Eastman Chemical Co EMN
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/26/2013

Operator: Good day, everyone, and welcome to the Eastman Chemical Company First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website www.eastman.com.

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

Gregory A. Riddle - Director, IR: Okay. Thank you, Michael and good morning everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and CFO; and Josh Morgan, Manager, Investor Relations.

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

Second, earnings per share and operating earnings referenced in this presentation exclude mark-to-market pension and OPEB losses and gains, Solutia acquisition related costs and asset impairments and restructuring charges and gains.

A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items available on our first quarter financial results news release which can be found at eastman.com in the Investors section.

Projections of future earnings in the presentation exclude mark-to-market pension and OPEB losses and gains, Solutia integration costs and any asset impairments and restructuring charges.

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

Lastly, we've posted slides that accompany 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 Jim.

James P. Rogers - Chairman and CEO: Thanks, Greg and good morning, everyone. Let's go over to Slide 3. As is my normal practice on these calls, I'll take just a moment upfront to provide an update on our most recent outlook statements. First of all, we continue to make good progress on the Solutia integration. Curt will provide you with more color in his section, but I just want to reiterate how pleased I am with how the integration is going and how well these businesses and our cultures are coming together to create value.

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

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

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

On Slide 4, I'm reviewing the Eastman corporate results. Operating earnings increased first quarter 2013 versus first quarter 2012 as lower raw material and energy cost more than offset lower selling prices.

For example, propane prices declined over 30% year-over-year, while on a corporate basis, total corporate selling prices declined by 1%. Almost all segments had higher year-over-year earnings where the largest increase has been in Specialty Fluids & Intermediates and Fibers.

Our operating margin increased to 17.5%, almost a 200 basis point improvement year-over-year. So first quarter EPS was a $1.62, an increase of almost a third compared with the year ago quarter. First quarter earnings saw a strong start to the year in what remains a difficult and unpredictable global economic environment.

On Slide 5, I'll highlight our results by geographic region. As you can see the U.S. and Canada remains our largest region on a percent of revenue basis with Asia-Pac a strong second and then Europe and Latin America.

Revenue in North America was down about 5% but this was a typical price/raw story. As I mentioned earlier, propane down over 30% year-over-year in the quarter and this resulted in some lower prices for derivatives in the U.S. Asia-Pacific revenue was up 11%, and the increase was a combination of both volume and price.

There was particular strength in our Fibers, Advanced Materials and Specialty Fluids & Intermediate segments with the SFI improvement coming against in easier comp in the first quarter 2012.

Revenue in Europe was down 3% and given the state of their economy this is a solid performance in my opinion and Latin America revenue was down $4 million or about 3% as well.

We continue to see our geographic diversity as a source of strength for our portfolio and our first quarter results are indicative of that.

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

I'd also add for the anti-degradants business that we are in the process of implementing a price increase to try and recover some of the margin loos to significantly higher benzene cost. Operating earnings for the segment increased slightly as lower raw material and energy costs and higher sales volume were partially offset by lower selling prices. We also had lower capacity utilization in first quarter 2013 for rubber additives as back in the first quarter 2012, the business was preparing for expected outages and increases in demand. So it's was a tough comp for rubber additives.

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

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

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

While we expect operating earnings to increase sequentially in the second quarter and for the first quarter results to be the lowest quarter of the year in 2013, we are reducing our full year operating earnings guidance for this segment to approximately $225 million.

With that said, we remain confident in two secular trends that will continue to drive growth for this business. First, solid growth from increased use of hygiene products such as diapers in fast expanding markets, particularly Asia and increased usage of hydrogenated hydrocarbon resins in case and carton packaging adhesives.

Second, substitution of phthalate plasticizers with non-phthalate plasticizers in Europe and the U.S. But to get back to the kind of earnings we expect from this segment, we're also going to need stronger global economic growth to help this world.

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

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

The operating margin for the quarter improved year-over-year to just over 11%.

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

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

For the year 2013, we are raising our earnings expectations to approximately $430 million and we expect earnings to be slightly higher in the first half of the year compared to the second half based on how price and raw material and energy cost (will do to our) accounting system.

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

I will finish off the segments on Slide 10 with Specialty Foods & Intermediates; operating earnings increased significantly year-over-year due to lower raw material and energy costs, primarily for propane, which were partially offset by lower selling prices. The operating margin for the quarter was just under 16%, an increase of about 400 basis points over the prior year quarter. Sequentially, operating earnings increased slightly going from $93 million in fourth quarter '12 to $95 million in the first quarter this year.

You will recall that we had an operational issue at one of olefin cracking units in the fourth quarter that had a slight negative impact on those results. We also had a separate issue with one of our crackers in the first quarter that had a slightly larger negative impact on results than in fourth quarter last year.

I know this is disappointing, but frankly I see these types of issues is common across our industry. In addition to the cracker issues I would add that lot of the benefit of lower propane cost was already in our numbers in the fourth quarter, partly due to LIFO.

So although we did benefit from an improvement in the propane and propylene spread in the first quarter a significant portion of that was already in our fourth quarter numbers. In 2013 will also benefit from an additional furnace on our type 4 cracker, providing an additional GBP100 million of ethylene on an annual basis.

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

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

However global economic uncertainty continues with particular weakness in Europe and raw material and energy cost continue to be volatile including propylene, paraxylene and benzene and taking all this together we are maintaining our full year expectations, which we had increased in January.

For 2013 EPS of between $6.30 and $6.40. This would be our fourth consecutive year of double-digit earnings growth if we achieve this and I remain confident we are well-positioned to continue to deliver double-digit earnings growth for the next two years and beyond.

With that, let me turn it over to Curt.

Curt E. Espeland - SVP and CFO: Thank you, Jim, and good morning, everyone. I'll begin on Slide 13 by reviewing some of the financial highlights for the first quarter. We generated $5 million of cash from operating activities in the quarter. Net earnings were solid. Working capital increased for normal seasonal requirements and we made an $11 million contribution to the U.S. defined benefit pension plans.

Moving to free cash flow for the quarter; you see it was a negative $83 million, a good result in what is typically our seasonally lowest quarter for free cash flow. Also keep in mind, there was no dividend payment in the first quarter as we elected to pay the dividend to our shareholders in December of last year. Finally, our cash balance, which includes cash equivalents, was $178 million at the end of first quarter.

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

On Slide 14, I'll walk you through our current estimate for free cash flow in 2013. Consistent with our previous guidance, we project operating cash flow of roughly $1.3 billion. The full year operating cash flow estimate includes our projection for continued strength in earnings, as well as the following items; slightly higher working capital as a result of increased revenue and our broader geographical footprint, with the working capital we built in the first quarter working down through the remainder of the year; funding of balance sheet accruals, such as the annual environmental funding of approximately $35 million, primarily for legacy Solutia sites and restructuring accruals for site closure in Brazil. Any additional restructuring and integration costs are excluded from our earnings projections. Finally, we anticipate contributing approximate $120 million to our U.S. defined benefit plan this year.

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

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

Next on Slide 15, I will provide an update on the integration of Solutia. As the slide indicates, we remain well on track to achieve the synergies we expect – expected when we acquired these businesses last year. We're also on track with the retention of key talent which is at 93% of what we identified.

We recently achieved one of our key integration milestones with the successful system migration of the rubber additives product lines which is a part of our Additives & Functional Products segment over to our SAP system.

For those of you familiar with SAP migrations, you know this is a very complicated process. To give you a sense, this migration itself impacted 1,300 people at 19 different sites and locations in 12 countries.

The implementation went as well as we could have expected and these businesses are now fully operational in our SAP system with seamless impact to our customers.

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

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

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

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

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

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

Gregory A. Riddle - Director, IR: Okay, Thanks, Kurt. This concludes our prepared remarks. Michael, we are ready for questions.

Transcript Call Date 04/26/2013

Operator: Kevin McCarthy, Bank of American Merrill Lynch.

Kevin McCarthy - Bank of American Merrill Lynch: Jim, in adhesives, I think you mentioned a couple of issues, it sounded like you are experiencing some market related weakness on the packaging adhesive side, and then I heard you mention an issue on hydrogenated hydrocarbons related to some input cost dynamics. Just wondering if you could just flush those out a little bit more and comment on the expected duration of these issues and whether or not there's anything company specific at work in either category?

James P. Rogers - Chairman and CEO: Kevin, how does I know the first question might just be on adhesive? (Guess what) when we had our business review, guess where spend some time. Long-term like our position, there is nothing company specific negative to Eastman, but you do have softness in the packaging market which hit a part of it. I think one of the reasons the results were worst and most all of us expected was, it wasn't just demand, it was also on the supply side. The best I can understand it speaking somewhat generally. If you've had probably several years now tight raw materials where customers can quite often worry about, whether or not they are going to get the supplies, some of your competitors couldn't necessary make all they want to make and then if those (raws) loosen up, you have more availabilities of supply. Customers don't need to keep their safety stocks and inventory and so I think you had a bit of a double whammy, you had soft demand and then you also had more supplier or at least the comfort level with customers on supply. That second thing doesn't last forever. So they go ahead and take their inventories down skinnier, they are comfortable doing that, knowing that they're likely to be able to get product. The overall demand issue is one that you are going to be able to watch as easy as me in terms of one general level of economic activity picks up and packaging in particular picks up again. So it was a disappointment. I think we still like the hydrogenated hydrocarbon outlook. We like the outlook for diapers in the emerging markets, et cetera, that trend is not going away anytime soon. So long-term feel fine. Short-term, we got caught on both demand and supply.

Kevin McCarthy - Bank of American Merrill Lynch: Then second question if I may Jim, on Specialty Foods & Intermediates, you referenced the operational issue at Longview. Can you give us a sense of I guess the absolute impact of that in the first quarter and remind us of what it was in the fourth quarter? Just trying to get a sense of what the sequential delta might have been in that segment related to the operation side.

James P. Rogers - Chairman and CEO: I'll probably let Curt chime in on this too, but I thought you might be going to ask this question, Kevin, since you're high man on the numbers. Obviously, without the subset, we would've gone all the way to your number, let me just say it that way, but we would've been between your number and our number.

Curt E. Espeland - SVP and CFO: I'd say, the impact on first quarter is roughly $10 million and the fourth quarter is a little less than that.

Operator: Jeffrey Zekauskas, JPMorgan.

Jeffrey Zekauskas - JPMorgan: Can you update us on your cost reduction initiatives? What you think the ultimate savings will be from the integration of Solutia?

James P. Rogers - Chairman and CEO: Let me let Curt pick that up, because he is the leading man on that.

Curt E. Espeland - SVP and CFO: Well, what we have mentioned in the past, Jeff and this still holds true, our target is over run rate of greater than $100 million by the end of this year on those integration savings. We did talk about there is different levels of probability of other projects we've identified. So that $100 million target we talked about was roughly 5% of the acquired revenues. There is a possibility that could be a 6% number, which could be another roughly $25 million and there is a remote chance that it could be 7%, another $25 million. So it is just a range of probability we are working on. Some of that you won't see until 2015 if it were to come to fruition. In addition, we continue to make good progress on the operational commercial side of Solutia. I think you're starting to see that in the benefits. Then lastly is, within our culture, we have a culture of continuing to focus on productivity and trying to drive unit cost down and you heard some of that Jim talk about today in our asset deal stream through some debottlenecks, et cetera. So part of it is still synergies, part of it's just operational excellence we expect and have been able to achieve.

James P. Rogers - Chairman and CEO: Jeff, if I could just tag on, I mean a lot of times people look at spread and spread widens out and they say, they just got more price so the raws went down. We don't talk a lot about it. We still got all the basic programs going on in part of our culture in terms of Six Sigma and cost monitoring, headcount, labor cost, et cetera. So we're trying to fight it on all angles and that's about the only way you can deliver these kind of results.

Jeffrey Zekauskas - JPMorgan: Then lastly, you had such a nice price raw material margin in your Fibers business. Now, Celanese shutdown Spondon, their Spondon facility in late last year. Did that tighten up global supply/demand balances sufficiently to sort of allow for greater industry pricing? Is that the reason why it widened out so much?

James P. Rogers - Chairman and CEO: I would not point to that, because they also added capacity. Of course, we're both adding capacity in China, but no denying, we're running a very high utilization rate, the whole industry is. Part of our benefit is – and again, we don't always talk a lot about it, but we just operationally ran very well in terms of cost. Then there is also a benefit that comes from the first quarter how the pricing flows through versus the cost flow through. So usually your first quarter, you're getting a little tailwind, if I can, that maybe all your costs, say, higher wood pulp, et cetera, haven't flown through for full three months or you've probably gotten more of your pricing and that's why we tried to guide that for Fibers, the first half of the year is probably going to look better than the second half of the year, and not because of any change in the marketplace, simply because of how those costs flow through.

Operator: David Begleiter, Deutsche Bank.

David Begleiter - Deutsche Bank: Jim, I think you also called out some weakness in Plasticizers in the quarter. Is that weakness, do you think, permanent structural or was it temporary going forward?

James P. Rogers - Chairman and CEO: Beauty is in the eye of the beholder, so how temporary is temporary? You've got some plasticizers guys who have been losing the share who are reacting trying to use price. We also had, if I remember correctly, kind of soft market in Asia. So they ship more of the stuff to maybe higher priced markets, Europe and the States. Long-term, the non-phthalate trend, it's not going to change, it's not going to go away. We're not going to see high-single-digit growth rates in the non-phthalate plasticizer side. I still expect good growth there. The real weakness came more on the Adhesives side this quarter than the Plasticizers side, so that's really where more of our focus is right now.

David Begleiter - Deutsche Bank: Just in (SFI), Jim, how should we think about a narrowing of the propane propylene spread in Q2 versus Q1 and how would it impact your numbers?

James P. Rogers - Chairman and CEO: It does look like it's going to narrow, and that's what drives me nuts. When it's widening out, everyone thinks I should be raising guidance, et cetera and we're trying to say, guys, it's only one or two months, so it's going to come back to you other way. I try not to look -- honestly, I try not to look quarter-to-quarter. I try and think for the year. I think overall, for the next several years, we still got a tailwind here. Let me just point out one other thing though, when you look at that segment, it's not just that spread propane, propylene, I also got a really nice fluids business in there and the fluids business didn't quite do what we would have hoped in the first quarter and that is more is on learning, because again those shipments when they have major fields, et cetera, can kind of move from one quarter to another. So they should – the fluids business should do noticeably better next quarter over first quarter, but yeah we think the spread will come in some, but overall I think these segments can have a great year.

David Begleiter - Deutsche Bank: Lastly, any update on the fourth ethylene cracker at Longview?

James P. Rogers - Chairman and CEO: Yeah, I mean l said last I may have a little chagrin. I don't have more to tell you. All I can tell you now is that we got site visits going on. We've narrowed a list down to a few parties. Midyear is probably when we'd hope to be out with something. I can also say that I worry a little bit that guys are spending too much time or they're building the anticipation of too much on this is what I mean. We're pretty good-sized company and you know restarting another cracker or doing something with the excess ethylene that you know would probably take, two or three years to get in place anyway, I hope they are not buying our stock on that waiting for that shoe to drop and for us to tell them what to do because we think we got a great portfolio of businesses. But yeah, hopefully, midyear we can kind of spell out who we're going to work with and what it's going to look like.

Operator: Robert Koort, Goldman Sachs.

Robert Koort - Goldman Sachs: Jim you mentioned more aggressive competition from Asia in the Adhesives business. Is this a function of the weak economy over there and you think there is sort of ebbs and flows as their own home cooking improves and they won't have to seek out other markets, or is this just sort of a standard product cycle issue where it's becoming more intense?

James P. Rogers - Chairman and CEO: I think I was mainly talking about Plasticizers on that, but – yeah that's okay, but let me just talk about Asia in general and basically, we had pretty much all the segments, but Adhesives & Plasticizers had pretty good results in Asia. It seemed like we were seeing something a little different than a lot of the guys were talking as we were going around beginning of the year, last conference call, et cetera. I don't know that we're that exceptional except I like our portfolio of products in Asia. So filter tow being such a major product for us in Asia gives us pretty good Asian numbers usually quarter in and quarter out. I know that as I look forward, just to give you some little anecdotal stuff, I think on the oxos, it's going to get fairly competitive there. I think butanol, for example, under price pressure in Asia right now. So yeah, we had a good first quarter in Asia. I would think – I'm pleased that it's our second largest region, let me say it that way, but we take nothing for granted in Asia. I think the hardest thing is figuring out segment by segment what's going on with inventory levels in Asia, because I just think they are masters at moving those inventories around, I think it's to their advantage.

Robert Koort - Goldman Sachs: Could I ask a separate question on Crystex? It seemed like there was some consternation among investors that that was just such a great ride that had to end at some point. I didn't get that sense from your comments. So could you talk a little bit about what's going on in the market there in particularly in pricing?

James P. Rogers - Chairman and CEO: Yeah, I disagree that it's something that has to end. I mean, we have the best product in the marketplace. We have the best cost position. The way I look at this, in fact, I (run) through a few of the Solutia businesses, if you want. But the way I look at this, and this is a great business, and you're seeing it probably at its weakest because of what's going on in the general tire marketplace. So we held volumes in Crystex, which I think is a good thing. A year ago, they were running their utilization rates a little harder so the comp was going to be tough for us. They had all kinds of rational why they ran harder a year ago, but let's just say we think we're running it very prudently today in terms of how we are running our plants. When the tire market comes back, I think that's we're going to get to see how good this business really is and also when we pull the trigger and do our Kuantan expansion and get some further cost reductions because of process improvements, I think that's also going to be quite a positive. So people, they should not judge the tire Adhesives business by the way it looks right now. This is fairly tough marketplace for them. I'll just say similar thing with interlayers where you got Europe so soft, I mean I just know that's a better business than you are seeing today. But you are seeing it down because of Europe. If I look at the fluids business, sold out, fantastic business, we're going to have the wherewithal to add capacity and so that's going to meet or exceed our expectations. The films business is probably the highlight. That's the one that's doing the highest above our expectations and will I think maybe next call or so, we'll try and focus – I am looking at Greg. I think we're trying to focus a little more on films to give you guys more color because I don't want you to ignore that. Some of our best growth rates and create products and some real opportunity we see there. So, I mean – so you got two of the muscle players from Solutia that I think you are seeing at low points and the other businesses are performing very well.

Operator: Duffy Fischer, Barclays Capital.

Duffy Fischer - Barclays Capital: Just to go back to PVB interlayers. At the Investor Day, you made a comment, you thought the old management had made an error around kind of price volume decision about a year ago. So is that anniversaries this year? Were you guys or all you guys able to get back the volume you think they lost?

James P. Rogers - Chairman and CEO: I think if remember correctly, we talked we kind of had a two-year game plan for doing that. We've got a long ways in the first year. So we're pleased with the contracting strategy we did. We got more price in Asia, we got more volume in Europe, and that's exactly what we wanted. So, yeah, overall I think we're getting the right response from the major customers. They want long-term players; some of these are going to work with them. We've had to accommodate customers where necessary to make sure that we had the market position we wanted with the key players in that industry. But yeah, overall I'm pleased with what we've been able to accomplish in one year.

Duffy Fischer - Barclays Capital: Then another comment from the Investor Day. I thought you guys had forecast you would grow about half the market in Crystex because you needed to make room for the number two and number three player that brought on some capacity, but it seems like you're holding volume. Has their capacity rolled into the market and is it just going smoother than you thought? Or are we still waiting for that capacity to come online?

James P. Rogers - Chairman and CEO: Yeah, I am pleased to what we've been able to do in the Crystex market, but let me – Greg, you want to add some color?

Gregory A. Riddle - Director, IR: I was just going to add that when we were talking at Investor Day, we were talking about growth rate that might be in the 5% range for tires and what we are seeing right now is flat. So when we are talking about growing half of what the market's growing, the market has to be growing and we are not seeing that right now.

James P. Rogers - Chairman and CEO: I'm pleased with how we did share-wise in Crystex.

Duffy Fischer - Barclays Capital: But did the capacity from those competitors come on online or – because the growth rate will be where it will be, but if people bring on capacity and they're willing to use price to get into the market, I thought that's why you guys were going to back off and basically just make way for them, so that it didn't hit pricing, but that's what I am trying to figure out, did they come online or they did not come online?

James P. Rogers - Chairman and CEO: I understand your question and I can't remember specifically. I know that the kind of capacity adds we had were small from numerous players. So I just assumed honestly they were coming on along those curve.

Curt E. Espeland - SVP and CFO: I have not heard any discussion amongst our business about any change in outlook of how that capacities coming on?

James P. Rogers - Chairman and CEO: I wasn't aware – it's not like there was one big step function coming on, but I can't give you any more color on that.

Operator: Andrew Cash, SunTrust.

Andrew Cash - SunTrust: Just to follow-up on the acetate tow. I think there was some raw material pressure coming from cellulose side. Could you give us your index, what do you think raw material cost will do for acetate tow over the course of the year and also what sort of volume change year-over-year do you expect for the business full year?

James P. Rogers - Chairman and CEO: Let me hit the raw materials side and just remind folks on the major wood pulp we do an annual contract. So we know what the cost is there, I don't see that moving around. What we were trying to say is we didn't get a full three months' worth of that cost in the first quarter, the increase in the first quarter. We also didn't get quite a full three months of the pricing in the first quarter either, but it's slanted a little more to where you get less of the raw material cost. I don't want to mislead anybody, obviously business is doing great. We're covering our raw material cost, outperforming partly to that spread, also partly to just great operational excellence. Fibers is pretty tight now. I don't know, Greg where we've seen much more volume this year versus last year?

Gregory A. Riddle - Director, IR: Low single digits, which is pretty consistent with where we were in the first quarter.

James P. Rogers - Chairman and CEO: By the way, the other piece that moves around there it's small as yarn, but yarn is not causing any swings. That's pretty much steady.

Andrew Cash - SunTrust: If I can just ask one other question about some of your growth businesses. You alluded to V-Kool doing well. Could you talk about, just give us a ballpark of the range of growth you're seeing from V-Kool films on acoustics and also Tritan side?

James P. Rogers - Chairman and CEO: They are good numbers. Why don't I let my CFO -- you want to say the percentage increase? Tritan was 40%, V-KOOL I think, was a strong double-digit. It was a 20% or something like that. When we were -- the acoustics I think was 30%. These things -- I just wish they were bigger, so that these percentages (would be offer) bigger basis, but yes, it's pretty good growth on that, but it brings up the bigger point. That stuff that's growing fast is your higher margin, so you're getting the nice mix improvement like when you sell more acoustics in the interlayers, the same thing with Tritan, same thing with V-KOOL. Those are all good trends. So, if I got a disappointment, I wish we'd had more volume growth this quarter, but I'm very pleased with the mix changes that we're seeing in our businesses.

Curt E. Espeland - SVP and CFO: If I could add Jim, on top of it, what you're getting with those growth rates is we already have the investments made so you're getting the leverage off that.

James P. Rogers - Chairman and CEO: That's true.

Andrew Cash - SunTrust: Just if I could go back to what Duffy was talking about earlier about the PVB. In the auto area, shouldn't your business see a better comps going forward if the auto (indiscernible) and the European business is less onerous on a year-to-year basis going forward?

James P. Rogers - Chairman and CEO: Yeah, that would be -- that would definitely be a help. Remember, the interlayer business is not just the autos. You've also got the building and construction, commercial buildings, particularly in Europe and so that's quite soft, and I don't think that's forecast to turnaround any time soon, but you're right on the auto side.

Operator: Nils Wallin, CLSA.

Nils Wallin - CLSA: On the Adhesives business, I know you've got some expansions in Longview and then YPC over the next couple of years. Is there any way, if the market continues to be weak, that you might dial back some of those expansions to keep -- prevent operating rates from declining too significantly?

James P. Rogers - Chairman and CEO: Yes, the big one would be the one in China and frankly I am not too concerned about the hydrogenated hydrocarbon resins that's – we're going to need that volume and I think we said when we announced it that we also had quite a bit at the output under contract already from that plan. So not going to be a major risk, I don't see it screwing up the market because of the segment it's in, (let's say that way).

Curt E. Espeland - SVP and CFO: On the hygiene market it's growing strong for the hydrogenated. So that that trend is still there Nils.

Nils Wallin - CLSA: Then on the interlayers business again, I mean I think at Investor Day you said that that business was about 50% Europe and yet, obviously if Asia contributed. So I was just curious as how much of a drag Europe was because of autos and construction?

James P. Rogers - Chairman and CEO: I don't know how to quantify for you without trying to get in number-by-number. I can just tell you that, that the thing for me on that business was the tough comparison the last year as well in terms of how they ran the business last year, but the Europe is -- Europe is the one we need to turn. When Europe turns we're going to feel really good, because it is a major – the major impact on that segment.

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

Curt E. Espeland - SVP and CFO: I think when you look at what happened in the first quarter, we had about $10 million of integration costs and restructuring costs. Those will kind of continue at that level through the course versus this year, but start to unwind as we finished those major SAP implementations. So it will be pretty much behind us as we finished the year. It is pretty much in line with what we expected when we announced the deal.

Operator: Frank Mitsch, Wells Fargo Securities.

Frank Mitsch - Wells Fargo Securities: Jim, in your prepared remarks, you said it's a difficult and unpredictable environment out there. So, of course, that bags the question. I would like you to do some forecasting here. You did a nice job of talking about the geographies, the Q1 results for the various geographies and the sales movements, this that and other things. Can you give us the state of – the current state of affairs whipping around North America, Europe, Asia, what you're seeing there?

James P. Rogers - Chairman and CEO: I would say, first of all, as we give our guidance, we're expecting things to kind of truck along the way it is right now. So, if we had a nice surprise, the upside, where somehow, Europe pulls a rabbit out of a hat, we could do better. But odds are, it's going to play out, in our opinion, kind of the way we're seeing it now. So you had North America – and it's probably the same thing everyone is saying, North America pretty good; Europe, frankly, still just down and don't really see where the light is at the end of the tunnel for Europe. I mean I guess in the year or two they got to come out of it, but in general our best play there is to keep improving mix within that region. I'd say Latin America, just not that big for us, but you know when you look at how we were down a little bit volume wise, I think Brazil is probably tougher times than Mexico is and then you get to Asia and Asia is the one that could make a difference but harder, I'd say the hardest to call. I've pretty good idea where Europe is going the next year, so pretty good idea the States is going to stay good the next year. So Asia is a little bit tougher to see and then you have to start getting into the segments. But by and large, I think it kind of keeps tracking alone the way it is. So we may have had a little more of a tailwind in the first quarter and it may be tougher for Asia to keep up at that level. I don't know, I hope that's helpful.

Frank Mitsch - Wells Fargo Securities: So how would you describe the April pace of business versus Q1 pace of business in Asia overall?

James P. Rogers - Chairman and CEO: Let me ask Curt, as he probably looks at that as well.

Curt E. Espeland - SVP and CFO: I think when we look at the order trends, April even early part of May, we're seeing that same trend of strength in most of our businesses is in Asia. We haven't seen any dramatic (up) or downwind.

James P. Rogers - Chairman and CEO: I just have the anecdote of some of the excess pricing pressure there like Butanol et cetera. That's about the only negative change from first to second.

Frank Mitsch - Wells Fargo Securities: And then Curt, you described use of cash on the shareholder bullet – continued share repurchases to offset dilution. Yes, I noticed that your share count ticked in Q1, can you expand upon the potential that we might see more of that happen as we go forward?

Curt E. Espeland - SVP and CFO: I'm glad you noted that, Frank. If you look at our fully diluted share count, you are right it did tick down a little bit as we implemented share repurchases. I'd actually point out on an actual share count base, it increased.

Frank Mitsch - Wells Fargo Securities: Probably has more to do with price and options.

Curt E. Espeland - SVP and CFO: Right, options exercise, then we had few share issued under the old Solutia warrants. So right now our strategy continues to be repurchased shares to offset dilution as we made progress on our debt pay down. As you heard before, we will look at how we deploy that cash further, whether we do more share repurchases beyond dilution.

Frank Mitsch - Wells Fargo Securities: And then if I could just come back to the Tritan volumes up year-over-year, which is obviously an eye-popping number. Any color around that, I mean, operating rates for that unit. How is that trending, do you expect more of that to continue?

James P. Rogers - Chairman and CEO: I think its perhaps unrealistic, I think it's going to have 40% up comps from Perennial, they just had a bang up quarter, where the market acceptance for the product is just fantastic, which not only gives us the volume but allows us to concentrate on the segments of the market. So things like medical versus some of the other packaging applications that would be less attractive. It's still going to take us a little while to fill up the capacity we got. So we are not worried about running that capacity soon. We've talked in the past about how you add a monomer plant and then you add lines, et cetera. So I think we're still looking at Tritan, not filling up to what, into next year maybe something like that, but that's a good part of what's going on within Eastman right now. It's how Tritan – how the market is responding to Tritan.

Operator: Vincent Andrews, Morgan Stanley Smith Barney.

Vincent Andrews - Morgan Stanley Smith Barney: Just a question on the acetate tow business. I know Asia from a cigratette perspective is, I know, almost 60% of you volume, but in the rest of the world, what level of concern do you have over certain medium and long-term about when President Obama announces the potential for federal excise tax pretty substantial in the U.S. or you see Phillip Morris Internationals volume down mid-single digits in the quarter? In the potential for further excise tax increases in Europe and other places, what level of concern at all is that to you?

James P. Rogers - Chairman and CEO: Well, we're not naive about it. I mean we can see what part of the world we live in with the smoking trends are here; we know one is the biggest impacts in the past on smoking has been tax increases. So you're right to focus on one of the levers that can have almost immediate impact. Interestingly enough, a year or two later you lose some of that impact. Again, in other words, it goes back up, but long-term I think we all know the trend outside of Asia. It will be a slow decline, which you are going to want as you don't want to have the best cost position and you are going to want to have a nice base in Asia and that's what we are building long-term.

Vincent Andrews - Morgan Stanley Smith Barney: Curt, if I could just ask you on the free cash flow, can just sort of remind me sort of how it help sequence through the year and just let me know if there is any impact from the sort of – maybe in the inventory from the weakness in adhesives and sort of how you see that playing out through the year?

Curt E. Espeland - SVP and CFO: First of all, in the inventory, I can assure you that our business and our supply chain guys are keenly aware of order trends and mixture we operate consistent with those trends. So that wasn't a factor. As I look at free cash flow, as we'd expect we're kind of negative in the first quarter and it starts building through the end of the year. I don't remember it maybe third or fourth quarter will be one of our strongest, but second half of the year is where we'll see significant generation of our free cash flow.

Operator: Laurence Alexander, Jefferies.

Laurence Alexander - Jefferies: Two quick ones. On the tire side, are your customers giving any sense of having a sense for when the market actually turns or are they still waiting on pins and needles. On the fibers business is there a point – I mean how many years can you sort of maintain a good pricing cycle or is there a threshold that we should be thinking about where I should run the risk of creating your own demand destruction separate from tax increases or other government's interventions?

James P. Rogers - Chairman and CEO: So, let me start with the tires. We just happened to ask that same question when we were having our reviews. What are the customers telling you? What can you see? The destocking has been going on in that industry for a while now, more than a quarter or two, to best of our knowledge and we also by the way, we're humble enough to admit there is other companies who've been dealing with the tire industry a lot longer than us and it's a lot bigger percent of their business. So trust me that these guys out there can speak much more intelligently than me about it. So we haven't seen the turn yet in where people have gone the other way and started to feel like they need to build inventories again and I don't think we're getting a lot of feedback on how soon that's going to be. So, it's just one of those where I am thankful. We've got such a diversified portfolio of businesses that one business is soft like adhesives, something else can kick in. On the Fibers business, I don't really worry about things we would do as a supplier that would cause demand destruction. The filter is actually the cheaper part of the cigarette. So to the extent they lengthen the filters and call it a premium cigarette, their cost goes down and therefore their margin goes up and we sell more products. So, I think it's just what we talked about earlier. You can just see the long-term trends in terms of developed world smoking on a very slow decline, still growing though in the developing world. Those are going to be the dominant trends. And taxes, country-by-country can move things around and in particular, can cause upset, say, in a particular quarter for one year, but then the world seems to adjust. So the other thing, I think the industry has been fairly disciplined about looking at their high cost production facilities, and over the years, have gravitated to lower cost and to Asia from higher cost and places like Western Europe.

Operator: Mike Sison, KeyBanc.

Michael Sison - KeyBanc Capital Markets: In terms of Crystex, I just wanted to -- maybe help us visualize, where are your operating rates now, and once they do sort of recover, is the leverage higher than what we might have seen in the years passed and maybe give us a feel for how that can shape up?

James P. Rogers - Chairman and CEO: Yeah, I got plenty of capacity right now, if that's your question. I think there is a track record; it was a leader by far in this industry, the capacity utilization Solutia and now us. We're more likely to move our utilization rate around than the small competitors are, so I'm not going to give you a percentage number on the utilization rate, but let's just say, I've got capacity; one of the key things to watch for though and you'll get a signal as soon as anybody when we announce we're going forward with the (Kuantan) expansion and the newer technology and lowering our cost position. That's going to be a very good sign and that is the kind of thing that can give you more leverage than you've had in the past that you got a lower cost process that's actually retrofitable. So we'll see. I never take anything for granted. Don't give you any guarantees, but I think we got some much better times ahead of us for Crystex.

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

James P. Rogers - Chairman and CEO: Yeah, it did have probably the steepest (incline) -- maybe now Adhesives & Plasticizers does, but I feel better than I did six months ago, but then being able to hit their targets and partly remember I got, you know three businesses in there. So I get the specialty plastics business like I think I said in our last call, it's going to have a very good year, probably the best year ever that still seems to be intact. They had a very strong first quarter. Performance films is outperforming our expectations has nice growth rates and is becoming a more significant part of that segment, although admittedly, it's still the smallest. Then the interlayer business is where the upside is and we do need some improvement in Europe and we do need some global improvement to hit those numbers. We said that back then. so I don't want to pretend like Europe and just stay where it is forever and we're going to be happy. We do need a pickup in the global economic activity, in particular Europe.

Operator: P.J. Juvekar, Citi.

P.J. Juvekar - Citigroup: I got two questions; one on Kingsport and one on Longview. At Kingsport, I think you are working on this project to convert your coal feedstock into partly into natural gas. Where do you stand on that? Then on Longview, or your forth cracker start up, do you need a long-term offtake ethanol contract agreement?

James P. Rogers - Chairman and CEO: Let me hit Kingsport. It's not the feedstock, it is for energy converting our major power house from coal to gas and so we're going to – for energy purposes, we're going to be about half coal, half gas. That's proceeding on pace. We haven't started (doing) around with steel and concrete, et cetera, but that's going to go in line with what we would want to have done for regulatory reasons anyway. But remember the feedstocks coal, we gasify coal, that's always going to stay that way. In Longview, you were breaking up a little bit, P.J. so I don't quite understand what you were asking about the fourth cracker.

P.J. Juvekar - Citigroup: Do you need a long-term customer agreement for off peak?

James P. Rogers - Chairman and CEO: Let me say this way, we're not looking to be a bigger merchant player ethylene. So when you say do we need a long-term agreement, whatever we do with a partner is going to be a long-term arrangement, whether we continue to own that cracker and operate it or we sell the cracker or what we do with our excess ethylene, but whatever we do is going to be a long-term solution. It's not going to be spot market exposure.

P.J. Juvekar - Citigroup: There was a lot of discussion on the tire market. Can you just breakdown for us your tire exposure to commercial trucks versus passenger cars?

James P. Rogers - Chairman and CEO: Commercial is larger than passenger. I don't know, whether we used to do – we used to say 60-40 or something. I mean, obviously more than.

Curt E. Espeland - SVP and CFO: Yes. It's more than that.

James P. Rogers - Chairman and CEO: More than that; okay. Yes, it's more commercial.

Operator: John Roberts, UBS.

John Roberts - UBS: You've got a core group of people enjoying a great job on the integration activities. Do you just span them back into the organization as you work through that? Or does this sort of set out a challenge for you to try to find some other things to keep these people active on integrating?

James P. Rogers - Chairman and CEO: Let me just say, you guys on that side of the call, you actually do know something about how to run businesses. A lot of the questions you've been asking is exactly the kind of conversations we had internally, and that's another one where you've got some synergy having a group together and then the issue is do you think you can keep them fully occupied. This is really Curt's baby. So let me have Curt define.

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

John Roberts - UBS: Then just as a follow-up. It sounds like you're completely dismissing the e-cigarette phenomenon, which maybe correct, but I've got some friends and families who really love the product and sometimes electronic devices come down in price really fast because of the learning curve and scale they go up. So I just wanted to do a gut check that's something that you really don't think is on the horizon anytime soon.

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

Gregory A. Riddle - Director, IR: 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 approximately 11 a.m. Thanks again. Have a great day.

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