Eastman Chemical Company (EMN) — Q4 2015 Earnings Call Transcript

Thank you, Taylor. And good morning everyone and thanks for joining us. On the call with me today are Mark Costa, Chairman and CEO; Curt Espeland, Executive Vice President and CFO; and Louis Reavis, Manager, Investor Relations. Before we begin, I’ll cover two 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 2015 financial results news release, and our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2015 and the Form 10-K to be filed for 2015. Second, earnings per share, operating earnings and EBITDA referenced in this presentation exclude certain non-core costs, charges and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in the fourth quarter and full year 2015 financial results news release and the appendix to the slides that accompany our remarks this morning, both of these can be found on our website, www.eastman.com in the investors section. Projections of future earnings in the presentation also exclude such items as described in the news release. With that, I’ll turn the call over to Mark.

Good morning, everyone; I’ll start on Slide 3. 2015 was another outstanding year for Eastman as we continued to make excellent progress on our strategy to transform towards a specialty portfolio. We delivered our sixth consecutive year of solid EPS growth despite a very challenging global business environment, and generated record free cash flow of $960 million, reflecting strong earnings as well as the benefit of recent acquisitions that generated outstanding free cash flow. A strong contributor to earnings growth in our specialty businesses in 2015 was the progress we made on organic growth initiatives. I’ll highlight just a couple of examples. In the Advanced Materials segment, our window interlayers, particularly our acoustic and heads-up display products delivered solid double-digit volume growth for the year. Also in AM, we delivered very strong growth from our new optical film solutions for mobile devices. And in Additives & Functional Products, tackifying resins into tires was a strong contributor to overall growth in 2015. These are just a few examples of how innovation and market development is supporting growth in an overall difficult environment. We also did a great job in 2015 of successfully integrating our recently acquired businesses. Each of these acquisitions were completed and aligned well with our strategy of delivering consistent superior value, and combined delivered over $0.50 a share in accretion for the year, as expected. In our cost management, we did an outstanding job in 2015, reflecting very strong productivity gains. Overall, we were able to more than offset inflation by about $25 million. We also made substantial progress on reducing our net debt. Finally, during the year, we remained committed to returning cash to our stockholders. We increased our dividend by 15%, the sixth straight year of increases, and over that time, we have more than doubled the dividend. And we repurchased more than $100 million of stock. This strong performance on so many fronts is a great testament to the strength of Eastman’s portfolio and the integration and scale that has been built over decades. More importantly, I am very fortunate to work with such a strong team of employees who consistently overcome challenges and find ways to deliver results for our stakeholders. Now, I hand the call over to Curt to cover the financial details for 2015, and then I’ll come back to talk about 2016.

Thanks, Mark; good morning, everyone. Since we have a lot to cover today, I’ll be brief with my comments. I’ll start with our fourth quarter corporate results on Slide 4. We delivered solid earnings despite the many increasing challenges we faced during the quarter. The decline in revenue largely reflected lower selling prices due to lower raw material and energy costs. Operating earnings were down somewhat. Positives included strong volume growth in Advanced Materials and strong operating margins in Adhesives & Plasticizers. Headwinds were low oil prices and the associated propane hedges, which largely impacted Specialty Fluids & Intermediates and lower volumes in Fibers. Earnings per share was solid and included a lower tax rate year-over-year, which reflected the full-year impact of the tax extenders enacted in December. Next on Slide 5, looking at the full year, we delivered outstanding results reflecting the strength and robustness of our strategy to transform to a specialty portfolio. Sales revenue increased slightly as sales from recently acquired businesses more than offset lower selling prices which largely reflected lower raw material costs. Operating earnings increased in three of our segments with particularly strong earnings growth in Advanced Materials. Our operating margin for the year was 18%, an increase of nearly 100 basis points compared to 2014. Overall, we’re very pleased with our results in a challenging business climate. Moving next to the segment results beginning on Slide 6, Advanced Materials had an exceptional year, as they continued to deliver on the elements of their strategy. Sales revenue increased due to higher sales volume and sales of products of the acquired performance films business. Offsets were currency and lower selling prices which reflected lower raw material costs, particularly paraxylene for copolyesters. Operating earnings increased more than $100 million or about 40% due to a number of factors: Volume growth and mixed improvement; volume from the acquisition; operational improvements; and improved spread. The improved product mix was driven by increased sales of optical film solutions and premium interlayers. The operating margin increased to roughly 17% from just over 12% in 2014. These results reflect execution of a strategy over a number of years to improve the operating margin in this business and to achieve an appropriate return given the investments made. We expect to build on this success going forward. Moving next to Additives & Functional Products on Slide 7, which had a solid year; the revenue increase was due to the impact of the Taminco acquisition. This was partially offset by lower coatings and other formulated products, selling prices which reflected lower raw material and energy costs as well as the impact of currency. Operating earnings were up year-over-year, reflecting both improved spread and the impact of the Taminco acquisition. The business did a great job managing value in the face of a slower growth environment, increased competitive rivalry, and narrowing olefin spreads. Moving next to Adhesives & Plasticizers on Slide 8, for 2015 sales revenue declined primarily due to lower prices reflecting lower raw material costs and currency. Volume was about flat as growth in non-phthalate plasticizers, particularly in North America, was offset by lower adhesives resins volume due to the lack of availability of raw materials early in the year as well as some operational constraints. Operating earnings increased as improved spread was partially offset by propane hedges and currency. The operating margin increased to just under 20% as we did a good job of holding onto value through the year. Now to Fibers on Slide 9, revenue declined mainly due to lower acetate tow and acetyl chemical sales volume. The decline in tow volume was mainly attributed to customer destocking, especially in China. And the decline in acetyl chemicals volume was due to increased sales to the cellulose acetate flake joint venture in Kingsport. Operating earnings were down year-over-year due to lower tow and acetyl chemicals volume. Despite the challenge for lower volume, the operating margin for the segment was 32%. I’ll finish the segment review with Specialty Fluids & Intermediates on Slide 10. Sales revenue decreased as lower selling prices, and lower chemical and other intermediate sales volumes more than offset the impact of acquisitions. For operating earnings, we had a number of significant headwinds impacting results. The significant decline in oil prices reduced the North America shale gas advantage. And as the market became long in ethylene and propylene, the drop in olefin prices outpaced the decline in oil, further impacting margins. Also slower than expected economic growth in Asia led to an increased level of competitive import threats to the U.S. and Europe. And the impact of propane hedges was significant for this segment. These headwinds more than offset earnings from acquired businesses and commercial and productivity actions we took through the year. While operating earnings declined for the year, we did a good job managing through a challenging environment. On Slide 11, I’ll transition to the overview of cash flow and other financial highlights for 2015. We did an excellent job of generating cash in 2015 with operating cash flow over $1.6 billion. This is a new record for cash from operations as is our free cash flow of $960 million for the year. Capital expenditures totaled $652 million, below our previous expectations as we managed the pace of spend with the current economic environment while maintaining our growth investments. We expect to be at a similar level in 2016. Looking at the balance sheet, net debt stands at $6.7 billion as of year-end, reflecting almost $600 million in debt reduction for the year. Our cash flow, strong balance sheet, and liquidity keep Eastman in a position of strength in an uncertain economy. Our full-year dividend was $238 million, and this included a 15% increase in the fourth quarter. In addition, we had $103 million in share repurchases through the year including $55 million in the fourth quarter. The combination of regular increases in our dividend and share repurchases reflected a continued confidence in future earnings and cash flows. And finally, our effective tax rate for the year was approximately 25%, which again includes the enactment of tax extenders during the fourth quarter as well as favorable geographic mix of earnings. We expect the effect of tax rate for 2016 will be at a similar level, if not better, as we continue to pursue opportunities to reduce this rate further. Overall, a strong year of results given the challenging conditions. And with that, I’ll turn it back over to Mark.

On Slide 13, I'd like to discuss our key objectives for 2016. We are clearly navigating a difficult macroeconomic environment and are utilizing every possible method to generate value for our shareholders. In the upcoming slides, I will elaborate on some of these methods. Our main focus will be on driving volume growth and enhancing our product mix in our specialty divisions. We are aggressively ramping up our cost reduction initiatives while also advancing our portfolio management and organizational design. We intend to share our robust free cash flow with our shareholders. On Slide 14, I want to present a brief overview of our historical volume growth as a foundation for our future outlook. Over the past five years, we have achieved 10% compounded volume growth. Initially, our heritage specialty businesses demonstrated around 3% compounded growth, as indicated by the yellow line. We leveraged our strong free cash flow and solid balance sheet to connect with attractive end markets through high-quality specialty products via several strategic acquisitions. The organic growth we are experiencing, both in our heritage Eastman operations and our acquisitions, reflects our management team's capabilities on two key fronts: Firstly, we are fostering high growth and innovative platforms that surpass end market growth rates, and secondly, we excel at balancing price volume trade-offs in our core segments. This story of organic growth and disciplined capital deployment is noteworthy. We are proactively driving our own growth rather than relying solely on market conditions. On Slide 15, you will see how we implement our innovation and market development strategies. The vertical axis represents our key, world-class technology platforms, which include both long-established and recently acquired platforms. The horizontal axis outlines four primary end markets where we are focusing our growth efforts. We have a concentrated set of initiatives leveraging our expertise in these platforms to deepen our penetration into these attractive markets, including tire resins, acoustic and heads-up display interlayers, and new mobile device displays. Additionally, we have previously mentioned Tritan, our next-generation copolyester coatings, and microfibers. We have made significant strides in our innovation and market development portfolio, and I am dedicated to ramping up investment and focus in these areas, which I believe are critical to Eastman’s long-term success. We anticipate that our innovation and market development initiatives will contribute between 1% and 2% to our overall revenue growth on a compounded basis over the next three years, with operating earnings from these revenues surpassing our corporate average. Moving to Slide 16, we acknowledge the tough economic landscape necessitating rigorous cost management. In recent years, we have managed to counter inflation through productivity and cost reduction strategies. In 2015, we achieved even more, contributing over $25 million to our bottom line. This year, in light of the challenging conditions, we recognize the need for further action. We aim to double our productivity and cost savings efforts, targeting around $200 million. After accounting for inflation, we estimate that these combined initiatives will add approximately $0.50 per share to our earnings this year. I want to highlight that as we reach these cost savings targets, we will continue to invest in our innovation and market development initiatives. We have a strong track record in cost management, and I am very confident that we will meet and achieve our cost reduction goals for 2016. Let's move to our outlook on Slide 17, which begins with the growth drivers that have remained stable for us over the past six years. We maintain a strong portfolio of specialty businesses that are well-prepared for growth. They have performed well over the last six years, and we expect this to continue into 2016 and beyond. Moreover, we anticipate continued strong growth from our innovative specialty products, leading to improved product mix and heightened overall earnings growth. As noted earlier, we are implementing aggressive cost actions to achieve the $0.50 per share target. Additionally, we expect to realize further cost synergies from acquisitions, as previously indicated. We are also exploring every potential option for improvement, including tax advantages and pension costs. We will utilize our industry-leading free cash flow for share repurchases following debt reduction later in the year. That being said, we are confronted with increasing short-term challenges. The recent significant drop in oil prices has heightened pricing pressures particularly in our olefin and acetyl products. Stagnant global economic growth, along with weakened Asian and European currencies, is intensifying competitive dynamics in certain products. Moreover, we expect inventory destocking in Fibers in China. Despite these challenges, we are committed to achieving earnings per share in 2016 that are close to our 2015 results and anticipate that our EBITDA margins will be similar to those of 2015. Lastly, we expect to deliver another strong year of free cash flow exceeding $900 million. Next on Slide 18, I’ll share that we are refining our business structure, leading to changes in how we report our financial results. These adjustments will better align our business model with long-term growth objectives and support our ongoing transition to a specialized portfolio, aided by the completion of the Taminco integration. This new structure is intended to create more growth opportunities in attractive markets and streamline cost management. Additionally, this revised reporting format will lessen complexity and improve visibility for those monitoring our performance. On Slide 19, you can observe our new structure. The most notable change is the reduction from five segments to four, with the Adhesives business joining the Additives & Functional Products segment, and the Plasticizer business moving to the newly created Chemical Intermediate segment. The combination of Adhesives and AFP allows for better business management, especially with our successful tackifying resins in tires. We also foresee further potential in application development within adhesives, leveraging our world-class development capabilities in AFP. The management of plasticizers and distribution solvents from AFP will be improved within Chemical Intermediates, where we excel in pricing and asset utilization in a competitive arena. There will also be various product line adjustments to enhance market connections. This reporting structure will take effect in the first quarter, and we plan to share historical segment results under the new framework before releasing first-quarter earnings. With these changes, more of our specialty businesses will now fall under Additives & Functional Products and Advanced Materials, while most of our oil exposure and olefins will be categorized in Chemical Intermediates. For 2016, we expect strong growth in Advanced Materials driven by volume and mix improvements; Adhesives & Functional Products is likely to remain stable despite a tough market, as volume growth offsets price challenges, with Adhesives showing modest decline. In Fibers, we anticipate declining prices due to lower pulp costs and weakening currencies, which will be mitigated by our cost-saving initiatives. Thus, volume will be a key factor. We expect continued destocking in China, but the extent remains uncertain for the upcoming months. For Chemical Intermediates, we predict lower earnings due to reduced oil prices impacting spreads in that sector, with similar trends affecting plasticizers. Therefore, we believe this new business structure supports our strategy of transitioning towards a specialty portfolio. We have been on a lengthy and dedicated journey to divest from commodity businesses and focus more on specialties. On Slide 20, I will provide an update regarding our portfolio management efforts. After successfully integrating our acquisitions in 2015, our focus will shift in 2016 towards portfolio optimization as part of our long-term strategy. For the past few years, we have been trying to divest from our excess ethylene position, which has been a source of earnings instability. These efforts have faced delays due to our previously discussed pipeline dispute with Westlake. With favorable judicial rulings, we believe we can now advance our plans to divest from excess ethylene. We are also looking at strategic opportunities for both excess ethylene and commodity olefin intermediates that are non-essential to our specialty strategy and can be operated separately on-site. The specific details may vary depending on buyer interest and valuation. It’s important to note that our integrated Texas site produces competitive ethylene and propylene, most of which we convert into specialty derivatives, and thus, it will remain a vital part of our portfolio. We have engaged an investment bank to revive the process of monetizing our excess ethylene position and other commodity olefin product lines that do not align with our long-term strategy. This effort will be a top priority in 2016, and we will provide more updates as it develops. On Slide 21, we will discuss our cash generation expectations. The accompanying bar chart illustrates our consistent ability to generate strong free cash flow, particularly over the last five years. This showcases the strength of our core businesses and the changes within our portfolio. For 2016, we expect free cash flow to exceed $900 million. With this cash flow, we plan to continue reducing our debt, having already decreased it by over $600 million in 2015, and we aim to reach about $1 billion in debt reduction in 2016. Consequently, we have committed to fully utilizing our free cash flow for increasing dividends, continuing debt reduction, and share repurchase. In conclusion, on Slide 22, we uphold a strong portfolio of specialty businesses in which we have confidence, knowing they will drive volume growth this year and into the future. The organic initiatives, innovation, and product mix improvements are fundamental to our strategy and have been essential in generating value both last year and this year, as well as for future growth. We are dedicated to employing every resource available in this challenging environment, including enhancing our cost reduction initiatives. We will ensure our robust free cash flow is returned to shareholders. Despite the temporary challenges we face this year, I am confident we will maintain solid earnings growth in the long-term. I look forward to your questions during this call. Thank you.

Okay. Thanks, Mark. We’ve got a lot of people on the line this morning. So, I ask that you limit yourself to one question and one follow-up. With that, Taylor, we’re ready for questions.

Mark, on SFI, it was a challenging Q4; how should we think about the earnings progression into Q1 and for the full year?

This is Curt, David. I’ll take that. It’s fair to say first half will be our toughest comp year-over-year especially the first quarter given the strong performance Specialty Fluids & Intermediates had last year. Also if you think about earnings trajectory in general, our cost reduction efforts will help in first quarter but will be mostly in the subsequent quarters, plus the deleverage in some other share repurchases in the second half of 2016 will help kind of the overall shaping of next year. And specifically of SFI, when I look at their run rate last year versus this year, I would say right now the way things are shaping up what you saw in third quarter is more representative of what you might expect for the year.

And just Curt and Mark, just on Slide 16 on the cost actions, can you give any more concrete examples besides Workington reduction, where else will cost actions come from, plants being closed, people being let go, anything more concrete you can add?

Sure. So, we saw things developing and knew that we needed to take action on cost like most people in this industry. And so, we’ve done a restructuring program where we’re going to reduce non-operating labor about 7%, David. In addition, there’s a bunch of other non-labor spend items in SG&A and R&D that we have that we are going to be able to reduce some spend on, and then there is a wide range of manufacturing cost improvement throughout our plants that we are pursuing. In addition of course, there are things like the plant closure in Workington. But that would be additive to the $0.50 a share. That Workington closure was not included in that $100 million. So that’s an additional plus. I’d also emphasize that you’ve got quite a bit of cost synergies continuing to flow in from the acquisitions on top of that $0.50 a share. So, in collection it adds up to a pretty significant number.

When Curt was talking about the various segments, he did talk a fair amount about the interplay of pricing dropping due to the raw materials coming down, and that always is kind of a signal of more commodity type behavior rather than specialty type behavior. So, Mark, as you think about your portfolio, and you went through this exercise to re-segmenting to four, what percent do you see being commodity versus specialty in your mind? And I know you mentioned that you’re going to restart the ethylene sale process. Are there other parts of the portfolio that you see as perhaps not fitting longer term into EMN?

Sure, Frank. First on the specialty part, with the re-segmentation, you should think about the parts of the products that we have that are commodity oriented have been concentrated in Chemical Intermediates. So, the other segments really don’t have anything we consider to be commodities. The reality is that even in specialty businesses when you have oil prices drop from $100 to $30, and you are oil-based, your customer sort of notices and expects that some of that raw material benefit is going to be shared with them. So throughout last year, we realized obviously significant raw material benefits in our specialties and our commodities. And the pace at which the price is shared with them is very different. So, in the commodities it happens relatively quickly. In the specialties, you still give back value to your customers. If you don’t do that and if you hold onto price very aggressively which you can certainly do in a specialty, you set yourself up for a volume cliff in the future because even if you’re a proprietary product and we have a number of ones where we’re the only manufacturer in the world, if you don’t share some of that value at an appropriate level, you put your customers on a jihad to find new suppliers, whether it’s an alternative material or a smaller competitor you might have where you’re a very strong leader in a specialty business. So, we do that. We have probably the most sophisticated commercial excellence and pricing systems I think in the industry where we make these price volume trade-offs all year long to make sure that we’re sharing value but we’re also maintaining to be able to grow volume in the long-term. So, over the year that plays out and prices come down to some degree and you take that into this year, and that’s a bit of a headwind versus how you started last year. But no, I don’t think our specialties are commoditizing at all. And what I love about most of our technology platforms is we have next-generation products building off of the same assets whether it’s next generation of acoustics in heads-up display, the Tritan product replacing some copolyesters and a series of opportunities going on to improve Crystex with our next generation Crystex technology, etc. So, we never sit around waiting for people to try and replicate as we are always moving the ball down the field and advancing what we offer to our customers. So no, overall I would say the portfolio feels great on that front. What I did say though in my prepared remarks is, we are expanding the scope of what we’re considering selling beyond excess ethylene. So, we are looking at what other olefins that have commodity behavior in Chemical Intermediates, a lot of volatility, a lot of distraction for investors that is not essential to our long-term strategy, so they are not critical intermediates for our specialties. And so, we’re going to look at how much of that we can package with excess ethylene and find a buyer who values that olefin portfolio and their strategy.

And following up on this theme, I really appreciate the Slide 14 with the volume growth of 3% in your AAA businesses. And then on top of that I believe you’re expecting 1% to 2% innovation market development as well. So that would almost imply kind of a 4-plus percent improvement in that area. My sense is that given the economic backdrop in 2016 that would not be the case. How are you thinking about the potential volumes in the AAA side in 2016?

So Frank, I think when we look at what is now the AA, I guess, we’re moving up in the ranks, those two segments we still expect solid volume growth. Obviously, the economy is going to do what it does and we’ll track with it, especially in the end markets we serve from transportation to B&C and consumables being our three large end markets. And I think those all have attractive growth trends this year from what we can see. So, I think we’ll grow with those markets. So, I think we’ll have volume growth that will be like history. And within that I think we’ll get some mix uplift that will be these high growth specialty products that aren’t necessarily huge volumes but they are very attractive to earnings and they provide a nice lever to earnings. But we don’t see a volume problem in this year. We think it continues to be solid. We think AM and AFP will have good volume growth. We think AFP’s volume growth will be better this year than last year when we look at as last year wasn’t as much as we wanted of course. So, we do see some places in specific areas where we’re improving our market share position where we’ll get better volume growth there too.

Just trying to get a sense on the earnings bridge. You did 7.28 in 2015 bringing $0.50 of cost savings. In your segment breakdown, you basically told us that AM is going to be up; AFP is going to be stable; Fibers, there is a question mark around volume; and then you’ve got the oil spread issues. So, can you just help us, what do you think the FX headwind is in 2016? And then when you say, you’re going to approach last year, does that mean you’re going to be north of 7 or do you think you’re actually going to get close to 7.28? And I guess what I’m really asking you is how much risk do you think there is on the spread side of things and is that really the true wildcard for results next year or this year?

So Vincent, thanks for the question. And it’s obviously a very important one. As we look at it, we do see a lot of tailwinds, as you noted. Good volume growth, mix upgrade, the cost reduction actions, the acquisition synergies, improvements in tax, pension costs as well as share count. So, there are a number of very attractive tailwinds for us. And there are really two principal issues, as you’ve identified that are the headwinds. So, how much spread compression do we take this year versus last year in this volume on Fibers? When it comes to the spread issue, I think that there’s predominately that spread from compression is going to be in Chemical Intermediates but you also feel a little bit of an AFP, which still will have some olefins in that segment and we expect prices to come off a bit in Adhesives where things have been relatively tight last year. And so, we’ll have a little bit of price give back but better volume growth this year, netting each other but somewhat down. But the majority of the issue is really a spread issue. And then of course, we’ve put in an expectation of some additional destocking in Fibers. There’s a lot of moving parts when it comes to oil, the economy, the uncertainty in destocking, and I can combine those into a variety of different scenarios. The way I would suggest you all think about it is we’re somewhere between stable to 2015 EPS and down 5% when I combine all those different factors together. And those I think give us that sort of a range. Specific to FX, I’ll let Curt answer that question.

Yes, Vince, just the way I think about currency itself, right now the currencies we’ve seen, predominately our exposure is euro is slightly down compared to what we saw on average for 2015. Maybe the best way to look at is if you think about just the net impact of hedges, whether that was the cost of the propane hedges or the benefit of the currency hedges, net-net that was probably a $0.60 headwind for us for the year. For ‘16, we think the net impact of these changes in hedges net-net is going to be about flat. This is a little lower than we were thinking before, primarily due to the class of oil and the underlying impact on our propane hedges, but then that $0.60 impact really rolls off in ‘17 and ‘18.

Building on that point, it's crucial for investors to recognize that much of what we are experiencing is perceived as short-term pressure rather than long-term challenges. We believe there is nothing hindered in our long-term growth strategy aimed at achieving strong earnings growth in 2017 and beyond. If oil and currency remain stable, we expect a natural earnings lift of $0.60 per share in 2017 and 2018 as those factors roll off. If oil prices rise, our earnings will improve, just as they have been negatively impacted. In either scenario regarding oil prices, we anticipate earnings growth in 2017 and 2018, as we expect better conditions than currently exist. Additionally, we foresee continued volume growth next year and a transition in spread expansion into 2015, with some normalization of those spreads in 2016. This adjustment from $100 to $30 oil is a two-year process, but we will have that behind us in 2016. Furthermore, we continue to find ways to enhance our cost structure, and importantly, we have strong free cash flow. We will begin repurchasing shares in the latter half of this year and will do so aggressively in 2017. While we are disappointed by the current challenges we are facing, we remain committed to pursuing long-term growth and taking steps to sustain that volume growth over the long term and deliver robust earnings growth in 2017, 2018, and beyond.

Question on just the bridge between earnings and free cash flow. So, other than the share count changing, which should advantage earnings, if I’m looking at a linear relationship, is there anything else that should affect the difference between free cash flow and earnings in that bridge?

I think if you look at that bridge, the only thing that probably is going to be a little different, two aspects: One is we’re not anticipating the release of working capital as great as we experienced in 2015 as we go into 2016, just because of just the way the raws have fallen on a relative basis; plus, there’s always some difference in years between when you make your tax payments, etc. But I’m very confident in our ability to generate meaningful cash flow in 2016. And I think it’s just a matter of how much higher over $900 million it’s going to be.

And then in Q4 AF&P also saw price down about 10%, which was probably the price movement that surprised me the most. Is that still just the olefins affecting that segment or were there some other spreads in there that got compressed as well?

It was principally just the olefins. We’ve been doing a great job of holding onto value all year long, but we came to the point where at some places we needed to reduce prices to remain competitive. It’s a tough comp versus where prices were at $100 oil in the fourth quarter of ‘14. So, it was just that.

It just seems like you were hurt more by the ethylene change than the propylene change, given your spot ethylene exposure. Would you agree with that? On the propylene side, how much give backs did you have to do in the coatings area?

On the propylene side, prices decreased throughout the year, and when you examine the cracking spreads, they also declined for propylene, especially when comparing the first half of the year to the second half. Our prices followed this trend. We are incorporating the lower propylene prices as we move into this year, which creates a headwind in the first half compared to last year. In contrast, the story for ethylene is different. Ethylene prices were relatively strong in the first half of last year but decreased significantly in the latter half. We anticipate ethylene prices to improve in the second quarter of this year due to a large maintenance schedule for cracking that should help raise ethylene prices somewhat. While we do not expect them to reach last year's levels, we do foresee improvements from the current situation. Regarding coatings, our customers have made commendable efforts, collaborating with us to lower their prices on propane-related derivatives, which has benefited them.

A quick question on tow. You took a step down in 4Q in terms of year-over-year comparison. Can you discuss some of the declines? You said declines in China. Can you discuss tow declines in China and outside of China?

Certainly. First, I'll address the business outside of China, which has a clearer narrative. We have observed that destocking has concluded, and we anticipate volumes to remain relatively stable this year. Prices outside of China have decreased somewhat due to falling pulp prices, and our competitors in Europe and Asia Pacific are trying to increase volumes by leveraging their weakened currencies. We have maintained our market position, but prices have slightly declined. The cost-saving measures we are implementing have allowed us to offset this pricing decrease outside of China. The main focus now is on volume trends within China. From our perspective, the Chinese National Tobacco Company made strides in destocking in 2015 but didn't fully meet its targets. They must carefully balance the need to increase tax revenues while also managing inventory and production levels, which limits how much they can reduce production. They plan to continue managing their inventory this year. Additionally, the volume issues observed in 2015 and 2016 were partly due to the CNTC's backward integration with tobacco suppliers. Our joint venture with CNTC in late 2014 contributed to some volume decline in 2015. Another joint venture from Daicel will also impact volume this year. It’s essential to understand that this is not a sign of declining primary demand, as we don’t anticipate any reduction in cigarette consumption. The situation revolves around inventory management and backward integration. Fortunately, we do not foresee any additional backward integrations by CNTC until around 2019 or 2020, so that won’t pose a problem. As we move into 2017 and 2018, we could see additional opportunities compared to this year. In summary, we expect some decline, and we will need to monitor the outcome of our final discussions and contract negotiations.

Mark, could you give us outlook in 2016 on the Crystex business?

Crystex has been a strong business for us. While the market conditions are challenging with weak primary demand, we did see volume growth last year, particularly in the second half compared to the first half. We expect that volume growth to continue this year. From a demand perspective, everything seems to be on track. On the pricing side, it's a competitive market, with several small competitors in Asia that we've dealt with since 2012, and we're experiencing some price pressure there. Our Japanese competitor is leveraging their weaker yen to chase volume, while we are focused on defending our market position, which may limit their earnings growth but help us improve margins. Overall, things are progressing as we planned. We are optimistic about our new technology and are bringing on our new process technology and retrofit in Germany this quarter. We are also on track to develop and build new plants, with plans to have them online by early 2017. This will significantly enhance our cost structure for competing in this business. We feel confident about the future of the business.

And then you made some comments on ethylene divestitures and how the pipeline dispute was holding that process up. It looks like you feel more confident that this process is moving forward in 2016. Could you just evaluate the pipeline dispute and where it stands and how quickly you think you could wrap that up?

Eastman has won every case to date in this dispute, including the Texas Railroad Commission rulings and the favorable opinion from the Appeals Court. This demonstrates the strength of our position. While we acknowledge that there may be additional steps required to fully resolve the dispute, we are confident in our ability to proceed with efforts to divest the excess ethylene at this time. The timing for resolving these disputes aligns closely with our expectations for completing the divestiture.

In the fourth quarter, your EBIT in Specialty Fluids was $20 million, and I am unsure about the extent of the hedge penalty you experienced or the number of hedges you unwound. However, generally speaking, oil prices have decreased significantly. Is that $20 million a sustainable quarterly run rate for 2016 in the current environment, or is it somehow an inaccurate figure? If it is, could you provide an explanation for why it is not representative?

Jeff, I mentioned that earlier in a previous question, do not think the fourth quarter is representative of this business segment. When I think about the moving parts that you’ve highlighted, we think it will be down, as Mark mentioned in 2016. But it’s probably more comparable, if I look at the best quarter of last year, it’s more comparable to kind of a third quarter normal rate as we’re going into 2016.

And so why was it so much lower than the third quarter? Is that because there was an above average amount of hedges that were unwound there?

Jeff, and I’ll end it with this. There is a plenty of items that always affect the fourth quarter; sometimes it’s your schedule of shutdowns; sometimes it’s going to be the impact of the seasonality; and sometimes it is going to just be competitive behavior in that particular quarter. So those are some of the moving parts. As we best see it, we know it’s going to come down, but fourth quarter is not representative of what we’re expecting this share at this point.

We also saw some destocking in volume...

Some destocking?

There was just a variety of individual elements that added up to that number, making it a bit more sort of extreme than what is representative.

And then lastly, you have very good cash flow and free cash flow generation for next year. You talked about a $200 million productivity gain. Are there non-recurring charges that you need to enact in order to capture that $200 million? And if you do have to take them, how large are they?

As you’d expect, Mark mentioned some of the labor reductions of that restructuring. You do anticipate a restructuring charge in 2016 that will have a cash impact. We’ll highlight that into our adjustments and that number is roughly about $50 million.

$50 million. And then of the businesses that you want to sell, like if you totaled them all up, what’s the revenue and EBITDA order of magnitude?

Jeff, as we said, we’re still working through the scoping of what our divestiture process, our strategic options will be. That’s going to highly depend on just a variety of factors including what the buyer slate may be interested in. We’re just going to work on that out over the next several months.

Yes. On that point, I just want to be clear with folks because I’m sure this question will come up a lot. The reality is we want to maintain some flexibility because in the olefins world, each potential buyer actually has a slightly different interest in what they might want in our portfolio. And so to maximize shareholder value in what we sell, we’re going to keep that flexibility in there and be able to sort of address what the interest might be.

Good morning. This is Ryan Berney on for Bob. I just wanted to ask within your EPS guidance that you’ve given, which sounds like it’ll be a little bit below where you were in 2015. You gave this really nice breakout where you break out price and volume for us, both kind of by the segments but also for the company as a whole. So, if you were to take a step back and think about what you’re imputing in your guidance for 2016, what kind of overall Eastman Corp. volume price assumption are you assuming?

Well, to be honest with you, I would just have you go through segment by segment and do that analysis. I think what you’re going to see is the volume growth in the Advanced Materials as well as AFP. You’ll probably see solid volumes in SFI. That’s going to be more of a margin pressure. And Fibers volume is going to be impacted by the final imports into China. Pricing, we’re going to see where oil goes.

Can you help me understand the ethylene issue a bit more? I understand that you are using about 70% propane feed in your crackers and that one of your crackers is currently shut down. When considering divestitures, would you be looking to divest the asset that has been closed, or would you potentially invest capital to increase the use of heavier propane feed to secure the necessary propylene? I'm trying to understand how you plan to eliminate the ethylene while ensuring you don't lose the propylene that you require.

The good news, there are solutions they are. And so, as we’ve talked about in the past as we’ve tried to monetize our excess ethylene, we’ve always indicated we do not necessarily need to be the owner of the smaller crackers, many times we call the type 3 crackers. Nothing has changed in that regards. Our larger cracker is really heavily integrated into our overall site operations and is really critical to our specialty derivative production. So, as we go through the strategic evaluation and we will ensure the reliability, integrity and the safety of this cracker is preserved to support our specialty derivative product lines. And this is consistent with our strategy again to reduce volatility, but not compromising our specialty growth. On the propylene, I’d also remind you, yes, we are a net buyer today but as we look forward to the start-up of the PDH unit with Enterprise, we’ll be kind of fully integrated with our propylene. But as we look down the road, we can think about different options on how these crackers may play out in our strategic options. And we’ll be able to adjust appropriately.

Just a quick one on your transportation and construction breakouts for the special businesses, can you break out your current thinking about how much is maintenance versus first fit for OEM and what you’re seeing on the OEM trends in the very near term, like the next three, six months?

I can give it a try, but our customers might be better suited to provide input. In the tire segment, approximately 75% of our business is from replacement tires. It's crucial to note that we have a greater reliance on commercial tires compared to passenger tires, as the amount of Crystex used in a commercial tire is about ten times that in a passenger tire. We're observing an overall improvement in the global economy, especially in the U.S. and Europe, while China continues to grow, albeit at a slower pace than desired. This situation is boosting the demand for replacement tires, particularly due to increased construction activity in North America and some uptick in Europe. Regarding coatings, we anticipate a strong year in North America, where we hold a significant market share, driven by rising housing construction rates in 2016. We also experienced reasonable growth in Europe. China remains unpredictable but is still showing some growth. As for interlayers, we had an outstanding year last year in the automotive sector and a solid performance in architectural applications in Europe. In automotive, our growth has significantly outpaced the market for several reasons. One is the expanding addressable market, as many OEMs are now opting for laminated glass in side windows and sunroofs, which increases the market relative to OEM build rates. There's also a rising demand for acoustic solutions for noise reduction in vehicle cabins, as well as light-weighting, and heads-up displays are seeing strong growth alongside the mobility trend. To identify upcoming trends, attending consumer electronics shows for cars is essential, as heads-up displays are crucial to these technological developments. Consequently, we're growing much faster than the OEM build rate, which constitutes about 60% to 70% of the interlayer market. Each area has its own narrative, but overall, they are all positive.

And then if we roll all of them up for the two As over the next three, four years, what you see as your mix tailwind for margins when you have a lot of moving parts in terms of the hedges and market trends, but what do you just see as a tailwind just from margin uplift, if any from mix shift?

I think what you’re going to see, this is Curt, in Advanced Materials, you’ve already seen what has happened with their different elements of improving mix, getting volume growth and fixed cost leverage. And so they are at a 17% operating margin, so I think they’ll continue to grow from that. On the Additives & Functional Products, I think over the next several years, they can maintain their margins if not slightly improve them through that mix of group.

I was wondering, it might be helpful if you total up all the headwinds that you’re facing in 2016, it seems like it’s going to be well over $1, maybe even more. And is that kind of what you’re overcoming with your specialty businesses and what you can control internally?

I’m not sure I’ve done all of the exact math that Mike you’re doing, but we can compare notes like we always do over time. But I would say, yes, we’re facing significant headwinds and so we are offsetting that with again growth in Advanced Materials, stability in AFP. We’re also then seeing the cost reduction actions. I’d also remind that we’re also going to finish deleveraging during the course of 2016 as well as look at repurchasing shares, mostly weighted towards the second half of the year. So, those will also help overcome some of that headwind.

Mark, Eastman has effectively shifted away from more commodity businesses and focused on adding specialty businesses. However, it seems that the commodity sector continues to significantly impact your earnings, likely more than anticipated. What are your views on how to adjust the portfolio to further reduce those exposures? I understand the focus is on reducing debt, but are acquisitions something you might consider to enhance the portfolio?

We aim to eliminate volatility from our portfolio as we transition to four segments, concentrating olefins in one area to manage daily business fluctuations and maximize value in the current market. This is why we've removed distribution solvents from AFP and included plasticizers. It also enables us to evaluate options for divesting distractions that negatively impact our valuation and concentrate on our specialty strategy. Last year, we effectively grew our specialties, contributing to our earnings growth, and we plan to continue this trend moving forward. Our focus should remain on our existing platforms rather than pursuing large acquisitions. We have plenty of organic growth initiatives underway, especially in AFP, which is slightly behind Advanced Materials. You'll hear more about that soon. While there might be opportunities for smaller acquisitions that enhance our business, like the Commonwealth acquisition last year, our priority is on generating cash flow and repurchasing shares.

How did Taminco products do in the fourth quarter and was there any change in competitive intensity or volumes there?

Taminco had a great year and a good quarter. So overall, they did as we expected. Volumes held together nicely. You saw strength in things like crop protection for the year as well as personal care doing well. Obviously, there’s some pressure in soybean and corn-related functional mean demand with all the drama in the ag industry, but that’s a relatively small percentage of their total revenue. And we took some hits of course in some of our products going into down-hole applications on the energy side but a lot of that was offset by gas cleanup sales doing quite well on the downstream part of that business for us. So, volumes held in well and it came out as we expected. Margins also are fine. The only two hits we’ve had in that business is currency obviously like everything else, and then some of the methanol that we produce from our advantage contract obviously is feeling spread pressure relative to how methanol prices have come down.

And as a follow-up, does your guidance include buybacks? And if so, how much?

The guidance, you could assume, there will be some buybacks weighted mostly towards the second half of the year, and so some of that would be included in that guidance. But that will be more of a benefit as we go into 2017 because you’ll get the full effect of those buybacks plus how we deploy our cash in 2017.

Congratulations on moving forward. We had another chemical company write off an unfavorable raw material contract this quarter. You haven’t been able to do that with your propane contracts. Is that just due to how hedge accounting works or is it simply because it would just improve the optics and there is no net present value to doing it?

In this case, John, it is purely the accounting because it’s a cash flow hedge. Even if we settled those hedges today and spent the cash, I’d still have to recognize the impact and earnings over the cash flow associated with the purchases.

Okay. Thanks again for joining us this morning. A web replay and a replay in downloadable mp3 format will be available on our website later this morning. Have a great day.