伊士曼化學 (EMN) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company fourth-quarter and year-end 2012 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman 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, Tiffany. Good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; and Josh Morgan, Manager Investor Relations.

Before we begin I will cover four items. First, during this presentation you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the Company's fourth-quarter and full-year 2012 financial results news release and our filings with the Securities and Exchange Commission, including our Form 10-Q for third quarter 2012 and our Form 10-K to be filed for 2012.

Second, earnings per share and operating earnings referenced in this presentation exclude mark-to-market pension and OPEB losses and gains, Solutia acquisition-related costs, and asset impairments and restructuring charges and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our fourth-quarter full-year financial results news release which can be found in the Investors section of our website, Eastman.com.

Third, this presentation includes revenues and operating earnings on a pro forma combined basis assuming the acquisition of Solutia had been completed prior to first quarter 2011 that compare post-acquisition results to pre-acquisition pro forma combined results. More information on pro forma combined results is in our fourth-quarter and full-year financial results news release.

Lastly, we have post slides that accompany our remarks for this morning's call on our website in the Presentations and Events section. With that, I will turn the call over to Jim.

Thanks, Greg. Good morning, everyone. Thanks for joining us. I will begin on page three.

The numbers are in. We had another outstanding year in 2012, the latest in a series of outstanding years reflecting the significant improvements we have made which have resulted in Eastman becoming a portfolio of specialty businesses. There were numerous accomplishments throughout the year with some of the more significant listed here.

We began the year by announcing the Solutia acquisition and with Solutia we have broadened our global footprint, brought together complementary and adjacent technologies, and diversified our end-markets. We believe we are in the early stages of seeing the significant value that this acquisition will bring to Eastman. We also continue to add capacity in key markets where there is a secular trend driving growth and where we have a technology advantage.

A couple of examples from 2012. As the market continues to switch from plasticizers with phthalates to non-phthalates plasticizers we completed the retrofit of an asset we acquired from Sterling to our proprietary Eastman 168 non-phthalate plasticizer. Early in the year we started our second line of Tritan copolyester and Tritan volume increased almost 25% in 2012 as it penetrates markets, including medical and durable goods, with a superior value proposition.

And as passengers demand improved features in the cars they drive, including noise reduction, we increased capacity in Belgium of our advance safe lights PVB sheet which offers enhanced acoustics performance among other properties. Going forward we will continue to meet the needs of our customers with expansions in growing markets.

Moving next to the earnings growth. With 2012 EPS of $5.38 we have delivered greater than 20% compounded annual growth for EPS over the past two years and nearly 40% over the past three. And given the strength of our cash generation and the importance we place on returning cash to shareholders, in December our Board increased our dividend 15%. I remind you this is our third increase in two years and we have increased the dividend 36% since the beginning of 2010.

Going next to slide four, as is my normal practice on these calls I will take just a few minutes to hold us accountable and review some of our key outlook statements for 2012.

As previously mentioned, we closed the Solutia acquisition in 2012 doing so on July 2 and thereby meeting the midyear commitment we made to you last January when the deal was announced. Next, in October we raised our full-year 2012 EPS expectation to a range of $5.30 to $5.40 and then reiterated that expectation at our investor day in December. We came in at the high end of that range and I will talk more about that in a moment.

We also indicated we expected to generate $1 billion of free cash flow in 2012 and 2013 combined. With our cash generation in 2012 and our expectations for 2013 we are on track to exceed this projection, as Curt will cover in his section. Lastly, we committed to being disciplined our capital allocation. And if you look at how we have put capital to work through the year and really over the last several years, I think you will agree we have been disciplined and focused on returns.

Overall 2012 was a terrific year for Eastman and it has positioned us well for profitable growth going forward.

On slide five I will review the Eastman corporate results for the fourth quarter. Pro forma combined operating earnings increased significantly fourth quarter 2012 versus fourth quarter 2011 as lower raw material and energy costs more than offset lower selling prices. The earnings increase was broad-based with almost every segment showing a year-over-year increase and our operating margin increased 370 basis points to 15%.

Fourth-quarter EPS was $1.19, an increase of more than 50% over the year-ago quarter. As many of you know, fourth quarter has not always been our best, and I'm smiling as I say that, but I hope you'll agree that this is a very strong performance in an uncertain global economic environment.

Moving next to the full-year results on slide six. Pro forma combined operating earnings increased in 2012 as lower raw material and energy costs more than offset lower selling prices and higher operating costs, particularly for labor and maintenance. As was the case in the fourth quarter, the earnings increase was broad-based with almost every segment showing improvement. In addition, our operating margin for the year was 16.3%, a 90 basis point improvement over 2011.

Full-year EPS was $5.38 on the high end of the range we provided you back in October and a record for Eastman Chemical Company. This is now the third year in a row that we have delivered double-digit earnings growth, the first time in our history as a public company that we have been able to achieve that. Given our portfolio of specialty businesses, we are well-positioned to continue to deliver double-digit earnings growth in the coming years.

Now I will start on the segments with slide seven where I will begin with Additives & Functional products.

For both fourth quarter and full year operating earnings increased year over year, mainly due to lower raw material and energy costs partially offset by lower selling prices, which were mostly in the solvent product lines.

Within the segments solvents product lines had the strongest 2012, mainly due to three factors. First, we have been taking action over the last several years to leverage our assets with a better product mix and we're starting to see the benefits from these actions.

Second, there is high capacity utilization in the US for the industry as no significant capacity has been added for the last several years. Key end-markets, including autos, are rebounding and the strong shale gas position in the US is enabling exports globally. Third, solvents continue to benefit from producing versus purchasing olefins, and for solvents this is mainly propylene.

For full year 2013 we expect Additives & Functional Products to have another strong year, increasing operating earnings to approximately $410 million driven by solvents product lines, continuing to see strong volumes and gradual improvements in the tires market partially offset by higher benzene costs for antidegradants product lines.

Moving next to slide eight, Adhesives & Plasticizers. Fourth-quarter operating earnings increased slightly as lower raw material and energy cost and an 8% increase in sales volume more than offset lower selling prices. The higher sales volume was a result of continued substitution of phthalates plasticizers with Eastman's non-phthalates plasticizers.

Full-year operating earnings also increased, primarily due to a 5% increase in sales volume which was partially offset by higher operating costs, including labor and maintenance, and costs associated with the start-up of non-phthalate plasticizer assets at our Texas City facility. Looking forward to 2013 we expected Adhesives & Plasticizers to increase operating earnings to approximately $280 million, primarily due to continued growth in the non-phthalate plasticizers.

Advanced Materials is on slide nine. Fourth-quarter operating earnings declined year over year due to lower capacity utilization, which was primarily the result of efforts to reduce inventory in PVB sheet and specialty materials product lines as well as weakened demand in specialty copolyesters. For the full year operating earnings declined due to lower capacity utilization and additional costs related to expansions.

As a reminder we increased capacity for Tritan copolyester cellulose triacetate to serve the displays markets; Santoflex and Flexvue to serve the electronics market during the year. Looking forward to 2013 we expect Advanced Materials to increase operating earnings to approximately $250 million due to increased volume in both specialty materials and performance films, higher value product mix in advanced inner layers, and improvements in fixed cost absorption as we begin to fill out recent expansions.

Next is Fibers on slide 10 and once again they delivered an outstanding year. Earnings in both the fourth quarter and for the full year increased due to higher selling prices with the increased selling prices for the full year partially offset by higher raw material and energy costs, particularly for wood pulp, and higher operating cost. Sales volume declined, both for the quarter and the year, within the acetate yarn product line and was the result of overall weak demand in the apparel market.

Through 2012 the Fibers segment has now grown earnings for nine consecutive years and we expect 2013 to mark a decade of consecutive earnings growth due to continued strong acetate tow volume and higher selling prices.

I will finish out the segments on slide 11 with Specialty Fluids & Intermediates. Fourth-quarter operating earnings nearly doubled compared with the year-ago period as margins increased due to lower raw material and energy costs, particularly for propane, more than offsetting lower selling prices. For the full year, operating earnings increased by almost 30% and the story is similar as lower raw material costs more than offset lower prices and higher operating costs.

The operating margin for the year was 14.5%, right in the middle of the 13% to 16% range we expect for this segment. Looking forward to 2013 we expect operating earnings for Specialty Fluids & Intermediates to be approximately $380 million olefin spreads are improving so far in 2013, and we also expect improved volume in mix and fluids.

One other item I wanted to cover here is our thoughts about actions we may take at our facility in Longview, Texas, including the one cracking unit that is currently shut down. We have had a team working on options for a number of months now as they are currently engaged -- I should say and they are currently engaged with multiple external parties that have strong interests in a variety of different options. These options include some of the parties potentially building a derivative plant at our Longview site.

While it is difficult to predict timing, one common theme as we have been in discussions with third parties is an interest in getting something done the first half of this year, an interest we share. So for now we see value in the options we are discussing and we will provide more details when we can talk about it.

That brings me to slide 12 and an update on our Perennial Wood growth initiative. Here we are shifting our strategy for Perennial Wood in 2013 to narrow the focus down, as a result reduce the spend for this growth initiative.

The change in strategy is due to the insights we obtained by launching into what was, frankly, a difficult building and construction market, particularly for decking, in the first half of 2012. It also due to the refining of our technology which gives us an improved coating for our decking product.

In 2013 we will narrow our decking marketing program to the Boston market and by the end of 2013 we will be in a position to reassess this growth initiative and determine the best path forward. We remain confident in the value proposition of our Perennial Wood product and believe that the additional market understanding that we will gain in 2013 will position us to make the best decision for this initiative by the end of the year.

I will end on slide 13 with our outlook for 2013. As I mentioned at the beginning of my remarks, 2012 was the latest in a series of strong years for Eastman Chemical Company and we are confident that in 2013 we will build on this strength. Our world-class technology platforms and leading positions in attractive end-markets position us well to continue to deliver consistent, superior value.

And we enter 2013 with a number of tailwinds, including excellent progress on the integration of the Solutia, capital expansions serving customers in growing end-markets, and the increased benefit of producing versus purchasing olefins. We also know global economic uncertainty continues and Curt will speak more to the economic assumptions that underlie our expectations.

When we put this all together the result is that we are increasing our 2013 guidance to a range of $6.30 to $6.40, which would be growth of between 17% and 19% over 2012. This would mean that we would have grown EPS from about $2 in 2009 to well over $6 in 2013, and I think with a clear path to EPS of approximately $8 in 2015.

With that I will turn it over to Curt.

Jim, thank you. Good morning, everyone. I will begin on slide 15 by reviewing some financial highlights for 2012.

Cash from operations in 2012 was $1.1 billion. This is well above our 2011 total of $625 million and is built off of a solid base of earnings, good discipline with working capital, and the expected use of NOLs acquired from Solutia of approximately $150 million in the year.

Within these free cash flows we spent $465 million in capital expenditures, which is slightly more than our guidance earlier of $450 million. We also paid dividends of $192 million, which includes the $45 million of accelerated dividend payments the Board authorized to pay stockholders on December 31. With the strong free cash flow generation we paid a total of $250 million on the $1.2 billion acquisition term loan and ended the year with $249 million in cash. Thus, our net debt at the end of 2012 was $4.5 billion.

Next I will mention several items that impacted our fourth-quarter results and that are excluded from our non-GAAP results.

During fourth quarter 2012 Eastman recognized a mark-to-market loss for pension and other post-retirement benefit plans of $276 million. This was due to a reduction in the Company's assumed weighted average discount rate versus prior year partially offset by an increase in the pension asset values.

In addition, we also had asset impairment and restructuring charges of $83 million primarily related to four items. First was termination of an operating agreement with a third-party site in Brazil and related facility closure cost. This site produces Santoflex antidegradants and Santoflex PVB resin. We will continue to meet customer demand with our other global manufacturing sites.

Second was discontinuance of a company's project to modify existing coal-based utility assets in order to meet recently enacted environmental regulations and instead changing 50% of our furnace capacity to be fueled with natural gas. Third was inventory and other costs related to the change in strategy for Perennial Wood that Jim just covered earlier. And, lastly, severance related to the acquisition and integration of Solutia.

Finally, we had costs of $11 million related to the Solutia acquisition in the form of integration and costs related to the step-up of inventory.

Moving next to slide 16 and our key assumptions for 2013 to help you with your models. Consistent with the outlook discussed at our December 2012 investor day, we expect global GDP in 2013 to be slightly above 2% with the US staying steady and coming in around 2%, Europe close to zero for the full year, and China near 8%.

For the tax rate we expect our 2013 rate to be approximately 31.5% with the exceptions of the first quarter where we will see a $10 million benefit from several business tax credits recently extended by the Congress that will bring our net rate to slightly below 31% all-in for 2013. We also expect to see a decrease in other corporate costs of $25 million in 2013, primarily to reduce spend in Perennial Wood. And we expect the fully diluted share count to be approximately 157 million shares for the year.

Moving next to slide 17 where I would like to give you some sense of how Eastman is working hard on multiple fronts to deliver consistent year-over-year earnings growth.

Jim highlighted the remarkable earnings improvement the Company has made the last several years. Our evolution to a portfolio of specialty businesses will significantly contribute to more consistent earnings growth. We believe this is a key attribute to being valued as a specialty chemical company.

We recognize within our portfolio there are some product lines that are more commodity-like in nature and other factors that could impact our ability to contribute to more consistent earnings growth. Thus, we have taken additional actions.

First and foremost, our heritage businesses have worked hard the last five-plus years improving our pricing systems, contracting strategies, and commercial capabilities. This ensures we are able to work with our customers to deliver on our value proposition. If products are less differentiated, we try to tie pricing to underlying raw materials. We enter into multiple year agreements to help lift the trough while reducing the upside, etc.

We are bringing these same disciplines to enhance the practices of our recently acquired businesses.

In addition, we have an ongoing hedging program that we will use to help our businesses manage raw material volatility and to allow time for prices to adjust. We will, in some limited cases, also hedge the margins of some of our bulk olefin sales. For example, we have locked in approximately 50% of our bulk ethylene sales at margins similar to 2012.

We will also hedge currencies on a short-term tactical basis and in some cases longer-term strategic basis with the goal to remove volatility in earnings due to currencies. You can see this at work with our 2012 revenues which declined by just over 1% due to exchange rate movements.

And we are continuously working to improve productivity, both to reduce our overall costs but also to identify opportunities to reduce volatility in earnings and cash flows. I highlight this today just to reemphasize the focus of the men and women at Eastman is to deliver consistent year-over-year earnings growth.

Next, moving to slide 18 and an update on Solutia integration. As the slide indicates, we remain well on track with integration efforts. For the cost synergies we closed 2012 at greater than $50 million on a run rate basis and we have every expectation that number will exceed $100 million on a run rate basis by the end of 2013.

On tax synergies, we are well on our way to use more than half of the $1.3 billion of NOLs starting the second half of 2012 and extending through the end of 2014. We have also put in place initial tax structures to lower the effective tax rate and we will continue to pursue other opportunities for further improvement.

Not included on the slide, but worth noting are the revenue synergies. While these are longer term in nature and more difficult to quantify at this point, I believe we have upside in this category and that we will further strengthen this value -- this will further strengthen the value of this transaction.

As I have mentioned before, we have successfully retained key talent. For example, we have retained 97% of critical key talent identified and we continue to be impressed with the capabilities our new employees are bringing to the Eastman team.

Finally, our functional consolidation remains on track with the system integrations that are currently underway.

On slide 19 I will walk you through our current estimate for free cash flow. We currently project operating cash flows of roughly $1.3 billion in 2013. This is due to continued strength in earnings. This cash flow will also be impacted by cash outflows related to increased working capital as a result of increased sales and larger geographic footprint, funding of balance sheet accruals, such as the annual environmental funding of roughly $35 million for legacy solution sites, and restructuring accrual such as that related to the termination of the Brazilian operating agreement.

We will have some additional Solutia restructuring and integration costs that are excluded from our earnings projections but will impact our operating cash flows. And finally, the level of contributions to our US defined benefit plans which is currently estimated to be approximately $120 million.

We expect capital expenditures to be approximately $525 million this year. This capital includes both growth capital and infrastructure capital. In 2013, we expect an increase in infrastructure capital as we integrate recently acquired sites, initiate the change with coal-based furnaces in Kingsport and other needs.

In regards to our Kingsport facility, we currently use coal-based furnaces to provide electricity and steam generation for the site. As we evaluated both operating and capital costs to maintain these furnaces, we have elected to convert 50% of our capacity to natural gas. We have signed an agreement with Spectra Energy to expand their natural gas pipeline to our site. The capital required for this conversion is approximately $90 million, and is expected to be completed in 2016. This capital cost is significantly lower than what would have been required to modify the underlying coal-based furnaces to meet changing regulations.

I would like you to note this has no impact on our coal gasification process, and Eastman will continue to use coal in the future as both an energy source and a raw material. Our capital expenditures will be weighted more towards the second half of the year due to normal operational trends, as well as the timing of our key growth projects such as the planned Crystex and PVB resin expansions in Malaysia.

Putting this all together, we expect free cash flow generation to be between $600 million and $650 million in 2013 with the midpoint of this range representing a growth rate of greater than 30% over 2012 levels.

Just to close on slide 20, I will remind you of our disciplined approach to capital allocation. Already mentioned we expect capital expenditures of $525 million, which is similar, quite honestly, to 2012 when you factor in the $51 million Solutia spent prior to the close of the acquisition. This reflects our commitment to continue to pursue attractive organic growth projects across our portfolio.

On the debt side we paid down $250 million of the $1.2 billion acquisition term loan in 2012 and expect to pay down a significant portion of the remaining balance in 2013. This remains a priority for cash in 2013.

On joint ventures and acquisitions we will be progressing with our two announced joint ventures, the acetate total joint venture with China National Tobacco Corporation expected to be online mid-2013 and the Regalite hydrogenated hydrocarbon resin JV with Sinopec expected online in 2014. In addition, we will continue to evaluate opportunities for strategic bolt-ons.

Lastly, we expect to continue returning cash to shareholders in the form of dividends and share repurchases in order to offset dilution. During 2013 we will probably be a little bit behind offsetting current and expected dilution, but we should be in a position to offset dilution and then some by the end of the year and on into 2014.

With that thank you for your interest in Eastman Chemical Company and I will turn it back over to Greg.

Thanks, Curt. Tiffany, this concludes our prepared remarks and we are now ready for questions.

(Operator Instructions) Duffy Fischer, Barclays.

Good morning and congrats on a great year, guys. The question I had; we have had pretty steep propylene pop in January and people are thinking there is going to be another move in February. I guess for you guys can you talk about the key propylene derivatives and how you think those markets will pass on that price increase? Where you will be able to get it quickest and how long that lag will be?

Sure, Duffy. It is one of those things where as we move to more of a specialty I would have thought we would be spending less and less time on this. On the other hand, I must admit I am enjoying the exposure we have at this time because you are right. Fourth quarter we got helped with propane, particularly staying down, and then this quarter it looks like we are going to get helped with the other end of the spread, the propylene moving up.

By the way, we are just in January so I try not to get too carried away about what the spread is going to do this year.

One of the key places you see it is in our solvents business, the propylene that shows up in the functional products, the Additives & Functional Products segment. As I look at it there is a range -- the other place would be in our Intermediates business. But as I look at it, it is a range of how far downstream you are; how much transparency the customers have.

Certainly I think we are much better at pricing and moving things along quickly. It will depend again by how much it's specialty, how much it's commodity, but we will definitely see the affects of this movement in propylene in those two segments in the first quarter. And some will then flow over into the second quarter because of the lag, but it is hard to break out. Would you average in one month, two months, three months. In the past it has been as long as three months; I think we are much faster than that now.

Okay. Then the changeover at Kingsport to gas, why half? It seems like kind of half pregnant. If it made sense why not go 100%? Or was it that was just enough to get you over the hurdle what you needed to do regulatory wise?

So you are one of those poker players who always goes all-in on every hand?

Well, unfortunately, sometimes wrongly.

We try and be judicious. One of the main drivers was the whole regulatory environment. Not only what we are facing with Boiler MACT and something called BART, but just trying to look down the road a few years as to where do we think this country is going.

In the past we have always looked at it and coal was always so advantaged that you just swallowed hard and paid all the regulatory changes you had to make, paid for all those changes. Now with the outlook for natural gas as compared to the Central Appalachian coal, it's really a push on the economics. So then you go to the capital costs, and Curt gave it to you, $90 million compared to something that was probably a couple hundred million north of that for getting coal in compliance. So you knew you were going to do something.

Then the issue is how much do you do. This amount allows us to avoid debt capital, meets all f our reaching regulatory requirements and then some, plus, frankly, we tend to like the idea of being for our energy needs here at our major site half gas, half coal. We think that kind of plays to what we talk about so many other places in terms of being diversified and trying to smooth out earnings.

So net-net a good result. It is a shame in a way we had to eat, I think, $17 million but we couldn't just sit on our hands earlier. We had to get going on the engineering to be in compliance to meet the timeline. Then, of course, the world for shale gas just moved; the gas prices just moved and we got a much better alternative. So we had to scrap the plans to change our boilers over.

Great, thank you.

Bob Koort, Goldman Sachs.

Thank you very much. Good morning. I was wondering if you could give us a little more granularity on what is going on in two of the key markets from the Solutia acquisition, maybe on a regionalized basis, for both auto and tires.

We can. Frankly, there is some other players out there who have been out ahead of us who have done a pretty good breakdown, guys who are directly in that market and almost totally dependent on that market you might say. But I don't think you're going to get any new insights from us.

But as we look at tires around the world, obviously the States is coming back. Europe is still very much down negative again this year in 2013 and Asia seems to be improving.

One distinction I will draw so that you don't just think about auto builds is realize we are more dependent on, frankly, commercial activity because of the truck tires being more important to us than the car tires. So that is one comment I can probably make globally is I think we are still at a lower level of commercial activity.

And so when I think about a business like Crystex to me it just seems like such a great business and we are not getting do see it shine. I was trying to think of an analogy. It is like having this champion surfer and right now we just have two and three foot waves. And we keep waiting for the big waves to come so we can see what this business can really do.

Plus we have got Kuantan expansion that we will probably get going on later this year that is going to make some fairly dramatic changes in their cost position in terms of their fixed costs and variable costs. We will go be able to go back and retrofit existing sites for that.

So while I think we have got a fantastic business, the markets are not allowing us to show just how good that is. What was the other -- was there something else besides tires you wanted to hear about?

Just autos generally, but my suspicion is you will give me the same response so let me ask a different question if I might. Which is, in the context of your 2% global GDP, can you give us a sense of where you see volume growth across the division?

What you want to drive is volume growth in everything except maybe fibers won't see it until they get their JV on because they are running so hard right now. I mean just volume in general, Bob, I wish we had had a little more this past year, frankly, but there were some things that slowed us down.

Net-net I can't complain too much. I think we had a really good year. We need to get the volume growth going in the future.

Most of it will hinge upon capacity additions, so getting more hydrogenated hydrocarbon resins, getting that thing going in China will be fairly significant for us. Filling out the lines we have already built, like Tritan and CTA. We will get volume growth in mix change with the acoustic interlayers because that is a great product and that ought to be growing nicely.

Would you want to add anything, Greg?

(inaudible -- microphone inaccessible)

We have been talking about that; that one I think I can count on for some time to come is the switch on the plasticizer side. Realize, too, that we have got a couple of competitors out there -- we didn't put it in our prepared remarks.

But SK came on with some copoly volume this past year; Kalama came on with some volume in the benzoate plasticizer arena. And so we are trying to be smart about how we make pricing volume choices this past year to preserve as much shareholder value as they go to fill up some of those expansions. But, for example, I think specialty plastics business, which we don't break out anymore, but they came under some pressure this year because of what I just said about SK and they wanted to work down some inventories at year-end.

I expect that specialty plastics business to get back to setting the record in 2013 again for earnings, and that will demand some volume growth. So things like Tritan will have to continue to grow, which it will.

Okay, thank you.

David Begleiter, Deutsche Bank.

Good morning. Jim, was the entire guidance increase versus December was that due to the propane/propylene spread being wider early in the year?

That was due to the fact I didn't think you guys would let me stay where we were. I mean I am only one month into the year, so I got to tell you we felt a little sheepish having just stood in front of all of you in December. Then we come out six weeks later or whatever and we are saying we are probably going to do a little better than we told you.

But that was the major change I could point to is just propylene moving up and we are going to get it in price. We deserve it and that is what is going to happen.

Jim, if I could add also, we are probably showing a little bit more decline in corporate other spending because of the (inaudible) adjustment than we were probably thinking back in December.

That is true, but a lot of times people only want to add in the positives and this thing is going the other way. So I got benzene and paraxylene -- the same way propylene is really good. Not as big an impact, but benzene and paraxylene is hurting us.

We try to pull it all together and give you our best thoughts just like we did in December on how we are going to end the year.

Jim, what were the Perennial Wood losses or costs in 2012?

I will let Curt give you the specifics, but just on Perennial Wood, this is still something I like. We just got to be smart about it.

We said our top priority was hitting the earnings goals and so I'm not going to do anything that -- or say it another way, I am going to give myself as many cushions as possible to have as high a probability as possible of hitting the earnings targets all the way out to 2015. So we like the product.

We got to work on the economics of the product which includes more than just decking. It gets to what else can you do with the wood? Can you -- how do you approach porch flooring and potentially siding, furniture, trim, all the other things you can do with a good product like this, and make sure the economics work? But as for the actual change in write down, Curt?

David, if you look at that $126 million of other corporate costs, which as you know is corporate R&D programs, etc., Perennial Wood is roughly $50 million of that number.

Thank you. Just lastly, Jim, just on Crystex you had mentioned some competitive intensity back at the beginning of December, maybe some lost share. With the Kuantan expansion and lower variable costs -- fixed costs should you at least maintain, if not grow, your share in Crystex this year and going forward?

Yes, we will see. My top priority in that business is the value preservation. Setting ourselves up nicely such that when Kuantan comes online and we have that lower cost we are smart about our position in the marketplace because you know we are the big guy in the marketplace.

We will have not only lower costs, but we are probably going to have some additional functionality with our product too, which will be another way of separating our products out from the (inaudible) guys. So when it comes to share sometimes you're willing to make trade-offs to make sure you make the right pricing decisions. Long-term I feel like when this industry has to run hard we will probably pick up share during that time, so we will just see.

We need a little help, though, from the marketplace. We need a little more commercial activity, a little more truck tires being sold.

Thanks a lot.

Andrew Cash, SunTrust.

Good morning. I heard your favorable forecast for Advanced Materials for 2013 so I was just curious, if you look at the PVB business are contract negotiations complete there for this year? And if so, in what quarter would you expect the PVB volume to start increasing?

That is a good question, I don't know. You identified the business that has the steepest hill to climb over the next year, as well they should.

I was pleased with where we got to on the contracting for the interlayers business. I think Mark Costa and his team did a great job there. They told me up front it was probably a two-year process to get back to where you want to be in terms of having the right mix with your customers in regions, etc. I do think the acoustic product is going to be a big help in terms of improving the mix which helps your margins. Maybe also gets you back on the volume growth side.

Biggest factor is probably outside of my control and that probably gets back to just general economic activity. So I don't want to try and pick out a quarter, but I like the direction we are going.

As you look at that segment though don't forget about the copoly business, the specialty plastics business. Like I said, they took it in -- how do I want to say this? They took a P&L hit; they did a bit of a P&L hit last year purposely working down inventory. It's the right thing to do, the inventories had gotten a little high, and they did a lot of that in the fourth quarter. That can be a pretty powerful contributor as that business comes back strong this year.

Understood. Just a follow-up. Going back to the propane, could you just put in ballpark figures for us the increase in Eastman's earnings in 2012 as related to the spread between propane and the price of the derivatives?

You are picking propane, but I guess you mean propane ethane in general, or are you really (multiple speakers)?

Yes, the whole complex.

Well, we are probably not going to give you the exact number. I can tell you it was significant. What we say in our statements, Curt, is we try and cap it out for people.

Yes, it is less than 20% of our total EBIT.

Yes, less than 20% of EBIT. But it was significant; it was a nice move in our direction.

Okay, thank you very much.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. Question on Advanced Materials again. When you look across the forecast you guys have had for 2015 and margin targets it is certainly the one that has the longest bridge to get there in the 14%. So what really needs to happen to make sure you can meet this target and how much relies on macro versus controllable factors and versus your three big products -- PVB, Tritan, and CTA?

I will make a couple comments. Greg may want to chime in too because he is sitting over here looking at me like he has got a better answer than I do. But I mean, like I said on the last question, they got a steep hill to climb. They are very confident, by the way, though.

I mean when you look at the EBITDA percentage that they have to grow it is nowhere near the same because they got a pretty big installed base and they got capacity they can fill out that we have added. And so you ought to see a faster ramp up as they fill up something like the CTA line, etc. The interlayer capacity we had.

And it is also a place where in particular the interlayers where Europe has held them down below what I would say is a normal -- normally how that business should look. So partly you are looking for Europe to come back out of the doldrums and partly you are looking to fill up capacity you have already built. And so they should be levered to faster growth in the EBIT line than perhaps some of the other business.

Okay, great. Back on the specialty plastics, I know that you mentioned the SK expansion but it seems like there has been lower utilization and weak demand all year. Is there any type of share shifts? I mean in the past copolyester was kind of the betweener between acrylics and polycarbonate. Has there been any end product share shift between those two might also be affecting demand on the copolyester side?

I would say -- we said we thought demand was off some, so I had a little bit of a double, really a triple whammy. I had a competitor filling up some capacity. We had probably soft end-market demand, although I wouldn't say really losing anything to poly carbonate for sure because poly carbonate, of course, is struggling with that headwind of high benzene cost.

Then we had intentional working down the inventories, which -- that was not insignificant. That had a pretty good P&L impact. So I think copoly with Tritan in particular -- Tritan is taking share from other competitors, other plastics. Greg, anything you would want to add to that?

No, that is it. I mean packaging --

Did I scare you off from saying something?

I would say the packaging market has been soft for awhile.

Yes, that is true.

That is affecting not just copolyester but a lot of different products.

Okay. Then just finally, acetate yarn has had some issues in the past year; obviously your tow is doing fantastic and you have got expansions there. Is there a point when acetate yarn is no longer core for you is or is there anything there that in terms of integration of your facilities that even if you might not want to be in the business anymore it is going to be hard to disaggregate it?

Others have clearly exited, so it is a logical question. I wouldn't necessarily use the word core, but it sure helps us run our stream better.

Could we move from yarn to just tow? Yes, we could, but right now the economics are in favor of us staying in the yarn market. It is a positive cash contributor. In fact, it has never been negative cash. It has always been positive cash and absorbs costs, helps us run the lines full even when the EFO on that business is negative.

The other thing I would say is it is really just not that big anymore, so if I was sitting outside the Company I wouldn't spend a lot of time on yarn. We feel compelled to talk about it because it can move things at the margins but, of course, the big horse is the tow and then the acetyl intermediates, the flake, that we sell.

Thanks very much.

Vincent Andrews, Morgan Stanley.

Thanks. Two questions; first, could you just give us a little bit of update on the contracts with Santoflex and Crystex? I know in particular you were talking back in December about trying to get some improvements in the structure of that going into 2013, so just first on that. Then, secondly -- or why don't we go with that first?

I will only give you oh so much color, other to say I am pleased, which hopefully that carries some weight. It is, I realize, a two-year process. I would say we have done a better job than has been done in the past of segmenting out the really key customers, the ones that are important to us, working with them.

Where do they see value added? Where should we be thinking multiyear? How should we be thinking about pricing structure with those customers? And I can tell you I am pleased.

I mean Mark Costa has been personally involved out there with some of this and we are building relationships quickly. We are approaching it differently perhaps than they did in the past in terms of not just working with the purchasing department, but really wanting to be in there with technology and the whole gestalt, if I could.

And we try and make smart trade-offs between volume and price. You don't chase volume in Asia just because you want to say you are growing in Asia. You take volume in Asia when you can make money there.

We respect all our customers, all regions of the world, but we know where our bread is buttered. And that is what this past contracting strategy reflects and that is true for -- I guess I mainly had Santoflex in mind as I was talking but Crystex would be something similar.

Just as a separate follow-up, you mentioned SAP integration in the prepared remarks -- and you might have talked about this in the past I just don't remember. But can you remind us which -- either you had SAP or Solutia had it or neither of you had it. What is the process that you are doing?

I'm going to let Curt comment on that. I just want to make a general comment about integration and then I will let Curt talk about it because Curt is one of the guys driving it.

I would have guessed that by now I would have had some kind of disappointment in the integration. I have been around a while and to do an acquisition this size usually something doesn't go the way you want, so I knock on wood as I say it but this has been a good one. This one is going the right way. We are hitting our milestones, we are exceeding our cost and revenue synergy goals, and so I like what we see. On SAP, Curt?

If you look just briefly on SAP, part of their shop was on SAP so we are migrating that over. That would be in advanced interlayers. Another part of their portfolio, which are the tech specialties, Solutia was even on a path of getting ready to convert that over to SAP and that is one we will continue. Those would be the two big horses we convert in 2013.

And we are an SAP house.

And we are an SAP shop, right.

Single-instance, global SAP house. Everything is on SAP.

A lot of good talent on both sides of the house on SAP and we know how to get this done.

Okay, perfect. Thanks so much.

Chris Nocella, RBC Capital Markets.

Alcohol prices have been strong in Asia recently and I think I saw you guys put an announcement out as well. Is this just the push-through of propylene or are you guys seeing particular strength here?

No, there is strength in the markets have picked up in the fourth quarter. Of course, we got an operation in Singapore and that has been doing better. That had one of its better fourth quarters in some time the way I remember it. So there is definitely strength in that market as well as you have the wind, tailwind this time, of what is going on with propylene.

Okay. There has also been some talk amongst your peers over the last couple of days about improvement in China. You guys had a nice 67% growth in that region the last couple quarters. Are you seeing a pick up as we are sitting here today in that business or is it just trending along the same trajectory?

No, I think you would have to say it has picked up. I don't have January results. What I have got so far as I have looked at how the year is kicking off with volumes; one, there is pretty much an uptick everywhere except maybe the adhesives business, but, two, I would say Asia is definitely picking up.

P.J. Juvekar, Citi.

Good morning, Jim, Curt. Your margins in Additives & Functional Products have held up quite well despite the weak tire demand that you talked about. So are Crystex margins holing up or are coatings margins coming in to help out with the raw material benefit that they have?

Both, but more the latter. This is where we talk about the solvents as well as some of the old pieces of CASPI, some of the additives from CASPI. It is quite, quite strong right now.

You know our North American presence is good. What you are going to see more of, not just us, you're going to see more of us with this -- with what is going on with natural gas in this country you're going to see products being globally competitive that in the past logistics might have held you back. Now you are going to be shipping some of the stuff around the world.

Okay. Can you just make a comment on the Crystex margins please?

I guess I would say more holding their own. Holding steady is probably the best way to think about that.

Okay. Then a couple of things on ethylene. You mentioned about the restart of the cracker in the (inaudible) unit at Longview. At today's raw material prices can you just ballpark the impact?

If you restarted the cracker?

Yes.

Hard to do because what we are talking to people about it is that you wouldn't just run the cracker and then sell the output. You would probably -- I think I had it in my prepared remarks you would probably put something additional on our site and take it to a derivative.

But look at it this way. We are running now on three crackers. Cracker four is the larger of the two; this would be equivalent to one of the two smaller crackers. You can probably back into the volume impact of a cracker --

It's about 300 million pounds.

300 million pounds. And so then you can do your math P.J.

Okay, thank you. Curt, did you say that you locked in ethylene sales at 2012 margins?

We have (multiple speakers) well, let me just make sure we break -- if you think about our total ethylene that we produce, about half of which we consume and put down into our derivatives, that remaining half is what we call bulk ethylene. And about 50% of that we have locked in at 2012 spreads.

So my point was 2012 margins are great, but in 2013 here margins have gone up even higher so you wouldn't see that benefit.

Well, couple comments. First of all, they were great in December and early January. They have pulled back a little bit since, but, yes, the comment is going to be of that 50% of bulk ethylene sales we have locked it in and we won't see the upside or the downside on spreads.

And I will take your guarantee that they are going to stay strong the rest of the year. I really appreciate that.

Thank you very much.

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen. Jim, I lost some money today. I bet my team that the CEO spotlight was going to feature Greg for running a successful investor day and in fact he stopped it all together. Didn't anybody at Eastman deserve the CEO spotlight?

You know, I thought about that and then what I have been told is our prepared remarks already go long to the point that you guys don't always get all your questions in. So, honestly, if I was going to do it today I would have done it on the integration team.

I will do a three second -- integration team doing an excellent job led by Curt and Mark. Seriously, I am pleased with that. That is just going about as good as you could expect.

Well, regardless, I lost money anyway since you didn't highlight Greg. Curt, I found it rather curious that you talked about on track to exceed $1 billion in free cash flow, yet you are going to fall behind in terms of offsetting dilution on the share count and you're going to get to the share buybacks later in the year.

Can you expand upon that?

Yes, what I mean by that is just simply with some of the dilution that occurred in the fourth quarter probably expect some additional dilution at the start of the year. The timing is such that our buyback, as you have heard me talk before, so I got to make a little more progress on the deleveraging before we start fully doing all of those purchases.

So it is just a matter of timing and how the math works on the 2013 calculation. But by the end of the year we will be there and then some.

All right, okay, fine. Then you also talked about you think that there is upside in terms of Solutia revenue synergies. Can you expand upon that?

Yes, if I look at the synergies, the ballpark of $100 million off of their original revenue base is about 5% of revenues or 5% of revenues. And when we look at the project listing that this integration team is managing there is different levels of probability, so when we talk about the 5% of revenue, the $100 million, we are highly confident in that number.

As you go down the level of probability of success for the remainder is it possible that we can get to 6% of revenue? Yes. Is there a chance we can get to 7% of revenue? Possibly.

He was talking about revenue synergy to the --

Oh, you're talking about revenue synergy? I am sorry (multiple speakers) I thought it was a [percentage of revenue].

The revenue side I would say we are off to some good start on the commercial practices. I think we need a little more time on the longer-term aspects of the programs that we have talked about, the tires, etc. But if I look at commercial activities and practices I think there is some real benefits we are already starting to see in our numbers and there is more to come.

Okay, fair enough. Then can you give us an update on your thinking regarding the photovoltaics business?

Yes, honestly, I haven't thought a whole lot about that one lately because, as you know, when we divvied up the businesses I gave that one to Curt. So, Curt, what is your --?

Right now photovoltaics is a tough marketplace. We are continuing to evaluate some options and we are still working through those options, but either way it is not a material add on to Eastman. But we are working through the strategic alternatives.

Any thought on as to when we might get a go/no-go, keep/not-keep type of decision?

I would say within the next quarter or two we are going to have some --

We're not going to be talking about this forever, Frank.

All right, terrific. Thank you.

Operator, this will be our last question please.

Laurence Alexander, Jefferies.

Just a very quick one then. Are you seeing any areas or regions where you are seeing demand destruction in response to attempted price increases?

I would say I review pricing every month and I would say this is in most areas one of the better pricing environments, finally, than we have seen in a while. So part of that is just thinking about the things that are propylene-based. Part of it is some areas that are tight such that customers are more concerned about making sure they have surety of supply than they are the last penny.

Anything doing with packaging is still tough, so some of the adhesives. Parts of the adhesives is still tough; other parts, the hydrogenated hydrocarbon resins, still a tight market. So if I had to make a general comment it wouldn't be so much regionally. Europe would probably be the toughest region and I would guess packaging would be the end market that would be the toughest.

Thank you.

You're welcome.

Thanks again, everyone, for joining us this morning. A Web replay and a replay in downloadable MP3 format will be available on our website beginning at approximately 11 a.m. this morning. Thanks for your interest in Eastman. Have a great day.

That concludes today's conference. Thank you for your participation.