Eastman Chemical Company Earnings Call Insights: Key Propylene Derivatives and the Solutia Acquisition

Eastman Chemical Company (NYSE:EMN) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Key Propylene Derivatives

Duffy Fischer – Barclays Capital: The question I had, we’ve had pretty steep propylene pop in January and people are thinking there was going to be another move in February. I guess, for you guys, can you talk about the key propylene derivatives and how you think those markets will pass on that price increase? I mean, where you’ll be able to get it quickest and how long that lag will be?

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James P. Rogers – Chairman and CEO: Sure Duffy, and it’s one of those things where as we move to more of a specialty. I would’ve thought we’d be spending less and less time on this. On the other hand, I must admit I am enjoying the exposure we have at this time, because you’re right, for fourth quarter we got helped with propane particularly staying down, and then, this quarter, it looks like we are going to get helped with the other end of the spread, the propylene moving up. By the way, we are just in January, so I try not to get too carried away about what the spreads are going to do this year. One of the key places you see it is in our solvents business. The propylene that shows up in the Functional Products, the Additives & Functional Products segment, I guess, as I look at it, there’s a range the other place would be in our intermediates business, but as I look at it, it’s a range of how far downstream you are, how much transparency the customers have. Certainly, I think we’re much better with pricing and moving things along quickly. It will depend again by how much is specialty, how much is commodity but we’ll definitely see the effects of this move in propylene in those two segments in the first quarter and some will then flow over into the second quarter because of the lag. We’ll try to breakout just would you average in one months, two months, three months in the past, it’s been as long as three months. I think we’re much faster than that now.

Duffy Fischer – Barclays Capital: Then the changeover at Kingsport to gas, why half – I mean, it seems like kind of half pragmatic if it made sense, why not go 100% or was it – that was just enough to get you over the hurdle what you needed to do regulatory wise?

James P. Rogers – Chairman and CEO: So you are one of those poker players who always give all in on every hand.

Duffy Fischer – Barclays Capital: Well, unfortunately sometimes wrongly.

James P. Rogers – Chairman and CEO: No, I mean, we are trying to be judicious. One of the main drivers was the whole regulatory environment, not only what we are facing with Boiler MACT and something called (BAR), but just trying to look down the road a few years as to where do we think this country is going. In the past we’ve always looked at it and coal was always so advantaged that you just swallowed hard and paid all the regulatory changes you had to make paid for all those changes. Now, with the outlook for natural gas and as compared to Central Appalachian coal, it’s really a push on the economics. Then you go to the capital cost, and Curt gave it to you, $90 million compared to something that was probably a couple of hundred million north of that for getting coal in compliance. So you knew you were going to do something. Then the issue is how much do you do. This amount allows us to avoid that capital meets all our regulatory requirements and then some, plus frankly we tend to like the idea of being for our energy needs here at our major side half gas, half coal. We think that kind of plays to what we talk about some of the other places in terms of being diversified and trying to smooth to earnings. So net, net a good result it’s a shame in a way we had to eat I think $17 million but we couldn’t just sit on our hands earlier we had to get going on the engineering to be in compliance and meet the timeline and then of course a world for shale gas just moved — gas prices moved and you know we got a much better alternative. So we had to scrap the plans to change our – change our boilers over.

The Solutia Acquisition

Robert Koort – Goldman Sachs: I was wondering if you could give us a little more granularity on what’s going on until the key markets from the Solutia acquisition maybe on a regionalized basis for both auto and tires?

James P. Rogers – Chairman and CEO: Frankly there are some other players out there, been out ahead of us, who’ve done a pretty good break down. Guys who are directly in that market and almost totally dependent on that market you might say. But I don’t think you are going to get any new insights from us. As we look at tires around the world obviously the States is coming back, Europe is still very much down negative again this year in ’13 and Asia seems to be improving. One distinction I’ll draw so that you don’t just think about auto builds, is realize we are more dependent on frankly commercial activity because of the truck tires being more important to us that the car tires. That’s one comment I can probably make globally is I think we are still at a lower level of commercial activity. And so when I think about a business like Crystex, to me it just seems like such a great business and we are not getting to see it shine, so I was trying to think of an analogy. It’s like having this champion surfer, and right now, we just have two and three foot waves and we keep waiting for the big waves to come, so we can see what this business can really do. Plus we’ve got Kuantan expansion that will probably get going on later this year that’s going to make some fairly dramatic changes in their cost position in terms of their fixed cost and variable cost. We’ll be able to go back and retrofit existing sites for that. So, while I think we’ve got a fantastic business the markets are not allowing us to show just how good that is. What was the other – was there something else besides tires you wanted to hear about?

Robert Koort – Goldman Sachs: Just autos generally, but my suspicion is you’ll give me the same response, so let me ask a different question, if I may, which is in the context of your 2% global GDP, can you give us a sense of where you see volume growth across the division?

Curt E. Espeland – SVP and CFO: Yeah. I mean, what you want to drive is volume growth in everything. So maybe Fibers won’t see until they get their JV on, because they are running so hard right now. I mean, just volume in general, Bob, I wish we’d had a little more this past year frankly, but there were some things that slowed us down and net-net I can’t complain too much. I mean, I think we had a really good year. We need to get the volume growth going in the future. Most of that will hinge upon capacity additions, so getting more hydrogenated hydrocarbon resins, getting that thing going in China will be fairly significant for us. Filling out the lines we’ve already built like Triton and CTA and we’ll get volume growth and mix change with the acoustic interlayers. That’s a great product and that ought to be growing nicely. Are you going to add anything Curt…

Curt E. Espeland – SVP and CFO: (indiscernible)

James P. Rogers – Chairman and CEO: Yeah, that’s we’ve been talking about that. That one I think I can count on for some time to come is the switch on the plasticizer side. Realize too that we got a couple of competitors out there. We didn’t put in our prepared remarks, but (SK) came on with some copoly volume this past year, (Kalama) came on with some volume in the benzoate plasticizer arena and so we’re trying to be smart about how we make pricing, volume choices this past year to preserve as much shareholder value as they go to fill up some of those expansions. But for example, I think specialty plastics business, which we don’t breakout anymore, but they came under some pressure this year because of what I just said about SK and they wanted to work down some inventories at year end, I expect that specialty plastics to have – get back to setting the record in 2013 again for earnings and that will demand some volume growth, so things like Tritan will have to continue to grow, which it will.