Eastman Chemical's CEO Hosts 2012 Investor Day (Transcript)

Dec.12.12 | About: Eastman Chemical (EMN)

Eastman Chemical Co. (NYSE:EMN)

December 12, 2012 1:00 pm ET


James P. Rogers - Chairman and Chief Executive Officer

Mark J. Costa - Chief Marketing Officer and Executive Vice President

Ronald C. Lindsay - Executive Vice President

Gregory W. Nelson - Chief Technology Officer and Senior Vice President

Curtis E. Espeland - Chief Financial Officer and Senior Vice President


David L. Begleiter - Deutsche Bank AG, Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

Gregg A. Goodnight - UBS Investment Bank, Research Division

Robert Walker - Jefferies & Company, Inc., Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

William Young

Duffy Fischer - Barclays Capital, Research Division

James P. Rogers

Welcome. Thank you for coming to Eastman's Investor Day. We wanted to do this a little bit earlier but you guys aren't used to that rough weather called Sandy, and so we thought we'd take it easy on you and reschedule it. Seriously, I hope all your lives are back to normal. I hope you had a chance to see the exhibits. If you didn't get to see it upfront, they'll be there on break and when we finish up, and we have a little reception you can have time to be -- to walk through the exhibit. Those of you on the phone, you're really missing something because these are pretty cool display of our products. Before I really get cranking, I want to do some introductions. Let's see if -- can I read this without my glasses. Yes? Okay, good.

Let me introduce some of the Eastman executive team that's here today. You may, after you hear all the names, wonder who's running the shop. Trust me, we've got a lot of talented people back in Kingsport as well. But if I could, and I'm pointing these folks out, so if you have specific questions, you can find them on break or afterwards. So Tim Dell, who is Vice President of Innovation, Marketing, Sales and Pricing, stands up. Let me go through my VP GMs and the next 3 are VP GMs within Advanced Materials. Travis Smith with the Window Films business; Eric Nichols with the PVB Resins; Lucian Boldea, Copolyester and Cellulose Esters; then, Erwin Dijkman with Adhesives and Plasticizers; Linda Hensley with the all-powerful Fibers. Now that I've said it that way, every VP GM is going to want to have an all-powerful business; Mike Humby with the Specialty Fluids and Intermediates; and Brad Lich with the Additives and Functional Products. And then for my direct reports that aren't presenting, you'll see the presenters, Earl, you did show up, thank you. You'll see the presenters with the exec team that's not presenting. Let me just hit this quickly. Perry Stuckey is in charge of HR. Just stand up, Perry, if you would. Godefroy Motte who heads the Regions and Supply Chain; Michael Chung, who's our Chief International Ventures Officer; and David Golden, who will be our Chief Legal Officer. I think that catches just about everyone I wanted to introduce. Oh, except Theresa Lee, who has been our General Counsel and has worked for Eastman for 25 years. And Theresa, please stand up. Theresa has chosen to retire at the end of this year over my strong objection, so we are sorely going to miss you Theresa and thank you for everything you've done for Eastman, thank you. Seems like every investors day I have a retirement. Last time, it was Rick Johnson. I don't know if this is a -- not a pattern I want to set up.

Okay, for the next 17 minutes or so, I'm going to give you an overview, and then we're going to turn it over to the team to give you all the real information. First, for all the speed readers in the crowd go, and stop. Okay, that was your forward-looking statement. Thank you, Evelyn Wood. Hopefully, you all took your class.

The agenda, you see the names up there. I'm going to ask the speakers to stay on their time so that we have plenty of time for questions at the end. I promise you, we'll give you a break and then there is a reception that we invite all of you to afterwards. And remember, again, you can go look at the exhibits any time during the break or the reception. Okay. What's the punchline today? We believe we're a specialty chemical company, and we believe that not because we're -- we just have 1 special product or in 1 special market or 1 special technology, but we have a portfolio of specialty businesses. And intelligent people can disagree with what makes something a specialty, I understand that. We laid out for you 4 attributes, there's obviously more, but 4 attributes that are important to us that we always want to do well on, and that we think specialty companies should do well on. Now we're not so full of ourselves that we put ourself all the way over to the right, right on top of Specialty as if we're 100% Specialty. Remember, we're an integrated company as well. Anytime you have integrations, you're going to take a lot of extremes off upstream and sell them out, and by definition, they are going to be more commodity-like. But we like our position and we think we're about as special as anyone, and it has taken a lot of hard work to get there. And this slide shows you some of that hard work.

Okay. So we've been working within the businesses but we've also been working with the portfolio of businesses. You see the divestitures, about $3.5 billion of sales, not much in the way of margins that let go with those names, unfortunately. But then, look what we added in. In addition of Solutia, we added another $1 billion or so of revenue, and all those things we added taken together were higher margins than what the corporate margin was before. So we think with this portfolio upgrade in particular, we're going to have more consistent earnings growth, and feel much more like a specialty company.

The strategy. People, a lot of times are looking for a complicated strategy. Ours is fairly simple. You can read the words on the chart but if I could just dumb it down to the way I like to talk about it. We run our core businesses as well as we can, we maximize the cash that comes into the corporations, and then we think we can differentiate ourselves by making smart choices with how we spend our cash. We're either pursuing the organic growth opportunities, pursuing acquisitions, or giving back the cash to shareholders. That focus on cash, in our opinion, is how you grow a company. It comes from a strong foundation of cash flow. And we think a simple strategy like that is something you can execute well on. And a well-executed, simple strategy, it's a complicated strategy that is only halfway done every time. When you do that and you have that kind of strategy and you can execute, you get to talk about financial objectives like these. I feel pretty good to be able to stand up and say, "We are targeting $8 a share in 2015, which would mean 6 years of double-digit earnings growth if we can achieve that, and that feels pretty good to us." You see a couple more targets up there in terms of revenue and free cash flow that. You'll hear something about that when the rest of the team speaks. But I also just wanted to mention ROIC. You can't take your eyes off the ball on return on capital, that's what keeps management teams honest. You've got to have a good spread between your cost of capital, which we pegged between 8% and 9%, and the return you want. What you ought to be listening for, in my opinion, when you hear all those folks talk is, how is the senior team compensated? Two measures that are most important to the senior team in terms of our personal compensation are the total shareholder return on a relative basis, you can judge for yourself, do you get what you pay, for when you see that; and the return on capital of over cost of capital. Those are the 2 that have the biggest impact on the senior leadership team. I think our interests are aligned. Okay. All that work we did with the portfolio and I'll go through -- quickly through some of these. This brought a lot more diversity to our end markets. 2005, our top market was 44% of sales. You see the diversity we have there. Within those markets, each of our business units have strong #1 or #2 positions on a majority of their revenue. That's the kind of thing you expect to see with a specialty company.

Let me hit a couple of the market segments. The point of this slide and the next slide is just to show you, not only are we diverse across markets, but even within a market, we're not just tied to 1 product. So we have a nice portfolio of products within each market. And you see the combination of heritage Eastman and Solutia in transportation with the OEMs and the refinish remodeling, as well as in building and construction, where you have the new builds and then you have the rebuilds and remodeling. And again, products from both heritage Eastman and Solutia. I don't want to lose sight of what's helping drive our growth. Again, we didn't just tie ourselves to 1 particular trend, there are several trends that are important to us. Energy efficiency, think about light-weighting cars, think about being able to take glass out of the window screens. Emerging middle classes is where you always hear about the disposable diapers, higher income going to disposable diapers, which is our adhesives. Health and wellness, that's the little medical test strips or the non-phthalates plasticizers. We're taking advantage of all these global trends, and it's helping drive our growth.

I can't help but look at this chart and think about the old Risk game. Anybody remember playing Risk? Now look at this, and it looks like Europe's got a power play from Kamchatka to Congo or something like that. Seriously, if you remember our history, we were Eastman Kodak, North American-centric, noticeably higher percentage of sales in North America through acquisitions, how we run our business, how we build our assets. You've seen us move more revenue outside of North America. I take some comfort in the fact that our 2 largest regions now are North America and Asia. To me, they're the most attractive, and I like the fact they're about 75% of our sales.

Zero in a little bit more on some of that international growth, and there's 7 countries that are represented on this chart. So it's the BRIC countries, it's Indonesia, it's Mexico and it's Turkey. We look at these separately. We think they're special to us. We think we can drive growth there. Historical growth, 11%. If I took out the PET business that's in its earlier years, we were growing about 15% in these 7 countries. To me it seems reasonable to think we can grow at 13%, and get it to $3 billion in revenue by 2015 in these countries.

Okay, this is the money chart. Curt is going to talk more about our numbers and what we're expecting and what this is based on. I can tell you I need a little bit better global growth than we have today. We need more like 3% global growth over the 3-year period. But today, we're reaffirming $5.30 to $5.40 for this quarter. I know some of you guys want to jawbone me up, but folks, I'm sitting in the middle of December, I get to see everything, I'm telling you, it feels like about $5.30 to $5.40. Next year, $6.25. The big number to me on this chart. What I play for is to do the $8 on 2015. I don't want you to miss the little bubble at the top there above the $8 because we're going to be generating some serious cash over these next 3 years, and we'll see how smart we are and how we can put some of that cash to work besides paying down debt. But I do think that as we get into this period, there's a good chance we're going to see some upside on the $8.

Talk more about Solutia. But one of the things Solutia clearly did for us, it moved us in the right direction on 2 key measures: 1, the size of our operating earnings; and 2, the margins. You see on this chart, a simple representation, that it's moved us into the better half in both of those, and that's based on the 2011 as if we had the whole thing. Now forgive me for a second, I'm just drawing a blank. Can anybody help me out on what message I might have been trying to make with the...? Oh, yes, you want to be on the red line, I remember. Seriously, we don't take anything for granted. We know we've got to earn it every day. We start every month thinking we're back at 0, and it's that mindset that enables you to deliver that performance. Okay, so we've been making some changes in the company, and some of us may think that not everyone has picked up on some of the stuff that's changed at Eastman. So I think of that analogy about how do you boil a frog, you do it very slowly. Maybe it's our fault. We've been just taking these steps and haven't really talked about it and the temperature of the water has been going up, have and we haven't had a chance to really look back and see what we've accomplished. So we thought we'd have some fun. Forgive me these next couple of slides, but let's go back and look at total shareholder return and compare it to the commodity diversified players, S&P 500, tracking that early time frame, before a lot of the work got done, and frankly, you could have predicted our performance pretty well, just knowing what those other names did, but... Started to part company. They stayed at C level. We pretty much doubled. And so you might say, in our opinion, we left that neighborhood, and it's not such a good predictor of our performance to still look at those names. And in fact, there's probably other names that you would have been much better predicting our performance, if you'd been comparing us to some like an SMC[ph]. So you can decide how hot the water is getting right now for you.

Let me take another shot. This is something I think is worthwhile to pay attention to. I don't know if you guys typically do this kind of analysis, I guess you can look at whatever metrics you want, but let me just ground you first. So the horizontal axis, that's earnings growth from '06 to last 12 months, compound average growth rate. Vertical axis, a little harder and we got a slide in the back that explains the methodology, but what we tried to do, look at quarterly EPS volatility, smooth out the seasonality. So if you know your fourth quarter is always worse, don't count that as volatility. You can predict the fact fourth quarter is always worse. You can do that for all the names, and again, I think it's Page 124, or something, shows how we did it. However you want to do it, whatever methodology you want to use I think as I put the dots up, it'll be intuitively obvious or you'll tend agree. But if I look at diversified and commodity names, you would see them spread across the chart like this in terms of their earnings growth, volatility. The numbers in the boxes is the PE, that's the price from November 30, so what I think Bloomberg had or -- I'm looking at Greg, was it Bloomberg? It's probably in the footnote. What Bloomberg had for 2013 earnings. You see on average, the industry was 10.6 on a PE of forward earnings. I put up another group of companies and I'll remember where is good on this chart, on the bottom and to the right. I put up what you might call more specialty companies. I think you would recognize those names, and probably intuitively obvious that you would expect them higher earnings growth, maybe less volatility, higher multiples. Here you see an average 14.4%. So what am I leading up to guys? What's the question? Where would Eastman be on the chart? Eastman would be right there, over that time period, '06. So obviously, it would be better if we didn't count on those stuff we used to own further back but it's history as it is. And then a final question and then I'll turn it over to Mark. By now, that water is just about boiling. So at the end of November, you got us cheaper than the diversified and commodity names, and you got to be in that part of the chart. Let me call up Mark Costa.

Mark J. Costa

Good afternoon. A pleasure to be here and talk to you about how we have both the strategy and a lot of capabilities in place to deliver that compelling earnings growth, and I can convince you that we deserve a better multiple and can deliver $8 a share. We've been on a great journey here of evolving our portfolio at Eastman, and it's not just selling some businesses, but it's also how we've improved the businesses that we still have, where the margins and the stability of the margins and the quality of the market positions we have continue to improve. And then the combination of Solutia really accelerated our journey onto that -- being that specialty chemical company. So it's exciting to see that. The 2 segments that report to me, which is Additives and Functional Products and Advanced Materials really is a combination of a lot of our specialty businesses with the Solutia specialty businesses where we saw some great synergy.

I'm going to start out by talking about Additives and Functional Products. And I thought I should first define what the segment is in case anyone's still not familiar with it yet. This is really a combination of Eastman's legacy CASPI coatings business, so our polymers and our solvents. We took the adhesives and put it in a different segment that Ron will discuss. Combined with the rubber additives business from Tech Specialties and Solutia. We brought these together because they really share a common business model around how you serve formulation companies. The tire formulator and the coatings formulator aren't that vastly different in how do they need support with a wide range of both commodity products but, more importantly for us, additives that deliver very critical functionality to the performance of that formulation at a low percentage of the cost. And it really requires a very deep application development's capability, very deep market insight capability and working through both the OEMs and the formulators to do that. And bringing these businesses together, especially with the end-market alignment we had in transportation between coatings and end-rubber additives, it's really a great opportunity. We have already seen great advantages from it in this business model where they're helping us think about some tires opportunities, we're helping them on some of the commercial front, so reinforcing already. So you can see that coatings would still be the largest segment from a revenue point of view, but tires now being the second largest.

We do think that we're in a very good and solid position in this business. It's got very attractive margins, and it's one that we think we're very well-positioned to sustain these margins in that 22% to 25% range, and continue to grow this segment from a top line point of view in the 5% to 7% range. And the reason we can do that really comes down to these 3 critical strategic elements. It starts out with the positions we have. As Jim mentioned, we have some great businesses today, both in Solutia and in Eastman in this place. We have strong leadership positions in the additives that we have in this market. We continue to be very committed in investing and enhancing and extending the quality of our position and using our scale to be more competitive in how we serve our customers. We'll continue to stay very focused on being an additive provider in this marketplace where we see the most value is created. That strong base of business allows us also to have a very deep relationship with customers, and that allows us to develop and innovate new opportunities. These technology platforms, as you'll see throughout the presentation today, can go into many different applications. We're not limited to just the applications we serve, but working with these customers we can extend and develop additional products that take us into new applications and add additional growth on top of that solid base. And the third element, of course, you can't take your cost position for granted. You need to always be improving your cost position. It allows you to defend your leadership position, of course, as well as enhance your earnings. This segment really benefits from a couple of things on the cost side as we go forward. Certainly, we've seen advantages in the shale gas advantage of North America flowing through to the solvents component of this business and expect that to continue. We also have some new insights. I'll tell you around our -- one of the -- the Crystex product and how we can improve our cost position there. And that all combines together to deliver a very attractive earnings profile. From a market point of view, this segment is very much focused on transportation and building construction, and those are the markets where you'll see disproportionate growth. I would note that the other markets are good markets that will grow at GDP plus, or at least GDP. Where we're going to really focus our targeted growth efforts is in those top 2 segments. Another thing I would note is that these segments have a very large percentage, that's replacement business that has a different tendency than just looking at auto builds as an indicator of growth in this segment. So keep that in mind, about 2/3 of this businesses is actually replacement in the transportation and building construction segment. But overall, I feel good about where we are in the cycle. So I look forward from 2012. I'm pretty confident we're going to see a lot more cars, trucks built, houses built, commercial building built in 5 years than what the build rate is today. From a market geographic point of view, I also like the profile that we have. This segment is over 60% revenue outside of North America, and we're very well positioned to grow at the fast expanding markets. I'd also note that the margins outside of North America are above the average. We are primarily selling our additives outside of North America, the solvents in this segment are primarily sold in North America where we're closer to our cost position. So as we accelerate growth outside of North America, you'll see the mix improve as well.

So to double click and get down into the Tires business. This is probably one where I'm guessing there's a few questions which is what's our view on Solutia and the viability of the Tires business in particular, Crystex. We feel good about this business and confident we can continue to maintain the earnings and grow it. Overall, if you look at the market, if you look at all the external experts, roughly 5% growth rate is what we would expect for the market in Tires. But then you really have to boil it down to what's going to happen in our products and how that plays out. So for Crystex which is the vast majority of the profit in this segment at this point, the dynamics are a little bit different. 70% of the business in Crystex is actually commercial tires as opposed to passenger tires. They use a lot more Crystex, actually 10x as much Crystex in a commercial tire as a passenger tire. And for those who aren't familiar with what Crystex is, it's insoluble sulfur, it's a critical processing aid in making rubber, it's for vulcanizing the rubber. And we've had a long historical position in this market and a very large market share. Challenges that we face in the short-term are mostly macroeconomic driven so demand is off 2012 relative to '11 in the mid single digits and that's really a function of 2 things. The footprint we have with our customers and geographies ties with the multinationals more than some of the Chinese tire manufacturers. And so they have experienced a down draft in demand in the last 12 months, and we've experienced that with them. We also have given up a little bit of market share. There's a few competent competitors in this industry. They've brought in a little bit of incremental capacity and we've seen some of that go to them in the marketplace. As we look into the future, from a long-term point of view, we feel good about our ability to grow this segment at about half the rate of the market, because we want to make sure we're recognized that there are competitors in this business who are going to chip away a bit at the market. But we feel confident that we can grow and maintain our position in our margins because of several elements I'm going to get to in the next couple of slides on our product performance, on our scope and consistency and reliability and our ability to improve our cost position.

But before I get into Crystex, I wanted to hit a couple of the other elements about how we're going to grow in Tires. First part is in the Santoflex business. This is the other product in the portfolio for Solutia, and it really is an Ni degrading PPD. It's a competitive commodity product these days. There's a couple of Asian players that have massively overbuilt capacity. The earnings have been challenged this year, that's part of the headwind in this segment that we've had because vending prices have gone up a lot if you're following that, and it's been hard to pass that on. But we are looking at this business as one where we can improve the profitability and we're going to see the opportunity to do that by shifting our strategy. We're going to really focus on developed markets, where we have by far, the cost advantage in serving those markets, as well as the customer relationships, and consolidate our position there, take some cost out, and we think we can definitely improve the earnings for this business and stabilize it from where it's been.

The last and most important element is really the opportunities we see in Tires for innovation. In addition to being a good growth market at 5%, there's a lot of innovation opportunity in this market. The tire manufacturer, especially the multinationals, are under tremendous pressure right now. The car companies want energy efficiency. Tires are a big driver of energy efficiency. The Europeans are passing a regulation that will now codify for consumers the performance of a tire, so everyone can go out and compare how good your tire is. So now we can actually measure it and show it to consumers. This is great for the multinationals. They're excited about it because their nightmare right now is the Chinese tire manufacturers are really being very aggressive in the marketplace, and they're all shifting to a differentiation strategy in how their tires perform, which means they got to get their tires to be better. We're fortunate in that we have a couple of products that I'll describe later that really can improve the performance of the tread in the tire and that allows us to leverage our existing relationships into these innovative relationships and create a lot more opportunity to grow in this space beyond just maintaining this core business.

So back to Crystex, on product performance. We do have a competitive advantage in the quality of our product. There are 2 key dimensions that when you're vulcanizing rubber. This is a processing aid so it's all about how fast I can make a tire, how much scrap I have in the tires. When you use a high-quality product like ours, Crystex, what you get is better thermal stability. Thermal stability just means that if I want to run the plant faster, I have to run it at a higher temperature to get the mixing that I need. If the Crystex isn't stable, it blooms which is what you see in the left-hand top side of this chart and you have to scrap the rubber. Obviously, they don't want to do that and they also don't want to run slower, so there's a differentiation in using our product if you're focused on trying to drive cost efficiency out of your plant and throughput. Same thing applies to dispersion. You have to have it evenly dispersed or you're also not going to get proper mixing. And we have a new product that we're all trying right now where we can not only deliver this performance, but more performance, 20% enhancement in manufacturing efficiency for our customers with our new product. So we feel good about extending and improving our product position relative to our competitors over time. The second element is consistency and reliability. We are the largest player by far in this industry, and that matters for 2 reasons: One, we run large, continuous scale processes. A continuous process allows us to make a very consistent product, and the scale allows us to have a very advantaged cost position. But also that network of plants you see on the right side also gives us much more reliability. Our competitors are batch operating plants, single sites, and so there's a lot more risk when you tie your fate of a tire plant to those players than with us, because if you don't have this product, the tire plant shuts down. So this is a really important driver of value and it's typical in specialty additives when they think about who they want to buy from.

The last and important element is actually a result of good work being done by Solutia and a great synergy we're discovering as part of this acquisition, which is our ability to dramatically improve our cost structure in this business. So Solutia was on track to build a Kuantan plant which would double the capacity in Malaysia. We're still committed to doing that. We've chosen to delay the construction of that plant by about 12 months, because as the Eastman and the Solutia people came together this summer and started collaborating around this technology, our Eastman people saw very significant insights about how we could improve the process and design of the plant. And because the macroeconomy is off, we certainly didn't feel in a rush to build it. So we're going to take advantage of that macroeconomic slowdown, if you will, and substantially improve the technology. We can take 20% to 40% of the capital out of the plant relative to what they intended, dramatically improve the yields, and back to the product performance, this is part of also how we get to that higher performing product on a sustainable basis. And the best part about this is it's not just the last incremental capacity. This technology, most of it can be retrofitted into our existing plant. So we can improve the cost structure of the network, not just the last plant. That's a significant opportunity for us to improve our cost, as well as when you look at the network of plants, once you've doubled this capacity, it gives you opportunities to think about how you optimize the cost structure of all those plants. And when you look at that over time, it allows us to take variable cost down by roughly 20%, fixed cost down by 30%, and that really allows us to pass some of these savings onto our customers, use that relationship and those savings as a way to cement our relationships, defend our position and as well as extend it into innovative opportunities onto new products, which really is on the last slide here around Tires. This is a great opportunity for new additives, these are the Eastman technology products that we think and had been working on taking to the tires market. And now that we have Solutia, that really helped us to accelerate understanding the value proposition, have more credibility to tire companies when we bring it to them. I'm going to talk about one part on hydrocarbon resins, and then I'm going let Greg Nelson of Technology hit the cellulose esters. But in resins, historically, it's always been used as a processing aid. But now that they're under pressure to improve the performance of the tire, they have problems. They load the tire with silicon, they're losing grip and you can use resins now to modify the tire to improve wet grip. Now, we are now in the performance part of the tire as opposed to a processing aid, very different relationship with multinationals. This is where they spend all their R&D and it's allowing us to get a much deeper access and type of conversation with them about how to be their partners. And this is an exciting opportunity. We've already had great growth, 10% increase in sales here in this year around this space and expect for that to continue and accelerate.

Let's switch gears now to Coatings. Coatings has been a great business for Eastman and CASPI. It's delivered very consistent solid earnings growth if you look over the last 3, 4 years, and we expect that to continue. It's a good market, growing at 4% and we have a lot of opportunities that can either sustain and extend our advantages in our core applications that we're in today, as well as bring on a new platform in polyesters that I'll tell you about. And of course, the advantage in shale gas flows through on the solvents side. When you think about the overall portfolio, roughly 60% of the revenue is additives and 40% is solvents.

On the additives side, there really are 2 critical key technology platforms that deliver a lot of the earnings value in this segment. So with cellulose esters, we use that in automotive base coats, oven base coats, and it is the critical additive that you use to get metallic flake basically to go down evenly in a paint and manage flow and leveling of a paint. We're the only manufacturer of these products, and we are by far, the preferred product of choice for that need. Great news is, is even though that's not growing that fast due to waterborne trends, we've had great success in starting to see ways to extend these additives into other applications. We're moving into enabling high solid base coats which is critical for performance in getting VOCs down on the solvent side, as well as clear coats. We see ways we're going to grow beyond our current application, but in more kind of performance. The other high derivatives are Texanol, that's the additive used in architectural paint to get the film forming correct, and we see that as a great market. We have a 70% share, again, a great leading share in this business. That continues to grow well in the world, very profitable. We have new products that we're introducing that allow people who are looking for a different film forming additive that has lower VOC or lower odor and so we have a broader portfolio now to maintain our relevance in this space as people try and look for different solutions. So this whole portfolio is solid both in margin and growing it sort of GDP, GDP plus.

Beyond that, we have a new platform to add to our growth in coatings, and that is our polyester platform that we're just starting. You'll hear more from me later around Tritan, which is a plastic that we have developed in specialty plastics. Many of you know it. It's enabled by taking a TMCD monomer modifying polyester to give a polycarbonate characteristics, which is great in thermoplastics, for a whole new market for us.

Same thing happening here in polyester. We can take that TMCD monomer, modify a polyester coating, get dramatically better performance in that coating that was not achievable before. And that opens up applications that the polyester players to date have never thought possible. So, in metallic packaging, metallic cans, for example, BPA concerns, like in specialty plastics, are very much here as well, because most metallic packaging cans are coated with epoxy that contains BPA. And so we have 2 customers heavily engaged with us, they are the leaders in this space, looking to use this polyester-based TMCD-modified polyester to coat packaging.

Second opportunity that's even bigger from an addressable market point of view is we can actually replace acrylic and clearcoats for automotive paint. And that's a huge opportunity. We see great opportunities here. We can lower the VOC emissions relative to acrylic, and we can lower the applied cost because polyester is a more affordable product than acrylic, and so a great opportunity to grow in there as well. So that's exciting. Longer-term opportunity but very good customer engagement with the type of customers you want to see.

The last part here on the coating side is solvents. Solvents has been a key contributor in earnings growth this year. Macro economy has obviously been tough for tires, tough for automotive, but in solvents, which is North American-focused has really benefited from a couple of factors. And obviously, the shale gas advantages has flowed through to this business just like Specialty Fluids and Intermediates. We've made significant improvements beyond just shale gas in moving our cost down on conversion cost, and I think we have much more room to do that going forward, as well as this is just a good industry structure. North America's a great business, and there's not a lot of people adding capacity here like they do in Asia, chasing that growth. So there's just the quality of the industry's improved, that's helped us improve and sustain our margins.

The last part I note is that new cost position has also made us a global player. So not only is North America good, with this cost position, we can take some of our high-value products in the solvent portfolio and sell them globally. So we're getting a much higher asset utilization as a result as well. When you put that all together, we feel like we've got a very good story to credibly sustain these earnings, grow them into 2013 and really accelerate the earnings growth out into 2015.

Our pro forma basis improvement from '12 to '13 won't be significant based on our planning assumption. So it's a modest macroeconomic environment, but the markets that we're serving like tires are not expected to have a dramatic improvement in demand when we look at what we're selling to the customers that we're selling to. And so there'll be some economic improvement on that side. And right now, the planning assumption is that spreads in the solvent side will be relatively flat to 2012. Ron will talk more about that. Obviously, everyone has their own opinion about where propane, ethylene and the olefins are going to go, so you can make your own assumption, but what's assumed in here is relatively flat spreads. But as you look out beyond that with the economic recovery, with the growth programs kicking in, we see much more earnings growth.

Now I'm going to switch to Advanced Materials and talk a bit about that business. Advanced Materials really is a combination of 3 businesses, so we have our specialty plastics from Eastman combined with advanced interlayers and performance films from Solutia, and brought these together because there are tremendous technology synergies between these 3 businesses. We're already seeing many benefits from that in the first 6 months of being together as a team, and we see a lot of further product development opportunity on that front as we go forward, and I'll bring that to life a little bit later.

There's also a common thread here around market development and application development. The reason we succeed in this space in specialty plastics is because we really have a world-class market in application development capability, bringing some of that and combining it with the Solutia team is also going to create a lot of upside because there's a lot of similarity in some of the applications and markets that we serve. So it's a good business, and it's well positioned to deliver very high top line growth. This will be the fastest-growing segment in Eastman from the top line and even more so at the bottom line for a couple of reasons.

As you look at the strategy, there are really 3 key elements. First 2 are about the top line, the third about the bottom line. On the first 2, we have a great opportunity to continue growing our core applications, and we'll grow faster than the end markets because we're substituting against a lot of other polymers in some of these applications due to some -- the trends that Jim mentioned around energy efficiency and emerging middle class looking for branded products, et cetera. We also see lot of opportunities to take this technology platforms in the new markets and add growth on top of those core businesses.

Importantly in this segment, we, good or bad, it's been tough this year -- we have significant fixed cost leverage in this business. So we've made a lot of investments in this business in a lot of different assets. We have a lot of capacity in place to support our growth going forward. For 2012, that wasn't a good thing. That fixed cost was a headwind for us as the macro economy wasn't cooperating. But for the next 3 to 5 years, we don't really have to make a lot of capital investment, and we've got all that asset in place to leverage against the marketplace and accelerate earnings at a much faster rate. So this is a segment we believe we can grow 7% to 9% in revenue, and the earnings growth will be well over 20% when you look at the fixed cost leverage, both cash cost as well as the depreciation and amortization, which in this segment is about 50% higher than additives and functional products. So when you think about that on a DA basis, a lot of DA for business with half the earnings because of the capacity and the acquisitions we've done in this space. So very well-leveraged earnings growth going forward.

End market diversity is a great aspect of this business. I like having a lot of end markets. It allows us to innovate and grow in different applications. Every year, you got something going your way, going against you, and that diversity is quite helpful. As well as a good geographic footprint, like additives and functional products, 2% of the revenue, roughly, is outside of North America, and will continue to grow as a percentage just like AFP. As you look forward, we're very well positioned in the emerging markets to sort of exploit and realize that growth.

I'm going to dip down now into specialty plastics and talk a little bit more about what we're doing in specialty plastics. These themes are brought to life in each of these parts of this business, so from a leading position point of view -- we are by far the #1 leading position in copolyesters. We have 4x the capacity of our nearest competitor, really only competitor who can do what we want to do -- what we do in copolyester, so great position there. And we're really well positioned to grow. While we're big in copolyester, there's a big thermoplastic market out there as far as things that we can replace. So plenty of addressable market to grow, and those trends around a branded product, wanting a much higher-quality product is very much leveraged to what we do. We value products up with our higher-performance copolyesters, and that really helps us out.

We also believe that we can innovate and add on additional growth beyond that in our copolyesters. And our specialty cellulose esters, I should have also mentioned, we are the leader in that space. We have the broadest product line and the most capacity that also positions us well for growth. So a lot of opportunity. This is a place where we have a lot demonstrated success in market and application development. 30% of our revenues has been resulted from new product introduction in the last 5 years. It's a very good metric for an innovative company to have that high of a percentage, and we are confident we have the pipeline to continue that going forward. And the last part is we do have the fixed cost leverage. There's both the Tritan investment and the cellulose triacetate investment we've this year, and we'll be all levered to filling those out over the next few years.

In consumables, which is the largest revenue segment inside specialty plastics, it's been a very solid growth market, about 2x GDP if you look at the past, and we expect it to continue at a GDP plus rate. We've done a lot of innovative things in this space. This is where we make very high-end polymers for packaging, to deliver a very unique performance that's difficult to find with another polymer.

So our clear handleware products, our shrink products, you may have seen some of that out in the displays, are very compelling, very high-quality graphics. As consumer package companies are looking to differentiate themselves from the shelf, these kind of things really make a difference in achieving that differentiation. We see them looking for that. Also, we are much better environmental solution for them. So they're replacing PVC shrink with our copolyester, that has a much better recycling footprint. They're also looking for ways to downgauge and things like that. We've had a number of new product introductions here this year. So a new clear handleware product with a recycle 1 code, that's very important to customers. On the shrink side, we have a product that allows downgauging that our competitors can't match. We have one that floats, which is important in the recycling stream, if that's your priority. We probably -- and we're seeing great engagement on the cosmetic front with a new product that we've introduced that I think is world-class, well ahead of our competitors in what it delivers in clarity and toughness and performance. So, good segment we'll continue to grow.

Highest growth segment here is durables. This is where we've introduced the Tritan product I mentioned earlier that's a polycarbonate replacement. And it really was designed as a superior product to polycarbonate in certain applications like durables. There's no question that the concerns around BPA from a health and safety point of view have been a great -- huge driver of growth and adoption in a relatively weak economic environment, and we've seen tremendous growth here. And once the customers start using the product, they also realize it's a much better product than polycarbonate and I'm quite excited about that too. So growing quite fast. We expect it to continue growing.

We brought on our first 30,000-ton line a couple of years ago, filled that out. Our second 30,000-ton line came online in the second quarter of this year. I want to complement the manufacturing team. They hit spec on it in 1 day, which, in polymers, is a very had a hard thing to do, and we are well on our way to filling that line out over the next 2 years. Just to remind you, the TMCD monomer plant, which is designed to support 60,000 tons of polymer, it's where a lot of the fixed cost set in. Today it's still only 50% utilized. As you think about filling out that next line, a lot of earnings accretion for this segment will come from that contribution margin falling to the bottom line. But it's a great success. I want to complement the Specialty Plastics market and application development teams who have done a wonderful job in getting out there and getting customers committed, and I want to sort of share some of that success with you.

So as you look at where we've been, we've just had a few brands think that we had a value proposition. For North America, we have seen a lot of the leading brands buy into the value proposition, get committed to using Tritan and replacing polycarbonate. These really are the brands you want to have in North America. And, as we look at Europe and North -- and Asia Pacific, we see a good adoption also starting. These are just happening in the last year outside of North America. It took us a while to get the right approvals. We still have a tremendous amount of growth opportunity in Europe and Asia, where this value proposition is just as relevant as it is here in North America. Great story.

I also wanted to give you a visual about how this product is better than what it has to now compete against. We're no longer facing polycarbonate in this application with leading brand companies. The only 2 alternatives you can consider are 2 styrene-derived products that are SAN, ABS. As you can see, in the SAN product, after several dishwashing cycles, it starts to deform. More important, I didn't have time for the video, but if you drop SAN it'll break like glass, which, for a lot of durable applications isn't so good. ABS, a lot tougher, but in just 5 cycles, you can see how it hazes. And then you've got Tritan, which looks great. Actually, it will look the same after 500 cycles. It's just a tremendous product in this application. You can beat on this thing with a bat and it won't break. In fact there's a video out there after the presentation where you can see the local high school team hitting the thing with a bat or take the hammer to some of the rubber-made containers out there and try and break it. It's just incredibly tough, and that's very important here.

It also creates a great opportunity in medical. So our core business in medical has been a key, stable profit generator for us in this segment. We expect it to continue. We've been the industry standard for 20 years for rigid medical packaging because of our superior strength and toughness, as well as chemical resistance and sterilization and how the product holds up. We see opportunities to continue that, but, more importantly, extend into other medical applications. So, making good progress and taking our copolyesters to replace PVC and pharma packaging. More importantly, Tritan is really starting to pick up momentum here. So the medical device companies are now starting to become sensitive to BPA, just like some of the durable companies. Looking for alternatives, they're trying our products and seeing that not only is it BPA-free, it actually performs better than polycarbonate and a bunch of applications. We've had a number of great wins just recently with medical device customers. Long term, I expect this market to be bigger than durables and certainly more profitable. It just takes a while to build momentum in this because the time it takes to win specs. But this is a great business and one we'll invest to win.

I'm going to skip the next slide in the spirit of time and just -- which is just more value propositions like durables and talk about displays. Displays has been a great growth market, and as you know, what we care about is not just the units but the square meters sold. And so as TVs continue to get bigger, we really see a very solid growth market going forward as it has been in the past around 14%. We're very unique in this market. In the wide viewing angle layer of the film, that allows you to look at the TV from an angle. We are by far the performance leader with our proprietary cellulose acetate propanate product. And we see that continuing, and it's very profitable and a good business for us.

Equally exciting for us is our cellulose triacetate expansion. This is a polarizing film layer in the LCD TV structure. We just completed a 70% expansion of our plant, and that technology, for all of the capacity, enables us to make a far superior product for our competitors, and the key criteria for this application. We're now not just a leader in capacity, but also by far the best product. So we're excited about that, excited about our ability to win there. There are some additional innovations that are going to get us into the iPhone, iPads, as well as looking at some opportunities with some films that we got from Flexvue, which is the part of performance films in Solutia. Those are opportunities that Greg in his technology discussion will talk more about, at additional growth that we see to extend beyond where we are today in this space.

Let's switch gears now to Advanced Interlayers, another place where we're #1 in the market. And in fact, all of that is in functional products and in Advanced Materials. For every specialty product in the whole portfolio, we are #1, not #2, #1, and we like that position. So here, we are going to continue to invest and maintain that position and I see a lot of opportunities to do that. We think, long term, the automotive market is an attractive one to serve. We see a lot of opportunity for innovation on the premium products, which are higher margin that will improve the mix in this business. And like specialty plastics, we've had asset investments this year. That will be in a fixed cost headwind, but we'll be well positioned to support growth over the next 3 to 5 years as a result of those investments.

When you think about this segment, though, I do feel that I need to explain what happened in 2012. So, across the entire portfolio, I'd say the most disappointment for us was certainly the earnings performance of Advanced Interlayers. And it really comes down to 3 factors over the challenge in this segment. First was just the economy. 50% of the revenue of advanced interlayers is in Europe. When you think about auto production being off 10% in Europe, when you think about the stagnant construction market, obviously that's a headwind and a problem for us. In addition to that, you have some mistakes that were made last year in the contracting season going into 2012. Solutia is very focused on trying to improve their margins due to the raw material situation, pushing very hard for that, didn't recognize that the economy was weakening pretty dramatically in Europe, pushed too hard, lost some market share. We have a new contract strategy in place right now. We are working with the customers to regain that share. I feel confident that over time, we will. But obviously in this current macro environment, especially in Europe, it's going to take some time to recover from that position, but I'm confident we can and we're certainly improving our mix there in the short term.

The third part is more unique to 2012, which is, as we brought this capacity online, tripled our acoustic capacity, which is the premium products we make, as well as added our second line in China this year, we ran into some start-up problems on the acoustic line, that hurt us in the second quarter and the beginning of the third quarter, as well as impaired a bit of our ability to serve the volume growth in acoustics. I'm happy to say that all those problems are now behind us. In fact, we set records in acoustic sales in October, November. So we're feeling like we're back on track with that, but it's certainly been a bit of a cost headwind for us in this year. And I think we're well positioned to grow going forward depending on how the markets develop.

Long term, we think that this market is going to grow 5%, and we're confident about that growth rate from a long-term point of view, but everyone has their own opinion and this is just JD Powers as a source. Next year is not going to be 5% on a global basis. I think the latest JD Powers analysis is roughly 2%. It continues to get revised down every month from June to now. And certainly, Europe is going to be off again next year, so that's a headwind for us, part of our portfolio, but we are making great strides in improving our mix and that has a big impact on our earnings here. We still did view this segment as improving in earnings next year versus this year, but certainly not going to get back in this segment all the way back to 2011 next year.

As I mentioned, we are the leader here. From a capacity point of view, we're the largest player in the industry, and we're unique in that we serve both automotive and architectural applications and have a very confident global footprint, and an outstanding technical service organization versus our competitors that our customers highly value. This is a situation and an operation where technical service is highly valued by our customers. It's very important. In fact, some of our tech service guys can run some of the customers' plants better than they can. There's a lot of customization that goes into running a plant right with these materials. We have some unique competitive advantages there to serve and support the global multinationals that I think we can use and leverage as we go forward.

And this is a market that really has tremendous opportunities for innovation, and that's the key thing I look for in any market that gets me excited is, is there are opportunities where they have strong and persistent unmet needs, where we have unique technology that intersects with those needs, that we can do something to then solve it unique to other people in the marketplace? This is a space just like specialty plastics where that is absolutely true. Trends are very strong, so acoustic was a big first thing we've seen in the marketplace, and that's been driving a lot of our premium growth right now. Next big thing is energy efficiency, so, can you improve the acoustic product enough to actually lightweight the glass, as well as add solar control to that interlayer? Solar control is just a way to either reflect solar energy away or reduce -- absorb the solar energy going into the car. You can reduce the air-conditioning load on the interior of the car that also contributes to improving mileage. It's all about efficiency.

Then there's all the features that they want to add, heads-up display, well, small very attractive and growing things like, can we defrost windows without having to use heat or wires embedded in the window. Lots of innovation opportunities, and architectural is no different. Lots of opportunities to innovate there in the same themes including aesthetics in the architectural, but acoustics. They're even looking at glass for structural purposes. When you look at our track record here, we've had great growth in the past in these premium products that are much higher margin than our core products. And we expect that to continue at a very high rate going forward, roughly 12% to 14%.

What's most important to me on the slide is actually the bottom left-hand corner, which is, I think we're uniquely positioned to work with the big players because of what we can bring from an innovation point of view that's unique. It's not just about innovation in PVB, it's also about innovation in plasticizer, which is 30% to 40% of that sheet, and it's the kind of plasticizers Eastman make. We have a lot of opportunity to innovate and leverage our full technology platform. And even some of these solar-control capabilities that you're trying to add to these interlayers is related to polyester films, things that we know how to uniquely modify that our competitors don't. So I think we are in a great spot for long-term innovation here. Market's very committed. As you can the right-hand side, all the auto OEMs are getting into looking at how to value up the product by adoption of acoustics that you can see across all the OEMs in the top right hand chart, and that's accelerating. So we feel we're in a very good position here.

Last segment, or part of the Advanced Materials segment, is Performance Films. I think we're in a very good position to grow here. This segment has grown well this year. Premium products, probably 20%, and the core products about 10%. In this environment that's very good growth. Once again, we're the leader in this market space, have the largest market share, a leader in technology, leader in the largest distribution network and manufacturing scale. And that really allows us to continue to leverage and be the innovator in this space and continue to bring new products, add on to our growth rate. And here, not only do we have leverage of excess capacity, which is certainly the case, we're also well-positioned to doing a bunch of operational improvements on just cost efficiency. And the Southwall acquisition integration had not been completed that Solutia did last year, so we will complete that integration, that will release a lot of operating earnings from a cost efficiency point of view, and we see additional opportunities just to improve operational excellence that will contribute earnings.

From a technology point of view, we're a clear leader on a couple dimensions. So there's a wide spectrum of film out there. So the cheapest one is $100 tint job on a car, that's the bottom left, it's dyed, it fades, it bubbles, it's what you can think of in a Fast and Furious movie, right? That's my image of this business when I first started doing the due diligence. I'm like, "We're doing what?" But the reality is, is this segment has dramatically changed from that image. So if you get to the upper right-hand where we're the technology leader with the Southwall acquisition of sputtered film is very scientific. You're layering down 10 coats of precious metal at the molecular level that has tremendous solar heat rejection and has up to 80% visible light transmission. This is a high-performance product. This auto can be the $2,000 tint job on your car, instead of the $100, and that's the fastest-growing segment in our market, from a CAGR point of view. So we see growth -- great growth rate in that technology position. We're also unique in that we have the broadest product line by far that we serve the markets. And that's very important to our dealers because they want to buy a full product line because everyone doesn't want the high end or the low end. And more importantly, we have the easiest to install products in our core product, which is about our adhesives technology. I'm familiar with Eastman another place where we're going to find synergy, is to continue to advance how easy it is to install. And frankly, that can drive a lot more dealer behavior because that's what drives their economics. So a technical leader, we feel very good about that.

From a market point of view, very different stories about how we grow across the globe. So in North America, the penetration rate is relatively low, 20% at most. In Asia, South America, very high penetration rates. I mean, in China it's 90%, 9 out of 10 cars put film on their car. It's tremendous. So very different stories about how one grows. So when you look at North America, which has been our historically core market, we are the market share leader by far with the branded market with about 40%, and this is all about how we grow the category. Right now, mostly, we -- I never spend any time thinking about filming my car. And so we're -- there's a lot of market out there that has not been approached and sold a proper value proposition around solar prevention. I mean, this can really keep the interior car cool, which I would personally like to have, as well as UV protection and a bunch of other features. So a lot of opportunity that we see where we could do things better and how to grow the category with the dealers in North America.

In Asia, very different story. We have a lower market share position in Asia, and it's a very different market dynamic. So in Southeast Asia, we have a 30% to 50% market share, well positioned, we'll just ride the growth there, maintain what we have. In China, less than 10%, and there's 2 dynamics that will allow us to have very high growth relative to auto OEM build. First is a dynamic that's actually outside of our control, which is the emerging middle class is hyper brand conscious and believe it or not having V-KOOL or LLumar on your car is a status symbol. Those are our key brands. And if you go and ask anyone in Shanghai, they will know what brand they have on their car. I've done the experiment. It's a big deal. And so as that emerging middle class comes along, you're going to see a shift of branded to unbranded accelerate. In addition, we have a number of things we can do better in how we're going to market to take up more market share within the branded. I feel good about where we are. I think we can continue to deliver very high growth in this segment and combine that with the operational synergies. This can be a bigger earnings contributor than what you would think from the revenue in this segment.

The last bit here is around architectural. This is a market where we've had some growth but not as much growth. 3M is actually probably the leader in architectural relative to us, even though we're the global leader for window film in total. And there's a lot of opportunities for us to be more sophisticated about growing in architectural. The good news is we now have the best product in the marketplace which we just launched, EnerLogic, is the only film that actually gives you solar reflection in the summer and heat retention in the winter. You get a much better payback in how you can get energy savings. On a commercial building, it's less than 3 years, which is quite compelling. So great opportunity. I expect to see a lot more architectural growth over the next 3 to 5 years. When you bring that together, you've got a great story on how to grow the top line on a lot of premium products in that mix.

I wanted to just come back to that fixed cost comment I made in the beginning. Fixed cost were a headwind for us, probably $15 million to $20 million of fixed cost headwind in '12 relative to '11 associated with all the capacity start-ups and the start-up issues, and that's why you see, in the left-hand chart, the percentage of fixed cost as revenue going up, not to mention that revenue was challenging here. If you go forward, assuming a 3% GDP, which is what underlies all of our plans here. On a global basis, we see the opportunity to really accelerate and improve earnings and drive that fixed cost as a percentage down. And there will be 2 target investments we have, but basically, that's it for capital. We have the PVB resin plant that we'll build in Kuantan that will improve our cost position in Advanced Interlayers. Like Crystex, we saw opportunities to improve that technology. We delayed it 12 months, and the macro economy is going to let us do that. That will materially improve our cost position in serving Asia growth in Advanced Interlayers, as well as sputtering lines to support the growth in Performance Films, but much less capital in the next 5 years versus the past.

The other part is on the mix side. We are focusing on growing premium products. Not only do we have good top line growth, within that is a new improving mix, where the margins and the premium products are substantially higher than the core, and so you get that mix advantage in driving earnings growth. So when you bring that all together, you get this picture. Very high growth rate in earnings, over 20%. So we think that on a pro forma basis, we can get back to $250 million in 2013. We don't have any fixed cost investment headwinds next year assuming the economy is growing. All the contribution margin from that revenue will fall to the bottom line, then we can continue that growth rate out, leveraging the assets we have in place over the next 3 years. So it's a great story, and one that, when you look at the mix, fixed cost leverage really allows you to have this accelerated kind of growth.

So in summary, I just want to wrap up with a few additional thoughts or broader thoughts. I want to reinforce a point that Jim made. We have a wonderful portfolio of specialty businesses. This is a great set of products. We have leading positions. We have ways to invest and maintain the margins and our ability to grow with the market and in many places because of the trends in the market grow faster than the underlying market. That position allows us to invest in innovation. So we have a lot of diversity in that portfolio that gives us sustainability earnings. So something will go right 1 year, wrong the next, but that portfolio has balance to it. And then on top of that portfolio, we can add on new markets, new applications, some of which I've told you about, and then a bunch of which Greg will talk about, further reinforces the growth in these segments because they typically flow into these 2 segments. So tremendous opportunities, innovation is where our technology platforms continue to find new application so we can leverage that core capability.

And finally, on return on investment point of view, which is critical, the earnings and the EBITDA of both these segments is incredibly strong, and that's going to give a great payback to all of you. The synergies on the cost side are certainly ahead of schedule. More importantly for me, the revenue synergies are substantial. The strategic depth is stronger in these 2 segments than what I expected going in. We see a lot more commercial opportunities to improve how we contract price but also the new product to sustain our advantage in the marketplace long term. We feel very good about that. And what's equally important to this is the proposition for employees. This is a great opportunity for our employees. When we added Solutia. We created tremendous growth opportunities, exciting projects to work on, and that's key. In the Specialty Business, you're only as good as your employees. You win a ton at a time out there in the marketplace in Specialty Businesses, so you have to have a very capable organization. This allows us to retain people, allows us to hire great talent who want to be part of our story, and that just creates more and more great innovation ideas. It gives me the confidence that we can continue to deliver these results and beat that $8 a share in '15. Thank you.

I will now pass it on to Ron.

Ronald C. Lindsay

Okay. Good afternoon. Thank you, Mark. Hope you're getting excited. That was a great set of stories. We're really excited about what we're seeing there. I'm going to talk about these 3 businesses. Before I get in there, I just want to make a comment about the synergies Mark reflected. We're a company that's quite integrated. You're going to hear me say that word more than once, probably through my part. A lot of that integration came from Eastman finding things that fit together and finding new opportunities in the market. As we looked around, the capabilities, the products, the confidence we have in the company. When we bring Solutia in I can tell you our folks are really excited about getting to do that all over again, bringing together what they brought, what we have to begin with and taking it out to the market. And you're seeing some of those examples. And I'm going to tell you a bit more about some [indiscernible].

So I'm going to start with our Adhesives and Plasticizers business. This is a business we formed, as far as the reporting segment, back when we integrated solution, brought them into the company. Made up of adhesives out of our old CASPI segment and plasticizers out of our old PCI segment. We've put this together because we see real opportunities bringing them together for some of that synergy. They share similar business models. We actually have customer overlap between these 2 businesses, and they both have the similar kind of need for a particular competencies and capability to take advantage of growth opportunities they both have. A little bit more than half the revenue was -- is from our adhesive resins part of this business, and the rest is plasticizers. You see the stats down the bottom. What I don't have on the page, though, is this is a great growth story already underway. We've been growing at a high-single digit CAGRs on revenue. We've had these kinds of margins. We continue to see great opportunity to grow both of these business. I'm going to tell you a bit about that.

What we're focusing on here for growth, 3 different vectors. Let's first talk markets. We do have leadership positions in the key markets that we expect to grow in for both of these businesses. The folks understand the market needs, where there are opportunities to bring new products or new formulations, new solutions to our customers. We're out about doing that.

We've got a great set of products. You'll see, as I walk through this, a broad range of products for both of these businesses. What that means is, is we go to customers and we're trying to satisfy needs. We've got a lot of tools in the toolbox, and probably more likely that we have a solution than competitors has much narrower product line.

Couple that with people that really understand how to apply these products. This is not one size fits all. They do not just drop in. They have to work with customers, blending what we have with other materials in their shop in order to produce the products, to get the performance they need. It's a skill we've got that we're very deep end, and we're leveraging that with our customers to drive growth opportunities.

Speaking of customers, we've got good relationships now. We're working well within that. But we want to take that to the next level, and they want us to take that to the next level. Our customers are looking for ways to grow, and they're actually looking back upstream at their suppliers for enabling ways to grow. We're looking for suppliers that can do that, and we've got some very interested customers who want to work specifically with us to help them satisfy the needs that they have. They also see us, and our commitment to the business, adding the capacity they need. They're really concerned, because they get these great new products. Are they're going to have enough? And they see our commitment and the capacity that we're adding and they want to stay with us.

Just think about the market from an end user and worldwide standpoint. First off, we are selling into the markets you see here. What you don't you see here on this chart that I'll hit more is that we're not just riding the end-use market growth rates for any particular one of these. There are several cases where we've got products that are enabling our customers to make better products that they can then go take share with, while we're offering substitutes for what they're currently using that are growing faster than their end use. We've got growth drivers within some of these markets higher than the trend for the markets themselves.

From a geographic standpoint, you see the footprint as you blend all this together. I should make a distinction here, the adhesives part of this business is growing, driven by a lot demographics, rising standard of living, that means a lot of their focus is in Asia.

The plasticizers part of this business, counterintuitively, a lot of their opportunity is North America and Europe, because a big part of the growth story there is substitution of our products for incumbent products. We play where there's a large base of incumbent products, and where people are interested in switching, and right now that pretty well describes North America and Europe.

Let me talk about adhesives more specifically. First off, we call this adhesives. What we're selling is a component to making -- or components to making adhesives. We work with adhesives producers who typically start with some polymer, and these are polymers made in very large quantities. They're not very customized for any particular adhesives use for sure.

You look to the resins to enable them to tweak and tune the adhesive properly. That's where we come in. We've got a broad range of products that enable our customers making adhesives to make a product that they can then go and sell to their customers and get advantage. And that advantage can come in a couple of forms, either their customers can make better products, and I will tell you about diapers here in a second, and how to make better diapers. We can also make products that enable the end users to run faster speed, less downtime and operate more efficiently to save money. In both cases, it's the same kind of application of bringing that resin into the mix, tune the adhesives to get what's needed.

A couple of key markets you'll see there where we have -- we see lots of growth opportunity in hygiene, as well as case and carton adhesives. You see the market growth rate, that's the end market growth rate. So in the case of one, pretty good growth rate on its own but we see additional opportunity there. In the case of the second one, GDP, but this is a story of substitution potential where we can grow faster. I'm going to give you a little bit more color to those.

In terms of the adhesives that enable better products. Diapers are the largest particular end use in this segment we call hygiene. It also includes adult incontinence products, as well as feminine care products. Diapers is the largest part. A lot of growth there, a lot of innovation there. There is still also a lot of market growth potential. The chart there, the lower left shows in the green, how much more opportunity there is, just un-penetrated opportunity for diaper sales around the world.

In addition to additional sales though, there's the opportunity for better diapers. In both cases, we get growth tailwind. Our adhesives enable the diaper constructors to make diapers that have better stretch, be thinner. These are fairly complex constructions. They need to be able to make them very fast. And in both cases, or in all these cases, our adhesives help them accomplish that, and give us a tailwind because as then those diapers go out and take share, we're pulled along with them, as well as growing where the diapers are penetrating further.

We see a global growth rate there, about 7% that we can draft behind in this market. In case and carton, that's part of the overall packaging market. It's the biggest part of it as we see. I think in terms here of cereal boxes, we got examples out in our display. Packaging boxes for shipping things around, think about Amazon shipping out all the stuff they're shipping out this Christmas season. Now adhesives are used there.

Customers need products that peel very quickly. They also need products -- the packagers that is, they need products that also don't foul their equipment.

Our resins allow adhesives to be made that accomplish both those versus the incumbent. Think about that, a very small part of their cost structure enabling them to get significant productivity improvements, great value proposition, and that's pulling on us all the way back to the resins.

And that pull is causing our need for more capacity. We've been adding capacity over the last several years. The most recent kind of a dark blue there is our announced joint venture plant with our current joint venture partner in China to build a 50,000-ton plant that will come online in 2014, it will be a key part of our continuing our growth story here by supplying the capacity we need to keep up with this demand.

Let me just give you a quick view of how excited our customers are, because they are growing these products that include these resins. They need to be sure they got the supply to satisfy the demand, so much so that we have customers already committing to firm offtake agreements for this plant that's yet to be built to ensure they've got the products. You see there, first off, the de-risking of the project, but also, customer validation. They really want this, so much so that they've taken take-or-pay contracts out with us.

So a great story followed by another one, plasticizers. This is a story to a large degree to share shift. Plasticizers are used similar to adhesives. You take PZs and you mix those with some polymer, in particular, PVC. That's the large market. Make it more flexible, soft, so it can go on all these different products we think about when we think about vinyl products. Huge market worldwide, about $14 billion. 90% of that is a classic compound called phthalate plasticizers.

This has become a matter of concern from a health aspect through the last 5 to 10 years and has resulted in some regulations of use, labeling requirements and just plain old customers want to switch because they just don't want to have to worry about that. So all that's driving a lot of customers to want to look for alternatives. We have a portfolio of alternatives. We've had it. We've added to it over the years. We now have the widest range of non-phthalate PZ out there. That gives us a lot of tools, as I said, in the toolbox to solve the needs for switching, and we've got that same kind of capability here, working with our customers so that, #1, we can give them a new formulation using our products, then get the same or better product performance for whatever they're making, but also so that they can switch at low costs with not much disruption or cost in altering their plant.

We're able to do that, big value proposition for -- thus created a lot of growth. We're up to about a 40% market share now starting with our early mover advantage we got going on this in about '05, as well as the capabilities we've added has made for some very nice growth. We believe this is running about 3x in the next chart, but about 3x the growth rate for our products versus the end-use market for PZs.

Specifically, within there, what we are targeting is markets that I have shown here in this pie chart, where there is a large market, $1.1 billion of PZ sales in these segments in North America and Europe. Penetrated something to less than 30% by non-phthalates, so there's plenty of growth opportunity still just in these markets and that region -- or these regions. And we see customers wanting to go ahead and move here. We're working with them. Interior surfaces or things like flooring, molding, wallpaper and the like, building construction, put in medical devices, food, contact, more consumables. We've got a broad range here of customers interested, and that's driving good growth as you see in the chart to the left.

And as I said, down here at the bottom you see the comment, it is all about having the products but also the capability to know how to use them with our customers. They don't have that capability, and they look to us for that.

As with adhesives, we got to be sure what they're there for. I mean, think about this, our customers want to switch. They like the products. They don't want to switch back. They don't want to get shut down. They need to be sure there's secure supply as well. We've been doing that. They see that. We've done it in both organic growth. We've done that through acquisitions over the last several years. We've added capacity, and we've added products to the mix.

That's taken us from when we really got going down this strategy, of about $100 million in revenue in '05 and forecasting about $800 million, plus revenue in 2015. So great growth. We see a lot still ahead of us. And I should say, we've got the capacity in the ground to meet those sales needs on out through 2015.

So pulling that together then, as we look at the earnings impact here, and it's been kind of nice actually to have blown this one back aways, too. Just so you can see the history because bringing the segment out, you're going to see some visibility you haven't before. We're really happy about that. We had a good runup to 2012. We're expecting to continue that.

We've got growth contributions, earnings, top line as well from both of these businesses. You see the step-up from '12 to '15. As I said, plasticizers, we're going to do this with the capacity, the products we have in our hands. And in adhesives, we've got the project in our joint venture in China that will be adding the capacity, and that's the good bump we see out there in the 2013 to 2015 time frame.

So we have got good growth ahead of us here. This is a great story. Maybe it hasn't gotten as much understanding, being part of the other organizations. We're looking forward to the growth independently in these 2. We also see, as I said, synergies, and we're looking forward to the opportunities to take advantage of that as we see more and more. Much like an integrating acquisition, we're bringing together things here that are giving us synergies as the teams work. And we expect more upside even from that, all the while, maintaining very good margins over this period of time. So a great story. We're extremely happy about this one.

Now let's change gears, specialty fluids and intermediates. This is the 1 part in these 3 businesses that I'm going to talk about that has a Solutia component. Now let me give you what this is made of. And again, this is also heritage PCI. Think about the old PCI minus plasticizers, plus specialty fluids part of Solutia. That is this business.

Specialty fluids, that's made up of 2 product lines, the Therminol brand of heat transfer fluids and the Skydrol brand of aviation hydraulic fluids.

If we look at intermediates, this is a part that's been with Eastman a long, long time, and it can seem like old news, but there's been some great things done here to transform the footprint of this business in terms of the markets in our competitive advantage. About 1/2 of the revenue, and I'll tell you more about it. But the products in here, with things like Oxo alcohols and anhydride, as well as acetyl derivatives like acetic and hydride.

And then the rest of the business is a set of products that are fairly basic. Jim talked about our integrated structure, how we take products out all along that value chain. These are further up the value chain, more basic materials, a bit more commoditized. We sell these to the market to drive high capacity utilization. This helps keep our big integrated engine like our coal gasification plant in Kingsport, or our crackers in Longview, keeping those at very high utilization, effectively 100% capacity utilization routinely. That helps drive costs lower for all of those derivatives spread across all of these businesses, and drives good value for the company.

This is about a $2.5 billion of revenue business. Operating margins in the last 12 months about 12%. I'm going to show you how we expect that to look in the future.

I divided up this into the 3 different parts about what is the focus for each of those. I've alluded to it a little bit but let me hit it a little more explicitly. Specialty fluids, we see a really good growth opportunity here. We are going to grow this. These are premier product lines in their respective markets. In many cases, these are actually spec-ed in by name by the aircraft manufacturers and designers, engineering houses, not just transfer fluids, but Therminol. We've got a great market position. We've got growth opportunities, and we've got capacity adds that we're planning to make. I'll tell you more about that.

In the middle here, this is our chemical intermediates. We have evolved this product to -- or product line to a good market position, good earnings, good margins. The plan is to continue that forward, to continue optimizing the targeted capacity adds as necessary as the markets grow and the markets that we're competitive -- or have a good competitive advantage in. For example, in beginning of this year, we started up our 2 ethyl hexanol expansion, and that will fit firmly right here in the middle.

And then lastly, we'll continue driving that high capacity utilization. In addition to that benefit, the other thing I would say about those products we sell is that really is our raw materials for growing our derivatives. We want to be sure we have a good, pure source of those key raw materials as effectively as these products were selling out to the market. Those are products we're going to value up over time to these other derivatives. In the meantime, we're selling into the market to drive cost lower.

All right. From a market standpoint, main point I'd say about the end-use footprint is it's quite diverse. We have a lot of touch points, a lot of different products, a lot of different end uses, as you see that in the display, that gives us some robustness of demand. We're able to keep utilizations pretty high in this business, that benefits elsewhere in the company as well in a variety of economic conditions.

On the worldwide look, a little bit like adhesives and plasticizers but for different reasons. We've got 2 different footprints. For specialty fluids, these are worldwide markets. There's worldwide growth opportunity, customers around the globe and we sell around the world globe, competitive around the globe. For the rest of this particular segment, our advantage, to a large degree, is around -- is near where we make these products. Good cost positions making them at leverage good logistics by selling to markets close by, and that generally means the focus here is the North America footprint.

We dive down to the specialty fluids a bit. I mentioned that these are the market-leading there. We have about 50%, give or take, market share for both of these, great value propositions. These are products used. They don't cost much, relative to cost of whatever they go in. Think about an airplane, we're selling a number of gallons of this fluid for a large airplane. A small part of that total cost, huge impact on performance for the plane. So a lot of average on the cost versus performance, same for Therminol, small part of a plant, very important for the effective operations of that plant. That's the product part of the story.

Customers need those products to perform, so they've got to get good products. They also need good service. We've got a great service offering that makes sure they get the promise of the performance, that distinguishes ourselves from a lot of our competition. So a great ratio of the cost of these versus the value and use. Because of that, we're seeing growth opportunities.

I'm going to hit on Therminol. That's the largest of these 2 by a fair margin. That's where we're seeing great growth opportunities. Let me kind of walk you through that. First off, Therminol is not a product, it's a product line. We've got a broad range of transfer fluid offerings, so that we can cover a lot of different kind of needs. The whole portfolio, our folks work with our customers to spec in the products they need.

In addition, you see this logo, TLC, this is the brand for think about service after the sale. these products are out there. They're effectively utilities for the plant operators, and I can tell you that plant operators don't want to worry about their utility systems. They've got plenty of other things to worry with. We take a lot of that worry off their hands. Our folks sample their systems to make sure the fluids are in good shape and haven't been contaminated. We make sure that the levels in their plants are full. And eventually, all of these will need replacing and so we work with our customers on when is the right time to get a refill. We see, when we look at all of this with the product quality performance, along with this TLC program. There's customer retention for repeat business of greater than 90%.

The customers have voted with their feet. They love this service. They love the products, and they're coming back to us. The geographic footprint I was telling you about is shown here. Pretty much you think about plastics plants, chemical plants, refineries, other oil and gas operations, waste heap recovery systems, green energy, wherever people are building those assets, that's the growth from the market for us. And we've got -- we're planned worldwide.

And one additional thing that's kind of interesting that we are just starting to get our hands around is some synergy here in this business with the rest of chemical intermediates. In addition, the heat transfer markets will find some of these products are actually of use and of interest to customers to use them in direct contact parts of that operation, process solvents or even chemical intermediates.

These are some of the same names interested here for these fluids as the rest of our customers in the chemical intermediates part. So we see synergy opportunity here to grow sales of these products and other applications. And we're looking forward to growing there, so all that's translating in and we need more stuff. We've been debottlenecking already, the plants that we've got in the ground and we're planning a fairly significant expansion that will be started up in 2014 to grow the Therminol capacity, to enable us to continue to grow 2014, '15 and beyond. We're very excited about that. I think it's going to be a great story for us going forward.

Now with chemical intermediates, I've talked a bit about this already. But let me give you a little bit more color to this. These are products that we have had a long time. We have repositioned these products in markets where we can bring our advantage to bear. The advantages here we start with good raw material positions, coal in our coal gasification operations that goes down to some of these. North American-based ethane and propane flowing down into these. So good raw material position coming off a very large scale plant, giving us good economies of scale, low conversion cost. And we play where we can win. And that generally means fairly close geographically, so we keep logistics costs low, all adding up to a low delivery cost for our customers.

And all that together with the reliability, we've carved our great positions here where we now have either #1 or #2 positions, or 2/3 of the sales in the chemical intermediate slice of the pie. And that we've turned that into good margins over the '08 to 2012 time frame. We think about what happened in that time frame, still kept margins anywhere from 13% and 19% for this business. So I would dare say, probably some have thought was a pretty low-end commodity business, and not terribly exciting, but we've been able to make good money out of this and believe we can sustain that position going forward.

The rest of this business, I've already alluded to, the function of other parts. This is acetic acid, ethylene that we're selling out of these big engines to drive capacity utilization and provide raw materials for the downstream derivatives. So in the case of acetic acids, for example, that goes on downstream and ultimately is used to make things like golfer trucks [ph], one of the coatings esters that Mark was talking about for automotive coatings, LCD displays, so you think about the specialty nature of those. This is a good raw material to ensure we have unbroken supply, as well as some cost position for this.

Now within this part of the company and this part of the business, we also kind of shepherd these large assets to help drive improvements. Particularly in the olefins area, we have been making improvements to reduce our cost and drive higher earnings out of this. You all know that we've restarted one of the crackers that we had closed back in 2010, and that's been very good for us.

We've got 3 other things that are set. We've got to play out in time, and they're on the chart here. Let me give you that quick rundown. First off, early next year, we're going to be debottlenecking, finishing a debottleneck of our largest cracker. That's going to start benefiting us in 2013, along about sometime in Q1.

Secondly, from about 2013 into '15, we've been able to negotiate a better contract arrangement for the propylene that we buy. You might remember, we're net short on propylene from our crackers versus our needs. We buy propylene. That's going to also start benefiting us in '13 and will carry through into '15. And then in 2015, we have got a more long-range answer for our propylene needs, and that's the deal we cut and announced to participate in Enterprise's PDH unit to get propylene to satisfy the rest of our propylene needs for our derivatives beyond what we make ourselves. That will start benefiting us in 2015. This particular chart only has a partial year of that.

You see, this is the corporate benefit of these moves we've made. This doesn't certainly include starting up the cracker, by the way. These are just the 3 things that's going to help us each of these 3 years in terms of earnings improvement. We still think there's opportunity here. We've got a cracker that's still down.

We've got product that we sell that we think there's potential for business uses for that than just for general trade sales. So we're examining opportunities for creating value out of that for Eastman. I can tell you, this is all fairly much in the category of exposure to the merchant market for olefins. That's not really strategically where we're after, so it likely means we'll be interested in bringing a partner into the mix here to help us create value here. We don't have a specific project to tell you about today, but we do have a strong interest in capturing value, we think, exists here. And as we develop things, we'll let you know.

Now let me look at the EFO effect of all of this. 2012, we see this business coming in a little bit over $300 million. We get a full year of fluids here as we go into 2013. We also have growth in fluids, and that's part of the step-up 2012 to 2013.

That other segment end is the part that includes our sales of olefins. And as we debottleneck, we get benefit there. And then we also have additional sales on chemical intermediates.

Fluids going 2013 to '15, we will get some benefit, not the full of that plant coming online, but we'll start to get the benefits there as we continue to grow specialty fluids.

And then chemical intermediates, that benefit comes from multiple sources: #1, as we get better propylene positions, that flows through these intermediates and improve their earnings; #2, we will be continuing to grow in a targeted way some of those intermediates; and then 3, we also have opportunities for continued license income as we license some of the technology we have as we've done in the past, and we expect there to be some of that also in the time frame.

Let me back up, too, and talk about both time periods as far as our view of olefins. Mark alluded to that a bit ago. Now what I would say here is it's always dicey trying to call how these things are going to move, particularly in the short term. But I'll calibrate you on how we're thinking about what went behind these numbers, and you can adjust as you see fit. But our view is we went from 2012 to 2013, putting this together as we were thinking propane, propylene would be relatively flat in terms of spread. And ethylene margins would be probably be something flat to slightly down actually. We'll see how that turns out. A lot of things have happened just recently. We understand all that, but that's what is in these numbers to make sure that you're calibrated. And as we look to '13 to '15, pretty similar, we see relatively flat to maybe modestly up from those -- over those couple of years or so.

We'll see how it turns out. But the story I want to leave you with is we got some really good things. If you want to actually just neutralize the whole olefin spread part of this thing, which, to some degree, is the way this works out, this is actions that Eastman has taken to drive earnings in this business. If we see some additional benefits, that would be great.

Now last one is our fibers business, a great, great source of earnings for this company for a long, long time. And the punchline here, and I could probably just stop with this, but I will tell you a few more things is it's going to continue. This is our footprint worldwide. This is a business that has been shifting towards Asia, in particular, where there's growth. Our sales have shifted that direction as well. The story here -- part of the story's success has been we've been very connected to the customer, and we've gone where they want us to go both with our assets, with our products. And we've been rewarded for that.

Let me talk about the market overall, because one of the key issues that we get is, well is this still growing? I'll build this up, I've started with Asia here. But let me just go to punchline at the end, and you got it on your page already. We do see market growth for acetate tow over the next several years at a fairly modest level of 1% to 2%, but it is still growing. And that's really on the back of Asia. Asia is the largest volume product. The growth rate you see here are retrospective. That's what we've seen over the last several years. Going forward, we think Asia is going to be more up, like about 1/2 this rate, and that's driven to a large degree by China where there's both large market and growth.

Next up is Europe. Europe is the second largest market. Again, a retrospective growth rate, very modest. Going forward, we think it's going to be relatively flat, maybe even slightly down in terms of consumption.

And then the last is the Americas. It has been on decline for some time, but a fairly low part of the -- small part of the total volume any more. Still expect to see decline there.

And then the rest of the world with some growth. But all-in, do all the math, it works out that we still see the growth there, still some need for capacity.

Now I said our customers have appreciated what we've done. They've wanted capacity near their markets, and we've complied. Back in '08, we expanded our facility in the U.K. In 2010, we started up our plant in Korea. That was very well-received. That plant was sold out its first year of operations. And then next up is our JV plant that we're building in China. It's going to be starting up next year. Again, we're going where the growth is. We've been sure to stay close to our customers and, again, they've appreciated it. And we believe that, that's the key part of what you see on this chart.

This is 2012 backwards. We expect to do about $385 million this year. Now look at that, from 2003 forward, pretty good story. 9 straight years of earnings growth for this business, but we're not done.

This is our outlook for the next time period. You see growth year-over-year. We'll start seeing some benefits of our China capacity in 2013, and then more full benefits in '14 and '15. We continue to see a great, solid source of earnings for this company through this business and a business that's pretty unexciting from an overall induced growth rate. Very exciting, the way it has played out here.

All right. Let me kind of pull all this together then, much as Mark did. Because I think about all these together, and I get out of specific stories for a moment, think about all this together, what you hear is a collection adding up to a great, strong financial performance over the last several years. And this has come from getting ourselves in a good position where a lot -- a high percentage of what we got have very good competitive position. That's some of that evolution I talked about, as well as some of the things we have acquired. Great competitive positions. We've been able to identify really good, compelling growth opportunities throughout these businesses, and that's turning into great earnings performance up till now. And we see great earnings performance going forward.

In addition to that earnings, these businesses throw off a lot of cash, much more than they need to support what they're doing themselves. That cash is part of the story for Eastman's growth going forward. It's a key enabler of earnings growth in and of itself and you think about that a second way, it's a great enabler of Eastman's earnings growth above and beyond these businesses.

As I think about how we got here, let me, this is where I will refer back a bit to the individual stories, but I think it's important. We've been able to change these businesses by making, what I'll say, smart choices executed very well. So think about changing chemical intermediates and, I tell you I was there, a fairly unexciting, unimpressive set of businesses with low earnings to one that we believe is going to deliver consistently good earnings, fairly steady businesses that we honestly didn't have a lot of belief that could actually be done.

In the case of adhesives and plasticizers, we found some really good growth opportunities. I'm telling them, got a nice set -- I got momentum already and carrying that forward. And then fibers, think about that business. It's flat, kind of dull, nothing much happening there, oh yes, except for 9 straight years of earnings growth, and we expect to add another 3 as we said here in this forecast.

Smart choices, executed well. Let me give credit where credit is due. You all were introduced to the leaders of these businesses earlier on. They and their teams are very good at what they do. They are the ones that have been making these smart choices. They are the ones that have been executing very well. Now, why do I say that? Well, makes them feel good probably. But I want you to have confidence that, that history is -- that has been created by those teams and those leaders, and those are the same people that we'll be looking to build that future forces. So I've got a lot of confidence in our ability to do this because of them and what they've been able to identify, the things they've done and the plans they've laid in place. I feel really good about what we've been able to tell you and, I hope you get that sense as well.

Okay. So now I have the pleasure of telling you that you have earned a break. And okay, all right. And so it's actually going to be a little bit longer maybe. My watch says it's 5 after 3. We'd appreciate it if you could be back in your seats so we can get back going again. Thanks.


Gregory W. Nelson

I think I'm going to have a lot of people at the product displays while I'm talking about the product here in the room, so that's going to be good. We'll do a little demo while we talk here.

All right, we got the last few people coming in at the back here, so I'm going to go ahead and get it started here. Welcome back to the second part of the session today. I'm Greg Nelson, Chief Technology Officer. And I'm always delighted when I hear all of the new products and the innovation talk that's going on from the business partners that we serve. It's great to see the innovation having an effect on the bottom line, and that's our goal every day to make that happen.

We've talked a lot today about the specialty product platforms that Eastman currently enjoys in the marketplace, and the growth that is occurring in those platforms. As you'll remember, these specialty products come from our strong manufacturing streams where we have gotten, not only world-class manufacturing capability to operate those streams, but world-class competencies on which we build those streams out and we build new products from those streams.

Many of the products that the heritage Eastman company has are products which involve things from multiple streams that we put together in very unique ways to drive marketplace growth, and that we build products for applications in the marketplace, and these have given us some very differentiated platforms.

As you can see on the slide here, the Solutia acquisition also gave us a nice addition, across these platforms and these specialty products, for which to build our growth going into the future.

An example that we've used to talk about how we think about product innovation is illustrated here in our little tree chart here. Polyester stream, if you think of it as a tree, has got many branches on it. The early branches of that tree were the kind of products that you see with DuraStar, Eastar copolyesters, Embrace copolymers, the Aspira polymers. These are polymers that are all variants of that polyester stream, each of which was adapted to particular marketplace needs that we saw at the time and that we've been able to take forward and grow.

Cerfis product, and I'll talk about it a little bit more later, but it is a product that's a close cousin of a medical polymer, that we've taken to a whole different market to create demand downstream.

We've talked about Tritan and Mark showed you all the brands that Tritan is in, in durable goods and now in medical goods. And as we work to take that into the medical market, we're enjoying lots of success and we continue to do applications development product-by-product and application-by-application to establish these long-term opportunities. But we're also taking in the new products such as TMCD in can coatings, using that expertise from the polymer side, going to very different markets to give marketplace solutions.

One of the things you might not have thought about up to this point is the fact that the Solutia acquisition brought us 3 polymer -- or 3 products that are based upon polyester polymers. Flexvue, the LLumar, the V-KOOL types of products all have a polyester film base upon which we apply technologies through metal coating or other types of wet coating techniques, have products that are very tuned for marketplace applications.

This ability to put together base polymer characteristics and downstream innovations down the channel to create new products is the basis of how we are building the new products for the future of Eastman Chemical Company.

Now to do this, you need to be able to have focus. We've talked a lot about the markets that Eastman is in where we have a #1 position. And as we think about our innovation program, we want to take that market know-how and that market position and focus our innovation engine to deliver in those markets.

So the primary markets that today are driving our product application development work are transportation, building and construction and medical. Other opportunities exist, but you would find the bulk of our portfolio looking here.

Each of these markets have got strong innovation drivers that are driving change and are driving persistent change, whether it's energy efficiency, fuel efficiency standards, other standards which are causing change to happen in an industry, such as automotive and transportation, or health and wellness concerns that are causing consumers and medical technicians to switch the kind of materials that they use, all of these types of influences are coming together to make change happen in these markets. A strong position that Eastman has in each of these markets with the products that we have allows us to see and understand where those changes are going.

From the technology platforms that we have, or the base products that are built to go into those markets, we can then add applications capability, bringing in experts who understand how to adapt these technologies across our streams and across these markets to build new offering. This is how Eastman is growing our portfolio. And over the last 5 years, we have continued to add to our new products portfolio to give you a portfolio like the one that is depicted on the screen at this point.

Eastman has launched over the last few years a very solid marketplace portfolio into many of the markets that Mark and Ron have talked about. Whether it's been the non-phthalate plasticizers, where we not only have brought products to the marketplace, but we've taught our customers how to use those products; or the diapers and adhesives in personal care markets, where adhesives are allowing to take the applications that we have seen in North America and Europe and move those into Asia and to grow with the rising consumerism that we see in those markets; or the displays market where we have taken materials that we have innovated for our cellulose triacetate displays and we continue to drive innovations into that marketplace to bring quality and to bring value to our customers in that rapidly changing market. Each of these types of applications has allowed Eastman to grow upon that base that we have put in place.

Now our Solus materials, which you've seen displayed outside, allow us to take and drive new materials into the automotive coating space, allowing us to be able to match the standards that we see in the marketplace for low VOC and to improve our offerings there. And, with the Solutia applications coming into our portfolio, we have been able to add in our early-stage discovery and development portfolio, brand new applications of which we can apply the same methodology and drive the next generation of products into the marketplace.

I want to tell you at this point about some of the specific applications that we're working on and give you some insight into how we see this growth turning out more specialty products to drive the growth of Eastman Chemical Company.

We talked a lot about tires and about the products that we have in tires. As you know, Eastman has been working, and we've been talking about for the last year the ability to take new materials such as cellulosics into the tire space. Regulatory fuel standard and economy pushes in that space are driving the industry to want to deliver tires that have got increased fuel mileage, and that means a reduction in rolling friction. The reduced rolling friction: Oftentimes, in this industry, you have to give up other properties. An important property you cannot give up is traction. So if innovation of new materials makes you give up these properties, it limits the kind of breakthroughs that these manufacturers of high-end tires can take to the marketplace.

The types of material that Eastman is now taking into this segment allow us to break the normal performance trade-offs that exist here and take those trade-offs into new places where we can break into this space with applications that allow for reduction of rolling friction while, in some cases, enhancing wear and enhancing traction of the tires. Multiple Eastman products allow us to do this, and we've made great progress in the last year completing our first round of track testing for these types of materials, and driving forward into new rounds to adjust our formulation.

The acquisition of Solutia has brought us a very key element to be able to pick up the speed of this innovation and move ahead, and that key element is expertise in our Akron lab. The experts that we have there, and the relationships that they have with industry players, have allowed this innovation to pick up speed with the major brand owners. And we're seeing great interaction going there, and we expect that we will continue to have good interactions with these early alpha customers, bringing new products into the marketplace in 2013.

When a tire is built of over 60 different components, and you're introducing a new component into a highly regulated environment, it takes time. But the progress that we're making makes us believe we can do this as fast as an insider in the industry could ever do it, and we look forward to delivering this as we move ahead.

Mark talked about both the acoustic and the solar trends that are going on in transportation and in building and construction. These trends are largely being driven in transportation by light-weighting trend. The ability to begin to combine these properties into a single product that meets multiple functional needs, is one of the things that we believe we can do best. Great progress has been made within Solutia to do this, but we have found that once we have brought it in and we've added the type of polymer capabilities that our application scientists have, we picked up the speed. We've gained insight into what's happening in this product, and we believe now that we're on track to be able to deliver products that not only give you acoustic reduction inside of an automobile or inside of a building, but also have the kind of solar control that's needed there. These premium products will enter through premium brands into the marketplace, but we believe they will set the standards for what will happen in the future in building and construction, and in transportation. This ability to get multiple functions into a product, again, is what Eastman believes we do best.

Eastman microfibers is perhaps the most exciting platform that I've seen in my career at Eastman. Microfibers are a technology which allow you to control the shape, length, cross functional or the cross-sectional area, as well as the material of construction to make very, very different kinds of fibers than any other technology that exists can make.

These fibers, typically 2 microns in diameter or smaller, are typically formulated into multifunctional components such as wet-laid nonwoven materials. And these materials go into a variety of markets, battery separators, filtration markets for both air and liquids and a wide range of other types of materials.

Eastman's technology has progressed very rapidly over the last year, with the addition of an applications development group that is up and running, staffed with industry experts, I should say. And those industry experts have been able to take us into very new places with the insights that they have from 15-plus years experience in their industry, to broaden out our portfolio and to tune it to the type of applications that we believe are going to make for a great launch in 2013. In the near horizon, we expect the first quarter of 2013 to see the launch of these products.

Companies such as Ahlstrom, a leader in products that are in the nonwoven space, has got Eastman fibers now in multiple products for development and is very close to launching those. Other alpha customers have taken us into other segments of this marketplace. We've increased the number of offerings that we've had from our first generation technology to have a very wide engagement with the industry. And we believe to have a very successful launch in the first quarter.

Not only are we focused on that, but we're also looking at the front end of the innovation pipeline to look at how these cross-sectional areas and how these different fibers can add performance features to performance textiles. So knits and woven materials of these fibers, we have already seen do things that are very different than anything that another fiber can do in the marketplace. And the major brand owners who are interested in performance textiles are talking to us very readily now. We're still a ways away from having these materials ready for commercialization, but I offer this to you as an example of just how well the pipeline is running as we drive our developments in the microfibers program.

Cerfis technology. As I told you before, Cerfis, the polymer that's used to coat wood, is very related to a medical polymer that we have, but the way this polymer got to market is nothing like the way medical polymers got there. We had to go down the channel and innovate the process to be able to coat polymer onto wood and a wide variety of not only natural woods but of wood composite materials give extremely high finish and extremely nice surfaces that don't have to be painted to the marketplace. Now as we enable those customers that we innovated down the channel with, we have seen great success in the marketplace out of the early phase launch and discovery.

Woodgrain, our first partner, has seen their store -- in-store sales increase by over 2x last year in, and they've added more stores all throughout the year as they have taken their Finished Elegance product out.

Our new licensee, Balcas in Europe, has just introduced their KOTA "Paint No More" product to the marketplace, and these are now available in stores in the U.K. and in homebuilding stores. We expect to see the same kind of performance there.

When you can take and eliminate labor from the process of doing construction, you can be rewarded in the marketplace for that and that's exactly what these first 2 applications have shown us. When we watched the people who use these products build something in the marketplace, we think the second-generation product which adds this technology to wider format shelving, cabinetry, furniture, other types of applications, will enjoy the same kind of pull-through as we work on taking that product to marketplace today. We expect to see over 20% annual growth rate each year for the next 5 years with these products as they continue to grow, and I won't be surprised if they grow faster.

Perennial Wood. We've talked a lot about Perennial Wood and how it leverages the outdoor trends in markets and, particularly, in premium building outside of the house for outdoor living. We've seen a very strong market understanding and acceptance and really desire for this type of a product, that was named, as you see here, one of the best products introduced by -- in This Old House in this last year.

The product was launched in a very difficult building and construction market. You need people building premium with decking and other premium fixtures outside the house to be able to pull this through, and it was a difficult market in 2012. We've learned a lot in that market. We're continuing to understand what we've learned and how our offerings exactly are fitting these trends, and we know that consumers still like these offerings. We also know that with the continued difficult building and construction market, we're not going to be putting as much money into Perennial Wood in 2013 as we did in 2012. You can look for us to continue to keep you updated as we understand and make decisions about how we move this one forward.

One that came to us from Solutia is Heat Mirror insulating glass. As standards in window efficiency have moved, we're moving to a place in 2014 where the low e-coatings that are used in double-pane windows will no longer meet those standards. We're seeing Europe moving to triple-pane coatings. And if you've ever lifted a triple-pane window glass panel versus a double-pane, you'll know the reason why you might not want to go there if you have to handle these and use these in construction.

The ability to put a plastics film instead of that central plain inside of a window has been known for a long time, but the ability to actually assemble a quality window with great optical properties has not been known for a long time because most of these windows were made in hand layout manufacturing types of operations. We have innovated a proprietary process that does an automated assembly, build pane windows with multiple films, if desired, inside of the window that does both heat control using IR reflective technology, but, more importantly, creates the cavities inside the window to give you insulation. So you can see the kind of benefits that you get from this type of material listed here on the slide. For us, the key -- we believe, this is another key example of going downstream to enable technology that then pulls through things that we can do very uniquely in the Heat Mirror insulated glass and in the Heat Mirror films that are inside of that glass.

Very strong interactions now with key players in the architectural windows industry, and we believe that out of our small development line that we'll be able to do the early-stage launching to prove this out, and we hope to take this to the next level as we move ahead. This is an opportunity that we envision can be over $100 million at maturity with over 30% gross margin.

Electronic films. One of the things that Mark told you he didn't have time to talk about was electronic films. I'm not sure I have enough time to talk about how excited I am in this area in the time I have left, but let me give you a couple of nuggets here. Electronic films typically serve markets that are moving very rapidly. Innovation cycle in these markets can sometimes be 18 months as products begin to change. If you think about the touch panels that you all have in front of you, the LCD panels and how fast that technology is changing. And even the medical devices and, in this case, medical devices where the disposable instruments for doing blood analysis. This is a very high precision coating, which commands a very nice premium in the marketplace. These kind of changes are being driven by the same trends that we've talked about for lower-cost health care, more home health care, but more precision in doing the health care. More devices that are brighter and do more and are lighter and enable you to do more things and put devices in more places than we've seen them in the past.

These trends all come together to create great opportunities for growth. The question is, do you have the toolset and the seeding capability to meet that growth? We believe that we do. The thin films and the high precision coating technology that we're able to apply through the Solutia acquisition and specifically from the technologies that we have acquired from Southwall, we believe are well-positioned into this trend.

In addition, one of the things that most people in this industry cannot control is how the coating technology interacts with the substrate technology, the polymer that's under this coating. We know how to control that, and we already have insights as to how we can push performance to the next higher level by changing the type of polymers that are underneath these coatings. This creates unique innovation opportunities for us in this space.

We currently have a global footprint for doing the coating, and we have plenty of polymer assets to begin to think about how you put these kind of materials together and deliver them to the marketplace.

Electronic films from the base we already have is going to have a greater than 15% growth rate through 2015. I anticipate this will be one of the richest number of new product offerings that we can bring over the next 5 years out of our innovation portfolio, marrying up to these trends and having an innovation heartbeat that's fast enough to keep up with the change in this marketplace.

So all of this comes together to have an innovation portfolio that has been growing over the last 3 years. The values increased, you've seen these metrics before in earlier presentations. But as importantly as our value -- the fact that our innovation value is increasing, we're not increasing the number of things we're doing. We're working to stay focused. And so we have roughly the same number of programs that we had 3 years ago with more value in those programs. Just because we believe we have better market insight, we got better ability to focus these things as we move ahead.

And our R&D spend has been modest as we've increased it, but we have increased that spend commensurate with the value that we see in each of these programs. We're setting a goal for ourself next year of taking the target up to $1 billion, and we believe we can meet and exceed that and grow ahead.

Now I'd like to stop for just a minute and talk very briefly about process technology. Process technology has been a heritage of Eastman Chemical Company, and the ability to deliver it tend to drive productivity out of our assets, and we've enjoyed that productivity in a lot of our businesses.

Mark told you that we've got some innovations going on at Crystex. Let me tell you why we have the innovations going on at Crystex. Solutia did a great job of having experts in their functional silos driving that process, and they've got great experts in the Crystex process. Routinely, they didn't cross people over out of other areas to look at things from a different framework.

Eastman's heritage way that we've done things, is we tried to maintain experts that were deployable to very different places. As we brought in experts to help with this process in the movement ahead, we have people who simply saw things that hadn't been seen in this process before. And that ability to think about your process in a very different way, recast it in a different way, has shown up in what we believe is going to not only be the great capital savings and the cost savings of running this plant and retrofitting our other plants, but in better products, because oftentimes better processes and better products go together.

This is the same thinking we've applied to Therminol, and we've already gotten great debottlenecking and reliability and productivity out of that plant. We'll see the same thing in the build of the new plants that are out there and the same thing in Saflex.

Applied process knowhow, while not always pointed at new products for growth, almost always deliver for us in better ways than just the productivity savings that we put in our pocket in the future. We'll continue to have emphasis on this.

This process improvement investment is not just limited to our chemical manufacturing processes. I have the honor of maintaining the Six Sigma functionality for the corporation. And as you can see over the last 10 years, we've had great progress in driving productivity with Six Sigma. This started in manufacturing, but it goes into a lot of places. And as you can see on the right-hand side of the chart, the total corporate productivity across all functions is now more than 50% made up from our Six Sigma capability: 10 master black belts, 50 black belts, scores of green belts out there driving productivity. The key of this is, this is in our DNA and we want to get better.

We also want to embed this DNA in Solutia and the acquisition. And we've made great early strides. And quite frankly, we have found each of the plants in the areas that we've worked for this technology and this methodology to be very receptive to this as we move ahead.

The last thing I'd like to tell you is that we're building a new innovation footprint and capabilities. That R&D increase that you saw, the majority of that R&D increase has come in Asia. We've had the fastest-growing workforce in R&D in Asia, working to adapt our products there, and our facilities are growing in Asia as we spread out our capability to drive growth in those markets where we see consumerism moving ahead.

New innovation hubs that we pooled from the acquisition such as Springfield, Massachusetts; Akron, Ohio; Canoga Park in Palo Alto, California, have given us great places not only to be engaged in the product technologies close to the customers of those products, but also brought great expertise and a great base to bring talent into as we move ahead, and we've already begun that journey.

Finally, we've announced that we've got a new Innovation Center in North Carolina State in the Research Triangle Institute on their Centennial campus. That's in the middle of one of the most entrepreneurial, practical engineering entrepreneurial spaces we believe we see innovation driving in the United States. And we look to see new product and process concepts coming out of that for the future continue to bring things to our pipeline.

So the integration of Solutia has brought us a lot of potential for revenue synergies, some we saw ahead of the close of the acquisition, more we're seeing every day that we interact with the people of the acquisition and begin to look at how we move ahead and accelerate. So I'm happy to have this chance today to tell you that Eastman innovation is alive, we're building great things for the future. We're glad you're looking at what we're building and asking questions about it, and we look forward to delivering as we move ahead and contribute to the growth of Eastman Chemical Company.

Now I'd like to introduce Curt.

Curtis E. Espeland

Thank you, Greg, and good afternoon, everyone. It's a pleasure to be here again back at the Sentry Center, great facility to host an investor day like this.

Before I get into my final section and then turn it over to Jim, I just want to comment and acknowledge the progress that you're seeing with the integration of Solutia. What you're seeing is our business and technology teams have been working with a resegmented structure both within Eastman, as well as the introduction of the businesses of Solutia. And as we've worked through these various aspects of strategy, the grind-me-down annual business plans, execution of forecast, et cetera, what you may not realize and what you may not see is that it feels like we've been running these businesses collectively for years, not months, and you're seeing it in the work that's been done, and as you talk to our business leaders out in the displays area.

What that does is it gives us confidence, gives the executive team, gives our Board of Directors confidence we will be successful with the integration of Solutia, and we will be successful in growing our portfolio of specialty businesses.

What that portfolio of specialty businesses does, is puts us in a position of strength. On top of that, from my perspective, we're also in a position of strength from our balance sheet, from our cash flow generation and in our people. So let me spend a few more minutes on that.

As you look at our financial projections, here are some of the fundamental components that went into our outlook. From a GDP perspective, we project our global GDP to be, on average, around 3% in the forecasted period. You break that down a little further, in United States, we're looking to have growth around just over 2% in 2013, growing to 3% to 3.5% in the remaining forecasted period. For Europe, we've actually forecasted a slight return or slight growth in Europe, growing to 2% in the forecasted period. And in China, we've assumed a GDP growth rate of roughly 7.5% to 8.5% for this 3-year time period.

In addition, we have assumed that there's modest increases in raw material costs over the 3-year time period, as well as we've assumed some moderation or just stability in currencies, and for us particularly the euro.

And some economic assumptions that are more controllable to us. We have assumed a tax rate of 31%. We have implemented our first phase of tax strategies and implemented those. Those will have us approaching a 31% effective tax rate in 2013. As we implement additional strategic options for us, as well as see a return of more normalized improvement in foreign earnings mix, we see the potential to be at a 31% rate, even potentially lower at 2015.

From a share count perspective, we have assumed that share repurchases, the complete share repurchases to offset dilution during this time period, we probably will be off to a slower start in that and in the beginning of 2013, as we focus on deleveraging. But during this 3-year time period, we're going to have more than sufficient free cash flow to offset dilution. So roughly 156.5 million shares would be the kind of the target share count during this time period.

One of the things I talked about with confidence that we'll be successful in the integration of Solutia. You've seen this slide before, so let me just give you some additional comments just to give you some perspective why we feel good about this progress. First of all, both the Eastman and Solutia teams were working closely together since the deal was announced back in January to start planning for the level of integration that had to occur. We implemented a program, a simple program called 2 in a box integrations planning. What that meant is that, as we've had a series of functional or business areas discussions on integration, the 2 in a box was there was always a Solutia person and an Eastman person in that box to make that decision, resulting in the best decision for the company.

The other thing we did to try to improve our capabilities on integration was we also talked to other companies, both in our sector and outside our sector, on what the best practices were out there on integration to make sure we enact them at Eastman. And in fact, if you talk to our advisor who has helped us through some of the integration efforts, at least on the front end, he would say Eastman has not only deployed these best practices, we've given them a few more to work with as they work with other clients.

On the positive feedback, a couple of additional comments there. You've heard some of the employee excitement from a business and technology standpoint from our earlier presentations. What you're hearing -- what I'm hearing from our Solutia employees who are now part of that Eastman team is continued excitement about the growth potential of the company collectively and what it feels like to be a part of that growth company.

Similarly, as we talk to customers, and we have more interaction with customers, what you're hearing more is Eastman is the type of company they'd like to grow with.

So the net result of all this planning and feedback is we are able to put in place an integration, that in essence, we had 5 new business segments operating on day 1 with a seamless transition to our customer base. Our business teams were also enable -- were able to talk to customers and suppliers very early on, talk about key strategic impact of the choices we have together. Well, that gives us confidence that we are going to be successful in the integration of Solutia.

What that results in is a continued confidence we will deliver on the synergies associated with this transaction. First, on the cost synergies, we've characterized the nature of those in the past. We are highly confident we will generate more than $100 million of cost synergies with this program. As we've talked about, and what I want to reiterate, we are well on our way to achieve those cost synergies. Through the end of 2012, we will be at a run rate of roughly $50 million. We have a series of specific projects, programs and other actions that we're going to deploy during the course of 2013 and the early part of 2014. That will enable us to be at -- have a cost synergy run rate in excess of $100 million. We're still working through some of those specifics, they have different levels of probability. As we continue to execute during 2013, we can provide more clarity on what those expectations are. I think there is potential for some additional functional cost synergies. And as you've heard me talk before, I also think there's some long-term potential for upside on raw material [indiscernible] .

On tax synergies, you've already heard me discuss kind of our expectations for the effective tax rate. We're also still on track to deliver the tax synergies listed here. We expect to use more than half of the $1.3 billion of NOLs over the next 3 years, specifically 2012, 2013 and 2014. The rest of those NOLs, as well as the foreign tax credits you see listed here, will be used for the multiple years thereafter. What that allow us to do is have an effective cash tax rate even lower than our effective tax rate for many years to come.

On the revenue synergies, you've heard multiple examples of business and technology synergies that are available to us as we bring these 2 portfolios together. As you know, those synergy -- revenue synergy potentials have some short-term benefits, as well as there's many that have multiple-year benefits. We have assumed some of the early successes of integration in the forecasted numbers. As we continue to make progress, I feel a lot of excitement about additional opportunities to grow the earnings through these synergies through 2015 and beyond.

So the punchline: Eastman remains on track with the integration of Solutia in achieving our synergy potential, and a lot of that is coming in the position of strength we have with our people who are behind the execution of this integration.

Moving next to the strength of our balance sheet. One of the strengths of our balance sheet is we have a fairly attractive debt maturity profile.

Listed here on Slide 112 is 2 elements of debt service that are required over the next 3 years. The blue bar is basically just the required payment on the $1.2 billion term loan that we used to finance the Solutia transactions. Consistent with our expectations when we announced this deal, we expect to significantly pay down this term loan by the end of 2013.

In addition, we have a modest bond maturity in 2015, but depending on whatever economic cycle you want to assume as you evaluate today's investor day, we have very manageable levels of service -- debt service, over this 3-year time period.

In addition to the strong free cash flow performance I'll talk about in a few minutes, as well as the cash we have on balance sheet, we also have a very solid level of liquidity in the form of a $250 million accounts receivable securitization program that's fully available to us today, as well as a $750 million credit facility that you can see through the end of 2016. So, from a balance sheet standpoint and a capital standpoint, we feel very good, support the growth programs, as well as to weather any challenges that the macroeconomic environment may hurl our way.

And in addition, as we pay down that term loan, what's going to be left is a very attractive bond portfolio. Let me give you some characterization of that. This shows you kind of the average maturity of our public debt. You can see through the public bonds that we issued in 2013, we've actually increased our weighted average years-to-maturity by 2 years, and we're one of the longest years-to-maturity in the peer group here, our specialty chemical peer group subset here.

At the same time, we were able to significantly reduce the average coupon rates on our overall bond portfolio. We've reduced it to 4.2% on a pretax basis, which is very competitive relative to the peer company listed here, the specialty chemical peer company here. So that leaves us with a very attractive set of bonds to continue to grow our company over the foreseeable future.

So the position of strength is our balance sheet. Another position of strength is our cash flow. As you know, Eastman, we have a track record in delivering strong operating cash flow and good free cash flow. And this gives you kind of a 4-year history.

As it relates to 2012, our expectation is that our free cash flow will be approaching $500 million in 2012. As a reminder, our free cash flow is operating cash flows less capital expenditures and our dividend.

We also have a track record of how to put that free cash flow to work in a very disciplined and balanced way. So to remind you, our capital expenditures are going to be roughly $450 million this year as we continue to support infrastructure, as well as from the growth projects that you've heard about today. Historically, we've also used the joint venture and acquisition bucket to create value for our shareholders. We've grown our non-phthalate plasticizer business with a series of attractive acquisitions. We're continuing to grow our adhesives and our fibers businesses through announced joint ventures in China that are in process of being executed today. And we, of course, completed the Solutia transaction.

And as we completed the Solutia transaction, you can see how we used the debt and equity buckets. On the debt side, our financing package had an average cost of debt of 2.8% on a pretax basis. In addition, we funded it with the issuance of 15 million shares of Eastman stock. And coincidentally, we happened to acquire 15 million shares of Eastman's stock during the period of 2009 to 2011 at $40 a share. So what you've seen is a good, balanced and disciplined use of capital allocation.

So going forward, you should expect that to continue. First of all, we expect our free cash flow generation and our operating cash flow to continue to be strong with those underlying assumptions that I've provided. Just as an example, for 2013, I would expect our free cash flow to be roughly $575 million, plus or minus. Some assumptions are on capital expenditure, which I'll cover in a minute. That free cash flow will continue to grow, and our expectations today, between the period of 2012 and 2015, will generate more than $2 billion in free cash flow.

So that -- where that puts us as we execute against this plan, by the end of 2015, that excess cash that will build beyond the deleveraging that I've talked about, as well as the improvement in the EBITDA and funding capacity, our debt capacity, together, we see our funding capacity could be in excess of $3 billion by the end of 2015.

So during that time period, what that allows us to do is, again, demonstrate discipline and balance across these different buckets of how to create shareholder value. For capital expenditures, forgive me. Over time, we're going to have to still figure out what the capital expenditures are each year, '13, '14 and '15. So what we have assumed in 2013 is roughly $500 million of capital expenditures. That could be plus or minus 10%, but the plus 10% typically means good economic growth. And we want to continue to accelerate some of our growth programs. But if it's a tougher economic environment, it might be minus 10%, so we moderate some of that growth spend in 2013. That carries into 2014 and '15. What I'm very pleased with, is we have a pipeline of attractive revenue and cost savings projects in our capital program.

So, for example, I would expect, in 2014, our capital expenditures could be higher than that range that was provided, as we still are evaluating the timing of our Kuantan investments for our PBB resin and Crystex plants.

In addition, we are anticipating some infrastructure spending in 2014 and 2015. And even when you put all those factors together, in that outlook that I provided, we still generate over $2 billion of free cash flow in this period.

On joint ventures and acquisitions, we will continue to pursue bolt-on opportunities. I would characterize our pursuit would be more strategic as it relates to -- within our existing portfolio in adjacent markets. And you've seen us be disciplined in that pursuit in the past. To balance out the rest of our capital allocation, we will continue to optimize with that area, and as well as continue to return cash to shareholders. Our return to cash to shareholders has 2 simple forms. One is share repurchases. As I already mentioned, what we have assumed so far is our share repurchase program, all it does to offset dilution. As we have done in our past, we recognize share repurchases are a viable use of strategic cash. And so as we progress through 2013 and through our deleveraging aspects, we will look at that equally as a use of cash as we see the other elements here.

And lastly, one of the things you've heard us talk about in the past is that it's reasonable to assume that our dividend will increase as our earnings will increase. That is evidenced by the recent action by our Board of Directors to increase our annual dividend by 15% to a nice $1.20 a share. That demonstrates a lot of confidence by this executive team and our board that Eastman is well positioned to deliver future earnings and cash flow growth. And we look forward to continuing our discussions over the coming years as we grow the company and continue to return cash to shareholders, and reward our shareholders for their investments.

So I thank you for your time and energy and attention today, and I thank you for your interest in Eastman Chemical. And I'll now turn it back to Jim.

James P. Rogers

Thanks, Curt. Personally, I love those 2 slides where the maturity gets pushed out, at the same time, the coupon comes down towards the front of the industry. I just, I haven't seen that happen that often in my life in finance, and so I love the fact we were able to do it and take advantage of this environment.

The other thing I like is that he highlighted the cash allocation, how we allocate our resources. When I think about senior management, probably the 2 key things that you can do: 1 is to incentivize and motivate your people; #2 is be smart about how you allocate your resources, with people, with cash, et cetera. And I've said for a long time, I think in your industry, that's a way you can differentiate yourself.

I'm glad you got a chance to meet more of the management team. I hope you got a chance to meet the VP, GMs and some of the other Eastman folks that are here. I know there's a lot of you who, perhaps, had only met me, and you were always scratching your head, "how in the world could you guys do this kind of performance?" Well, now you have a good sense. You've seen how deep our bench is, how talented the folks are. I'm very proud of them. I think I probably -- I'd say a very high degree of probability, have the best management team in the industry, and I've seen a lot of them. I won't pick out anybody, but I would not trade our team for anyone else. And I think the results show that.

I'm not going to spend a lot of time wrapping up. I've talked about our strategy, and you probably have a sense now. We talk a lot about cash, cash flow, maximizing the cash flow and what we do with our cash. Once you spend it, you never get it back. It seems to lead to superior performance. We think we can do that consistently.

I remember the last Investor's Day. For the few people trying to tell me, "Gee, Jim, you guys have had a pretty good run. I don't know, it feels late to get in. Maybe you're going to revert to the mean, I'm worried about your margins, I don't think you can grow. You've got some -- I mean, I heard all this stuff." And I remember saying, "There's never a bad time to enter a good investment." Remember that, Frank? Never a bad time to enter a good investment.

Guess what? With this slide behind me, I'm telling you the same thing. I'm telling you that our mission is to execute on getting to $8 a share by 2015. There's no guarantees. We got to always keep a sense of humility. I've said that, about how we come back and start at 0 every month. Think about it. Someone's buying our stock every day. In their minds, the TSR is 0. That helps keep us humble.

I do think we've got a good set of businesses. I think, overall, we've taken the right actions. I think we've had some tailwinds behind us. That has helped us kind of drive that red line I was teasing about earlier. Clearly, macroenvironment could be better right now. Think about 2 of the big markets we're in and that we're very big for Solutia, transportation, building and construction. What do you think? Closer to the trough or closer to a peak? I would guess we're closer to the trough, and I bet we've got some good years ahead of us.

So I'm very encouraged. Probably the best career move I ever made was coming to Eastman Chemical company in 1999. I didn't know I'd still be here, because it was in East Tennessee, and I'd been in New Jersey and Connecticut and New York all my life, but -- all my business life.

I love it. We have a great culture. It's working out very well with Solutia. And I will echo what Curt said, thank you very much for your interest in Eastman Chemical company. Those of you have been shareholders, you're welcome -- I mean, thank you. Sorry, thank you. Thank you. Those who have been shareholders, thank you for staying with us. Those who haven't, we look forward to getting to know you better. And hopefully, this has been an interesting day for you.

So with that, if there's no questions, we'll go right to the reception. But obviously, there may be some questions, and that's why I'm down on this level. And if I do this really well now, I will just look like a traffic cop. I'll acknowledge your question. And by the way, I'll ask you to wait for the microphones. So raise your hand, and I'll ask you to wait -- get the microphone. There are people on the lines, if you don't mind. You just state your name. If you want to state what institution you're with, that's great.

And then -- but I'm going to be the traffic cop, and I'm going to point to the experts in the room. So this is really cool. Most of the time, when I do an earnings conference call, it's just Curt and Greg and I, and we're always stretching and wishing we could pull a certain VP, GM, or Ron and Mark in. And that -- so if we don't know the answer, we just stretch it out and obfuscate. Today, we've got the experts in the room. We can give you the right answer. And so let's take advantage of that. And so please, what questions do we have? Why don't -- well, come up to the front of the room, if you would, Theresa. You guys have mics over here, too? You got your mics on? Yes.

Question-and-Answer Session

David L. Begleiter - Deutsche Bank AG, Research Division

Dave Begleiter, Deutsche Bank. A question for Mark Costa, so no need to...

James P. Rogers

Don't have to direct?

David L. Begleiter - Deutsche Bank AG, Research Division

Mark, on Crystex, you mentioned you expect to grow less than the market growth, lose some share perhaps. Why, given your cost of ambition, further costs and capital ventures going forward, you prepared to lose share or grow less than marketing prospects?

James P. Rogers


Mark J. Costa

So I just guessed that maybe I might get that question. So it's a good question and an important one. That's the largest product line for Solutia. And we're trying to be realistic. When we look at the market that we're in, we've had a phenomenal market share position that we continue to focus on and intend to maintain as best as we can. But we're the price leader in the marketplace, and there are competitors who are trying to come into this marketplace, and to some degree, they're going to succeed. What we see are 2 competent competitors in the marketplace who make a good enough product for parts of the application, and they've brought some capacity, incremental capacity on this year, and we'll complete that. And so they'll have a certain amount of capacity to take some share next year, and we expect that to occur. There are a bunch of other smaller players in the marketplace, primarily Chinese players, who don't really have a very good process or a very good product. Some of them will succeed in the lower-end applications. But what we look at is, those players will come in, they come in very small, batch operations, and they'll have some degree of success in taking up some of the market. But through our investments in product performance, through our investments in improving our cost position and being able to use that improved cost position to give some back to our customers. We can sustain and continue growing this business to maintain our margins. Did that hit your question?

James P. Rogers

I'll just start working from the front. P.J. here.

P.J. Juvekar - Citigroup Inc, Research Division

P.J. Juvekar from Citi. Mark, just following up on that, the Chinese have come into different markets with low-tech product and improved their product over time. So do you know if the Chinese are improving any technology in their business, like product and tires? And what is the risk from that, the Chinese coming in at the higher end?

Mark J. Costa

It's a great question. So far, from what we see, the technology that the Chinese are using does not really produce very high-quality products. So they'd have to move and advance their technology from where they're at. We're presuming, in our strategy, that all the players will continue to get better. We're not assuming they're going to stay where they're at. Most of the Chinese, Japanese, Indian competitors have good engineering, and they continue to find ways to improve. So our strategy is centered on how we keep on moving the bar ahead of them and what our product does. That's why we have so much effort on new product development, were the new products with much better thermostability, much better dispersion than our current products and having proprietary insights around how to do that will keep us ahead of the competition. It requires innovation.

P.J. Juvekar - Citigroup Inc, Research Division

A quick question for Ron.

James P. Rogers

Mark, just go ahead and stay on your feet because we...

Mark J. Costa


James P. Rogers

I mean, I know a lot of the questions are going to be about Solutia, and Mark and Ron are the guys in the business. So if it's okay, I ask you guys to stay up and then we can do a couple.

P.J. Juvekar - Citigroup Inc, Research Division

I think you've said in your presentation that you expect ethylene margins to be flat to down next year? I was just wondering if you can give us some background on that and what's the rationale for that?

Ronald C. Lindsay

Yes. So in any given week, you can change your opinion about this stuff, right? And when we put this together, the outlook was that we weren't forecasting, for example, propane to stay low all year long, through the winter in particular. And then there is -- you just start looking at ethylene balances, the number of scheduled outages, the -- looking at a short-term supply/demand, for lack of a better -- saw some potential loosening in '13 versus '12. Not a lot, but enough that we saw it could be some softening. And this is hard to call. A lot can change. So what we wanted to do is say, "Okay, whether we're right or not, you know what's behind the numbers you see." And if you want to have a different -- if you see a different view or think things are shaping up differently, then you can adjust that. But you know the starting point.

James P. Rogers

Kevin will be next.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Kevin McCarthy, BofA Merrill Lynch. Financial question for, I guess, either Jim or Curt. Jim, you've put out the $8 earnings goal for 2015, but you noted in your opening remarks, you've got this interesting bubble above that, that starts with plus. Plus -- put excess cash to work. And so I guess I'm just kind of interested to hear your thoughts about when that might occur, given your balance sheet? It sounds like you intend to pay down the term loan over the next 12 months or so. Is it in the wake of that in 2014 when you think you'd have sufficient financial flexibility to resume consideration of share repurchases or accretive bolt-ons? Maybe just kind of comment on the intermediate term path there.

James P. Rogers

I'm going to get Curt to join me, too. So we're all going to end up on our feet here eventually, guys. That's okay. It's been a long meeting, willing to stretch. So the way I'm thinking about that bubble? If I have to, it's a cushion to get to $8. The world doesn't work out the way I think, and macroeconomics aren't as good. I'd probably have a little upside I can use. There will be cash along the way that I can either buy back stock or do some bolt-ons. As to the timing of the cash, see how well the business do. But Curt, what would you say? I mean, he made a comment about term loan. I want you to make sure that you -- you want people to hear on that and also the timing of how the cash comes in.

Curtis E. Espeland

When we think about the commitment around deleveraging, we want to start this year with our deleveraging, and we have expectations to achieve that with that free cash flow. We also want to see how the economic environment starts to play out in 2013. I think our adjustments with cash flow expectations typically have some seasonality in working capital the first part of 2013. So we believe we'll make progress on our deleveraging through the first half of next year, such that we can start looking at those other buckets of capital allocation. It's in our commitment to hit the expectations of our investment grade credit rating. That means we actually could be repurchasing shares in 2013. But, like I said, we're going to probably start off a little light in '13. And let's see the year, how it progresses, at least to offset dilution.

James P. Rogers

Frank, over on this side?

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Frank Mitsch with Wells Fargo Securities. Jim, at the "Never a bad time to make a good investment" meeting, you laid out objectives for 2011 of $4 a share and your target for 2013 of $5 a share. Obviously, you reported $4.81 in 2011. You're looking at $6.25 in 2013.

James P. Rogers

What are you trying to say, Frank?

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Materially, is that you are a certified member of the sand baggers club, especially when you're telling us that you're going to earn $1.10 or $1.20 in the fourth quarter, middle of December, where Curt's already got $1.30 in his back pocket. But what went right? I mean -- certainly, not the economy. I can't fathom that you expect the economic environment over the past couple of years. So what went right there? And why are we not looking at $7 next year?

James P. Rogers

Actually, that's a good question because I'd -- I honestly don't feel like we're sand baggers. I do think that what we do is we look for all the alternatives we can, all the levers we can, all the cushions we can have so that if the numbers aren't going our way, we're willing to make other sacrifices where maybe others would say, "We'll just let -- let's just miss earnings for 1 year and continue on this program." That's not where our head is. So we will do what it takes to make sure we hit or exceed our numbers. At least that's -- we'll do everything we can. I agree with you, there wasn't a lot of tailwind in the macroeconomic environment. But there were some good tailwinds, no doubt. For those of you interested in cracking spreads, that worked out a little better than we thought here recently, and I think it'll be another good year next year. I think the execution is more than you should traditionally just count on in terms of the plants running as well as they did. Even there, we had some upsets. We had a cracker upset. We had a little something on the island in Kingsport. But overall, excellent execution. And I think, sometimes, people underestimate, including ourselves, the strength of those core businesses we have, like fibers. So -- and if you had asked 8 years ago, "Was it going to have 9 years of increasing earnings?" I'd say, "No, it's going to turn into an annuity stream and slowly fall off." Not so. I mean, it's continuing to grow. So it really goes back to portfolio business and the kind of people I get to work with every day, I think. So over here.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Jim, Mike Sison, KeyBanc. It's sounds like you've got a pretty good handle on Solutia right now. And when you looked to buy the business 1 year ago, they had rolled out $800 million in EBITDA. If you take D&A to $650 million, take away solar, which isn't going to happen, $600 million. So $600 million seems like a decent number, what they were looking for. Is there a way for you to help us understand how your new '15 goals and how they sort of relate in terms of the growth there from what they had in the past?

James P. Rogers

Honestly, I didn't pay a whole lot of attention to the -- to what the management team said they were going to do. I mean, to me, they lost it on the photovoltaic business, and their credibility was shot. So we made our own plans, our own thinking on what we thought we could do with the business. And just to sum up -- I mean, near term, not as good as we would have -- putting our plans closer to a recession plan, and mainly because Europe is in recession, and that's an important market for them, plus some other decisions they made in a couple of key markets I think are going to take us 18 months to 24 months to reverse. On the plus side, long run is going to be better than we thought, because the revenue synergies -- we hadn't really counted on much of anything. And now we're seeing them in quite a few places, and we're finding out that some of the fixes and some of the value adds we can do don't take us a long time. It's just -- I mean, with a bigger research organization willing to spend the money, and you find production problems you saw right away, quality problems you saw, et cetera. So I like the revenue synergies. We'll do a little better on the cost synergies than we thought. We did better on the financing costs than we thought. We're going to get everything we thought on the tax side and maybe a little more. The markets we're in, with that Building and Construction and transportation. If we can perform like this when those 2 markets are down where they are, as important as they are to us, I mean, those are our 2 top markets. I think we've got some good upside ahead of us. Overall, I pretty much like the Solutia acquisition, the right thing gives people something to work on. I would not be talking about $8 a share in 2015 if we hadn't done it. I don't believe. I mean, maybe we would've found something else. So -- and I can't really comment on the stuff they said. I just -- we're telling you the way we see it. And we think some great businesses, we think we're going to add value. And we like the businesses that were in Eastman to begin with. Right behind?

Brian Maguire - Goldman Sachs Group Inc., Research Division

Brian Maguire from Goldman Sachs. And Jim, I appreciate the 2015 target of $8 you threw out there. I was wondering if you might take a stab at what a trough, EPS number might look like. And I know you've got pretty good visibility in the next year, into $6.25. But as you look out beyond that, could you envision a scenario where EPS is actually down year-over-year? And what kind of environment would it take to get that?

James P. Rogers

Yes. I mean, certainly, if you have a really tough macroec environment, we're not impervious. I mean, I said we're not 100% special. And even the specialty guys will go off. So who's kidding who? There's always some downside risk. I can just tell you, it's not going to look anything like the last one. We have a totally different portfolio now, and the businesses seem to run so much better. So I'm not looking at that kind of thing. I'm going to call upon Curt just to -- throw it out there, Curt? What do you think? Let's put you on the spot. Give it -- let's do a more of a mild -- not a '09 recession but...

Curtis E. Espeland

Sure. If you give me a bar napkin to write on, I'll talk of what a mild recession might mean. A mild recession -- let me just define and say: North America is flat, doesn't grow any worse -- doesn't get any worse, doesn't get any better; Europe goes into a slight recession, continues in the slight recession; Asia goes -- growth rate is cut in half. I think the kind of earnings expectations we would have with that is I think our earnings would still start with a 5, and we may even still be similar to what we are this year. That would be kind of my rough math of what a mild recession might translate to. Given the strength of our portfolio...

James P. Rogers

And deeper -- I mean, if '09 would repeat, would...

Curtis E. Espeland

'09, if you look at '09, the strength of our businesses, the portfolio that we have back in '09, we did that just a little over $2 a share. I would imagine, if we had that same rough environment, we probably could have at least doubled that.

James P. Rogers

Feels about right. On this side right here.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Gregg Goodnight from UBS. So a question for Ron. You mentioned the Therminol expansion. I was wondering if you could give us a little more color in terms of lost timing capacity maybe? And then the rationale for the expansion, Solutia was selling some of this into solar applications. Do you see that growing? I mean, you mentioned photovoltaics. They were probably a bit optimistic, but what's your rationale for the expansion?

James P. Rogers

Yes. Okay. First, on timing, I mentioned that we expect to have it up in 2014. This is the -- I said in the review that there's a family of products here. We have -- I always considered the premier products in the family of products are the ones we see a lot of growth in. They're not aimed at solar. These are -- the growth that we are building for primarily are in all that wide variety of applications I listed off. Solar is a different product. There is some capacity that comes along kind of as -- think of a byproduct of doing the capacity for this premier product that could be aimed at solar. We're looking at the solar part as just upside. We're really not sure exactly where that's going to go, and it's that -- the projects that are out there get done and they're no more, and that's -- let me just say that's pretty much what we're baking into our base forecast. And if that keeps going, then there's some upside for us. But we're not relying on that for this capacity, to fill this capacity. We see this is our bread-and-butter feed markets growing where we have real advantage with the product. And that's the basis for the expansion.

James P. Rogers

Let me keep going back in the room to -- oh, right here. And then we'll come back.

Robert Walker - Jefferies & Company, Inc., Research Division

Rob Walker, Jefferies. Just on the fibers business, you're going to be expanding your capacity, I think, on an owned basis about 7% or so, deepening your flake full -- or more full. I think you're only expecting 7% profit growth in a few years. I guess, kind of what's -- is there any kind of shift and kind of -- that's making more...

James P. Rogers

Why only 7%? Yes.

Robert Walker - Jefferies & Company, Inc., Research Division

Why only 7% for 3 years when you're expanding capacity and...?

James P. Rogers

Let's get Ron. Let's get Ron to...

Ronald C. Lindsay

Yes. Well, the math works out pretty well if you think about -- first off. We're building 30,000 tons with the JV plant. We get 45% of that. So 13.5% to be precise. But it's turning out to be, as I said, about 6% or 7%. So it works out a proportionate growth in earnings, given the capacity that we're adding for our fraction of the capacity.

James P. Rogers

Yes, give him the mic. Yes.

Robert Walker - Jefferies & Company, Inc., Research Division

Yes. Just as the business has grown earnings about 10% year for -- since 2003, is there any reason why you shouldn't expect to see margin expansion over that period? Obviously, volume growth is relatively low, but I'm going to guess, anything is making your trajectory more cautious than it has been in the past?

James P. Rogers

I think it's just a matter that we're -- look at the market we are forecasting earnings as we get the volume growth, not forecasting a lot of margin growth over and above that over the next few years. We'll see. We do have very good margins on the product across the business now. And so that's really the basis for the outlook is essentially the volume impact.

James P. Rogers

Let me come back over to that side, if I could, to Jeff?

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Jeff Zekauskas from JPMorgan. I have a question for Curt. In your presentation, I thought you said that you expected your free cash flow in 2013 to be $575 million. $575 million. So if you earn $625 million, that's $975 million in net income, that's $450 million in D&A. So that's $1,425 million. And your CapEx is $500 million and your dividend's are $150 million. So that gives you $775 million in free cash flow. And you get some tax benefits and your raw materials are coming down. So your inventories are down. But why isn't your free cash flow $775 million, not $575 million?

Curtis E. Espeland

I think what you'll get into is what's your level of assumption around increase in working capital? Will be a component of that, as well as some of the levers we may have with or without pension. Maybe -- we may have the required pension assumption, you might have additional pension funding. So those are some of the variables that you would have add to -- have to add to your math, to include whether you like a $575 million or a different math if you might come to it.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

So you're assuming that your working capital plus your pension funding offsets your tax benefit, and whatever other items, tune of $200 million?

Curtis E. Espeland

I would say, in our forecast, we are looking at pension funding similar to this year. So it's roughly $120 million. We are looking at working capital that would be required, that goes with both the $1 billion of sales, revenue growth. Working capital that grows with increasing raw materials, as well as grows with -- as you fund some of your growth outside the U.S. So those are the factors that are going there. The reason I'd comment on the pension is that we still have some choices we want to make, depending on how cash flows project. In addition, as I mentioned, CapEx is $500 million, but it could be as high as $550 million, it could be as low as $450 million. So it's those variables that I'm kind of giving you a little perspective. It could be up there, it could be lower, and I just targeted roughly a $575 million in that math.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

How much cash tax will you capture in 2013?

Curtis E. Espeland

What I would do on the cash tax is simply take that NOL benefit that we said is roughly half, spread it over a 3-year time period and give you that percentage of it in 2013.

James P. Rogers

I'm going to just keep going through the back of the room before I come back around to the front. Right there.

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

Chris Nocella, RBC. You guys talked about a variety of capacity expansions this afternoon. Can you maybe just give us a sense of the combined earnings of these in your 2015 outlook?

James P. Rogers

I'll get Curt to give you a sense of it. But I can tell you, when we look at adding capacity -- and for most of the stuff, that's capacity expansions -- we already pretty much know the market we're serving and what products, where it's going to go and what our fill-out rate is. I would think that we have a fairly high degree of certainty on the return numbers. If we miss it, it's quite often not the cost of building it or the time of getting it up and running, but it's usually what the macroeconomic environment was that affected the fill-out rate of the plant. As we combine it all together, typically, most of our projects will have kind of a high-teens returns. To give you a sense of some of the better stuff, it gets well up into the 20s, some of the higher-margin businesses, let's put it that way. Curt, I don't know if you want to -- that may allow you to triangulate on it right there, but...

Curtis E. Espeland

I mean, if you look at the capital expenditures, a lot of the growth in earnings that we're looking for is investments already made, or some of the early investment benefits that Ron and Mark had talked about. To give you an example, advanced materials, Mark talked about, we've made a lot of the investments in advanced materials, and we're looking for fixed cost leverage with those. So some of our projects, new projects, will have benefits in '14 and '15, such as those that Ron talked about on intermediates. Some of the other projects we're talking about, like the Kuantan expansion, et cetera, will be the components of earnings growth beyond 2015.

James P. Rogers

Back in the room over here? Anybody? Let me come back around to the front then if you'd give me the mic, then we'll come over. Bill?

William Young

Bill Young with ChemSpeak. Ron, I think you mentioned a 2-EH expansion. How much capacity you added in? What markets are you focused on here, especially given the growth in the non-phthalate plasticizer area?

Ronald C. Lindsay

Yes. It was probably about a 15%, 20% expansion for us. And certainly, part of that story is supporting growth of the plasticizers with 2-EH. In other markets, there's a variety of end uses built for 2-EH. We're just -- we see growth across all of those many end-uses out there that we're selling into and just incremental growth there that we want to continue to support.

Duffy Fischer - Barclays Capital, Research Division

Duffy Fischer with Barclays. Jim, you talked about 3% global GDP growth and your sales growth a little bit above that. So maybe call it 4% or 5%. What would the breakdown in your numbers be between volume and price? And then can you kind of walk through the businesses over that 3-year period? Where would you expect to see pricing pressures? And where would you expect to see pricing tailwinds?

James P. Rogers

Yes, and I may get some help on this as well with Ron and Mark. But -- I mean, just so you don't think this is too much of a science, we can see the volumes easier than we can see what's going to happen with price. Because, in specialty businesses, customers have a way of seeing through what your cost components are, et cetera. So they can move it up or down based upon what the raws are. So I think that volume number, overall, is going to be in that 4%-ish kind of range, I guess, as we look at our plans. Does that sound fair?

Curtis E. Espeland

Yes. Mid-single digits.

James P. Rogers

Yes. Mid-single -- maybe 5%, we'll see. And then on the pricing side -- and maybe the right way to answer it, guys, is just where do you think it's going to be the most competitive. As -- you see an audience that's trying to talk us up in our numbers, so let's get some realism back in here that -- we're talking about a pretty good increase in earnings year-over-year, mid-teens. I don't think everything is going to go right for us. We got some serious work to do, and there's other players out there who want to take our business. With that lead-in, Ron, you want to go first? Where would you see pricing pressure over the next 2 or 3 years? Competitive pressure in general?

Ronald C. Lindsay

Yes, yes. Okay. Well, we just think about some of the areas we have growth. The trends we see, we have -- we think we've got great positions and a great angle on some of those growth opportunities. But others are going to be there. We're seeing -- we'll see additional pressure in some of the plasticizer areas, for example. We think we've got a head start, and we think we've got a great position. But we're not going to be alone. And also, in the adhesives area, there's going to be capacity added, whether it's in -- where we think that's coming is after us, so that may be a little bit further out, but we see some pressures there. And some of the more commodity parts of specialty fluids, there will be pricing. There's -- some of those products are sold worldwide, and producers will kind of chase price with the mob, and it, as our markets maybe look good to them, we may see some of that showing up. That's why we like the position we've got in terms of selling close to our assets, and we generally have the advantage of cost efficiency there. So that comes and goes. [indiscernible] loose this elsewhere.

James P. Rogers


Mark J. Costa

So as you think about the segments that report to me, first of all, the way we train our sales force, and our business people think about this, is what we call value add, which is the spread times volume. The sales forces actually -- that's what they're incented on. So what we want is everyone making the right tradeoff between spread and volume in each and every market that they're in. And that's really what comes into this. So as you look at the plans in AFP, we're not expecting much spread compression, we're making trade-offs in volumes and the rate at which we grow volume. We generally found that once you get the spread up, hard to get it back. And it's better to sell the value of what you're providing. Find the customers who appreciate that and grow with them, and take -- start dropping price to try and chase volume. And generally, that's a much better discipline than the marketplace. So in AFP, I think that, in general, we're not expecting a lot of price pressure where we are. For example, it's what I talked about in Crystex. But that is a structured approach. We're going to take a long-term approach with our customers where we trade price for volume commitments and manage our cost structure to try to maintain those margins as best as we can. But certainly, we'd see that happening in that marketplace. One place that's very competitive, as I mentioned, is Santoflex. The PPDs is the one real commodity we have. That is very much under pressure right now. Expect that to continue into next year as the industry is headed to rationalization. On advanced materials, again, I think that we're in a very good position to maintain our spreads and focusing on the applications and growing at the rate where people appreciate the value that we offer. We don't have a lot of spread compression assumed in the Specialty Plastics part or the Performance Films part of the business. In Advanced Interlayers, we are making trade-offs around where we want to be positioned with the customers who are winning in the marketplace, how we use price, get the right mix of products there, but not significant compression and spreads, just micro adjustments if you will. Overall, I think we're assuming things are going to hold together fairly well. There's always portions of every portfolio that face commoditization pressure. So parts, especially plastics. Not the markets I talked about, but some of the general packaging, it's very competitive. The margins get compressed there, and that's why we always are focusing on the mix value up, the premium products, to offset where we're seeing that compression and trying to slowly, exit some of those markets within the higher-value segments.

James P. Rogers

Don't want to hold you late. Is there anyone who has not had a chance to ask any question yet and they want to? We will be around for the reception. You can catch us one-on-one if you like. But if anyone has not had a chance to ask a question and has a question, we've got time for one more if you like to -- good! Well, let me do this. Thank you for the time you spent with us. And please, join us at the reception. I think you'd truck through the exhibits, and there it is. Thank you.

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