伊士曼化學 (EMN) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company first quarter 2011 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.

Thank you, Allen. And good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO and Curt Espeland, Senior Vice President and Chief Financial Officer.

During this call you will hear certain forward-looking statements concerning our plans and expectations for second quarter and full year 2011. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed in the Company's first quarter 2011 financial results news release on our website, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2010 and the Form 10-Q to be filed for first quarter 2011. Also, we posted slides that accompany our remarks for this morning's call on our website at www.investors.Eastman.com in the Presentations and Events section.

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

Thanks, Greg, and good morning everyone. We really appreciate you joining us this morning. We know you had a choice. You could have watched the talking heads talk about the Royal wedding for a little bit longer, but thanks for joining us here in the real world.

I'll start on page 3. As I normally do, I'll begin with a review of our recent outlook statements. It's fair to say that since we last talked a few months back, business conditions have improved markedly. Our guidance for first quarter EPS was that we would approach $2 a share, and I'll talk more about why we exceeded that in a few minutes. Our guidance for full year 2011 EPS was that we would approach $8 per share. And given the strong start to the year and with our first quarter results, we now expect to be slightly higher than $9 for the year. Given the strong net earnings, we are on track to exceed $100 million in free cash flow for the year, and Curt will speak to that in his section. And we remain committed to being disciplined in how we put cash to work. And see it as a way to differentiate ourselves from the rest of the industry.

Moving next to slide 4 and our corporate results. We are hitting on all cylinders right now, and as a result we continue to demonstrate a new level of earnings performance. This is the seventh consecutive quarter of year-over-year earnings growth, both operating earnings and EPS. And the sustained earnings growth reflects the strength of our current portfolio of businesses, which, as you know, we have substantially improved over the last several years through both divestitures and acquisitions. It also reflects continued volume growth, and this was really throughout the Company and in all regions of the globe. We were also able to increase prices, both due to higher raw material and energy cost and due to tight end markets.

There are probably two main reasons we exceeded our expectations in the first quarter. First, propylene prices increased more than we thought they would and therefore we benefited more from the propane, propylene spread than we thought. And to be fair, propylene probably went higher than most in the market thought it would. Second, we underestimated just how tight the end use markets are for many of our key products, and that therefore even minor outages in the market have a significant impact on pricing. And we expect this tightness to continue unless demand drops off. I'd also add we were a little bit cautious in our expectations for continued economic growth. The end result is a great quarter that demonstrates what 10,000 people working together can accomplish, including near flawless operational excellence in the quarter. And gives us a lot of momentum heading into the rest of the year.

Turning next to the segments, starting with fibers on slide 5. In a pattern that will never get boring, for me at least, fiber's once again reliably delivered strong earnings in the first quarter. Revenue was up 8% with volume up due to the new capacity in Korea filling out. Pricing was up slightly, but we expect you'll see more of the annual price increase for acetate tow show up in the second quarter results., Operating earnings were up both year-over-year and sequentially. But the operating margin was down slightly year-over-year because of higher percentage of our tow volume came from England and South Korea. And although these sites have a good cost position, they aren't quite as attractive as our Kingsport facility which is fully integrated and larger scale. Looking forward, we continue to expect fibers to have operating earnings of approximately $340 million for the year.

Up next on slide 6 is CASPI. And to say they had a very strong quarter is quite an understatement. Sales revenue was up 25% on higher pricing and higher volume. Pricing was up in response to higher raw material and energy costs, and also due to strong demand, particularly in the US. And high capacity utilization in the industries where they compete. Volume was up throughout the segment, but particularly in the US and the transportation, industrial and packaging end markets. CASPI is also benefiting from a more advantageous propane to propylene spread. And I'll talk more about that when I get to PCI.

As a result, operating earnings increased significantly year-over-year. Their operating margin in the first quarter was 21% compared with about 17% in first quarter 2010. The higher earnings are due to the higher selling prices, higher volume, and the improved propane to propylene spread which combined more than offset higher raw material and energy costs. We see the first quarter as the start of what we expect will be a very strong year where CASPI once again establishes a new level of earnings. We expect that full year 2011 operating earnings will be over $350 million.

Moving next to PCI on slide 7. They also had a terrific quarter, beginning with a 44% increase in sales revenue. The increase was due to higher volume and increased pricing. The higher volume was the result of the restart of a previously idled cracker, and continued growth in plasticizers. Both the result of the Genovique acquisition which closed on May 1 last year, and overall growth in plasticizers. Selling prices increased reflecting higher raw material and energy costs and tight end use markets. And, as I mentioned, we are benefiting from a more advantageous propane to propylene spread.

Comparing quarters, propylene prices were up about 30% sequentially, and over 15% year-over-year. And with the cracker restart in December we are now producing a good two-thirds of our propylene needs, up from about 50% before the cracker restart. We are therefore more leveraged to a favorable spread and because propylene prices continue to move higher, the spread is wider than we expected. Given our strong first quarter earnings and our expectations for the remainder of the year, we expect PCI to have a full year 2011 operating earnings above $300 million.

I'll wrap up the segments on slide 8 with Specialty Plastics who continue to deliver on their commitments with another strong quarter. Volume growth year-over-year was a solid 9%. And this builds on top of a 50% volume growth in first quarter 2010 over first quarter '09. They had all parts of their business contributing; core copolyesters, Tritan copolyester, and cellulose esters. And the capacity expansions we are working on for all three product lines are on track. The CHD and monomer expansion for our core copolyesters is expected to come online in two phases. First phase is the second half of this year, the second in 2012. A second, Tritan resin facility is expected online in the first part of 2012. And the cellulose triacetate expansion for the LCD market is expected online, also in early 2012.

Their pricing was up year-over-year, reflecting very high paraxylene prices. Paraxylene was up over 40% year-over-year, and almost 30% sequentially. Driving this increase is new polyester capacity in Asia, as well as high cotton prices, which are further increasing demand for polyester. There have also been some capacity outages and turnarounds with some of that capacity starting to come back online here in the second quarter. As a result, we see paraxylene prices moderating but remaining high due to the strong demand for the polyester is Asia.

Operating earnings were up substantially year-over-year due to the higher volume and increased capacity utilization and increased selling prices, which partially offset the higher raw material and energy cost. Looking forward, because of the way costs flow through our system, some of the higher priced paraxylene costs will be flowing through the second quarter which will pressure margins and earnings. But for the year Specialty Plastics is on track to approach $100 million of operating earnings.

Turning next to our geographic profile. We continue to derive advantage from our global diversity. You can see on this chart, revenue increased by double digits in all regions. This was supported by strong volume growth led by the US and Europe. And this volume growth is coming not only from the rebound in the global economy but from our growth initiatives. In the US, these include Tritan copolyester in our plasticizers business, including the Genovique acquisition and the cracker restart. In Europe the growth initiatives include our Regalite adhesives expansions and growth in our plasticizers business. And as a reminder, Genovique's main manufacturing facility is in Estonia. And in Asia-Pacific we filled out our acetate tow capacity expansion in Korea. And our Tritan copolyester is delivering strong growth. For the quarter our sales revenue was roughly 50% in the US, so therefore 50% outside. And our operating earnings were about 60% outside the US.

That brings me to our outlook for the second quarter and for full year 2011 on slide 10. Clearly, we are off to a great start in 2011 with our first quarter earnings. We are benefiting from a strengthening global economy. We are also benefiting from the restart of a cracker in the fourth quarter, the Genovique acquisition, and the acetate tow capacity expansion in Korea. Our interest expense is also lower due to the debt restructuring actions we took in the fourth quarter. Headwinds include higher pension expense for the year and costs related to the capacity expansions we are working on. More of which will be recognized in the second half of this year. Volatility of raw material and energy cost is also a headwind, particularly the potential for the spread between propane and propylene prices to narrow in the second half of the year. And there is a risk that global inflation could lead to demand destruction. But if that were to occur, given the portfolio of businesses that we have, I think we're better positioned than many to limit the impact.

Combining all of these factors, our outlook for the second quarter is that earnings per share will be slightly better than the first quarter. And we expect full year 2011 earnings per share to be slightly higher than $9. So we are maybe a year ahead of the guidance we gave you at our Investor Day. And I'll remind you that this is before we put our cash to work. And I'm confident we will create value for our stockholders in 2011 by putting our cash to work.

I next want to go to the executive spotlight and I've got to tell you, that's my favorite part of the call. I've been doing this since I became CEO and I do it to remind everyone that there's a team of highly talented executives leading this Company. Emphasis on the word team. It turns out that I've mentioned every exec except for one, and knowing her sense of humor she would say I've left the best for last. Theresa Lee is our Chief Legal Officer, and she is simply the best at the job that I've ever seen. Whether it's litigation, intellectual property rights, SEC compliance. You name it, her department's track record is outstanding. Of course, she has some help from lawyers who have, and still could, work for big firms in big cities, but they chose Eastman instead.

Dave Golden, Dave Woodmansee, Bernie Graves, Joe Davis, Etta Clark, they cover all the bases from corporate to HSE to government affairs. And usually play error-free ball. In addition to the legal function, Theresa recently became our Chief Administrative Officer with responsibility for Human Resource Department which I've highlighted before. One last tidbit, she's on the state's judicial nominating committee which means she has a hand in the selection of our judges in Tennessee. Now, just how cool is that? I can also confirm to everyone that I have seen Theresa's birth certificate.

And with that, I'll turn it over to Curt Espeland.

Thanks, Jim, and good morning everyone. I'm going to focus this morning on how these strong earnings performances are translating to strong cash generation. And then how we're going to put the cash to work in ways that generate value for stockholders.

Starting with our financial highlights on slide 12. In the first quarter we used $146 million of cash in our operating activities. There are two primary factors contributing to these results. First, during the quarter we made a $100 million pension contribution. You might recall, we had originally targeted the fourth quarter of 2010 to make this contribution. But we moved it to the first quarter to coincide with the timing of the PET divestiture, principally for tax reasons.

Secondly, we built $270 million of working capital because of the very strong revenue growth. And building working capital in the first quarter is a normal seasonal pattern. Given our expectations for continued revenue growth and higher raw material costs, I would expect a good portion of this working capital build will stay with us pretty much through the rest of the year. This working capital is well within our normal cash conversion cycle metrics, as required to support growth. But I would still expect to generate over $800 million of operating cash flows in 2011.

These factors contributed to negative free cash flow in the quarter, which again is a normal seasonal pattern for us. But given the strong net earnings and operating cash flows we expect to deliver, we are on track to generate approximately $200 million of free cash flow for the year. This includes capital expenditures of roughly $450 million, which I'll talk about more in a minute, and is also again after payment of our dividend. As a reminder, when I project both our operating cash flows and our free cash flows for the year, I am excluding approximately $100 million of cash tax payments related to the sale of PET business that will be made during the remainder of this year. One other item of note is that we did put $200 million of our cash and short-term timed deposits during the quarter, none of which have durations beyond ten months. We did this in order to increase our yield on cash and is slightly accretive for our 2011 interest expense while still maintaining liquidity and flexibility with this investment.

Given our discussion today, I thought I would update you on our funding capacity as shown on slide 13. With the PET transaction now completed and the proceeds included in our financial statements, you can see that we have the equivalent of $840 million of cash, cash equivalents and short-timed time deposits on our balance sheet. We expect to generate approximately $475 million of free cash flow for the remainder of the year, which excludes the cash tax payment related to PET transactions which I've actually listed separately here. And we generally maintain a strategic cash reserve of approximately $200 million for seasonality and operating cash flows and other needs. Given the strong earnings outlook we think we have debt capacity between $500 million to $1 billion. Ultimately that debt capacity does depend on various factors such as our future earnings growth and our cash flows, how we put that cash to work, et cetera. But putting it all together, we have funding capacity between $1.5 billion and $2 billion. Quite honestly, sitting here today we're probably towards the high end of that range.

We recognize in order to grow the Company and to provide attractive returns to stockholders, it is important to deploy much of this funding capacity over the next year or so. So let me recap how we intend to put this funding capacity to work on slide 14. You've seen this before in different fashions. There's nothing too complicated about our strategy here. There continues to be a focus on pursuing the best opportunities amongst these four areas. On joint ventures and acquisitions, we continue to make progress on various opportunities in our pipeline. And I continue to expect that we'll complete a couple of these small to medium-sized deals sometime this year. On debt we'll continue to be opportunistic in the marketplace, as appropriate. I'm going to go into more detail on building and returning cash to stockholders within the next couple of slides, but just to reiterate, the main focus we're having is putting capital to work and generating a strong return on investment for our stockholders. As Jim mentioned earlier, we see this as an area where we can differentiate ourselves with excellent execution.

As previously mentioned, our capital expenditures will be approximately $450 million for the year, maybe a little bit more, depending how the year plays out. Included in this expectation are several organic growth projects here on slide 15. The 17% volume growth we've had year-over-year in the first quarter is indicative of the strong volume growth we're seeing due to strengthened demand coming out of the recession and growing demand for our products. And the capacity expansions you see on this slide, which we've spoken to about previously, are our response to continued growth. These capacity expansions are across the Company and are in markets where strong demand is driving the need for additional capacity. Each of these expansions is on track, proceeding as planned, and are still expected to have returns of 15% to 20% or even better.

Moving to slide 16, we feel we have a very good track record of returning cash to stockholders. We have paid a dividend every quarter as a public Company, and increased the annual dividend by $0.12 a share in the fourth quarter of last year. It is reasonable for investors to expect the dividend to increase as our earnings increase as we see the value of a steadily increasing dividend. But I would remind you that that dividend is ultimately a board decision. On share repurchases, we've repurchased $74 million in the first quarter, and are on track to at least offset dilution in 2011. We had $331 million remaining in authorizations at the end of the quarter. And we expect to continue to repurchase shares at a measured pace over the coming year or so.

In summary, the strong earnings are translating to cash generation and we are on track to create value for stockholders by being disciplined in allocating capital. So, thanks for your time and your interest in Eastman Chemical Company. And with that I'll turn it back over to Greg.

Thanks, Curt. This concludes our prepared remarks. Allen, we are ready for questions.

(Operator Instructions). Kevin McCarthy with Bank of America-Merrill Lynch.

Yes, good morning. Jim, at the top of your remarks you mentioned that business conditions improved markedly, and you reference the more favorable C3 spread as well as some markets that were perhaps tighter than you would have anticipated. Can you elaborate on the latter? Which markets have tightened up the most across your portfolio, creating the most positive variance this year?

Thanks for the compliment, by the way. I've got to be careful when I start to pin down certain markets in terms of how tight they are. But let me speak broadly. And in particular within CASPI and PCI is where you would see most of that. And a lot of it has to do with demand but I think the main driver is the fact that supply is tight. And I think it has to do, if I just try and think it through, I think it has a lot to do with just how bad the downturn was a couple of years ago, how people put off a lot of their plans. Just now you're seeing capacity announcements, et cetera. And you know what it's like in our industry, it's going to take a while for that stuff to come on-stream. If I look within CASPI, solvents, the resins market, the adhesives part has been quite tight. PCI, many of their markets in the olefins, Oxos world are quite tight. I can't think of any market that you would consider to be loose. And so I think this is probably a trend that the whole industry's going to see going for quite some time.

Okay. And then second question, if I may. Curt referenced the funding capacity of $1.5 billion to $2 billion, and I thought I heard a comment that you would be looking to put that to work over the next year or so. So fairly large number there, not a terribly long time frame. Can you comment on what you're seeing perhaps in the private market in terms of attractive or unattractive acquisition opportunities? On the subject of repurchases, offsetting dilution doesn't sound like a heroic ambition there.

Yes, we don't want you to draw the wrong conclusion. If we see the right opportunities we're more than willing to put the cash to work. But there wasn't an implication there that no matter what we're going to put $1 billion to work in the next few months. That's not what we're saying at all. And in fact, you can judge by our track record just how disciplined we are. I do think our pipeline has improved for acquisitions. Curt and I have talked about it and we think we're likely to get two or three deals done this year, more than likely on the smallish to medium size. So probably just a few hundred million in total. Doesn't mean we wouldn't look at something bigger. It's just we're trying to be realistic in order to see the values we like and to get the kind of deal we like. We're just going to have to continue to be very disciplined. On the rest, stock buyback, whatever, the dividend, again, it's been a consistent story. We really think how you put your cash to work is one of the key things that creates value for shareholders and so we're trying to look across all our options and pick off the best ones in each bucket.

PJ Juvekar with Citi.

Good morning, Jim. What was the impact of the new cracker starting up in the quarter or maybe for the year? Can you quantify that for us?

I'm going to let Curt try and do the numbers. But one thing, I want to give credit to our guys on that one. I've been reading a lot lately about people talking about adding capacity. You think about it. We made the decision probably a year ago now that this would be a good thing to do. And so we got it online the end of last year. And I think maybe we were a little ahead on that and that's one of the reasons we're benefiting now. But it's definitely material. The other thing I'll remind you is we actually had a cracker down first quarter last year, so the comparison's perhaps a little more dramatic than you might think. Curt, I don't know what more you want to add.

Again, if you look at just the cracking spreads in first quarter on a year-over-year basis, probably the best way to look at it, if you look at PCI, PCI's year-over-year improvement is roughly $53 million. About one-third of that improvement probably relates to that propylene, propane spread, that cracking spread that we're benefiting today. The rest is improved volume, strength of derivatives, et cetera. The things Jim talked about. At a corporate level, PCI probably gets about 60% of the benefit. So if you do the math, CASPI gets the rest. So you put roughly a $30 million benefit year-over-year on that cracking spread.

Thank you. That's very helpful. Jim, you haven't talked about coal recently but is there a coal to natural gas spread that maybe the acetate chains benefit from, or is that not material?

I can't think of a time we have not been advantaged by being on coal, PJ. It will move around. I would not call it an extraordinary spread now, given the gas fines, et cetera, in the states. We still think we're quite advantaged. Little stuff that we don't often get to talk about. One of the projects we've had over the past year and-a-half is in our gasification plant to diversify what kinds of coal we can use and where the coal comes from. Which can keep us from having to pay near met coal prices for that type of coal. We can use stuff that looks a lot more like steam coal. And we made great progress on that. That's one of the things we'll benefit from long-term that that coal cost can look more like steam coal than near met coal. And so I think that's an advantage that's going to stick to our ribs.

Frank Mitsch with BB&T Capital Markets.

Congratulations, nice quarter. Quick clarification, Jim. Regarding Theresa, was that a certificate of live birth that you saw or was it an actual birth certificate?

Frank, I couldn't resist. And trust me, she didn't let me see her birth certificate. I was just teasing.

All right. Hopefully that doesn't put into doubt anything else you say on the call. PCI obviously very strong. You raised your guidance for the year from $260 million-plus to $300 million-plus. And Curt just explained that maybe $18 million or so was coming in the first quarter, this benefit of the propane to propylene spread that you guys didn't factor in initially. That looks like it's obviously sustainable if not going to expand here in the second quarter. So that pretty much accounts for all of that movement there in terms of your guidance. Does that suggest that there is room for more upside on the PCI business?

What it suggests is we think that that propane propylene spread may come in a little in the second half of the year. That would be our expectation, just looking at the historic charts and seeing how it's moving around. If it stays where it is today in April, then I would guess we would do better than what we said.

All right. So it's nothing more than looking at historics in the second half of the year. But in terms of plant additions, et cetera, is there anything there that concerns you about the second half on that spread?

No, not so much, that near term. Long-term you know there will be more adds. What we see going forward, though, the adds on propylene will probably be on purpose adds, probably have a little different cost position. It gives you pause to make a decision when you've got to do something on purpose versus it's just a byproduct. But it's just a matter of forecasting. And I'm surprised, Frank, you didn't bust our chops on forecasting again.

I save that for offline.

I was ready for you. So I used my line anyway. I was going to say that we're going to stick to what we're good at and others can beat us on the forecasting, we'll just stick to the actual results.

You've indicated in the past that you had a concern about your capacity limitations possibly. Where do you stand on that? Can you generally speak to the operating rates in the first quarter and your expectations for second half, et cetera?

Yes. Operating rates are high, obviously. By the way, they're not as high as they've ever been. We've still got more room on our existing assets. You'd be at that bottom 90% range this past quarter. And we've got room to operate a little higher than that. The key thing for us, when I look out a little bit and I think '12 over '11, because we started working on that some time ago, one of the main drivers for improvement there is going to be the capacity adds that we talked about in our comments, those coming online and kicking in for 2012. But we've got more juice in our existing plants. A couple places were awfully tight. The resins and for adhesives and a couple other places. But we've got a little more juice in our core assets.

All right. Lastly, the region with the slowest year-over-year growth was Asia. Obviously it had a terrific first quarter a year ago. So very difficult comp. But is there anything that you're seeing geographically with respect to Asia that gives you some concern in terms of growth projection there?

No, not at all. I asked the same question, Frank, when it all rolled up, what's going on, and it's really more a factor of just how well the other regions did, and in particular with PCI. You start up a cracker, so North America's going to have an outstanding quarter. You have an acquisition in Genovique that drives Europe and North America. It's more like we just got the typical expected growth in Asia and the other regions had some special stuff going on.

Jeff Zekauskas with JPMorgan.

Hi. Good morning. When I look at your income statement, I see that your tax rate is 32% or 33%. And if you compare your rate to Dow's rate, I think Dow's at 21%. and I think more than half of your revenues now come from the offshore areas. Is there anything you can do about it? Do you have some plans in place to make your taxation rate more efficient?

Jeff, this is Curt. Where you look at the difference maybe from just purely the revenues, also where your asset base is located. So, predominantly our assets -- 80%, 85% of our assets are still in the US. May be a different profile for the other Company you mentioned. So a lot of that does affect your tax rate. How we start impacting that longer term is more of how we deploy our new capital. That gives us opportunity to look at tax jurisdictions that are maybe a little lower than us currently. So a lot of it's how we put our capital to work. And then we'll watch the tax regulation. If there are some changes in our US tax rate we're probably positioned to benefit from that.

Jeff, let me tag on to that, and forgive me for using your air time to do this. The tax rate was one of the things I wanted to mention when I looked longer term. I see that as upside. I can't imagine it getting much worse than 33%. And as we go to drive our strategy, that's one of the things I want us to consider more is how do we bring that down. Because it's not lost on me that some of the other guys in the industry have noticeably lower tax rates. And I think about what's going on in Congress right now. Again, that's upside. Now that I'm sitting here today, I'd rather have a tax rate above the kind of range they're talking about than below if I think something could really happen there. I don't know what the odds are. But there's probably upside.

That was just going to be one of the macro trends I wanted to mention because as I look at longer term stuff, I think the propane, propylene spread is going to be at elevated levels for quite some time, when we look at how fast people can bring capacity on. So that's a positive. It may not stay as high as it is today, but it's going to be up there. I think oil being up generally advantages Eastman overall unless it kills end market demand for everybody. But overall buying coal and propane. Ethane is a positive compared to the guys who are starting with a different base. We'll take advantage of emerging markets and sustainability, maybe equal to or a little better than most. But a declining dollar, that trend, that probably advantages Eastman. Higher inflation. We've been eating inflation from the guys up-pipe of us and so the more inflation that comes down pipe, maybe not long-term good for the country and the world but it may help on the pricing getting passed along. Higher interest rates would also help on the pension pressure that everyone's feeling across the industry. I think the regulatory threats that I used to worry much more about have cooled down some with a split Congress. So if I look at some longer term trends, I'm fine being a major shareholder, at least personally, Eastman being a major shareholder in my portfolio.

What's the timing of you bringing up your other 300 million-pound cracker that's been idled for a while?

That's something -- it's not a no-brainer that we bring it up. Let me say it that way. The one we did bring up was a pretty quick decision. I think we've already been paid back for the money we spent to bring it up, so that was probably an easier decision than we thought it was. This next one's not so easy. It wasn't just we idled it. We actually shut it down. You run it until you would have done a major turnaround and then you don't do it, then you rob it for parts. And so what goes into the map on that one, Jeff, is how long would it take you to get it back up, how much money would you spend, and how long do you think the spreads are there, and what else can you do. And there's a number of alternatives versus just bringing it back up and continuing to crack like you do in the other three. So we're going through all of that now. Would I like to have already made a decision on how we can approach that? Yes. But the guys are being cautious and they're trying to understand what all the options are versus just crank it back up the way it used to be cranked up.

And then lastly, you talked about your interest in making acquisitions. If you look at Eastman, Eastman is tremendously advantaged because of its ethane and propane positions. When you buy new businesses, is your thrust to buy businesses that have intrinsic raw material advantages or to buy businesses that are more differentiated? And when you look at your acquisition selection, are they on one side? Are they on the other? I know you probably want to buy both, but given the market that you've got today, which one can you actually buy?

It's funny. We do look for both. We look for some kind of sustainable competitive advantage, as you might imagine. I think about Genovique, and I hadn't really thought about it as a raw material play, but not bad with benzoic acid and plasticizer marketplace in general, if you think about that spread you just talked about, then going to 2EH, then going to our plasticizers. There is an advantage there. So if I could build off of that, I would. Most of the opportunities so far seem to be in the PCI area, some popping up in CASPI. We've already done the inorganic stuff in fibers with the announcement of Korea and China. It may also depend some on size, Jeff, now that I think about it. So to get that raw material advantage, maybe bigger things. Some of the smaller things we're looking at usually already fit into one of our streams and you just take advantage of what you've got.

Robert Koort with Goldman Sachs.

This is [Monnin] in for Robert today. Just on the raw material cost escalations, how much higher could your raw material costs be in 2011 versus 2010 on current run rate of raw material price?

I'm going to have Curt try and ballpark that for you. I'd just take this moment to say that I'm pleased with how the business guys and our supply chain, et cetera, have been able to handle some very dramatic moves in raw materials and still deliver the results they got. So just to give you an idea, paraxylene, I gave you quarter-over-quarter moves, but April to April, year-over-year, it's like 60% to 70% move in paraxylene, and yet Specialty Plastics delivered the results they did. Curt, I don't know how much you want to quantify raws.

I can just tell you, on a year-over-year basis, raws are up $90 million, on a sequential basis $75 million. Just looking into second quarter, sequential raws are probably only half of what we saw first quarter over fourth. Second half of the year you've got the same forward curves we have. So that's where our raw material view is right now.

David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Jim, just on Specialty Plastics, you mentioned the pressure from paraxylene. Will that business -- it will be down sequentially, obviously. Will that business be down year-over-year as well from an earnings standpoint?

What we're saying, it's approaching $100 million. Again, some of the stuff that's harder for you to see, we mentioned the paraxylene, but we also have some more capacity coming on in that business, as we've talked about. And what we've seen is your income statement takes a hit of a few million bucks as you're bringing that stuff up, just the expenses of having to shut something down, to tie it in, et cetera, as well as going from capitalized interest to whatever. Curt knows all the stuff on how it works. But I'm planning on them eating a little bit of expense for starting up capacity in the second half that they won't have had in the first half. The main thing I know of when I look into the second quarter is just a flow-through of paraxylene, the way the cost flows through our system. We'll feel more of that in the second quarter than we did in the first.

David, what I might add is, for the things that Jim mentioned, is, approaching $100 million is actually an improvement over last year. And again, that's a function of maybe eating some paraxylene cost but on top of it getting that volume and benefit of Tritan absorbing some start-up cost this year. But when they bring that new capacity that's what gives us the confidence about how they can grow beyond that $100 million in 2012.

Just to be clear, in Q2 then, you're saying it will be up versus a year ago?

Q2, I'd have to go back and look at the number. I think they're going to be down sequentially but probably a little better than last year, if I recall their numbers.

And Jim, just on the fiber pricing, you said it should be up, reflect more of the annual increases in Q2 and Q3, than Q2. Will that have an impact as well on profitability and margins?

Yes, the guidance we're giving is fibers will be a little better second quarter than first. But they're at a pretty nice level right now so I don't expect a lot of volatility around those numbers. Their issue is they're going to have more volume in the second quarter, will be one of the drivers I believe. On the pricing, we just wanted to point out -- I know how you guys like to go through the volume percentages, pricing percentages, et cetera. You're just missing a little bit of the price increase in the first quarter. A lot of that doesn't kick in 'til, say, February. So January a lot of times you're on the old pricing, that's all.

How much pricing did you get this year? Was it typical 7%-ish?

We don't say our percentages. Others may want to go that route. But we negotiate with each customer individually. And our objective is to try and cover our increased cost. And we all know that the wood pulp in particular was a significant increase. But we think fibers will deliver the results we say and that's a combination of volume, price, service, et cetera.

And lastly, just on volume growth, Q2 and Q3, in the past you said you would be constrained, will be constrained. But let's say you have a little more volume now than you did. Have you seen some debottlenecking activities, give you a little more capacity than you though, perhaps, late last year?

Yes, always, it's amazing. These assets have been around a long time and yet continually some of that capital we spend goes to a minor debottleneck here or there. One of the mainstreams you're always looking to debottleneck is your acetyl stream. There's no major thing I can point to other than the projects we've already pointed out. Much of it just goes to just excellent operation in terms of running the plants better than we have historically even in, frankly, it sounds immodest, but we've been pretty good at running chemical plants. But we're doing an excellent job right now.

Edlain Rodriguez with Gleacher & Company.

Good morning, guys. Jim, a quick question on pricing. They've been extremely strong for the past few quarters, and of course a good chunk of it is cost push. But can you talk about how the portfolio is strategically positioned to hold on to some of those prices? Or do you have to give them up as quickly as they came if costs come down?

As you can imagine, it depends market by market, right? And also, even within stream. In the past in some of the Investor Days, maybe a couple Investor Days ago, I talked about products that cross more than one stream or maybe we're the only ones in the world who make it. And there, you have to be very judicious with price increases. You try not to tie it too much to raw materials. And so maybe some of the stuff in CASPI or a few things in Specialty Plastics you don't run them up as fast as the raws but they also don't have to come off. Stuff that's closer to commodity does move around, much closer tied to the raws. And in fact, much of PCI you think about price adjusting within 30 days of raws.

The key thing we focus on, though, is the spread. That's why a lot of times I don't even like to talk about percentage margins because I'm focusing on absolute dollar spreads. And the final thing I'll say on this is I don't want to imply that I think the industry has changed its psyche. I think, for sure, we'll still have some period in the future of overbuild and we'll have a supply-driven cycle eventually. But the downturn was so dramatic that as I talk to guys in the industry, I can just see that they're being much more cautious this time. They're not just throwing the cash at steel and concrete and throwing it in the ground. And so at best I'd say it's probably going to take a little longer to get to that point, speaking broadly for the industry.

Andrew Cash with UBS.

Good morning. Back at the investment day you highlighted a number of growth opportunities, expanding existing products, markets and so forth. So when you look at that 17% year-over-year growth in the first quarter, I was just hoping you might be able to break that down a little bit in terms of how much was from your new products, how much was from perhaps new customers or regions. And perhaps is there a way to get an idea how much was preprice increase buying?

Yes, that's something you always want to watch for. In fact, the last point about people trying to get in ahead of a price increase, we've got systems that handle that pretty well but you can never shut the door completely. Frankly, that was part of it, when we saw January results. At Investor Day all we had was January results. We knew revenue but we didn't know earnings from February. And there was a little bit of a concern that maybe we had some of the business pulled forward into January and so you shouldn't just take that times 12 or whatever. And then as the quarter unfolded, February and March were also extremely strong. I don't know, Curt, do you want to -- ?

The only thing besides that is I also look at how much was just the benefit of the crackers operating first quarter this year versus first quarter last year, and that was just a couple percentage points.

I would say, I don't think you -- in fact, I know we haven't gotten a lot of volume, hardly any volume, from some of the great new stuff we've talked about, like acetylated wood and surface. Surface is just now getting out in the stores. That was that coating that goes on trim from Specialty Plastics. I think that's going to be really strong. Early indications are that's good. But you haven't seen it. In fact, if anything, you've probably just seen a cost in the numbers so far. So not as much from new products yet. I'm really thinking that will be a driver for probably what's going to make '14 better than '13, '15 better than '14. It's going to be things like micro fibers, et cetera.

Okay. So, if you strip out the cracker benefit, the underlying growth was 15%?

Yes, roughly, yes.

Okay. You brought up the acetylated pine project. Where does that stand now? How much money have you spent? I think you said at Investor Day you're looking towards maybe $0.5 billion on that project.

No.

Revenue.

Of revenue.

Of revenue. Okay. Where do you stand --

I can just imagine if one of my Board members was listening, why didn't you tell me we were going to spend that much on A wood. But, no, on acetylated wood, it's on track. We're building the small commercial plant here to test the market spring of next year. So not a huge amount of money spent to date but you're seeing a lot of the expense on the other line when we put our numbers out there. And this is one where you probably get $2-plus of revenue for every dollar of capital. So long-term this is a nice business model. But again, we've got to prove it out. We've got to see people willing to pay the price point. We need to have the margins we want.

So if it's not a $0.5 billion project, what's the ballpark range that you might be spending there the next couple of years?

Andy, if you look at just the small commercial operation we're working on this year, that's included in the $450 million outlook. That's probably a modest percentage of that total. Jim talked about the 2 to 1 revenue. So if you've got a $500 million revenue that gives you roughly a $250 million type of number. As I mentioned at Investor Day that really is going to depend how the spring launch goes with '12. But that will start in '13 and '14, is where you'd see that capital.

Kevin McCarthy with Bank of America-Merrill Lynch.

Just a follow-up on fibers, Jim. One of your primary competitors there indicated they may need to run a facility in the United Kingdom a bit longer. I think the intimation was that some of the crises in Japan had an impact on that market. Have you seen that at all? And maybe you could comment on the incremental capacity you've added in Korea and how much of that is loaded at this point.

Yes, Korea's full, so that's a good thing. I tried to say that in my comments. The market needs the volume right now, I guess is the best way to say it. The customers need the volume. So we understand completely what kind of thinking went through the competitor you're talking about, what went through their minds. Other than that, I would just say Japan in general, not a major impact as far as we can see. That's not just fibers. That's across all our businesses. You want to watch for things like the displays markets for specialty plastics. But right now that looks like it's okay. Again, on fibers, we're trying to make sure we service our customers with what they need across the board. The concern out of Japan would be, in my mind, would be if eventually the supply chain just starts to hit some choke points where some of the end markets can't produce the volume they want that we sell into, but direct impact on us is minimal.

Okay. And then a couple of housekeeping questions, if I may, on CASPI. Is your 10% expansion of Eastotac complete at this point? And what is the time line for Regalite? Is that on track for the summer?

Yes, all our expansions are on track. I'm trying to remember what the timing was on Eastotac Do you remember, Craig?

I don't remember. I'll go back and check it, though, Kevin.

Okay. And then on acetyls, Jim, what is your operating rate at this time?

High. I gave you a ballpark for the whole Company at 90%. And I'm rounding a little bit but say 90%. And the acetyls would be in that ballpark and have a little more juice, as well. So overall, I want people to understand that we were judicious as we went to add capacity but we really do need to spend this money and add this capacity, and we're doing it in a number of places. I pretty much still got a little capacity left where I think we need it.

Jim, if I might add. Kevin, one thing that we will have in the fourth quarter this year, we will have a shutdown of [R Island]. That will affect some of our operating rates in the fourth quarter. But that's a normal periodic turnaround.

That's another chance you take to do any debottlenecks or cost saving projects that you've been waiting on until you do a shutdown.

That does conclude the question-and-answer session today. At this time I'd like to turn the conference back over to your presenters for additional or closing remarks.

Thanks again for joining us this morning, everyone. A web replay as well as a replay in a downloadable MP3 format, and the accompanying slides for this conference call, are going to be available on our website from 11 AM this morning. Thanks again, and have a great day.

That does conclude today's conference. Thank you for your participation