Eastman Chemical Company (EMN)

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Eastman Chemica (EMN)

Q4 2010 Earnings Call

February 01, 2011 8:00 am ET

Executives

James Rogers - Chief Executive Officer, President and Chairman

Curtis Espeland - Chief Financial Officer and Senior Vice President

Gregory Riddle - Director of Investor Relations

Analysts

David Begleiter - Deutsche Bank AG

Jeffrey Zekauskas - JP Morgan Chase & Co

Luisa Hermann - Dahlman Rose

Frank Mitsch - BB&T Capital Markets

Andrew Feinman - Iridian Asset Management

Kevin McCarthy

Edlain Rodriguez - Gleacher & Company, Inc.

Paul Mann - Morgan Stanley

P.J. Juvekar - Citigroup Inc

Presentation

Operator

Good day, everyone, and welcome to the Eastman Chemical Co. Fourth Quarter and Year End 2010 Earnings Conference Call. [Operator Instructions] This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the conference over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir .

Gregory Riddle

Okay. Thank you, Candice, and good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; and Curt Espeland, Senior Vice President and Chief Financial Officer.

Before we begin, I'll cover three items. First, during this call, you will hear certain forward-looking statements concerning our plans and expectations for first quarter and full year 2011. Actual results could differ materially from our plans and expectations, certain factors related future expectations are or will be detailed in the company's fourth quarter and full year 2010 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2010 and the Form 10-K to be filed for full year 2010.

Second, except when otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures, including earnings per share, operating earnings and cash flows from operating activities that exclude asset impairment and restructuring charges, early debt extinguishment costs and the impact of the adoption of amended accounting guidance for transfers of financial assets.

A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including the description of the asset pairs restructuring charges, debt extinguishment costs and adoption of amended accounting guidance, are available in our fourth quarter and full year 2010 financial results news release and the tables accompanying the release.

Lastly, we've posted slides that accompany our remarks for this morning's call on our website at www.investors.eastman.com in the presentation and events section. With that I'll turn the call over to Jim.

James Rogers

Okay. Thanks, Greg, and good morning, everybody. Thanks for joining us. I'm going to begin on Page 3. And 2010 was a tremendous year for Eastman Chemical Co. Our solid core businesses demonstrated their earnings potential and established a new level of earnings performance for the company. Volumes returned for the strengthening global economy and in a number of areas we gained market share due to innovative products. We continue to make progress on our growth initiatives including the acquisition of Genovique Specialties, manufacture of non-phthalate plasticizers in May of 2010, completing an acetate tow expansion in Korea during the first quarter which increased our capacity there by 15% and selling out our first Tritan Copolyster resin line a year ahead of schedule. Our free cash flow was over $400 million in 2010 and I remind you that we subtract out our dividend from that and just yesterday, we completed the sale of our PET business.

Moving on to Slide 4, and as I normally do on these calls, I'll take just a minute to review how we did again some of the commitments we made to you. In October, we told you that we expected our fourth quarter EPS to be between $1.40 and $1.50 and we came in at the low end of the range and I'll talk more about that in a minute. For the year, on the last call, we indicated EPS would be above $7 for the year and we were slightly below that. On cash flow, we said we would generate more than $300 million, and as I said, we came in at over $400 million with the outperformance mostly due to the timing of a pension contribution that Curt will cover. Earlier in the year, we said we would review strategic actions for our PET business and you know the outcome there, and we committed to be in disciplined with our capital allocation. If you look at how we put capital to work through the year, across the four buckets I've talked about, I hope you would agree we've been disciplined.

Overall, 2010 was a terrific year for Eastman and it has positioned us well for profitable growth going forward.

Now turning the Slide 5. Before I go into a discussion of our fourth quarter

performance, I want to remind you that Performance Polymers results are presented as discontinued ops. So you won't see them in our numbers in these slides or in the tables that accompany our release last night. It also means that the residual cost from the business, those cost that stayed with Eastman after the sale, have been allocated to the remaining segments. These costs were approximately $25 million for full year 2010 and we expect it will be approximately $20 million in 2011. And I expect this to grow into this cost in the next year or so.

Specifically, on the fourth quarter performance, year-over-year revenue increased due to the higher volume and higher selling prices. These factors drove the improvement in operating earnings in EPS. Sequentially, revenue declined by 3%, mainly due to a 6% decline in volume due to normal seasonality and some destocking. Operating earnings and EPS declined sequentially due to the lower volume, higher cost for growth and business development initiatives and higher raw material and energy costs. In a number of cases, we've pulled cost associated with growth forward due to demand returning earlier than expected. There are also a few other factors impacting fourth quarter results that combined had a negative impact on the fourth quarter. We had some asset write-offs and other charges that weren't fully anticipated. These were partially offset by the last payment from our insurance settlement related to the first quarter power outage at the Longview, Texas facility. And the EPS from continuing operations we're reduced by $0.11 a share due to the non-deductibility of early distributions under the executive deferred compensation plan.

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