伊士曼化學 (EMN) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company fourth-quarter, full-year 2013 earnings conference call. Today's conference is being recorded. This call is being broadcast live on Eastman's website, www.Eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Thank you, Chris. Good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, CEO; Curt Espeland, Executive Vice President and CFO; and Josh Morgan, Manager, Investor Relations.

Before we will 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 2013 financial results news release and in our filings with the Securities and Exchange Commission including the Form 10-Q filed for third quarter 2013 and the Form 10-K to be filed for 2013.

Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core or nonrecurring costs, 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 and full-year 2013 financial results news release which can be found at Eastman.com in the Investor section.

Projections of future earnings in the presentation also exclude such items as described in the fourth-quarter financial results news release.

Third, this presentation includes revenues and operating earnings on a pro forma combined basis assuming the acquisition of Solutia had been completed January 1, 2012, that compare post-acquisition results to pre-acquisition pro forma combined results. More information on pro forma combined results is in our fourth-quarter 2013 financial results news release.

And 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 Mark.

Good morning, thanks for joining us. I will start on slide 3. 2013 was an outstanding year at Eastman as we continue to build on our strengths and navigate through challenges. EPS grew by approximately 20% in 2013 and we have now delivered four consecutive years of double-digit earnings growth. The CAGR for EPS over the last four years is 34%.

We had another year of strong free cash flow in 2013 generating $674 million, and Curt will talk more about that in his comments. In 2013 we made solid progress on growth initiatives throughout the Company. Advanced Materials or Eastman Tritan copolyester volume increase by more than 50% in 2013 and we are currently adding additional capacity to serve continued demand growth.

In our plasticizer business, Eastman 168 non-phthalate plasticizers volume grew by approximately 25%. And as with Tritan, we are increasing capacity to serve continued demand growth. With our joint venture partner, China National Tobacco Corporation, we completed construction of 30,000 metric tons of acetate tow capacity and that plan is running at commercial levels today.

We also began construction on capacity expansion in Wales for our Therminol heat transfer fluids business which is expected to be operational later this year.

Moving next to the Solutia integration, we begin taking steps to ensure a successful integration before we completed the acquisition in July 2012. We have now brought the majority of Solutia's businesses onto the SAP system and expect to complete the SAP migration for the remaining businesses around midyear.

We've captured cost synergies we thought we would and expect to realize more here in 2014. We continue to work on revenue and operational synergies in a number of areas and the outlook for those is good. And we operate today as one effective team.

In addition, we continue to deliver cash to stockholders through both a growing dividend and continued share repurchases. In [2003] our stock repurchases totaled $238 million including $125 million in the fourth quarter. And we now have increased our dividend four times in the last three years. Overall, in 2013 we continued our journey of demonstrating the strength and consistency of our Company.

Moving next to our fourth-quarter corporate results on slide 4, we had a solid fourth quarter with revenue growth in all but one of our segments reflecting solid volume growth. Operating earnings are up as strong growth in the Fibers and Advanced Materials segment was offset by declines in Specialty Fluids & Intermediates and the Adhesives & Plasticizers segments. And EPS increased primarily due to the solid operating earnings as well as a lower tax rate.

On slide 5 our full-year earnings. On a corporate basis revenue increased by 3% in 2013, the primary driver again was volume with increases in all but one segment. Operating earnings increased by over $100 million in 2013 given this higher volume and improved capacity utilization.

And operating margin increased by 70 basis points to 17%. This is our highest full-year operating margin in the last five years reflecting the strength of our portfolio and end market diversity. Now I'll turn it over to Curt who will take you through our segment results and financial highlights.

Thanks, Mark, and good morning, everyone. I will start with Additives & Functional Products on slide 6. For fourth quarter sales revenue increased primarily due to higher sales. Solvents volume increased strongly as demand strengthened in both the durable goods and the building and construction markets.

We also added solvents capacity at our Longview facility at the end of the second quarter to serve the demand growth. In addition, volume increased for cellulosic polymers globally and for Crystex rubber additives, particularly in the Asia, Asia Pacific region. Both attributed to increased demand in the transportation market.

Operating earnings increased slightly as the higher volume was somewhat offset by higher raw material and energy costs, particularly higher propane.

As with the fourth quarter, Full-year 2013 revenue increased primarily due to higher sales volume. Full-year operating earnings increased as the higher volume was somewhat offset by spread compression for anti-degradants sold in the tires market and continued growth spending in the segment.

For 2014 we expect continued volume growth for solvents and cellulosic polymers as demand continues to strengthen in the transportation and building and construction markets. However, a contracted olefin spread will be a headwind for our solvents business.

We also would expect the restock cycle for tires in Asia-Pacific to continue in 2014, but we are not yet projecting a restock cycle for tires in North America or Europe in 2014. Putting this together we expect another year of solid earnings growth in 2014 with earnings between $410 million and $430 million.

Next on slide 7 is Adhesives & Plasticizers. Starting with the fourth quarter, sales revenue and operating earnings declined primarily due to lower selling prices for adhesive product lines and lower sales volume for plasticizers, with operating earnings also be negatively impacted by higher raw material and energy costs.

For the full year revenue and operating earnings declined primarily due to lower prices throughout this segment and lower volume of adhesive resins product lines, with operating earnings also negatively impacted by higher raw material and energy costs.

As we finish the year and start 2014, we are seeing early signs that demand has stabilized. For adhesive resins demand is projected to strengthen as we believe inventory destocking by our customers has concluded. And we're taking actions to reduce costs here including reducing overhead costs required to support the business and reducing operating costs at our Middleburg facility.

In addition, we are moving forward with our joint venture in China to build a low-cost world scale hydrogenated hydrocarbon resin facility which we expect will be online by the end of 2015. For plasticizers we expect better end use demand with our customers telling us the commercial building and construction market is improving.

However, we expect the competitive environment we faced in 2013 to continue in 2014 resulting in continued pressure on pricing. As a result we expect 2014 earnings to be between $150 million and $175 million.

Advanced Materials is on slide 8 and they made good progress in 2013. Fourth-quarter revenue increased due to higher volume for Tritan and higher volume for other copolyesters sold into the packaging market. Operating earnings increased as capacity utilization improved year-over-year leading to lower unit costs.

You also recall that in the fourth quarter of 2012 we were destocking inventory in a few product lines. For the full year revenue increased due to higher volume for Tritan and for interlayers with acoustic properties. Full-year operating earnings increased as capacity utilization was higher for the year and mix improved as we sold more Tritan, V-Kool window film and interlayers with acoustic properties.

For 2014 we expect volumes to increase and mix to continue to improve as we grow our premium branded products. We expect volume for our specialty plastics products sold in the displays market to be flat as demand continues to be soft in the displays market. Taken together we expect earnings to be between $280 million and $300 million, which would be solid results for this segment.

Fibers is on slide 9 and they had another exceptional year; 2013 marks their 10th consecutive year of earnings growth. Full-year sales revenue increased due to higher selling prices in response to higher raw material and energy costs, sales of acetate flake to our China acetate tow joint venture and higher acetate yarn sales volume.

And earnings were higher as the higher selling prices more than offset raw material and energy costs. Looking forward to 2014, we expect this streak of consecutive earnings growth will continue. We expect operating earnings to be between $500 million and $520 million.

I will wrap up the segment discussion with Specialty Fluids & Intermediates on slide 10. In the fourth quarter sales revenue increased slightly as higher volume, particularly for olefin-based products in North America, more than offset a decline in specialty fluids volume due to the timing of customer project completions.

Operating earnings declined as higher raw material and energy costs, particularly for propane, which was up more than 35% year-over-year, with an offset the higher volume for olefin-based products. For full-year 2013 both operating earnings and revenue increased slightly.

Operating earnings increased as the combination of lower raw material and energy costs, particularly propane, along with higher volume of olefin-based products more than offset lower selling prices and lower specialty fluids volume.

Looking forward to 2014, we expect operating earnings to be between $330 million and $370 million. The range reflects the volatility of key raw materials, particularly propane. I'd also remind you that we're expecting revenue from technology licensing in this segment in 2014, which should help negate the impact of all material volatility.

While volumes in specialty fluids are expected to grow, the timing can be impacted quarter by quarter by customer fills, especially in the renewable energy market. But all in all we are expecting solid results from this segment.

On slide 11 I will transition to an overview of our cash flow and other financial highlights for 2013. We did an excellent job of generating cash in 2013 with operating cash flow of $1.3 billion. This is a record for cash flow from operations for us. This level of cash generation reflects solid net earnings and discipline on working capital which was up only slightly year over year.

We also utilized just under $300 million of the $1.5 billion of NOLs we acquired as part of the Solutia transaction. Our free cash flow was $674 million for the year.

Capital expenditures were $483 million, about in line with the guidance we gave you, and dividends were $140 million for the year. I would just ask you to remember that we only had three dividend payments in 2013 since we accelerated the first 2013 dividend payment into the fourth quarter of 2012.

Looking at the balance sheet, we now have repaid the $1.2 billion term loan for the Solutia acquisition, $950 million was repaid in 2013 using a combination of available cash and lower cost borrowing. Our net debt now stands at approximately $4 billion, a reduction of approximately $500 million for the year. And we are solidly within the metrics for an investment grade credit rating with a stable outlook.

Fourth-quarter results were impacted by a mark-to-market gain of $297 million related to our pension and other postretirement benefits. For the year the net gain was $383 million which included an interim remeasurement in the third quarter.

Also in the fourth quarter we had asset impairments and restructuring charges of $52 million. This included charges for the decision to discontinue the Perennial Wood growth initiative. Perennial Wood has had a good response in the marketplace, but we could not get the underlying economics to continue to support this investment.

We expect spending and other for 2014 will decline slightly as a result of this decision offset by increases in spending for other growth initiatives.

Finally, our tax rate for the fourth quarter was 26%; this is lower than our previous expectation as it reflects the positive impact of integrating the Eastman and Solutia tax structures as well as a $14 million benefit of favorable foreign tax audit settlements that occurred late in the year.

For the full year 2013 the tax rate was approximately 28%. We have sharpened our pencils given the continued benefits of the Solutia integration and other business changes and we expect our tax rate for the full-year 2014 to be up only slightly to approximately 29%. And we're continuing to work hard to improve it even further from there.

So this is just great work by Vince, John and the entire tax team as well as those involved with implementing the various initiatives that are required. So with that I will turn it back over to Mark.

Thanks, Curt. I'm on slide 12 to discuss our 2014 outlook. I mentioned earlier that we've grown earnings for four consecutive years; we are confident the 2014 will mark the fifth consecutive year of earnings growth for Eastman.

Our confidence begins with the Eastman specific actions we are taking which we expect will contribute between $0.50 and $0.75 to EPS in 2014. The narrowing of the propane and propylene spread will be a headwind in 2014 likely in the range of $0.30 to $0.40.

Although there is currently economic uncertainty, we are well positioned to benefit from an improving global economy in 2014. And the combination of share repurchases and acquisitions are also expected to contribute to earnings growth.

Bringing all this together we expect EPS to be between $6.70 and $7 a share in 2014. We expect to start out the year slower than we did in 2013 as we face narrower olefin spreads, continued challenges in Adhesives & Plasticizers and then [binding powder] that is associated with certain differentiated product lines like specialty foods.

However, we expect to gain momentum in the second quarter as raw material costs decline, particularly for propane, coatings demand picks up in the building construction and transportation markets and we see normal seasonal improvement in demand across other areas of our business.

In addition, the benefit of the Eastman specific actions we are taking to increase earnings will build during the course of the year. With the next few slides I'll give you some additional detail on the factors impacting EPS in 2014. Beginning with the actions we are taking to grow earnings. We first showed this slide back in October and we remain confident and these actions today.

Regarding the capacity additions the acetate tow JV is at commercial quantities today and both the Tritan and Eastman 168 expansions are expected to be operational later this year. On mix improvement we made good progress with each of these products in 2013 and expect that we will accelerate in 2014.

On technology licensing we expect at least one license in 2014 and expect in the years to come we will have consistent revenue from technology licensing. With acetyl and the technology for the production of MEG from synthesis based feedstocks that we announced in October.

Lastly, on cost synergies from the Solutia acquisition, we ended 2013 at a run rate slightly above $100 million and expect about another $20 million of synergies by the end of 2014. All in we remain confident the Eastman specific actions will add between $0.50 and $0.75 to EPS in 2014.

on slide 14 is a discussion of the expected impact of changes in the olefins spread in 2014 earnings. In the table you can see the average annual prices we have projected for key olefins as we forecasted the impact of narrowing spreads. We are taking actions to offset the narrowing of spreads.

First we are adjusting the ratio of propane and ethane we crack to produce propylene and ethylene from 80% propane and 20% ethane we ran in 2013 to something closer to 70% propane and 30% ethane in 2014. And given the respective prices of propane and ethane this makes economic sense.

As we've indicated previously, we do have an active hedging program and we do have propane hedges in place for 2014 which will mitigate some of the impact of the higher prices. We're also taking actions with pricing to attempt to offset as much of the higher feedstock cost as we can. Propane prices are expected to increase in 2014 over 2013 helping us raise our prices for our propylene derivatives.

Our more substantial challenge is the propane to ethylene. So given the spike in the propane costs here in early 2014, in large part due to the cold weather much of the country is currently experiencing, the respective prices of other olefins and the other actions we are taking to offset the headwinds, we face -- we project a negative impact of $0.30 to $0.40 on EPS.

Next on slide 15 is our leverage to improvement in the global economy. And while there is uncertainty about the pace of global economic growth in 2014, I remain very confident that we benefit from the diversity of our end markets and our geographic exposure and that we have good leverage to improving growth.

On markets you can see that we do not have an end market that represents more than 20% of our total revenue. And as specific markets improve we are well-positioned. So as the transportation market improves we benefit through our tire [routers] and coatings businesses in the Additives & Functional Products segment and Saflex demand in Advanced Materials.

As the building and construction market improves we benefit through the Company, including our coatings and plasticizer businesses. And as the consumer markets improve, including consumer durables and packaging generally, we benefit through our adhesives resins and specialty copolyester businesses.

Looking at geographic regions in 2013, as you can see, the US and Canada represented 46% of our revenue while Asia was our second largest region at 28% and then Europe was at 21%. As the US continues to strengthen we expect to benefit in just about all of our segments.

We'll also benefit as Asia-Pacific and particularly China continues to strengthen from an infrastructure-based investment economy to more of a consumer-based economy since many of our products sold into China go into the more premium goods that consumers in China increasingly want.

As the European economy begins to improve we are leveraged to that in each of our segments. We aren't leveraged to one specific geographic region or to one specific market. As global economic growth improves I think the benefit of our diversity will be clear.

Moving to slide 16, another factor impacting our 2014 earnings was our cash flow and how we deploy it. We delivered strong free cash flow in 2013 and we expect to do that again in 2014.

Operating cash is expected to be at a healthy $1.4 billion. Capital expenditures will be up in 2014 compared with 2013 by about $100 million and above the top of our normal range as we have increased infrastructure spending in Kingsport; including converting two of our boilers to natural gas from coal and we are spending on growth initiatives such as the expansion of Thermo and heat transfer fluids in Wales as well as our Tritan and Eastman 168 plasticizer expansions.

On dividends, we only had three dividend payments in 2013 and we will have the normal four payments in 2014. And the net result is projected free cash flow of about $600 million.

Moving to the next slide, we remain disciplined and balanced in how we deploy the cash. I mentioned capital expenditures on the previous slide. On debt we will continue to optimize our debt structure within our investment-grade rating.

On joint ventures and acquisitions we continue to look at bolt-on acquisitions. For example, earlier this week we announced the acquisition of an aviation turbine oil business from BP. When combined with our Skydrol Aviation fluid the product from this acquisition, which has annual revenues of approximately $100 million and margins above our corporate average, will enable us to better meet the needs of the global aviation industry.

In addition, an acquisition like this provides an opportunity to access the capital markets to continue to take advantage of the attractive debt market. And on stock repurchases and dividends we expect to continue to be active as guided by our Board. In the fourth quarter we spent $125 million of share repurchases and we have continued to make purchases here in January.

For full year 2013 we have purchased 3.2 million shares for $238 million and we expect to continue to repurchase shares to more than offset dilution in 2014. On the dividend, we continue to expect our dividend to increase as our earnings increase.

I conclude on slide 18 with comments about our strategy for delivering consistent superior value. As you can see, we believe the combination of growing the existing portfolio greater than GDP growth rates plus growing beyond the existing portfolio and a balanced approach to capital allocation will create value for all of our stakeholders.

Key levers as we execute this strategy are winning with the customer through innovation and we will bias our SG&A and R&D spending towards innovation going forth, strengthening our competitive position through productivity and leveraging acquisitions to improve the portfolio.

We are also working to reduce our olefins exposure as we continue to pursue options for our excess ethylene and as we grow the current portfolio of businesses into other areas. Although we have challenges to overcome I'm excited about the opportunities that are ahead and the great team we have at Eastman that positions us to succeed. With that I will turn it back to Greg.

Thanks, Mark. We have a lot of people on the line this morning and we'd like to get to as many questions as possible. So please limit yourself to one question and one follow-up. With that, Chris, we are ready for questions.

(Operator Instructions). David Begleiter, Deutsche Bank.

Mark, in your guidance what are you assuming for share buybacks and why weren't you more explicit about buybacks given that the debt -- term loan is repaid and I think you have projected that you would be aggressive on buybacks in 2014?

I'm not exactly shocked that that might be the first question out of the gate. Good question and a fair one. We have been very clear that we have always had a disciplined and balanced approach to capital allocation and we intend to keep it that way.

We are prioritizing all of our investments around our organic growth opportunities and we are very excited about the strength of that portfolio and we will continue to make those investments.

As we clearly noted, we still have free cash flow available after those organic needs and after paying the dividend, so it's a fair question to ask where we are going to go with the capital allocation between sitting on it, which we don't intend to do. We intend to deploy. Or deploying it against M&A and share buybacks.

We are going to take a position where we stay flexible on how much of that we're going to do between M&A and buybacks. We think it's a good discipline to look at both the M&A market and the opportunities they present for creating long-term earnings growth as well as share buy backs. I think it is likely that we're going to buy back shares more than dilution this year, but, as always, that is subject to Board support.

And, Mark, if I could just add, David, just to let you know, we started the year with $160 million remaining on our current authorization. As Mark mentioned, we are continuing to repurchase shares to start the year.

So we know as part of our normal interactions with our Board we will be discussing with them the size and timing of our next authorization. You have heard from us in the past, we have had a great relationship in our Board and they have been fully supportive of that balance and discipline capital allocation strategy that Mark mentioned.

Very good. And, Mark, just on Fibers, given lower raws, higher prices and likely higher volumes, is there upside to your guidance of $520 million on the top end for Fibers in 2014?

Good question, Dave, especially given how we beat our forecast in 2013 from the beginning of the year. We put a lot more effort into trying to get that forecast right this year and thinking through all the elements of price, raws and volume and I think the guidance we've given you is a good one.

Thank you very much.

Kevin McCarthy, Bank of America.

Mark, on slide 14 you outlined some of your input cost assumptions for the year, which is very helpful. You also indicated though that you have some hedges in place.

And so, if I look at the propane level of $1.18 per gallon, is that on a market price basis? And perhaps you could comment on how hedges helped you or hurt you in the fourth quarter and what your expectations are for 1Q given some of the distortions related to the so-called polar vortex?

Yes, so I am going to answer the first half of that question around our view of prices and I'm going to let Curt handle the hedging question. With regards to our view on prices, the $1.18 is based on the forward market curve that we see that is available in the market.

So the other prices like propylene, etc., naphthalene are based on IHA's, but that is it forward curve for the market as of two days ago. In regards to hedging, we do have a very active hedging program where we try and mitigate a material amount of our exposure on propane and I will let Curt add some more comments there.

Yes. As Mark mentioned we do -- you know, Kevin, we have an active hedging program across commodities, currencies and even interest rates. On the raw material side we primarily hedge propane, ethane and natural gas. Traditionally we have hedged to provide some seasonal spike protection such as the winter or hurricane season. And to provide time for our businesses to kind of respond with the appropriate pricing that is needed with that input cost.

Given the trends that we have seen the last six months we've actually gone -- traditionally I would say we would have hedged out six months. We actually are now going beyond that timeframe. And we might even find ourselves hedging one to two years out to given some of the volatility that is out there.

As I look about fourth quarter normally we would have put a healthy level of spike protection into that. As you know, propane moved pretty quickly in that August/September frame. So I probably didn't get as much in there as I would have preferred. And some of that has continued in the first quarter.

But we do have a healthy level of hedging protection that helped us in fourth quarter, will continue to help us in the first quarter but more importantly will help us in the year at hitting that guidance that we provided.

Okay and then a second question if I may. Mark, you put out an Adhesives & Plasticizers earnings range of $150 million to $175 million or so? Can you talk about your level of confidence in that range?

If I look back at 2009, the credit crisis here, I think you had a 12.8% margin. Do you think that could prove to be a durable low or are there factors you are seeing that could create a little bit more risk on the downside?

Great question. And we certainly are paying a lot of attention to the Adhesives & Plasticizer business and doing what we can to improve it, Kevin.

Right now what we'd say is indications are the business is stabilizing. I think from a volume point of view in adhesives -- we were sequentially flat in the fourth quarter and actually stronger on a year-over-year basis. And as we look at 2014 over 2013 we expect demand to improve.

The destocking appears to be over so we don't have that as a headwind in this year. Hydrogenated demand is still quite solid with -- especially with hygiene demand. And I think it is fair to assume given the overall global economy that packaging demand is going to improve but it is unclear exactly how much. And that is one of the key issues is getting that demand to improve to suck up some of the excess capacity in Asia in particular.

The key uncertainty for us is really competitive behavior. So there are two elements to that, as we explained in past calls. One is the substitute material which is rosins verses our hydrocarbon resins, the prices have gone up a lot as we talked about in the third-quarter call and they have stayed up relatively high.

So that is reducing the amount of substitution toward rosins from hydrocarbon resins which is helpful. And those prices are likely to at least stay high for the first half of the year. There is uncertainty about what the rosin crop will be this year and how that will impact prices in the back half of the year.

The more significant issue is just what happens on the like competitors and hydrocarbon capacity and there's still certainly adequate supply in the market to serve demand. So we don't see a lot of spread recovery.

But if spreads hold and demand improves then you can see how this business would start stabilizing. And even if demand improves we have some room for some spread erosion to hit the low end of the guidance on the adhesive side.

Plasticizers is a pretty similar story, we see demand recovering in North America with BNC especially in flooring so that is going to help this year, which was certainly not there last year. And the non-phthalate substitution is expected to continue. We had very strong growth in our non-phthalate 168 plasticizers, and that volume growth will be there.

So I think we feel good about the volume side in plasticizers, and then you are just back to the same conversations with adhesives, which is what is going to be competitive behavior as excess capacity, in particular Asia, is chasing demand in Europe and the US because China demand has been relatively slow to grow last year and clearly uncertain this year based on all the press.

But again, you have got very strong volume growth to absorb some spread compression if it happens or if it doesn't happen, then you go towards the higher end of that range.

Okay, thank you very much.

Oh, Kevin, one other thing I would note is we are not just sitting here waiting for the world to get better. We are taking a number of actions to improve this business. So we are taking a hard look and reducing some costs in SG&A and R&D. We've got a great project in our Middleburg site that is going to improve the cost position of the plant in the late half of the year.

And we are very excited about the plant we are building with our joint venture partner in China. which we expect to be online in late 2015, which will be by far the world-class low-cost plant in the world to serve the hydrogenated resin market where we have a more differentiated position. So there are other things that we have going on that improve this business versus just waiting for supply/demand to get better.

I appreciate the color.

Robert Koort, Goldman Sachs.

It is actually Brian Maguire on for Bob today. Just back to slide 14, just as we -- I really appreciate the color on the 2014 impact from narrowing olefin spreads. But as we just think about the first-quarter impact just to help us with the modeling, I think that is where you are going to see the bulk of the impact. Is it going to be about half of that full-year number, or anything to kind of figure out the cadence of that $0.30 to $0.40 impact?

This is Curt. Our strategy here is to give you inputs on what is coming into our full-year guidance. We are not going to sit and try to break down that component quarter by quarter. But you can do the math off where that forward curve is and can expect a good portion of that headwind is going to be in first quarter.

Okay, and have you already shifted your olefins units to 70% propane today? And if so, does that mean that you have to buy a little bit more propylene from the merchant market?

We have shifted the assets over to that mix and are pushing it as hard as we possibly can. And it doesn't have any material impact on our need to buy propylene.

Okay, thanks very much.

Frank Mitsch, Wells Fargo Securities.

Obviously very strong volumes in Q4. Can you talk about where you stand on your capacity utilization? Obviously you've got some expansions going on in the Tritan and the plasticizers, etc. Where do you stand there and what should we expect in terms of overall capacity on a percentage basis additions in 2014 and what your utilization may be?

Sure. I think that utilization as we looked at 2013 was certainly relatively high across the Company. And we expect the utilization to continue to be high and higher in 2014 as demand improves.

It is important to keep in mind that looking at absolute utilizations is a little deceptive with Eastman because we have a mixture and flexibility of our integrated assets where we can always run the big engines and the big parts of our capacity quite high in selling off some of the intermediate products.

And then what we focus on doing is growing the higher value specialty products as fast as we can that shifts the utilization toward those higher value products improving the mix in our business.

And on the specialty products, in a lot of the areas we still have plenty of capacity and room for growth in that leverage on those assets. So in performance films we have that, in interlayers, both inside Advanced Materials, we have that leverage, and in copolyesters we certainly have that leverage as well.

Obviously in some places we are tight like Tritan and that is why we are adding capacity, or in Therminol where we are adding capacity. So we have got the room to support growth, we have had some great capacity additions that allowed us to grow that we brought online in the fall like the China JV in tow, the ethylene oxide derivative capacity expansion we did for Additives & Functional Products that allowed us to accelerate growth and will support growth this year.

So the key part of understanding our earnings is that it's not just about volume growth, you get misled if you just look at the top-line revenue. It is about substantial mix improvement given the high-value products were growing much faster than some of the intermediates.

Is it fair to say that given the volume growth that you are seeing in your businesses that pricing is definitely going to follow?

I think we feel good about our pricing strength in most markets right now. It is always subject to what competitors are doing. Adhesives & Plasticizers is the one place where we obviously have some challenges. But otherwise we feel pretty good.

All right, great. And then lastly, speaking of how you are feeling. How are you feeling about $8 in 2015?

I'm surprised it took this long to get to this question. I knew I could count on you, Frank. So $8 a share. We remain committed to driving towards $8 a share in 2015. From an organic perspective clearly we are going to have some challenges in reaching that number.

If you go back to Investor Day guidance and look at the earnings that we provided for each of the segments at that time, our largest problem obviously is Adhesives & Plasticizers and we just had a discussion around some of the challenges there and getting it to stabilize and improve. But that has been a big hit as we have already advised in the past.

But the strength of our portfolio also shows up here and why we like the diversity of our portfolio, because you can also see that Fibers is significantly outperforming what we would have guided at Investor Day offsetting a good portion of the hit we have taken in Adhesives & Plasticizers.

And that is always part of that diversity; you have a view on things at one point in time but the world never sort of cooperates, some things do better, some things do worse. But the value of that diversity continues to deliver consistent earnings growth.

The second part about our organic challenge, obviously at Investor Day we assumed about a 3.5% global GDP compounded from 2012 to 2015 and that has certainly not worked out in 2013 and 2014. I think we see that the world may strengthen here and hopefully it will help, but that is a bit of a headwind especially in Europe with some of our businesses that are focused on building construction and transportation.

And at a lower level I would say actually relative to those two things is the cracking spreads being a headwind. They are certainly a headwind from a 2013 to 2014 point of view. But if you go back to our view of the world in 2012, we had a bit of a different view.

And the propane to propylene spreads aren't all that different today than what we would have assumed in 2012. The real challenge we have is actually propane to ethylene where both ethylene and ethane prices today are much lower than where we were in 2012 and our expectations.

And that is a bit of the challenge that we feel on that side of it. And we do have hedging and pricing and other things that we follow to address some of those cracking spread challenges.

So those are some of the challenges. Now we are not just sitting here with that; we're thinking about how we pull every lever we have got in the Company to improve our performance and deliver. As we noted, we have a bunch of specific actions we're taking in 2014 to get to the $0.50 to $0.75.

In addition, we will also taking a variety of cost actions to improve the Adhesives & Plasticizers business and we're developing a fairly robust set of ideas for 2015 that we will do that we will talk to you about later in the year.

The other thing that is important to note that we can go back to what Dave asked about at the beginning of the Q&A is that we do have an extremely strong cash flow and balance sheet. We have one of the highest EBITDA margins of our peer set. And so, that gives us strength and flexibility to find additional ways to grow earnings beyond organic growth and we certainly intend to do that.

As I said, we're going to be balanced and disciplined in this approach, we are not going to get focused on any one lever as a solution. Our job is to create both short- and long-term value creation consistent earnings over the years. And so we need to be measured and careful about how we make the decision between acquisition and M&A -- I mean acquisitions and repurchase.

I think we have demonstrated that were willing to do that. Even in the last quarter we started buying back some shares and beyond dilution and we did an acquisition as well that is going to be a great addition to our SFI business. So I feel very good that we are in a good position here, we have delivered four very strong earnings growth years.

I think we are well positioned to deliver another earnings growth year this year and next year. And if you look at that and think about how many companies in the S&P have delivered sort of six years of continuous growth I think we are doing relatively well compared to that group.

And it all comes back to the strength of our portfolio. We have got leading positions in many of our businesses, we've got strong diversity in our end markets in geographies, we have got world-class technology platforms and we have the cash. So we feel good about driving towards that number, we are not letting go of that as our goal.

Excellent synopsis. Thank you so much, Mark.

Vincent Andrews, Morgan Stanley.

If we take sort of the hypothetical situation where you've got your $600 million of free cash flow this year, now let's say there is an M&A opportunity that comes along that would require the entire use of that $600 million. How will you sort of examine and make the decision between M&A and share repurchases? What things would be important to analyze for you to make the decision to go one way or the other?

It's a great question and it is one that we are constantly debating and trying to think about what are always the best things to do for our shareholders. As I noted in my prepared remarks, there is a debt market out there as well, so it's not just what do we do with our free cash flow. So we'll look at using and exploiting the debt market, especially how attractive it is right now as part of funding M&A as we go forward.

But the trade offs are trying to think through the timing. We look at a robust portfolio of M&A ideas that we have and we are continuing to revise and look at those. Obviously valuations are a bit high in a lot of opportunities right now, so we need to make sure that we continue to be disciplined and not overpay in chasing M&A ideas.

The accretion is important and it's easy to get with cash today, but we need to make sure there's a good ROC above the cost of capital. So we are not going to let go of our discipline. But there are ideas that we think are important to consider and that then factors into how much stock you want to repurchase this year and be balanced about that.

And I think we've got an authorization that allows us to continue to take out dilution this year and think about doing more than dilution on a limited basis and we are going to continue to make decisions with ourselves and our Board about what we should do going beyond that.

Okay, thanks very much.

Laurence Alexander, Jeffries.

Two quick questions, first on pricing. Can you give an update on the pricing negotiations or settlements for Saflex and the acetate tow business? And also just on the volume trends in Q4, were there any areas where you think you might've seen any significant pre-buying that also affects the bridge into the first half of 2014?

A great set of questions. First on the pricing, I think with the Fibers guidance we gave you we were successful in getting what we wanted on pricing and think we're going to have a good volume year there. So those contracts discussions were successful.

With the Saflex business I would also say we had a successful contracting season with our glass customers in succeeding and improving our position in the marketplace for price and volumes, we feel good about that business as well.

In regards to pre-buying we didn't see that much of it, I was actually concerned we would see quite a bit of pre-buying on the propylene side because propylene prices started moving up ahead of January in December, but it wasn't as much as we expected and I think we did a pretty good job of controlling that.

Thank you.

P.J. Juvekar, Citi.

There was a lot of discussion on propane. But can you talk about propylene and what specific actions are you taking in pricing on propylene derivatives? I think there was an OXO price increase announced. Are you getting any traction on the pricing side?

The propylene side certainly has gone up, as you know, already in December and in January and I think the expectation is for a modest increase in propylene prices for February as well, we will have to see how that plays out.

But overall I would say on average we expect propylene prices to be somewhat higher this year than last year and there's always the wildcard of unplanned outages that have a big impact on that story that obviously none of us can predict.

In regards to the pricing, we have rolled out multiple price increases here in January and for February and we are getting good traction and getting a good portion of those price increases to stick both in the solvents and Additives & Functional Products and the propylene derivatives and SFI.

Okay, thank you. And then you mentioned rosin supply earlier. Can you just talk about what are your expectations for rosin supply in China in 2014 as that seems to be impacting and giving -- I mean some pricing pressure? And then secondly, just (inaudible) is there a business you want to be in the long-term? Thank you.

In regards to rosin prices, you said rosin pricing I think. In regards to rosin pricing it went up significantly in the fall and it is staying up and it is expected to come off to some degree when the new crop arrives. The question is does it go all the way back to 2013 first half levels or does it go back to a more normal level which would have been higher than the beginning half of 2013 and most expectations is that middle ground.

So the good news about that is if it stays where it is at and only comes off a limited amount the substitution of losing demand from hydrocarbons to rosins is probably mitigated and not as much of a head wind as it was last year.

In regards to what the crop will be and how prices will be impacted in the second half of the year, we don't know. When prices are high more people tend to climb up the hill and seek rosin out of trees in China and it is a bit of a wildcard to predict what is going to happen on that front. So we will just have to see how it plays out.

In regards to the business, it is a fair question. I think that if you look at our history, Eastman has always been very disciplined about its portfolio and looking at vesting in great specialty businesses and continuing our journey of being a specialty company and exiting some businesses that were underperforming in that transition. And we do have a good track record.

I wouldn't say Adhesives & Plasticizers is yet in that discussion set. It is a good business; we have had one year of tough times and we need to let things play out a little bit here to see how it either recovers or it doesn't. At its current level though it is still a very value creating business.

At its current earnings level even for 2013 or 2014 given our guidance it is still creating value above our cost of capital in a meaningful way. And so we are going to continue to invest in it this year and fixing it and making it more cost competitive, see how things go and then we will make the appropriate decisions in the future if necessary.

Thank you, that is good. Thank you very much.

Jeff Zekauskas, JPMorgan.

In that $0.30 to $0.40 compression from commodities, does that include the benefits of your hedges or is that exclusive of the benefit of your hedges?

Jeff, it includes the benefit of the hedges.

As well as our pricing actions that we might take.

A lot of people are doing this math just doing how much propane we buy times the cost of propane and obviously it is hard to know exactly what our hedges are. But the hedges are in there, but you also remember, pricing actions are also in there. And we have a lot of good products that use propane in specialty derivatives where we have some pricing power. And so we use that to offset headwinds like this.

And then you spoke about changing your mix from I guess 80% propane to 70% propane. Where are you getting the extra ethane from or is your ethane supply now different than it was previously? Because presumably you could have done this years ago if you chose. What is different?

Well, Jeff, what is different is it is not necessarily the supply of propane or ethane, it is more of the front end part of our cracking operations. And so you had to make modifications to enable that mix change. And I can guarantee the guys are continuing to look for more ways to have more flexibility with the options of the feedstocks that we crack.

If you go back to years ago propane wasn't disadvantaged stock relative to ethane. So you had a different mix balance in how you created value between propylene and ethylene. Now we're in this world where ethane is so substantially lower than propane it has changed how we think about that and we have been making investments and creating more flexibility in our crackers.

Okay. And if I can just make a request, in your financial statements you don't itemize the effect that your pension gains have on your cost of goods sold or R&D or SG&A, at least as I read them. And it makes it very difficult to know what your cost of goods sold or SG&A or R&D actually is and to compare it year over year.

And if you look at the disclosures of Dow and some of the other companies, they itemize that. And so if it is possible it would be helpful if you guys did that as well.

Jeff, thanks for the feedback and I can guarantee our top-notch SEC and reporting group is listening so they will come up with good ways to help you out.

Okay, thank you very much.

Mike Sison, KeyBanc.

Hey, guys, nice end to the year there. Mark, in terms of the tire additives business, with your outlook for 2014 particularly North America and Europe, it sounds like if I did the math it is going to be several years in a row of that business struggling.

Maybe just some top-down thoughts -- do you still like the business? Is there potential for this business to grow longer-term, just kind of a thought of how that business is coming along for you?

Certainly the tire business is one we like. It is a great market, it has certainly gone through some very difficult demand challenges at the primary demand level over the last couple years because I think the tire manufacturers had overproduced and loaded the channel with more inventory than needed and it took a long time to sort of destock it back to demand.

When we look at 2014 -- 2013, by the way, was actually a decent improvement in demand for us for both Crystex and anti-degradants. And we expect 2014 to be another solid volume growth year for us in tires. The Crystex business, which is the majority of the earnings, is a very solid business, very attractive margins and we're making a lot of investments to continue to grow and innovate in that space.

The biggest headwind we had overall for the entire Additives & Functional Products segments was the anti-degradants facing a lot of competitive pressure that is a small part of the earnings but it was immaterial earnings headwind. As we continue to struggle with prices and benzene prices -- or struggle to improve market prices in our run material cost and been seen when up considerably. So that is one we are taking actions to try and improve.

But the overall business we like. And importantly, it's not just about the products we bought from Solutia, we have some great innovation programs going on leveraging Eastman asset and technologies into this space. And we are getting great traction with the customers in that space. So we see great growth opportunities for cellulose esters being used in tires to improve traction and wear of the tires and getting great feedback from our customers on that.

We're also finding very strong interest in our hydrocarbon resins that we sell through the adhesive segment. We also sell them into the tire segment and see great growth opportunities there. They're moving from using resins is a process aid into a functional additive for the tread and performance for traction in the tire.

There's a lot of innovation going on in that area and we are the leader in providing technical innovation in that area because of the breadth and depth of our technical expertise in hydrocarbon resins. So there is a lot going on there, we like the segment and we're going to continue investing.

Okay. And real quick on the heat transfer fluids business, you have added a nice asset there with the BP business it sounds like. Can you talk a little bit about that? And maybe is this sort of another growth business for you to do more acquisitions and it has always been a good business for Solutia, could be sort of the next platform for you to continue to grow on?

The BP business is a great high-margin attractive stable business, they have got greater than GDP growth rates to it. And importantly it is a great fit with our Skydrol hydraulic fluid business. The two are often sold as a package by our competitor into the marketplace and now this significantly improves our competitive positioning in what we can offer to the marketplace as well.

So, we view this as a great business and a great market. So whether there is additional acquisitions or not, that is something we will continue looking for. But right now we are just going to focus on integrating this one well.

And Mike I might also add from a financial perspective this is the kind of deal we like as well, it has got an attractive ROIC, it is going to be accretive in 2014. It is going to be -- when you include synergies in 2015 it is going to be high-single-digit kind of accretion. So a really nice strategic and financial deal and we really look forward to working with BP to close this deal out.

Single-digit EPS is what you said.

Single-digit EPS just to be clear, yes.

All right, thanks, guys.

John Roberts, UBS.

Are your discussions to sell part of your cracker capacity on hold until after the pipeline issues are resolved?

This is Curt. As you recall, we are exploring options for monetizing our excess ethylene position. And as we previously stated, there are various contractuals and other complexities that are involved in the process.

In July of 2012 Eastman initiated a challenge before the Texas Railroad Commission to -- because of the change made by Westlake to the tariff for its Longview-Mont Belvieu common carrier ethylene pipeline.

Just to give an update, on January 7 the Texas Railroad Commission actually ruled it had the authority to hear Eastman's entire challenge of the Westlake July 2013 tariff change to the common carrier pipeline. And if you recall that was affecting rate by directional flow and swaps.

So on the same day the case hearings officer then put Westlake's July tariff change on hold pending resolution of Eastman's challenge. So we are hoping to have a hearing in the next two to three months and remain confident in our challenge to Westlake's proposed tariff. We feel good with our position.

But to your -- on the question itself, yes, we are still exploring options with various parties but until this matter is resolved it is going to take us a while to get this thing concluded.

And as a follow-up here, Westlake has a project to convert its propane cracker to ethane, their capital cost I think is like $140 million. Could we prorate at a crusher capacity to get an estimate of what it cost to convert your facilities?

I think you have to look at different cracker operations, the scale of our operations because there are different types of crackers, quite honestly.

Yes, I wouldn't do that because all these crackers are very different beasts.

Okay, thank you.

Nils Wallin, CLSA.

I was interested in your choice not to pursue the Perennial Wood initiative. Would you give us some color as to -- I know you said the economics weren't favorable, but would you give us some color as to what you saw specifically? Was the market not as big, was it too -- did it cost too much to produce? And then given that you are not pursuing it what type of benefits should we see from the freed up investment?

Yes, Perennial Wood is probably one of the most frustrating growth platforms I have had to manage in that it was extremely successful from a market point of view but economically not viable. So the market, love the product, we had great interest and strong adoption building in the marketplace and it was performing well.

But when it really came down to understanding the economics from the price of the raw material to deliver the quality that the market wanted and the yield of the process the economics were just challenged and it was going to take too long to get to meaningful earnings for our shareholders to continue the [venture]. So long-term maybe we could have got there, but it just was going to take too long.

As it relates to your question around does the impact on that other segment where it reflects our investments, I think of the number as about $74 million investment or loss, however you want to characterize it, in 2013. The impact of this is probably $5 million to $10 million net of some of the other growth investments we are making. And that number will range based on how successful we are with the speed of those other initiatives.

One of the challenges we have is making sure that we always devote our R&D and SG&A efforts to the best growth portfolio. And we have a very robust growth portfolio right now, and so we are shifting a bunch of these resources to higher value opportunities.

Understood. And then another ethylene question. I believe in 2013 you had locked in maybe 50% of your margins on the ethylene side. Did that hurt you at all this year? And are you going to do the same thing next year or choose to not lock in those margins?

So, as it relates to 2013 I would say what I would do is actually probably a slight hurt. But what it actually did is smoothed out the earnings profile associated with that revenue during the course of the year. As it relates to 2014 we do not have that kind of had in place.

Thanks very much.

Let's make the next question the last one please.

James Sheehan, SunTrust.

Just wondering if you could quantify the impact in 2014 from the technology licensing?

We have not provided that. We are still in negotiations with different parties on different licensing. But it is a component of that $0.50 to $0.75 and we will let you know more as we are successful with that effort.

Great, thank you very much.

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 AM. Have a great day.

And this concludes today's presentation. Thank you all for joining and have a great day.