伊士曼化學 (EMN) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company first-quarter 2014 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website at www.Eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Investor Relations. Please go ahead, sir.

Thank you, Augusta, and good morning, everyone. 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 begin I'll cover three 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 2014 financial results news release, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2013 and the Form 10-Q to be filed for first quarter 2014.

Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core or non-recurring 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 2014 financial results news release, which can be found at Eastman.com in the Investors section. Projections of future earnings in the presentation also exclude such items as described in the first-quarter news release.

Lastly, we've posted the slides for accompanying our remarks for this morning's call on our website in the Presentations and Events section. With that, I'll turn the call over to Mark.

Good morning, and thanks for joining us. It's good to be here, emerging into the spring and putting the winter behind us. I'd like to begin on slide 3, and we'll hit some of the highlights from the first quarter. Business results from the first quarter were as expected, and we feel good about our expected performance for the full year. The Eastman-specific actions which we expect to contribute $0.50 to $0.75 of earnings per share growth in 2014 are on track.

Some examples include mix improvements in Advanced Materials where products like Tritan copolyester and premium acoustic interlayers bring up a larger percentage of our revenue in the first quarter. Our acetate joint venture in China is also producing commercial quantities. And we continue to benefit from synergies related to Solutia acquisition. Another Solutia-related synergy is the progress we continue to make on our corporate tax rate this quarter -- bringing the rate down to 28%, and with the potential for it to go lower. As a comparison, for the full year of 2010, our effective tax rate was 34%.

We also continue to be disciplined in how we deploy capital. During the quarter, we announced two bolt-on acquisitions, which are complementary to our existing fluids and performance films businesses and will help us grow profitably. And I'll talk more about those later.

And our Board authorized us to repurchase another $1 billion of shares. And with $260 million for share repurchase in the quarter, we have begun using this authorization after completing the previous $300-million authorization. This authorization further reinforces the Board's commitment to returning cash to shareholders and its confidence in our ability to deliver consistent superior value.

Finally, Eastman was recognized by the EPA with a 2014 Energy Star Partner of the Year Sustained Excellence Award. This is the third consecutive year Eastman has been recognized as an Energy Star Partner of the Year. And we are the only chemical company to have won three Energy Star Awards. This recognition is a great win for us on two fronts, as it represents both our commitment to improving the environment through energy conservation, as well as our ability to reduce energy costs through smart management, innovative sustainable solutions, and ongoing productivity improvement.

On slide 4, I'll review our first-quarter results. As we indicated back in January, we expected to start out the year a bit slower than we did in 2013, due to factors such as narrowing olefin spreads and customer-buying patterns for certain product lines like specialty fluids, fibers, and performance films, and our results are consistent with that guidance. Sales revenue was essentially flat, as volume growth in coatings, advanced material premium product lines, and adhesives and plasticizers was offset by lower volume in specialty fluids, performance films, and rubber additives.

Operating earnings declined by about 5%, with higher propane costs being a significant headwind this quarter, particularly for Specialty Fluids and Intermediates segment, and also impacting our Additives and Functional Products, and Adhesives and Plasticizers segments. Another factor that impacted our results in the first quarter was weak demand in China, particularly for solvents, tires, and plasticizer product lines, where we see slowing China growth results in increased composition in the North American and European markets. While longer term we remain very positive on China and their shift towards a more consumer-based economy, near term this transition is clearly challenged.

Earnings per share was about flat year over year as lower operating earnings was offset by a lower share count, stronger other income, lower interest expense, and a lower tax rate. And this result is consistent with our strategy of using all lines of the income statement to deliver EPS growth.

Now I'll turn it over to Curt to review the segment results and our cash generation.

Thanks, Mark, and good morning, everyone. I'll begin on slide 5 with the review of the Additives and Functional Products segments.

Sales and revenue increased slightly, as higher sales volumes for coatings more than offset lower sales volumes for rubber additives. The higher sales volumes for coatings was primarily attributed to strong demand in both the building and construction, and transportation end markets. The lower sales volume for rubber additives was primarily attributed to customer destocking in Asia Pacific, which we believe is now behind us, and we look forward to volume growth in this business for the balance of 2014.

Operating earnings were down $4 million, as propane prices were roughly 55% higher year over year. Looking forward, we expect strengthening in band in the coatings and tires markets generally will be a benefit; however higher year-over-year propane costs will continue to be the challenge carrying into the second quarter, though we expect these higher costs will not be a factor in the second half of the year.

In addition, we are investing roughly $10 million in our tire business for the year. This is primarily to support enhancements in the technology for our market-leading Crystex product line, and we expect this investment to begin ramping up in the second quarter.

And we are seeing increasing competition for solvents, primarily due to the impact of economic weakness in China. As a result, we expect -- continue to expect operating earnings will be between $410 million and $430 million for the year.

Adhesives and Plasticizers is next on slide 6. Year-over-year revenue was flat as tire volume was offset by lower selling prices, volume increase for adhesive resins as the hygiene and packaging markets strengthened, and in the year-ago quarter there was customer inventory destocking. Pricing declined for both adhesives, resins, and plasticizers due to increased competitive pressures. Operating earnings declined slightly year over year, with lower selling prices and higher propane costs offsetting lower operating costs and volume growth.

Given the challenge that Adhesives and Plasticizers experienced in 2013, I thought I would provide some sequential comments for this segment. Sequentially, revenue increased more than 7%, with volume gains in adhesives and resins, driven by a competitor outage and some seasonality, and volume gains in plasticizers, due to continued substitution of phthalate plasticizers with non-phthalate plasticizers and seasonality. Operating earnings increased sequentially, primarily due to the volume growth in adhesives resins.

Looking at the full year 2014, we expect end markets including hygiene, packaging, and buildings and construction, to have stronger demand. However, we do not expect the competitor outages that occurred earlier part of the year to continue into the second half. We are also expecting increased competition from adhesives resins capacity being added by a competitor. As a result, we continue to expect Adhesives and Plasticizers earnings to be between $150 million and $175 million for the year.

Moving next to Advanced Materials on slide 7, revenue was relatively unchanged while operating earnings increased. For revenue, higher sales volume for Tritan copolyesters and premium acoustic interlayers was offset by lower performance films volume due to a planned change in customer incentive terms in Asia Pacific, shifting volume to third and fourth quarters -- I'm sorry, second and third quarters.

The increase in operating earnings was primarily due to lower unit costs for specially copolyesters resulting from higher capacity utilization, partially offset by lower volume and lower capacity utilization in performance films. Additionally, product mix improvements continue to be a source of earnings growth for this segment. And that was reflected in this quarter's results with the previously noted growth in Tritan and premium acoustic interlayers.

Looking at the full year, we continue to expect volumes to increase and product mix to improve as we grow our premium-branded products including Tritan, premium acoustic interlayers, and performance films. As a result, we expect earnings to be between $280 million and $300 million, which would be strong growth.

Next up is Fibers on slide 8. Sales revenue increased as higher selling prices were partially offset by lower sales volume. The lower volume was primarily in acetate tow due to customer buying patterns and additional industry capacity, including our joint venture with China National Tobacco Corporation, which is now producing commercial quantities. This was partially offset by acetate flake sales volume to the joint venture.

We anticipate buying patterns for acetate tow will return to more normal levels beginning in the second quarter. Operating earnings increased as the higher selling prices and the sales of flake to the JV, were partially offset by the lower acetate tow volume. For the full year, Fibers is on track for operating earnings between $500 million and $520 million.

I'll finish up the segment reviews with Specialty Fluids and Intermediates on slide 9. Sales revenue decreased primarily due to lower volume, which was mostly offset by higher prices. The lower sales volume was in both specialty fluids and other intermediates. The lower sales volume in specialty fluids was primarily due to the timing of customer project completions. The higher selling prices were primarily due to more sales of higher-priced specialty fluids and higher raw material and energy costs.

Operating earnings declined due to higher raw material and energy costs, lower volume, and cost of a weather-related outage at our Longview, Texas, facility. For the Company, the weather-related outage in Longview had about an $8-million negative impact on the first quarters. And there'll be a smaller impact that will carry into the second quarter.

Looking at the full year, we expect higher raw material and energy costs will continue to be a challenge. We also expect some of our license activities to be completed in 2015 as opposed to during 2014.

And we're expecting specialty fluids volumes to be down for the year as the slowdown in China negatively impacts the rate of construction for new chemical plants. As a result, we are expecting operating earnings will likely be towards the lower end of the range of $330 million to $370 million that we provided in January.

On slide 10, I'll cover some of our other financial highlights for the quarter. We used operating cash of $30 million in the first quarter, which was in line with our expectations. Net earnings were solid, and we had our normal seasonal working capital increase for receivables and inventory.

Moving to free cash flow, you see it was a negative $205 million and at what is, typically, our seasonally lowest quarter for the free cash flow. Capital expenditures at $122 million is in line with our expectation for full-year [2004] capital expenditures of approximately $600 million. And when we paid our dividend, which was $53 million in the quarter. We also repurchased $260 million in outstanding shares during the first quarter, completing our prior authorization and using approximately $100 million of the new $1-billion authorization announced in February.

With our first-quarter results, we are on track for the full-year free cash flow of approximately $600 million. I would note this expectation does not include the cash impact of any acquisition-related costs.

Lastly, our tax rate for the first quarter was just over 28%, a nice improvement over our previous guidance, reflecting continuing benefits from the integration of Eastman and Solutia business operations, and our underlining legal entity structures. We currently expect our tax rate for the full year to be approximately 28%. We are continuing our efforts with Solutia integration, which could possibly result in a slightly lower effective tax rate going forward. Further, the effective tax rate excludes the benefits of any tax extenders in 2014, should our legislators be kind enough to extend them in this calendar year.

With that, I'll turn it back over to Mark.

Thanks, Curt. I'm on slide 11 to discuss our full-year 2014 outlook. Our first-quarter earnings were a solid start to the year, putting us on track to meet our previous expectations. We continue to expect that Eastman-specific actions will contribute $0.50 to $0.75 for the year. As we previously guided, the benefits of these actions should increase over the course of the year and be more significant in the second half.

We also haven't seen anything that changes our view on the impact of narrowing olefin spreads on 2014 earnings. We still expect to be between $0.30 and $0.40, with more of the impact on the first half, given how high propane prices were at the beginning of the year.

We started out the year with flat revenue, and we expect global economic growth to be lackluster this year. However, second-quarter revenues started out very strong. And with that and the expectations that we'll gain momentum this year, our revenue growth for the full year should be consistent with global GDP growth. We see economic growth improve globally from where it is now, and particularly in end markets such as transportation, building construction, and consumables, we have leveraged to that growth.

We will continue to benefit from a disciplined approach to capital allocation, including share repurchases and bolt-on acquisitions we have announced. As a result, we continue to expect 2014 EPS to be between $6.70 and $7 per share.

Turning next to slide 12, we remain committed to our strategy of delivering consistent earnings growth from a portfolio of specialty businesses that we will grow through both organic efforts and acquisitions. At the heart of our strategy is sustaining our earnings and growth in our core businesses that provides cash flow to deliver consistent growth. With two-thirds of our sales revenue coming from product lines where we have a number one or two position, we are well positioned to lead in these markets, including how we continue to innovate and win with our customers.

Our growth in Tritan, premium acoustics, are great examples of this success. At the foundation of our success is our world-class technologies and the integrated nature of our streams, which gives us an advantage. We are well positioned to leverage our world-class technology platforms in cellulosics, polyesters, olefins, and PVB into new applications as we address global macro trends such as energy efficiency in emerging class and a move towards increased health and wellness.

We're seeing great promise in several of our top organic-growth platforms such as micro fibers, cellulosics for tires, and polyesters for coatings. Further, our significant stream integration not only gives us a cost advantage, but enables flexibility in how we manage our portfolio deflects where we can have the highest margins.

The expectations we have for this year and beyond indicate that we're making great progress implementing this strategy, which should enable us to drive growth above GDP in the long term, while maintaining our industry average margins -- industry above-average margins. And, more importantly, this strategy delivers very strong free cash flow and enables us to continue our balanced approach to capital allocation to create shareholder value.

On slide 13 is an overview of the bolt-on acquisitions we announced during this quarter. Starting with the BP Aviation Turbine Engine Oil business, we expect this acquisition will close in the second quarter and will be slightly accretive to 2014 earnings, with high single-digit EPS accretion in 2015. Results from this acquisition will be reported in the Specialty Fluids and Intermediates segment, and 2013 annual revenues were approximately $100 million.

With this acquisition, we will gain a growing and nicely profitable business that aligns well with our existing Skydrol Aviation Fluids business. As a result, we'll be better able to meet the needs of the global aviation industry, which we expect will result in growth above GDP.

Next is Commonwealth Laminating and Coating, or CLC. We expect this acquisition will close during the second half of the year and will be accretive in the first full year after close. Results from this acquisition will be reported in Advanced Materials segment and, as with the BP acquisition, 2013 revenues were approximately $100 million annually.

With this acquisition, we will extend our performance films global product offerings for solar control window film, and protective film applications, expanding our portfolio and our customer base. We also gain efficiencies through better utilization of our manufacturing assets. These acquisitions are examples of Eastman deploying capital to businesses where we have a leadership position in order to strengthen that position and accelerate growth. And we are very confident that the returns from these acquisitions will be consistent with our expectation of value creating spread above the cost of capital.

Next is capital allocation on slide 14. And in the first quarter we continue to demonstrate our commitment to disciplined capital allocation. Starting with capital expenditures, we are on track for approximately $600 million in 2014. We are spending on specialty products that will contribute to earnings growth this year, such as Tritan expansion and the Therminol specialty fluids expansion in Wales, expected to start later this year or early 2015.

Moving next to debt. After repaying the term loan from Solutia acquisition last year, our remaining debt maturities are attractive and our profile is consistent with an investment-grade company. On joint ventures and acquisitions, we are continuing to look for additional acquisitions, but the market remains frothy.

In our returning cash to shareholders through dividends and share repurchases, we did both in the quarter. We expect to continue to repurchase shares for the balance of the year, but expect the pace to moderate from the first-quarter levels. And on the dividend, it continues to be reasonable for investors to expect that dividends will increase with our earnings.

Lastly this morning, I'm pleased to announce that we'll host an investor day in New York on Thursday, November 6. We've been on quite a journey over the last decade to get to where we have a portfolio of specialty businesses with leading positions and product lines that represent two-thirds of our revenue. We've delivered four consecutive earnings growth -- years of growth and are poised for a fifth year in 2014.

The main purpose of our investor day this year will be for our senior management to share with you our strategy for building on this foundation to grow our earnings for the years to come. We will be sending out more details shortly. I hope you all will be able to join us. With that I will turn it back to Greg.

Okay. 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 followup. With that, Augusta, we are ready for questions.

(Operator Instructions)

Kevin McCarthy, Bank of America Merrill Lynch.

Mark, can you discuss how your volume would have trended on a monthly basis through the quarter recognizing you had the outage at Longview, and then how your order books are shaping up for April?

Good morning Kevin. The order trend as you might expect from our guidance trended upward from January through March. So January and February were a bit softer than we expected due to all of the factors that we mentioned. And then we saw some good improvement in March and even further strength in April.

And then secondly, on adhesives and plasticizers you indicated some issues there. How would you compare the sequential improvement to a normal seasonal pattern, and maybe provide a little bit more color on the various issues plasticizer pricing and how you see that playing out through the year?

Sure. The adhesive and plasticizer segment I would describe as stabilizing this year. In along the lines of what we expected.

So on the adhesive side these stockings seem to be over and we put it behind us last year. We saw some reasonable improvement in demand in adhesives around packaging, hygiene, in particular hygiene and that was a good source of strength for us in the demand improvement.

I would also note though that last year was an easy comp where there was quite a bit of destocking in adhesives. As the market loosened up and people were dumping safety stock in Q1, 2013.

So overall, demand came in nicely and we were also given an additional bump in demand because one of the key competitors in this market had several supply issues that drove some demand our way as well. But that continues to be a solid strong growing market and we continue to expect it to do so. And look forward to that demand.

On the pricing side with adhesives, I would say that the pricing discipline is stabilized for the first half of the year from what we can see. Rosin prices went up considerably and are staying relatively high which is the key alternative material to hydrocarbon resins.

We do expect some moderation in rosin prices towards the back half of the year because we can see that people are climbing up the trees in China -- up the mountain in China to tap the trees and expect a bit of a better rosin crop this year. One of our competitors in hydrogen and hydrocarbon resins is bringing some capacity online we will be looking to fill that out in the back half of the year.

That is helpful, thanks a lot.

I just want to make sure I answered your plasticizer question too, Kevin. Which is, demand there is improving and quite strong. We see an acceleration in substitution toward 168 non-phthalate plasticizers especially with prop 65 in California naming [BINP] as a product of concern for health effects.

So we're already seeing some strong momentum there. So the demand is good there but we continue to face competitive challenges on pricing and plasticizers as a result of Asia-Pacific demand being weak and competitors from Asia looking to place material in Europe and North America.

Thanks, Mark.

Robert Koort, Goldman Sachs.

If you could talk a little bit about, I may have missed it, when you talked about the film customer incentives in Asia are they one-off issue or is it something that is a sustainable change?

It's a sustainable change in that we are shifting the customer order pattern we hope, to be more in line with demand and production through the season which is predominantly strong in the second and third quarter. We had some customers who were loading up in the beginning of the year and then not buying much and we're trying to smooth out the production patterns. So, we expect that demand will be solid and on track for performance films for the year it just has a slightly different shape and that will be the case in the future years.

And then the me ask on the rubber markets and particularly in tires. We saw some pretty good macro data out there, and it was evident -- I didn't notice it in your trends. Is there something going on around buying patterns for rubber additives that we would have missed some of that better macro data during the quarter?

No it is not a buying pattern shift. This was more of a destocking issue. In Asia-Pacific we had a number of customers who had built more inventory than they needed through the end of last year, and then tire demand was not great over in Asia-Pacific, and you have to remember that we are highly leveraged commercial trucks and tire demand as opposed to passenger tires. We saw a lot of destocking.

I think some of our other suppliers to this industry saw a similar kind of event in Asia-Pacific. But demand has already started to improve pretty dramatically relative to where we were in January and February across all the regions, so we feel good about the year from a demand point of view.

Got it. That is helpful. Thank you.

Frank Mitsch, Wells Fargo Securities.

I just wanted to follow-up also on this non-phthalate and phthalate switching on the plasticizer side. Obviously you had faced some issues with the phthalate guys driving price to maintain share, and that was capping your business but now you are talking about some of the regulatory issues that are driving your business. How should we think about that switch going forward and the concerns from the competitor behavior from the phthalate-based guys?

That the good question Frank and as we look at we are very confident in that the demand growth in non-phthalate plasticizers in North America and Europe in particular is going to be quite strong into the future. We're only a small percentage of the total plasticizer market at this point, so there's plenty of room for growth and this prop 65 event in California has pushed a number of customers over into finally switching. They all knew it was coming and this was sort of the straw that broke the camels back we think.

So on the demand side we feel quite good, but it is important to note that on the competitive side we still see a lot of competition and with weak demand in Asia there is still a lot of price pressure in this business. And with this large amount of demand growth, we would expect other competitors to switch into trying to make a non-phthalate plasticizers on a long-term basis.

Great growth. Competitive pressure. Still solid attractive business and the overall segment earning well above the cost of capital for the business, even though it is earnings we would like to improve from where we are today.

All right. Great. Obviously that feeds in to the guidance of the $150 million to $175 million for that business which kind of seems on the light side but we will see how the year progresses. And then I also want to follow up on that $0.50 to $0.75 of Eastman specific actions that you are taking on the capacity expansion improvements, tech licensing and synergies.

On the tech licensing I thought I heard you suggest that some of that might be slipping into 2015. I don't know if I heard that correctly. Can you expand upon that and how are you feeling about that $0.50 to $0.75 for 2014?

Frank you heard correctly. The license was part of the $0.50 to $0.75. And the reason why you had so much of a range of $0.50 to $0.75 was some of the uncertainty we had around licensing and what would happen. That would be pushing us toward the lower end of that.

But I would also recognize Curt and his tax department as delivering another solution related synergy on continuing to find ways to improve our taxes and therefore earnings per share. I think as Curt noted we are guiding 28% but we have a good chance of improving that number and continuing to deliver better EPS growth through that synergy.

I want to remind you Frank all of those factors that some of the improvement of specific Eastman actions like our expansion of Triton, is the second half of the year. So, we feel good about what is in that $0.50 to $0.75 as it relates to things that we can control other than the licensing which we are at to some extent have to work with our licensees. But it is really baked in well into our overall guidance for the year.

All right. So that probably makes $8 a little bit easier for 2015. Thank you so much.

Nils Wallin, CLSA.

What is on Europe, a lot of your competitors have noted how strong Europe has been from a volume perspective and the rebound in the economy there? It seems like your revenues were pretty flat year over year. So is there a mix affect? Is there something different that is going on that you are seeing than others?

I would say we feel good about Europe being solid. I wouldn't describe it as a strong volume growth for us. I'm not sure which competitors were discussing strong Europe growth in which segments.

What I can tell you is that we are seeing good strong growth in automotive demand, related to our safe flex products, we are seeing good recovery and strength in the tire related demand and feel good about that. It is pretty much in line with our expectations.

Got it, and then just on the closure of the performance film factory in Taiwan. Was that because of poor costs or demand? What was the reason for the closure?

What we looked at is ways to satisfy that business and I would say that some of our demand for that flex use is probably not as strong as we anticipated. We really took these actions for two fold. One is to respond to that expected demand but also then to improve our costs to serve it.

Great thanks very much.

John Roberts, UBS.

Can you tell us what the next steps are in the Westlake Pipeline dispute, and just give us an update on status of any efforts to monetize the assets at Longview?

I will start and I will ask Josh to remind people where we stand with our -- what is our excess ethylene position at Westlake -- at Texas. We continue to explore options for monetizing our excess ethylene. Josh could you just remind everyone on the phone what that is?

This is Josh, John. So the size of this we're talking about around 700 million pounds of excess ethylene that we sell to the market every year.

So there is various contractual and other complexities involved as we talked about, one of those complexities continues to be with our dispute with Westlake. We continue to feel good about our position. The next step is really the Texas railroad commission is going to be holding a hearing.

The next hearing here is coming up in May. So until we continue to progress with those actions, we will continue to try to monitor the situation. We still have people interested in that excess ethylene position, but this is just on now a matter of timing to get this resolved satisfactorily.

And then as a follow-up did you extend your propane hedge at all during the quarter and could you give us an update on that?

Sure, as I mentioned at the last call given the volatility of propane and some of our other input costs, we modified our commodity hedging program to extend up to a potential two years rather than in the past we kind of only looked out six months with some winter spike protection. And ultimately our goal is to remove volatility of costs.

I would say we are already actively executing our program. And quite honestly we're much further along this year than we were at this point last year.

So the only thing that is different year over year as I mentioned before, We don't have any hedges on the merchant ethylene sales. But I feel very good about our steps that we are taking to protect some of our input costs over the next couple of years.

Thank you.

Vincent Andrews, Morgan Stanley.

Can you remind me, what's in the other segment and what actually happened in the quarter that made it come in better?

Sure, if you look at the other segment that is a reflection of both some of our corporate growth spending that is not specific to any individual business. As well as some of our pension costs that are not allocated to a segment.

When you look at the performance in the first quarter, it really a couple factors going on. One is there are some lower costs based on some of the actions we took last year on reducing some specific programs.

We knew that some of those costs were going to go to some other segments as we supported those growth efforts and that is by being done. So it might have reduced this other segment but it is being felt in the other areas of the businesses.

And then some of our growth spending is probably off to a little slower start than we anticipated. But that's good cost discipline and aligned with what we are trying to achieve.

I would expect our corporate growth spending to increase during the course of the year. But when I look at all those pieces together, our other segment for the year will probably be more like $55 million versus what I provided earlier in the year.

I would just add that it is important keep Curt's comment about some of those resources being deployed to other segments. Which mask a bit of the earnings growth that is going on in some of these other segments as they were ramping up and working on some critical growth programs for the future of the Company, especially AFP and AM. So it is important to keep that in mind as you are looking at year over year comps.

Okay. Thanks very much.

Jeff Zekauskas, JPMorgan.

You spoke about improving your tax position. Does this change your cash taxes and if it does change your tax cashes, by what percent?

I would say the changes that we're making on the effective tax rate also impact our cash taxes. These are real savings both in 2014 and going forward. So the things we are putting in place are things that will help Eastman for many years to come.

The cash tax rate then is more the change would be more in line with the change in the effective tax rate. So if you go down to a 29% -- to a 28% rate, that improves cash taxes by that same percentage point. And then as we improve it further and I am confident we will improvement it, it is just the order of magnitude, that will have the same impact on cash taxes.

The main factor going on right this year on cash taxes continues to be the NOL that we were utilizing from the Solutia integration. That will continue this year and next year.

Great. You also said that there is $0.30 to $0.40 headwind from propane. How much of the $0.30 to $0.40 was in the first quarter?

The $0.30 to $0.40 that we talked about we have said predominately that was going to be in the first half of the year, and that is what we are experiencing.

I know that but how much is from the first quarter?

We are going to see a fair bit of the first half and it is probably weighted a little bit more towards first quarter than second quarter.

Okay thank you very much.

Duffy Fischer, Barclays.

First question to continue on the propane. If we look at the conversion propylene to your propylene derivatives, how successful on the commodity part of that have you been in getting price with the run-up in propane over the last six months.

On the propane to propylene side of the equation we actually feel quite good about how we have managed the pressures in the first quarter and what we expect in the second quarter. Obviously there is some pressure there. But propylene prices have been a little bit higher than last year giving us ability to price in the marketplace and on the commodity side in particular I think we've done a good job of holding onto our pricing and doing well there. That part feels good.

The real challenge we face is more on the propane to ethylene side as I noted in the last call. Ethylene prices are obviously considerably lower than what we would have expected at investor day in 2012, for example. So the pressure is more on the bulk olefins and some of the ethylene specialty derivatives.

Okay. Thank you and then on the comments you made around your new JV in acetate tow, can you talk about that dynamic there. It seems like you're kind of cannibalizing some of your old tow sales but yet getting some flake sales into the JV. How should we expect that to roll through over the next year as this anniversaries?

This is Curt, so you look at tow volumes again they're lower due to customer buying patterns which is again not unusual for this industry. But in addition, the industry is absorbing some additional capacity primarily at our 30,000 ton plant. With the joint venture with CMTC.

So you can think of that 30,000 tons is the volume and revenue from that is being -- we don't see the in our segment results that is really going through our other income line for our 45% interest. But as expected though, the volume lost that the industry is absorbing and we're including our percentage of that industry absorption, is resulting in lower toll volumes what it is being offset by the acetate flake volumes that we are selling to the joint venture.

So that is kind of the trade-off you are seeing in that. But again fibers is delivering some pretty good solo earnings even with some of that shift from direct sales versus through the joint venture, delivering that $500 million to $520 million, plus some of the benefits we'll see from the joint venture and the other income line.

Alright. Thank you.

We will go next PJ Juvekar Citigroup.

Mark, there was a big decline, a 500 basis point decline in specialty fluids and intermediates margin. I know you had that outage but how much of that was due to propane spike and how much of that was due to the specialty fluids destocking that you mentioned?

The drop was primarily driven by the propane compression on ethylene and propylene related products. But specialty fluids was a contributor -- a meaningful contributor as well. That is really just the chunkiness of demand patterns in specialty fluids so the fills just weren't as strong and in particular solar fills could be quite large and cause a chunky nature across quarters.

So it was soft in the first quarter. We actually expect it to be strong in the second quarter and balance itself out.

I would note though that this brings up a broader topic that means that this year because of some of these propane related things, we are going to have a bit of a stronger second half than normal from an earnings point of view, and a softer first half. You can see it just by the cost flow-through's and some of the way demand patterns are picking up. It is just important to keep in mind as you're thinking about your models.

And if I could Mark add, if I look at overall cost increases from raw materials year over year it's roughly about $40 million. That is many times what Jeff will ask on some of our calls.

And of that $40 million it is predominantly propane and natural gas. Josh remind me, the percentage of the segments of that propane cement?

For propane just the pure cost is the majority you are seeing this quarter is going to go to SFI but it's also shared between additives and functional products.

So the majority of that raw material headwind I mentioned is in SFI.

Just one other point which is the costs associated with the Longview outage, which was about $8 million in the quarter. A good portion of that was in the specialty fluids intermediate segment as well.

Thank you. And then secondly, sticking to this propane thing, you have this deal with Enterprise on their PDH unit and your long-term contract. When that starts up, what kind of bottom line impact do you expect? Thank you.

Okay so we're looking forward the unit coming on in our participation with it. When we announced that opportunity we also discussed a long-term supply agreement we have and we are already feeling the benefits of that. I would say once we bring the PDH unit, it will be a slight improvement over where we are at today.

Can you quantify that at all? Thank you.

PJ, I don't have a number for you right now.

Thanks.

Mike Sison, KeyBanc.

Mark, you mentioned investing in the Crystex this year, can you maybe help us what exactly that does for you and in terms of maybe profitability or longer-term positioning?

We have been working on a fairly comprehensive Crystex strategy about how we sustain our earnings growth in this business. As those who followed Solutia know, Crystex was one of the key parts of Solutia, a great product line which is insoluble sulfur that volcanizes rubber. But it does face competitive challenges with (technical difficulty). A great example of the synergy between Eastman and Solutia where we were able to take some of our scientists and (technical difficulty) to dramatically improve the process technology with them.

(technical difficulty) technology that will enable us to improve our cost structure in our new plant in Quantum on that I hope we will start building by the end of the year by 20% to 30%. What is also exciting about this technology is that it allows us to retrofit existing plans and get significant cost improvements. What will be more exciting for me, the innovation guy, is it improves the performance characteristics of the product, and allows us to differentiate ourselves in what we can offer to the marketplace versus the current competitors.

So we are actually starting to retrofit on one of the first lines in Europe, and we're also doing a lot of piloting to make sure we understand all of the product performance characteristics and validate all the last elements of the process technology. That is really what is causing the $10 million ramp up in cost. And I would note that, that ramp up really starts happening in the second quarter, through the end of the year on that $10 million.

So it is a great long-term investment. We're really excited about this. But when you start these things it takes some investment.

Okay. Great. And then when you look at Advanced Materials, had a decent start to the year. But still if you take a look at the ramp that you need to see to hit 2015, how are you feeling in terms of the maybe structurally getting there from what you are seeing from the businesses thus far?

Advanced Materials had a great the start to the year. It was a little masked by the performance films order pattern shift. But we feel great about the momentum in that segment for this year.

The demand recovery in the automotive sector is driving good demand not just for the premium products but for the standard products as well, and we certainly continue to see very robust demand for Triton and our other copolyesters. So that part is going great.

We're rushing to do our debottleneck expansion on Triton to enable that growth which will be a key contributor to 2015 earnings growth when we bring that additional capacity online to grow in the specialty plastics group. We also have some new product launches that are doing well, we will tell you about more later in the year, that are getting us into some new products and markets and specialty plastics in the electronics market.

Overall I feel good about the momentum. I think that as you look to 2015 and earnings growth for Advanced Materials I think it is well positioned to have another strong earnings growth in 2015 over 2014.

And what I could add Mike on top of that. If you remember our guidance back at the investor day, that was built around three elements of strong growth that Mark talked about with the product lines, leveraging the asset investments that we made and the improved product mix. All those things are on target.

I would remind you though that the two areas that maybe are a little bit softer than we thought back at investor day is one is just what is the level of auto and interlayer growth in Europe. And then secondly the electronics business, our display business is probably not as strong as we were envisioning back there. So, great fundamentals overall, but those are the two areas of weakness compared to what we probably assumed back at investor day.

And speaking on investor day just going back to one of the questions PJ had. There is a slide we provided the investor day that gave some -- shows you some of the benefits we're expecting from the improvements we've made in olefins, from our crackers some of our cracker expansions, the propylene contract we have as well as what we expected the PDH unit benefit to be in 2015. And the assumption at the time was a midyear benefit, it was about a $10 million benefit going from 2014 to 2015 was our rough estimate of the benefit of that enterprise contract.

Great. Thank you.

James Sheehan, SunTrust.

Just wondering on your Crystex investments. You mentioned some weakness in China and you specifically targeted the tire market for that. Is there any concern about where the demand is for that new capacity or are you confident that the higher technology offering that you're giving is going to offset that?

We continue to view the overall global tire market having around a 5% long-term growth rate. We don't think that anything that is going on right now in China indicates that there is some sort of structural change in the need for tires in the future.

I think that globally there is a question around changing consumer driving patterns and all of that, that feed into the long-term growth rate. But we're not seeing anything that says we're concerned about demand.

I would also note though that when we built the Quanton plant, it is an extremely attractive plant in how we can leverage the existing fixed cost at our Quanton site since we're just adding another unit next to an existing one. Which gives us great flexibility going forward in the future to both support growth of the markets growing, or if necessary if demand is not as strong as we would all like we have the flexibility to rationalize some of our smaller plants and improve our overall fixed cost structure across the globe. So it's a good investment no matter what scenario of the world you look at.

Very good. And then in just in fibers. I noticed the prices did go up this quarter but at a lower rate than in previous quarters. Do you see that pricing game decelerating over the rest of the year or are we getting back to the type of increases that we had last year?

I think on the pricing side I think what we tend to have is good conversations with our customers are around what's the quality of our product and their ultimate demands, as well as then the change in input cost. So I think there's usually good transparency with both parties and pricing will be indicative of raw material inputs and just how the overall market is.

Thank you.

Laurence Alexander, Jefferies.

One short-term question, one long-term question. On fibers. Can you give some detail on the negative volumes and (inaudible) given the [crack] expansion you did, what is going on with the industry dynamics.

And then the longer term question is as you look at the bridge 2015 you are going to have a tailwind from the acquisition it sounds like in the mid-teens, you have the buybacks, your pricing will catch up to those raw material pressure, you have the licensing that has moved into 2015, you have lower core price. You put all that together and it sounds like you have about a $0.50 to $0.70 tailwinds next year. What are the negatives that would offset that?

I'll get to the second question in a second. Could you repeat the first question, it was a little for some reason was garbled and I couldn't hear it.

So fiber volumes were down about 2%, could you give some detail on what you are seeing in the industry? And put that in a context of your recent capacity expansion?

On the first question around fiber demand, we certainly see a slowdown in fiber demand growth. We're not looking at the overall market in decline for 2014 relative to 2013.

But it is at the lower end of the growth rate that we would have expected. It's not hard to imagine why that is happening with all of the drivers out there from taxes to smoking concerns and to a minor extent, e-cigarettes.

That is consistent with how we think about and view the market. But I would say it's growing slower than it did if you look at past average growth rates over the last five years.

In regards to 2015 as we look at that year and the challenges. In general I'd say we feel very good about the things that you noted. The biggest challenge that is out there especially if people are asking the $8 a share question, is the global economic growth that Curt noted.

Propane prices are moving in ways that we expected from a propylene point of view as we discussed in the last call. We certainly face some compression on propane to ethylene related products versus our original assumptions. So that is a bit of a headwind in 2015.

But it is a year over year headwind. I think from a 2014 to 2015 point of view that impact is already being felt in 2014 and I don't expect a big year over year problem in 2015. In fact I think we have done a better job of hedging into next year to mitigate some of that cost pressure that we felt on a 2013 to 2014 basis. So I think we're actually well-positioned on the propane topic.

There is really more of a general economic question. And then you always have that question around competitive behavior.

The biggest impact we have had if you look at our 2012 investor day expectations was the drop in adhesives and plasticizer earnings relative to where we were. We don't see that recovering back to high levels.

I think it stabilized, I think it'll ability to improve from where it's at. But it certainly is not going to jump back to where it was.

One other thing I might add. What I like about Eastman today, maybe even what you saw about Eastman 10 years ago. The men and women of Eastman are focused on year over year earnings growth.

So the specific actions we take we know sometimes will have benefits in one year will be continuing benefits into the other year. So we know some of that $0.50 to $0.75 benefit that we are expecting in 2014 will have a benefit on a full year next year.

An example again is that Triton expansion where we are debottlenecking 25% of our capacity there. So we are focused on everything that we can control. To deliver that year over year earnings growth 2014, 2015, and beyond.

It is important to note the strength of our cash flow. So it gives us a lot of options as you have already seen. We are demonstrating the willingness to continue doing acquisitions that are accretive and have good synergy with the Company.

We're willing to repurchase shares, and we've got a great organic portfolio. We continue to feel very good about delivering consistent strong earnings growth as we go forward.

Thank you.

David Begleiter, Deutsche Bank.

On fibers, to reach the upper end of your guidance range you'll need to average about $135 million of earnings in Q2 through Q4 that's versus a $117 million in Q1. So what's going to drive that increase sequentially?

Well Dave I appreciate your effort to try to get me to move to the upper end of range on fibers. We have a range out there because there is some uncertainty about demand, and so as we look at Q1 we don't think that's representative of the future.

We certainly can see that the buying pattern's shifting back to what we actually call normal buying patterns. The last couple of years demand was so tight people were buying a lot more in the first quarter just to make sure they got product. And this year we see a more typical buying pattern develop where first quarter was a little bit softer than you'd like and second will be stronger.

So we don't have any concerns. We think demand will continue to sort of develop as we expected for the year. But it certainly it's at a more moderate growth rate than what we saw in the past couple of years.

And on just the buyback pace, Mark, you mentioned a little slow versus Q1. Just how much slow you think in the rest of the year? On a total basis.

I will let Curt answer that one.

As you know we look at share repurchases as one of the mechanisms to deploy cash. Our priorities for cash remain capital expenditures to support organic growth, attractive mergers and acquisitions and share repurchases is just again a good viable use of cash.

We still have $900 million remaining on our authorization that our board was kind enough to provide us given the confidence in our financial position and strong cash flows. But it will moderate. Having said that, we are the market today and will be in the market throughout the year, just not at that same pace of the first quarter and probably at a pace that's more similar to what you have seen from us in the past.

Thank you.

We've got time for one more question please.

Bill Cross, Eaton Vance

This question is for Mark, just and hopefully you might clarify a comment that you made earlier about the relationship between the first and second half. Were you referring to the growth rates being stronger in the second half or the absolute dollars of earnings being stronger in the second half?

I was referring to earnings. While we certainly would have preferred some revenue growth in the first quarter, than what we saw, we see strong improvement in revenue growth already in the beginning of the second quarter, and expect that to deliver a good revenue sequential improvement in the second quarter, and of course continuing out into the third and fourth. So it is really an earnings comment.

As the propane costs are primarily driven by the high propane prices in the winter of the first quarter, and of course a lot of that has to flow through into the second quarter, that creates some earnings headwinds. We have some additional growth investments like the tires growth investment ramping up in the second quarter that wasn't in the first.

So there's a few things that are creating some cost dynamics relative to revenue in the second quarter, those are expected to abate by the end of the second quarter as well as the Texas outage, I should note. That would allow earnings to be better than what is a typical first half, second half seasonal pattern earnings for Eastman.

And in fact also Eastman specific actions are weighted more toward the latter part of the year than the first part.

I mean just to be absolutely clear what you are saying is unlike current first call estimates, the third quarter will be larger than the fourth quarter -- larger than the second quarter. This was not the case in 2013. That's correct?

Bill, we are not giving quarterly EPS or EBIT targets today. That is not what we are doing. So you are getting directional guidance, but we're not going quite that specific.

Okay. Great. Thanks.

Okay. Thanks again everyone for joining us this morning. A replay and a replay and downloadable in MP3 format will be available on our website beginning at approximately 11 AM. Have a great day.

Thank you everyone.

That does concludes today's conference, thank you all for your participation.