Eastman Chemical Company (EMN)

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Eastman Chemical (EMN)

Q1 2011 Earnings Call

April 29, 2011 8:00 am ET

Executives

James Rogers - Chairman, Chief Executive Officer and President

Curtis Espeland - Chief Financial Officer and Senior Vice President

Gregory Riddle - Director of Investor Relations

Analysts

David Begleiter - Deutsche Bank AG

Manav Gupta - Goldman Sachs Group Inc.

Andrew Cash - UBS Investment Bank

Jeffrey Zekauskas - JP Morgan Chase & Co

Frank Mitsch - BB&T Capital Markets

Edlain Rodriguez - Gleacher & Company, Inc.

Kevin McCarthy

P.J. Juvekar - Citigroup Inc

Presentation

Operator

Good day, everyone, and welcome to the Eastman Chemical Co. First Quarter 2011 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 Co., Investor Relations. Please go ahead, sir.

Gregory Riddle

Okay, thank you, Alan, 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.

During this call, you will hear certain forward-looking statements concerning our plans and expectations for second quarter and full year 2011. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed in the company's first quarter 2011 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2010 and the Form 10-Q to be filed for first quarter 2011. Also, we posted slides that accompany our remarks for this morning's call on our website at www.investors.eastman.com in the Presentations & Events section.

With that, I'll turn the call over to Jim.

James Rogers

Thanks, Greg, and good morning, everyone. We really appreciate you joining us this morning. We know you had a choice. You could have watched talking heads talk about the royal wedding for a little bit longer, but thanks for joining us here in the real world.

And I'll start on Page 3, and as I normally do, I'll begin with a review of our recent outlook statements. It's fair to say that since we last talked a few months back, business conditions have improved markedly. Our guidance for first quarter EPS was that we would approach $2 a share, and I'll talk more about why we exceeded that in a few minutes.

Our guidance for full year 2011 EPS was that we would approach $8 per share, and given the strong start to the year and with our first quarter results, we now expect to be slightly higher than $9 for the year. Given the strong net earnings, we are on track to exceed $100 million of free cash flow for the year, and Curt will speak to that in his section. And we remain committed to being disciplined in how we put cash to work and see it as a way to differentiate ourselves from the rest of the industry.

Moving next to Slide 4, in our corporate results. We are hitting on all cylinders right now, and as a result, we continue to demonstrate a new level of earnings performance. This is the seventh consecutive quarter of year-over-year earnings growth, both operating earnings and EPS, and the sustained earnings growth reflects the strength of our current portfolio of businesses which, as you know, we have substantially improved over the last several years through both divestitures and acquisitions. It also reflects continued volume growth, and this was really throughout the company and in all regions of the globe.

We were also able to increase prices, both due to higher raw material and energy costs, and due to tight end markets. There are probably two main reasons we exceeded our expectations in the first quarter. First, propylene prices increased more than we thought they would and therefore, we benefited more from the propane propylene spread than we thought, and to be fair, propylene probably went higher than most in the market thought it would.

Second, we underestimated just how tight the end-use markets are for many of our key products, and that therefore, even minor outages in the market have a significant impact on pricing, and we expect this tightness to continue unless demand drops off.

I'd also add we were a little bit cautious in our expectations for continued economic growth. These results in a great quarter that demonstrates what 10,000 people working together can accomplish, including near flawless operational excellence in the quarter and gives us a lot of momentum heading into rest of the year.

Turning next to the segments, starting with Fibers on Slide 5. And in a pattern that will never get boring, for me at least, Fibers once again reliably delivered strong earnings in the first quarter. Revenue was up 8%, with volume up due to the new capacity in Korea filling up. Pricing was up slightly, but we expect you will see more of the annual price increase for acetate tow show up in the second quarter results.

Operating earnings were up both year-over-year and sequentially, but the operating margin was down slightly year-over-year because a higher percentage of our tow volume came from England and South Korea, and although these sites have a good cost position, they aren't quite as attractive as our Kingsport facility, which is fully integrated in larger scale.

Looking forward, we continue to expect Fibers to have operating earnings of approximately $340 million for the year. Up next on Slide 6 is CASPI and to say they had a very strong quarter is quite an understatement. Sales revenue was up 25% on higher pricing and higher volume. Pricing was up in response to higher raw material and energy costs and also due to strong demand, particularly in the U.S. and high capacity utilization in the industries where they compete. Volume was up throughout the segment, but particularly in the U.S. in the transportation, industrial and packaging end markets. CASPI is also benefiting from a more advantageous propane to propylene spread, and I'll talk more about that when I get to PCI.

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