere close to 150. So from your point of view, why do you expect your returns, though high, to ebb a little bit in the course of the year?

I guess for PCI and for a number of the businesses, a couple of things. One, we seasonally are a little heavier in the first half of the year than the second half and we're trying to reflect that historic norm. That's held true more years than not and we think it will probably hold true again this year, so that's part of it. Part of it is we know of specific things that pulled sales forward from the second half to the first half more so in [SPEBO], Specialty Plastics than in PCI. We know there was some outages in the PCI arena. Some of the competitors were down, same way we were down, except we had a license fee to offset our P&L. So we just roll that altogether and say first half of the year is going to be quite good and second half of the year will fall off.

Okay, thanks very much.

Yes.

We'll go next to Sergey Vasnetsov, Barclays Capital.

Good morning. Congratulations with your strong results and decision to exit PET. I just want to ask you your thoughts on dividends on slide 17, $1.76 and dividend paid for 16 years, however for 13 years of the 16 was double 76 and even more this inflation had eaten this value away by half by now. So as Eastman becomes more stable and growing with free cash flow across the rest of your PET and giving you strong results, improving economy, et cetera. I realize it's a Board decision but just curious, what are your thoughts on the dividend?

So before Curt answers the dividend let me just correct you a little bit, Sergey. Our announcement says we've hired a banker and we're looking at our alternatives. We'll see what the best alternative is for Eastman in terms of whether we exit the business, sell the business, what other alternative might be out there, but this isn't a case where we have to sell. I'm expecting that we'll have strong interest, but I'm being straight up when I say we will determine who the highest and best owner of this business is. So it could very well lead to divestiture, but that's not what our statement said and I'll let Curt address the dividend.

Well as you know, as you mentioned the Board does decide our dividend policy, but from a standpoint of options, we look at ways to put our strategic cash to work. We've talked about the four buckets across growth as well as how do we return cash to shareholders, we do look to ways to return cash to shareholders in the most efficient way possible. Right now our dividend still is nice solid to a little over 2.6%, 2.7% and that still benchmarks well with relative companies. So we'll look at different ways to return cash to shareholders, but right now the dividend seems to be in a good place.

All right, thank you.

We'll go next to Frank Mitsch, BB&T Capital Markets.

Good morning and nice results fellows.

Thanks, Frank.

Jim, back at a conference a week before the end of the quarter you put out a press release saying the Longview outage , the Longview plants are back online and the $0.20 to $.25 negative impact will be mostly offset by better sales in margins. Obviously you've come out and instead of mostly, you should have used more than or way more than offset by sales and margins, so what

Thanks for pointing that out, Frank. We only had two months under our belt. We weren't, let's be blunt. We were surprised how strong March was. We also didn't know exactly how bad the cracker outage would be. Would it be worse than margins? And we just missed it. March came in noticeably stronger than we thought and you're seeing results of that.

All right, and -- but so even -- I would imagine that you get financial data more than just on a monthly basis, more frequently than that. Am I incorrect in that?

No, you're not incorrect, but you don't really roll it up to a bottom line more frequently than that. We don't want guys jumping through hoops trying to grind out numbers every five or six days to what end. We're concentrating on making the money, not counting it, so yes, cut us some slack. It's not like we were sitting on a noticeably higher number and we just said that.

That's fine. As long as you haven't jumped through hoops for quarter end that's fine. I hear you there. Talking about M&A, the comment Curt made was you are seeing a better market right now. Can you talk about orders of magnitude in terms of what you think the sort of ballpark range that EMN is comfortable with?

Yes, I'm going to get Curt to comment on this too. When we say a better market, I think we're meaning we see more opportunities, there's more things shaking loose and we're starting to get some traction with the pipeline, let's put it that way. More so -- I'm not sure the valuations look any different to us. We're still just as picky as we've ever been. We really like this Genevique thing. The more we get into it the more we see it, and by the way I think that's probably going to close end of this month or so, but would love to do more like that, would love to do some a little bit bigger than that and that means a few hundred million dollars. I don't know, Curt is there anything more?

I'll just comment similar to what you said, Jim. Our pipeline is improving. There's a variety of opportunities that we're looking at. There's different orders of magnitude, but we're going to again remain choiceful and I do agree with you the Genevique transaction example is not only how well a transaction can be aligned with our strategy or growth area, like we're seeing with the non-phthalate plasticizers, but it's also a way we can also look at financial returns and find acquisitions that are accretive even out of the gate.

Yes.

Well, thank you for reintroducing Astonia to the lexicon, because I can't recall the last time I thought about Astonia. And then lastly, as you talk about your strategic review of the PET business, how do we think about the linkages between that business and your Specialty Plastics business in terms of the difficulties that you might envision should PET be no longer part of the portfolio? Is that -- could that be a stumbling block or not really?

I don't think that will be a stumbling block. We've obviously thought this through for a long time before we would make this announcement, so we know the business is divisible. Yes, Specialty Plastics as an individual business we'll have to see how it deals with its intermediate stream and the capacity utilization. Of course it's growing nicely, so it's one of these things where it will grow into some of the intermediates that now go to PET, but I think we can scale the business we're left with if we decide to divest PET. We can scale it such that it's not going to be a major issue for Eastman.

Terrific, thank you.

We'll go next to Andy Feinman, Iridian.

Thanks. Jim, you got any friends that run another company that I can buy stock in? Friends like you?

I appreciate it, Andy. It's going to be interesting to see how the rest of the industry does. I tell you, we've seen it strong, but I do feel, and I'm not trying to be immodest, I do feel like there's number of places where we're gaining share and in particular I think about within Specialty Plastics, where I know we're growing faster than the polycarbonate and acrylic boys, but yes, we're just keeping our head down doing our best.

Okay, so for this year, your free cash flow, if you include the acquisition dividend, is something like 260 to 360, you take out the dividend of 130, the acquisition of around 70, so that gives you $260 million to $360 million and you spend some of that on buying back stock, I don't know exactly, I haven't figured out how much and what do you do with the rest of that money?

Well I'm not quite sure of your math there, Andy, but I think as it looks to -- we have a good balance sheet, we have a net debt of roughly $1.2 billion. We have cash sitting on our balance sheet and as we've talked about before we're going to generate positive free cash flow, not only this year but a next year or so.

Let me chime in, Andy. So here is what we're looking at right now. So first quarter we held the CapEx down pretty low like around $30 million or so and that's not a typical number. That was us being really tight, which you would expect us to do. But now is the time as we're seeing volumes come back, we got to be really looking across the Company here and deciding where do I need to add capacity and only add it in the places where you know the demand is there and it makes sense. Because it's better to run close to full and be a little slow on adding the capacity, and especially with our Company where we can upgrade the mix and our stream. So the first thing we're going to be doing with cash is making sure, especially on our specialty products, that we don't run out of capacity. So you're going to see us starting to add some capacity in some key areas.

The second thing is we're going to continue to look at the acquisitions, particularly things that have an international vent with the emerging markets or a sustainable vent, but above all that have some really good financials such that they're accretive. We really like the thought of adding things to the portfolio that then add additional cash flow so we can grow even faster.

Okay, thanks for that and you mentioned when you were talking about PET, you mentioned that the process would be complete by the end of this year. So I was wondering if that means that you're going to announce something by the end of this year about what your decision is or if it means that the deal will be done by the end of this year if whatever deal that might be.

Well, Andy we'll have to see. We've hired the banker. We'll see what the response is to our announcement. My guess is when I get back to my desk here in about 10 minutes I'm going to have some phone slips on there where people are contacting me about the announcement this morning. So I would expect the process will proceed at a fairly good pace, that we'll be able to get a feel in the next few months of who the highest and best owner of the assets are, whether it's Eastman or somebody else, and then we'll see how fast we can get something done if that's the choice we make. I just want people to know, we don't feel like there's a clock ticking on us. So we're going to do the best deal possible for Eastman and we aren't working against any clock, but we just tried to ballpark it for people that we would expect something to happen this year.

Okay, thank you for that and one last question. Can we take 2012 now and move it to 2011?

Well I like the way you think, but let me just back up and give the logic again and you can make your own determination. When we said in 2012 back in investors day, what we did is we thought we could do about $6 a share when we're back to running in those low 90s full kind of recovery level and we guestimated that the recovery would be in 2012. Now to the extent the recovery happens faster or we reach those levels faster than yes, the earnings should be there faster, but it's hard for me to guestimate how 2011 and 2012 will go. We just got three months out of a 12 month year under our belt, so I don't want to get too far ahead of ourselves.

Okay, well I appreciate that very much and Greg give my best to Rufus.

Will do.

Thanks, Andy.

We'll take a follow-up question from Jeff Zekauskas, JPMorgan.

Thanks very much. In your free cash flow guidance of $200 million to $300 million, why is the range so big?

Well part of it Jim talked about just worked three months into the year. Part of it also depends how do volumes perform the second half of the year, Jeff, so we can get a feel for how much working capital changes right towards the end of the year. If sales are strong at the end of the year, then you're going to have more receivables and less operating cash flow. If sales come off a little bit you'll have more cash flow. So it's mostly working capital in how sales perform the end of the year.

And in your footnote it says this excludes the first quarter impact of the adoption of the accounting guidance on receivables, so why should we exclude that? Why shouldn't we include that?

Well, I think what we're trying to show is just what is our cash flow generation potential. That $200 million of cash, strategic cash is still available any time we want to. It's just in the form of a line of credit rather than having those receivables come back on our books and I'll leave it to you whether you want to include it or exclude it. The reality is the cash flow generation and the amount of strategic cash we have to put to work is the same.

Okay, thank you very much.

Yes.

We'll go next to Amy Zhang, Goldman Sachs.

Thanks for taking my questions and my question is really related to the Specialty Plastics as you may know. Back in last November, Investor Day you put out financial target for this business by 2012 and $100 million to $125 million on segment profit line, and I know the investors perception is being that target might be a little bit too strong and this is a show me story, but obviously the first quarter of this year you did a very good job in $21 million EBIT line. So how do you feel about the momentum of this business and how can you convince the market this momentum you've got in the first quarter is sustainable and you target on the Specialty Plastics business by 2012 is fully achievable?

Yes, Amy, we just have to put more quarters together. Very much believe it's an achievable target, in fact, and of course, we're pushing the business to see how quickly they can get there. A lot of it has to do with Tritan and does Tritan continue with this momentum such that that $30 million drag we'll have this year -- when that goes away you can just put that into the numbers as well and it's starting to get easier for people to see how we get to that $100 million to $125 million. The strength of the core businesses is real, the shrink film, the packaging film, what's going into the displays marketplace is very real and most people don't expect that to slowdown, they think that's going to continue to be quite strong. We're looking at adding capacity in this business, but the real proof in the pudding, again is going to come starting to stream quarters together for people so they can see it for themselves.

Sure, and can you just remind us if there's any seasonality associated with this segment and also is there any significant concerns about the raw materials, and obviously that's one of the things that people worry about going forward.

Yes, there is some seasonality because there's a big chunk of the Specialty Plastics business that goes in the packaging. So in that regard typically your fourth quarter is your weakest quarter, first, second better quarters, maybe second and third might be your best quarters. But again, we knew specific things why this quarter was fairly strong. We pulled some customer sales forward into the first quarter, but the underlying trend is solid. This is a business that's heading towards $100 million and $125 million and because of Tritan, I can easily see a path to get there as that swings from a negative to a positive. What was the second?

The raw materials concern.

Yes, paraxylene is always a concern, and of course Specialty Plastics, more of a specialty business, a lot of the times the pricing isn't quite as transparent, like the raw goes up you raise your price, the raw goes down you lower your price. I think the guys are doing a noticeably better job on that right now and also I think the pressure that some of the other competing materials are under, you can kind of see whether -- how often we're winning just by looking at our volume growth. You can see that we're winning when we come head-to-head with the other competing materials. So it's something we always have to watch for, can pricing keep up with the raws, but right now I think we're doing a pretty good job.

Thanks so much, great quarter.

That is all the questions we have at this time. I'll turn it back over to you, Mr Riddle.

Thank you. Thanks again everyone for joining us this morning. An audio replay of the conference call will be available on our website this afternoon through May 3. Have a great day.

That concludes today's conference. We thank you for your participation.