伊士曼化學 (EMN) 2013 Q1 法說會逐字稿

Good day everyone and welcome to the Eastman Chemical Company first-quarter 2013 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.Eastman.com.

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

Okay. Thank you, Michael, and 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 CFO; and Josh Morgan, Manager Investor Relations.

Before we begin, I'll 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 first-quarter 2013 financial results news release and our filings with the SEC including the Form 10-K filed for 2012 and the Form 10-Q to be filed for first-quarter 2013.

Second, earnings per share and operating earnings referenced in this presentation include Solutia acquisition-related costs and charges, 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 first-quarter financial results news release which can be found at Eastman.com in the investor section. Projections of future earnings in the presentation exclude mark to market pension and OPEB losses and gains, Solutia integration costs, and any asset impairments and restructuring charges.

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 2012 that compare post-acquisition results to pre-acquisition pro forma combined results. More information on pro forma combined results is in our first-quarter 2013 financial results news release.

Lastly, we have posted 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, and good morning, everyone. Let's go over to slide three.

As is my normal practice on these calls I will take just a moment up front to provide an update on our most recent outlook statements. First of all, we continue to make good progress on the Solutia integration. Curt will provide you with more color in his section but I just want to reiterate how pleased I am with how the integration is going and how well these businesses and our cultures are coming together to create value.

Next, in February we raised our full-year 2013 EPS expectation to a range of $6.30 to $6.40 which would be a 17% to 19% growth rate over 2012 and today we are reaffirming that guidance as on balance our portfolio of businesses continues to perform well despite an uncertain economic environment.

We also said we expected to generate between $600 million and $650 million of free cash flow in 2013 and we are right on track to achieve that target.

Finally, we committed to remain disciplined in our capital allocations and if you look at how we have put capital to work this quarter and really look at our track record over the last few years I hope you would agree that we have remained disciplined and focused on returns.

On slide 4, I am reviewing the Eastman corporate results. Operating earnings increased first-quarter 2013 versus first-quarter 2012 as lower raw material and energy costs more than offset lower selling prices. For example, propane prices declined over 30% year-over-year while on a corporate basis, total corporate, selling prices declined by 1%. Almost all segments had higher year-over-year earnings with the largest increases being in specialty, fluids and intermediates and fibers. And our operating margin increased to 17.5%, almost a 200 basis point improvement year-over-year.

So first-quarter EPS was $1.62, an increase of almost a third compared with the year-ago quarter. First-quarter earnings were a strong start to the year in what remains a difficult and unpredictable global economic environment.

On slide 5, I will highlight our results by geographic region. As you can see, the US and Canada remains our largest region on a percent of revenue basis with Asia-Pacific a strong second and then Europe and Latin America. Revenue in North America was down about 5% but this was a typical price/raw story.

As I mentioned earlier, propane down over 30% year-over-year in the quarter and this resulted in some lower prices for derivatives in the US.

Asia-Pacific revenue was up 11% and the increase was a combination of both volume and price. There was particular strength in our Fibers, Advanced Materials and Specialty Fluids and Intermediates segments with the SFI improvement coming against an easier comp in the first quarter 2012.

Revenue in Europe was down 3% and given the state of their economy this was solid performance in my opinion. Latin America revenue was down $4 million or about 3% as well. We continue to see our geographic diversity as a source of strength for our portfolio and our first-quarter results are indicative of that.

Moving next to the segments and to slide 6 where I will begin with Additives and Functional Products. Sales revenue increased primarily due to higher sales volume. This was particularly true for solvents as we are benefiting from a strengthening US building and construction market. For tire additives, both insoluble sulfurs and anti-degradants, volume was relatively flat. And given our estimate that global tire market demand was about flat year over year in the first quarter, we feel good about holding our share here. This positions us well for when the market inevitably begins to restock inventories as tires need to be replaced.

I would also add for the anti-degradants business that we are in the process of implementing a price increase to try and recover some of the margin lost to significantly higher benzene costs.

Operating earnings for the segment increased slightly as lower raw material and energy costs and a higher sales volume were partially offset by lower selling prices. We also had lower capacity utilization in first quarter 2013 for rubber additives as back in the first quarter 2012 the business was preparing for expected outages and increases in demand so it was a tough comp for rubber additives.

The operating margin for the quarter remained at just under 24% and looking at the full year we continue to expect operating earnings of approximately $410 million which would be a strong result in a challenging economic environment. So overall I would say Brad Lich and his team are doing an excellent job with this segment.

Moving next to slide 7 and Adhesives & Plasticizers. First-quarter results were disappointing in this segment due to several factors. For adhesive resin product lines, unfavorable trends in both demand and supply impacted our results. On the demand side, the consumables market particularly packaging continues to be soft and on the supply side, greater availability of key raw materials helped to loosen the non-hydrogenated market while lower price competitive material was also a headwind.

For plasticizers, we are facing aggressive competitive pricing from both manufacturers of phthalate-based plasticizers trying to defend market share as well as Asian producers who in response to slower growth at home have increased exports to Europe and the US.

While we expect operating earnings to increase sequentially in the second quarter and for first-quarter results to be the lowest quarter of the year in 2013, we are reducing our full-year operating earnings guidance for this segment to approximately $225 million. With that said, we remain confident in two secular trends that will continue to drive growth for this business.

First, solid growth from increased use of hygiene products such as diapers in fast expanding markets particularly Asia, and increase usage of hydrogenated hydrocarbon resins in case and carton packaging adhesives. Second, substitution of phthalate plasticizers with non-phthalate plasticizers in Europe and the US.

But to get back to the kind of earnings we expect from this segment, we are also going to need stronger global economic growth to help as well.

Advanced Materials is on slide 8. They bounced back from a tough fourth quarter to report solid first-quarter results. Year-over-year sales revenue increased primarily due to higher sales volume particularly for interlayer product lines and Tritan copolyester. To give you an example, Tritan volume was up about 40% year-over-year mainly in the durable goods market.

Operating earnings increased due to the higher volume and improved product mix. We are selling more premium products in this segment, acoustic interlayers, Tritan copolyester, V-Kool branded window films, and this is driving mix improvement and earnings growth.

The operating margin for the quarter improved year-over-year to just over 11%. For full year 2013, the Advanced Materials segment continues to be faced with a challenging business climate including weakness in Europe and lower demand for packaging. Despite that we expect operating earnings will approach $250 million for the year driven by the improving product mix and higher asset utilization.

Next is Fibers on slide 9 and it seems each quarter the results set the bar even higher. Revenue increased with both volume and price up. Earnings were a quarterly record at $114 million. In addition to higher volume and prices, operational performance has been excellent with our acetyl stream running at a very high level and benefiting from the debottlenecks we completed last year which are resulting in lower unit costs.

For full year 2013, we are raising our earnings expectation to approximately $430 million and we expect earnings to be slightly higher in the first half of the year compared with the second half based on how price and raw material and energy costs flow through our accounting system.

Lastly to update our progress on our joint venture with China National Tobacco Corporation to expand acetate tow capacity in China, I can report that we are on track for the facility to come online during the third quarter. We expect qualification and material will take place through the end of this year and therefore we expect to begin to see earnings through our equity investment in the joint venture in early 2014.

I will finish out the segments on slide 10 with Specialty Fluids and Intermediates. Operating earnings increased significantly year-over-year due to lower raw material and energy costs primarily for propane which were partially offset by lower selling prices. The operating margin for the quarter was just under 16%, an increase of about 400 basis points over the prior year quarter.

Sequentially operating earnings increased slightly going from $93 million in the fourth quarter 2012 to $95 million in the first quarter of this year. You will recall that we had an operational issue at one of our olefin cracking units in the fourth quarter that had a slight negative impact on those results. Well, we also had a separate issue with one of our crackers in the first quarter that had a slightly larger negative impact on results than in the fourth quarter last year.

I know this is disappointing but frankly I see these types of issues as common across our industry.

In addition to the cracker issues I would add that a lot of the benefit of lower propane costs was already in our numbers in the fourth quarter partly due to LIFO. So although we did benefit from an improvement in the propane to propylene spread in the first quarter, a significant portion of that was already in our fourth-quarter numbers.

In 2013, we will also benefit from an additional furnace on Type 4 cracker providing an additional 100 million pounds of ethylene on an annual basis.

Looking at the full year, we continue to expect operating earnings will approximate $380 million which would be very strong performance.

I will end on slide 11 with an update on our 2013 outlook. We started the year with very solid results from our portfolio of specialty businesses and we continue to benefit from our leadership position in attractive end markets from the diversity of the end markets we serve and from our broad geographic footprint.

However, global economic uncertainty continues with particular weakness in Europe and raw material and energy costs continue to be volatile including for propylene, paraxylene, and benzene and taking all of this together, we are maintaining our full-year expectations which we had increased in January for 2013 EPS of between $6.30 and $6.40. This would be our fourth consecutive year of double-digit earnings growth if we achieve this and I remain confident we are well positioned to continue to deliver double-digit earnings growth for the next two years and beyond.

With that let me turn it over to Curt.

Thank you, Jim, and good morning everyone. I will begin on slide 13 by reviewing some of the financial highlights for the first quarter.

We generated $5 million of cash from operating activities in the quarter. Net earnings were solid. Working capital increased for normal seasonal requirements and we made an $11 million contribution to the US defined benefit pension plans.

Moving to free cash flow for the quarter, you see it was a negative $83 million, a good result in what is typically our seasonally lowest quarter for free cash flow.

Also keep in mind there was no dividend payment in the first quarter as we elected to pay the dividend to our shareholders in December of last year.

Finally, our cash balance which includes cash equivalence was $178 million at the end of the first quarter.

Our tax rate for the first quarter was 28.7% reflecting the $10 million benefit we noted in our February guidance resulting from the extension of the R&D tax credit and allowance for the tax-free transfer of offshore dividends. We expect our tax rate for the remainder of the year to be approximately 31.5%.

On slide 14, I will walk you through our current estimate for free cash flow in 2013. Consistent with our previous guidance, we project operating cash flow of roughly $1.3 billion.

The full-year operating cash flow estimate includes our projection for continued strength in earnings as well as the following items -- slightly higher working capital as a result of increased revenue and our broader geographical footprint with the working capital we have built in the first quarter working down through the remainder of the year; funding of balance sheet accruals such as the annual environmental funding of approximately $35 million primarily for legacy solutions sites; and restructuring accruals for site closure in Brazil; any additional restructuring integration costs that are excluded from our earnings projections; and finally, we anticipate contributing approximately $120 million to our US defined benefit plan this year.

Also consistent with our prior guidance we expect 2013 capital expenditures to total approximately $525 million. This capital spending will be more in the second half of the year due to the normal operational trends as well as the timing for key growth projects including our specialty fluids expansion in Wales.

So putting this all together, we reaffirm our 2013 free cash flow expectation to be between $600 million and $650 million with the midpoint of this range representing a growth rate of greater than 30% over the 2012 total.

Next on slide 15, I will provide an update on the integration of Solutia. As the slide indicates, we remain well on track to achieve the synergies we expect -- expected when we acquired these businesses last year.

We are also on track with the retention of key talent which is at 93% of what we identified.

We recently achieved one of our key integration milestones with the successful system migration of the rubber additives product lines which is a part of our Additives and Functional Products segment over to our SAP system. For those of you familiar with SAP migrations, you know this is a very complicated process.

To give you a sense, this migration itself impacted 1300 people at 19 different sites and locations in 12 countries. The implementation went as well as we could have expected and these businesses are now fully operational in our SAP system with seamless impact to our customers.

I just want to recognize all of those involved in achieving this outstanding result and milestone. We are on track to migrate over through the remaining former Solutia businesses into our SAP system later this year or early 2014 timeframe. All in all, we continue to make great progress with our integration efforts and our synergy targets.

To close out on slide 16, I will remind you of our disciplined approach to capital allocation. As previously mentioned, we expect capital expenditures of $525 million which reflects our commitment to pursue organic growth across our portfolio.

On the debt side paying down a significant portion of the Solutia acquisition term loan will continue to be a priority for cash throughout 2013. During the first quarter, we did reduce the term loan balance by $200 million using our strong balance sheet to access attractive funding in the commercial paper market.

Moving next to joint ventures and acquisitions, we will continue to progress with our two announced joint ventures. The acetate tow joint venture with China National Tobacco Corporation expected to be online in the third quarter of this year and our Regalite adhesive project joint venture with Sinopec expected online in 2014 and we will also continue to evaluate opportunities for strategic bolt ons.

Lastly, we expect to continue returning cash to our shareholders in the form of dividends and share repurchases. During the first quarter, we repurchased $32 million of Eastman common stock.

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

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

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

Good morning. Jim, in adhesives I think you mentioned a couple of issues. It sounded like you were experiencing some market related weakness on the packaging adhesive side. And then I heard you mention an issue on hydrogenated hydrocarbons related to some meaningful cost dynamics. I was wondering if you could just flesh those out a little bit more and comment on the expected duration of these issues and whether or not there was anything company specific at work in either category?

Kevin, how did I know the first question might just be on adhesives? Guess what, when we had our business review, guess where we spent some time. Look, long term I like our position. There is nothing company-specific negative to Eastman, but you do have softness in the packaging market, which hit a part of it. I think one of the reasons the results were worse than most all of us expected was it wasn't just demand, it was also on the supply side.

And the best I can understand it speaking somewhat generally, if you have had probably several years now tight raw materials where customers can quite often worry about whether or not they are going to get the supplies; some of your competitors couldn't necessarily make all they wanted to make. And then if those raws loosen up, you have more availability of supply customers, don't need to keep their safety stocks in inventory.

And so I think you had a bit of a double whammy. You had soft demand and then you also had more supply or at least a comfort level with customers on supply.

That second thing doesn't last forever so they go ahead and take their inventories down skinnier. They are more comfortable doing that knowing that they are likely to be able to get product. The overall demand issue is one that you are going to be able to watch as easy as me in terms of when general level of economic activity picks up and packaging in particular picks up again.

So it was a disappointment. I think we still like the hydrogenated hydrocarbons outlook. We like the outlook for diapers in the emerging markets, etc., and that trend is not going away anytime soon. So long term feel fine, short term we got caught on both demand and supply.

Okay. And then second question if I may, Jim, on Specialty Fluids and Intermediates, you referenced the operational issue at Longview. Can you give us a sense of I guess the absolute impact of that in the first quarter and remind us of what it was in the fourth quarter. Just trying to get a sense of what the sequential delta might have been in that segment related to the operations side?

I will probably let Curt chime in on this too. But I thought you might be the one to ask this question, Kevin, since you were high man on the numbers and obviously without the upset, we wouldn't have gone all the way to your number, let me just say it that way but we would have been between your number and our number.

I would say the impact on first quarter is roughly $10 million and the fourth quarter is a little less than that.

Okay. Thank you, guys.

Jeff Zekauskas, JPMorgan.

Good morning. Can you update us on your cost reduction initiatives and what you think the ultimate savings will be from the integration of Solutia?

Let me let Curt pick that up because he is the lead man on that.

What we have mentioned in the past, Jeff, and this still holds true, our target is a run rate of greater than $100 million by the end of this year on those integration savings. We did talk about there is different levels of probability of other projects we have identified so that $100 million target we talked about was roughly 5% of the acquired revenues.

There is a possibility that could be a 6% number which would be another roughly $25 million and there is a remote chance it could be 7%, another $25 million. So it is just a range of probability we are working on. And some of that you won't see until 2015 if it were to come to fruition.

In addition, we continue to make good progress on the operational and commercial side of Solutia and I think you are starting to see that in the benefits.

Lastly is within our culture, we have a culture of continuing to focus on productivity and trying to drive unit costs down and you heard some of that that Jim talked about today in our acetyl stream through some debottlenecks, etc.

So part of it is still synergies, part of it is just operational excellence we expect and have been able to achieve.

Jeff, if I could just tag on, I mean a lot of times people look at spread and spread widens out and they say they just got more price or the raws went down. We don't talk a lot about it but we still have all of the basic programs going on part of our culture in terms of Six Sigma and cost monitoring headcount, labor costs, etc. so we are trying to fight it on all angles and that is about the only way you can deliver these kind of results.

Okay. And then lastly, you had such a nice price raw material margin in your Fibers business. Now selling these shutdown Spondon, their Spondon facility late last year, did that tighten up the global supply-demand balances sufficiently to sort of allow for greater industry pricing? Is that the reason why it widened out so much?

I would not point to that because they also added capacity and of course we are both adding capacity in China. But no denying we are running at very high utilization rates, the whole industry is. Part of our benefit is -- and again we don't always talk a lot about it -- but we just operationally ran very well in terms of cost and then there is also a benefit that comes from in the first quarter how the pricing flows through versus the cost flow through. So usually your first quarter you are getting a little tailwind if I can that maybe all of your costs -- say higher wood pulp, etc. haven't flown through for a full three months or you have probably gotten more of your pricing. And that is why we tried to guide that for Fibers, the first half of the year is probably going to look better than the second half of the year and not because we need change in the market place simply because of how those costs flow through.

Okay, thank you very much.

David Begleiter, Deutsche Bank.

Jim, I think you also called out some weakness in plasticizers in the quarter. Is that weakness do you think permanent, structural or is it temporary going forward?

The beauty is in the eye of the beholder so how temporary is temporary. I mean you have got some plasticizer guys that have been losing share who are reacting trying to use price. We also had if I remember correctly kind of soft market in Asia and so they ship more of the stuff to maybe higher priced markets in Europe and the States.

Long-term, the non-phthalate trend is not going to change, it is not going to go away. We are going to see high single-digit growth rates in the non-phthalate plasticizer side so still expect good growth there. The real weakness came more on the adhesive side this quarter than the plasticizer side so that is really where more of our focus is right now.

Okay and just in SFI, Jim, how should we think about a narrowing of the propane propylene spread in Q2 versus Q1 and how impact your numbers?

Well, it does look like it is going to narrow and that is what drives me nuts, when it is widening out everyone thinks I should be raising guidance, etc. And we are trying to say guys, it is only one or two months and so it is going to come back the other way.

I try not to look honestly -- I try not to look quarter-to-quarter. I try and think for the year. I think overall for the next several years we've still got a tailwind here.

Let me just point out one other thing though when you look at that segment it is not just that spread propane propylene. I also got a really nice fluids business in there and the fluids business didn't quite do what we would have hoped in their first quarter and that is more as I am learning because again their shipments when they have major fields, etc., can kind of move from one quarter to another.

So the fluids business should do noticeably better next quarter over first quarter. But yes, I think the spread will come in some but overall I think this segment is going to have a great year.

And just lastly, any update on the fourth ethylene cracker at Longview?

Yes, I mean I said last time I have a little chagrin. I don't have more to tell you. All I can tell you now is that we've got site visits going on, we have narrowed the list down to a few parties. Midyear is probably when we would hope to be out with something.

I can also say that I worry a little bit that guys are spending too much time or their building the anticipation up too much on this one. I mean we are a pretty good-sized company and restarting another cracker or doing something with the excess ethylene that would probably take two or three years to get in place anyway, I hope they are not buying our stock on that waiting for that shoe to drop and for us to tell them what to do because we think we have got a great portfolio of businesses.

But hopefully midyear we can kind of spell out who we are going to work with and what it is going to look like.

Thank you very much.

Robert Koort, Goldman Sachs.

Thanks, good morning. Jim, you mentioned more aggressive competition from Asia in the adhesives business. Is this a function of the weak economy over there and you think this sort of ebbs and flows as their own home cooking improves and they won't have to seek out other markets? Or is this just sort of a standard product cycle issue where it is becoming more intense?

I think I was mainly talking about plasticizers on that but that is okay. Let me just talk about Asia in general. In basic, we had pretty much all of the segments but Adhesives & Plasticizers had pretty good results in Asia. And it seemed like we were seeing something a little different than a lot of the guys were talking as we were going around beginning of the year last conference call, etc.

I don't know that we are that exceptional except I like our portfolio of products in Asia so [filter tow] being such a major product for us in Asia gives us pretty good Asian numbers usually quarter in and quarter out. I know that as I look forward just give you some little anecdotal stuff, I think on the oxos, it is going to get fairly competitive there. I think Butanol for example under price pressure in Asia right now.

So yes, we had a good first-quarter in Asia. I would think -- I am pleased that it is our second largest region, let me say it that way. But we take nothing for granted in Asia and I think the hardest thing is figuring out segment by segment what is going on with inventory levels in Asia because I just think they are masters at moving those inventories around when they think it is to their advantage.

Can I ask a separate question on Crystex. It seemed like there was some consternation among investors that that was just such a great ride that had to end at some point. I didn't get that sense from your comments. So could you talk a little bit about what is going on in the market there and in particular pricing?

I disagree that it is something that has to end. We have the best product in the market place and we have the best cost position. The way I look at this -- in fact, I will run through a few of the solution businesses if you want. But the way I look at this one, this is a great business and you are seeing it probably at its weakest because of what is going on in the general tire market place.

So we held volumes in Crystex which I think is a good thing. A year ago they were running their utilization rates a little harder so the comp is going to be tough for us. They had all kinds of rationale why they ran harder a year ago but let's just say we think we are running it very prudently today in terms of how we are running our plants.

When the tire market comes back I think we are going to get to see how good this business really is and also when we pull the trigger and do our [Quantan] expansion and get some further cost reductions because of process improvements, I think that is also going to be quite a positive.

So people, they should not judge the tire additives business by the way it looks right now. This is fairly tough market place for them.

I will just say a similar thing with interlayers where you've got Europe so soft. I just know that is a better business than you are seeing today but you are seeing it down because of Europe. If I look at the fluids business, sold out fantastic business. We are going to have the wherewithal to add capacity and so that is going to meet or exceed our expectations.

The film's business is probably the highlight. That is the one that is doing the highest above our expectations. And I think maybe next call or so we will try and focus in -- I'm looking over at Greg -- I think we will try and focus in a little more on films to give you guys some color because I don't want you to ignore that. Some of our best growth rates and great products and some real opportunity we see there.

So I mean so you have got two of the muscle players from Solutia that I think you are seeing at low points and the other businesses are performing very well.

Great, thank you.

Duffy Fischer, Barclays.

Good morning, guys. Just to go back to PVB and our layers, at the Investor Day you made a comment you thought the old management had made an error around kind of a price volume decision about a year ago. So as that anniversaries this year, were you guys or are you guys able to get back the volume you think they lost?

That is a good question and I think if I remember correctly we talked we kind of had a two-year game plan for doing that. We got a long ways in the first year so we are pleased with the contracting strategy we did. We got more price in Asia, we got more volume in Europe and that is exactly what we wanted.

So yes, overall I think we are getting the right response from the major customers. They want a long-term player somebody who is going to work with them and we have had to accommodate customers where necessary to make sure that we had the market position we wanted with the key players in that industry. But yes, overall I am pleased with what we have been able to accomplish in one year.

Okay. And then another comment from the Investor Day, I thought you guys had forecast you would grow about half of the market in Crystex because you needed to make room for kind of the number two and number three player that brought on some capacity. But it seems like you are holding volume. Has their capacity rolled into the market and is it just going smoother than you thought or are we still waiting for that capacity to come online?

I am pleased with what we have been able to do in the Crystex market but let me -- Greg, do you want to add some color?

I was just going to add that when we talked at Investor Day, we were talking about a growth rate that might be in the 5% range for tires and what we are seeing right now is flat. So when we are talking about growing half of what the market is growing, the market has to be growing and we are not seeing that right now.

But I am pleased with how we did share wise in Crystex.

But did the capacity from those competitors come online or -- because the growth rate will be what it will be but if people bring on capacity and they are willing to use price to get into the market, I thought that is why you guys were going to back off and basically just make way for them so that it didn't hit pricing. That was what I was trying to figure out. Did they come online or they did not come online?

I understand your question and I can't remember specifically. I know that the kind of capacity adds we had were small from numerous players and so I just assumed honestly they were coming on all along (multiple speakers).

And I have not heard any discussion amongst our business about any change in outlook of how that capacity is coming on.

I wasn't aware, it is not like there was one big step function coming on but I can't give you any more color than that.

Okay, perfect. Thank you, guys.

Andy Cash, SunTrust Robinson Humphrey.

Good morning. Just a follow-up on the acetate tow. I think there is some raw material pressure coming from the cellulose side. Could you give us your index what you think raw material costs will do for acetate tow over the course of the year? And also what sort of volume change year-over-year do you expect for the business full year?

Let me hit the raw material side and just remind folks on the major raw wood pulp, we do an annual contract so we know what the cost is there. I don't see that moving around. All we were trying to say is we did not get a full three month's worth of that cost in the first quarter, the increase in the first quarter.

You also don't get quite a full three months of the pricing in the first quarter either but it is slanted a little more to where you get less of the raw material cost.

So I don't want to mislead anybody. Obviously the business is doing great. We are covering our raw material costs, outperforming partly to that spread, also partly to just great operational excellence. Fibers is pretty tight right now so I don't know, Greg, were we seeing much more volume this year versus last year?

Low single digits which is pretty consistent with where we were in the first quarter.

Okay. By the way the other piece that moves around there, is it is small is yarn, but yarn is not causing any swings. It is pretty much steady.

Okay and then some of the -- if I could just ask one other question about some of your growth businesses. You alluded to V-Kool doing well. Could you talk about -- just give us a ballpark of the range of growth you are seeing for V-Kool films and acoustics and also Tritan?

Good numbers so why don't I let my CFO -- do you want to say the percentage increase?

Tritan was 40%, V-Kool I think was at strong double-digit -- I don't know was it 20% or something like that? The acoustics I think was 30%. These things -- I just wish they were bigger so that these percentages would be off a bigger basis. But yes, it is pretty good growth on that.

But it brings up the bigger point is that stuff that is growing fast is your higher-margin so you are getting the nice mix improvement like when you sell more acoustics in the interlayers, same thing with Tritan, same thing with V-Kool. Those are all good trends.

So if I got a disappointment, I wish we had had more volume growth this quarter but I am very pleased with the mix changes that we are seeing in our businesses.

And if I could add, Jim, on top of it what you are getting with those growth rates is we already have the investments made so you are getting the leverage off of that (multiple speakers).

That is true, that is true.

If I could just go back to what Duffy was talking about earlier about the PVB. In the auto area, I mean shouldn't your business see a better comps going forward if the auto pundits are right and the European business is less onerous on a year-to-year basis going forward?

Yes, that would definitely be a help. Remember the interlayer business is not just the autos, you've also got the building and construction, commercial buildings particularly in Europe and so that is quite soft now. I don't think that is forecast to turn around anytime soon but you are right on the auto side.

Thank you very much.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. On the adhesives business, I know you have got some expansions in Longview and then YPC over the next couple of years. Is there any way if the market continues to be weak that you might dial back some of those expansions to prevent operating rates from declining too significantly?

The big one would be the one in China and frankly I am not too concerned about the hydrogenated hydrocarbon resins. We are going to need that volume and I think we said when we announced it that we also had quite a bit of the output under contract already from that plant so not going to be a major risk. I don't see it screwing up the market because of the segment it is in. Let's say it that way.

The hygiene market is growing strong for the hydrogenated so that trend is still there, Nils.

Okay. Thanks. Then on the interlayers business again, I think at Investor Day you said that that business was about 50% Europe and yet obviously Asia contributed. So I was just curious as to how much of a drag Europe was because of autos and construction?

I don't know how to quantify it for you without trying to get in number by number. I can just tell you that the thing for me on that business was the tough comparison to last year as well in terms of how they ran the business last year. But Europe is the one we need to turn. When Europe turns, we are going to feel really good because it is the major impact on that segment.

And just finally if I may, I think sort of year to date charges and whatever from the Solutia integration are somewhere in the $80 million range excluding inventory step up and everything else. How does that compare to what you were expecting and how many more charges do you think you might have to take from Solutia?

I think when you look at what happened in the first quarter, you had about $10 million of integration costs and restructuring costs. Those will kind of continue at that level through the course of the rest of this year but start to unwind as we finish those major SAP implementations.

So it will be pretty much behind us as we finish the year. It is pretty much in line with what we expected when we announced the deal.

Thank you very much.

Frank Mitsch, Wells Fargo.

Good morning, gentlemen. Jim, in your prepared remarks you said it is a difficult and unpredictable environment out there so of course that begs the question I would like you to do some forecasting here.

You did a nice job of talking about the geographies, the Q1 results for the various geographies and sales movements, this that and the other thing. Can you give us a state of the -- the current state of affairs whipping around North America, Europe, Asia, what you're seeing there?

I would say first of all as we give our guidance, we are expecting things to kind of truck along the way it is right now. So if we had a nice surprise in the upside where somehow Europe pulls a rabbit out of a hat we could do better but odds are it is going to play out in our opinion kind of the way we are seeing it now.

So you had North America -- and it probably the same thing everyone else is saying -- North America pretty good, Europe frankly still just down and don't really see what the light is at the end of the tunnel for Europe. I guess in a year or two they have got to come out of it but in general, our best play there is to keep improving mix within that region.

I would say Latin America just not that big for us but when you look at how we were down a little bit volume wise I think Brazil is probably tougher times than Mexico is. And then you get to Asia and Asia is the one that could make a difference but I would say the hardest to call. Pretty good idea of where Europe is going the next year or so -- pretty good idea the States is going to stay good the next year.

So Asia is a little bit tougher to see and there you have to start getting into the segments but by and large I think it kind of keeps trucking along the way it is. We may have had a little more of a tailwind first quarter and it may be tougher for Asia to keep up at that level. I don't know, I hope that is helpful.

So how would you describe the April pace of business versus the Q1 pace of business in Asia overall?

Let me ask Curt because he probably looks at that as well.

I think when we look at the order trends April even early part of May we are seeing that same trend of strength and most of our businesses is in Asia. We haven't seen any dramatic upcrease or down wind.

I just have the anecdote of some of the pricing oxos pricing pressure there like Butanol etc. That is about the only negative I have heard change from first to second.

All right. Terrific. And then Curt, you described use of cash on the shareholder bullet, continued share repurchases to offset dilution yet I notice that your share count kicked down in Q1. Can you expand upon the potential that we might see more of that happen as we go forward?

I'm glad you noted that, Frank. If you look at our fully diluted share count you are right, it did tick down a little bit as we implemented share repurchases. I would actually point out on an actual share count base, it increased.

Probably had more to do with pricing options.

Right, options exercised and we had a few shares issued under the old Solutia warrants. So right now our strategy continues to be repurchase shares to offset dilution as we make progress on our debt pay down as you have heard, we will look at how we deploy that cash further whether we do more share repurchases beyond dilution.

All right, terrific. And if I could just come back to the Tritan volumes up 40% year-over-year which is obviously an eye-popping number. Any color around that? I mean operating rates for that unit, how is that trending, do you expect more of that to continue?

I think it is perhaps unrealistic to think it is going to have 40% up comps from here on out. They just had a bang up quarter where the market acceptance for the product is just fantastic which not only gives us a volume but allows us to concentrate on the segments of the market so think things like medical versus some of the other packaging applications that would be less attractive.

It is still going to take us a little while to fill up the capacity we got so we are not worried about running out of capacity soon. We have talked in the past about how you add a monomer plant and then you add lines, etc. So I think we are still looking at Tritan not filling up until end of next year maybe, something like that. That is a good part of what is going on within Eastman right now is how Tritan -- how the market is responding to Tritan.

Terrific, thank you.

Vincent Andrews, Morgan Stanley Smith Barney.

Thanks and good morning, everybody. Just a question on the acetate tow business. I know Asia from a cigarette perspective is almost 60% of your volume but in the rest of the world, what level of concern do you have over the medium or long term about when President Obama announces the potential for a federal excise tax, pretty substantial in the US or you see Phillip Morris Internationals volume down mid-single digits in the quarter? I mean -- and the potential for further excise tax increases in Europe or in other places, what level of concern at all is that to you?

We are not naive about it. I mean we can see what part of the world we live in and what the smoking trends are here. We know one of the biggest impacts in the past on smoking has been tax increases so you are right to focus on one the levers that can have an almost immediate impact. Interestingly enough a year or two later you lose some of that impact. Again in other words, it goes back up.

But long-term I think we all know the trend outside of Asia and it will be a slow decline. What you are going to want is you are going to want to have the best cost position, you are going to want to have a nice base in Asia. That is what we are building long term.

Okay. Then Curt if I could just ask you on the free cash flow, can you just sort of remind me sort of how it sequenced throughout the year and just let me know if there is any impact from the maybe in the inventory from the weakness in adhesives and how you see that playing out through the year?

So let met first of all on the inventory, I can assure you that our business and our supply chain guys are keenly aware of kind of order trends and making sure we operate consistent with those trends. So that wasn't a factor.

And as I look at free cash flow as we would expect, we are kind of negative in the first quarter and it starts building through the end of the year. Remember it may be third or fourth quarter will be one of our strongest but second half of the year is where we will see significant generation of our free cash flow.

Okay, thanks very much.

Laurence Alexander, Jefferies.

Good morning. Two quick ones. On the tire side, are your customers giving any sense of having a sense for when the market actually turns or are they still waiting on pins and needles?

And on the Fibers business, is there a point, I mean how many years can you sort of maintain a good pricing cycle or is there a threshold that we should be thinking about where you actually run the risk of creating your own demand destruction separate from tax increases or other government interventions?

Yes, so let me start with the tires. We just happened to ask that same question when we were having our reviews. What are these customers telling you, what can you see? The destocking has been going on in that industry for a while now, more than a quarter or two to the best of our knowledge and we also by the way, we are humble enough to admit there is other companies that have been dealing with the tire industry a lot longer than us and it is a lot bigger percent of their business. So trust me, there are guys out there that can speak much more intelligently than me about it.

But we haven't seen the turn yet where people have gone the other way and started to feel like they need to build inventories again. And I don't think we are getting a lot of feedback on how soon that is going to be so this just one of those where I am thankful we've got such a diversified portfolio of businesses that when one business is soft like adhesives, something else can kick in.

On the Fibers business, I don't really worry about things we would do as a supplier that would cause demand destruction. I mean the filter is actually the cheaper part of the cigarette so to the extent they lengthen filters and call it a premium cigarette, their cost goes down and therefore their margin goes up and we sell more product. So I think it is what we talked about earlier.

You can just see the long-term trends in terms of developed world smoking on a very slow decline, still growing though in the developing world and those are going to be the dominant trends. And taxes country by country can move things around and in particular it can cause upsets say in a particular quarter for one year but then the world seems to adjust so --.

The other thing I think the industry has been fairly disciplined about looking at their high cost production facilities and over the years have gravitated to lower cost and to Asia from higher costs and places like Western Europe.

Thank you.

Mike Sison, KeyBanc.

Good morning, guys. Nice quarter. In terms of Crystex, I just wanted to maybe help us visualize where are your operating rates now and whence they do sort of recover, is the leverage higher than what we might have seen in the years past? And maybe give us a feel for how that can shape up?

Yes, I have plenty of capacity right now if that is your question. I think there is a track record -- it was a leader by far in this industry, the capacity utilization Solutia and now us, we are more likely to move our utilization rates around than the small competitors are. But I am not going to give you a percentage number on the utilization rate but let's just say I have got capacity.

One of the key things to watch for though and you will get a signal as soon as anybody when we announce we are going forward with the Quantan expansion and the newer technology and lowering our cost position. That is going to be a very good sign and that is the kind of thing that can give you more leverage than you have had in the past that you've got a lower cost process that is actually retrofitable.

So we will see. I never take anything for granted, don't give you any guarantees but I think we have got some much better times ahead of us for Crystex.

And then just curious, I know it is still early but there are some companies when you look at the economic backdrop particularly in Europe over the next couple of years sort of the long-term goals seem more difficult -- and Advanced Materials is one where we needed a pretty big ramp over the next couple of years. Can you sort of give us an update of how you think about that business given some of the commentary that Europe could be weaker?

Yes, it did have probably these steepest incline in the climb -- maybe now Adhesives and Plasticizers does. But I feel better than I did six months ago about them being able to hit their targets and partly remember I got three businesses in there. So I got the specialty plastics business like I think I said on a last call is going to have a very good year probably their best year ever, that still seems to be intact. They had a very strong first quarter.

Performance films is outperforming our expectations, has nice growth rates and is becoming a more significant part of that segment although admittedly still the smallest. And then the interlayer business is where the upside is. And we do need some improvement in Europe and we do need some global improvement to hit those numbers. We said that back then.

So I don't want to pretend like Europe can just stay where it is forever and we are going to be happy. We do need a pickup in the global economic activity in particular Europe.

Great, thank you.

PJ Juvekar, Citi.

Hi, good morning. So I have got two questions, one on Kingsport and one on Longview. At Kingsport I think you are working on this project to convert your coal feedstock into (inaudible) natural gas. Where do you stand on that? And then on Longview, for your forth cracker start up, do you need a long-term offtake ethanol contract agreement?

Let me hit Kingsport. It is not the feedstock. It is for energy converting our major powerhouse from coal to gas and so we are going -- for energy purposes we are going to be about half coal, half gas. That is proceeding on pace. We haven't started fooling around with steel and concrete, etc. but that is going to go in line with what we would want to have done for regulatory reasons anyway.

But remember, the feedstock is coal -- we gasify coal; that is always going to stay that way.

In Longview, you were breaking up a little bit, PJ, so I didn't quite understand what you are asking about the forth cracker.

Do you need a long-term customer agreement?

Let me say it this way, we are not looking to be a bigger merchant player in ethylene so when you say do we need a long-term agreement, whatever we do with a partner is going to be a long-term arrangement whether we continue to own that cracker and operate it or we sell the cracker or what we do with our excess ethylene. But whatever we do is going to be a long-term solution, it is not going to be spot market exposure.

Okay. And there was a lot of discussion on the tire market. Can you just break down for us your tire exposure to commercial trucks versus passenger cars? Thank you.

Yes, commercial is larger than passenger -- I don't remember, do we say 60/40 or something --? Obviously -- is it more than that?

Yes, it is more than that.

More than that, okay. So yes, it is more commercial but thanks for your question, PJ.

John Roberts, UBS.

Good morning, guys. We've got a core group of people enjoying a great job on the integration activities. Do you disband them back into the organization as you work through that or does this sort of set out a challenge for you to try to find some other things to keep these people active on integrating?

Let me just say, you guys on that side of the call, you actually do know something about how to run businesses. A lot of the questions you have been asking is exactly the kind of conversations we have had internally and that is another one where you have got some synergy having a group together and then the issue is do you think you can keep them fully occupied?

Curt -- this is really a Curt's baby so let me have Curt --

What we're thinking through is just different scenarios by which you don't know how your M&A pipeline is going to play out so how do you keep that capability within your house. And there's different ways you can deploy them and keep them busy and if a project comes along, you can put them to work on integration. I would have to say our people are just excited about the integration efforts. They are demonstrating their capabilities and I think we will keep that talent available should we need it.

And then just as a follow up, it sounds like you are completely dismissing the e-cigarette phenomenon which may be correct. But I have got some friends and family who really love the product and sometimes electronic devices come down in price really fast because of the learning curve and scale they go up.

So I just wanted to do a gut check that that is something that you really don't think is on the horizon anytime soon?

I wouldn't use the word dismissing. We probably look at things at a depth and sooner than just about anybody else would when it comes to our Fibers business. But I would say that there is a comfort level that in the near to intermediate term we can pretty much see how demand and supply is going to flow. It is probably the most predictable market we are in. And so again I never take anything for granted, I don't dismiss it but I think we are fairly comfortable we are going to need that capacity that we are adding in China.

Okay, thanks again 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. Thanks again and have a great day.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.