Eastman Chemical Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Eastman Chemical Co. (EMN)
by: SA Transcripts

Eastman Chemical (NYSE:EMN)

Q1 2013 Earnings Call

April 26, 2013 8:00 am ET

Executives

Gregory A. Riddle - Director of Investor Relations

James P. Rogers - Chairman and Chief Executive Officer

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

Analysts

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

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

David L. Begleiter - Deutsche Bank AG, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Duffy Fischer - Barclays Capital, Research Division

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Nils-Bertil Wallin - Credit Agricole Securities (NYSE:USA) Inc., Research Division

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

Vincent Andrews - Morgan Stanley, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

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

P. J. Juvekar - Citigroup Inc, Research Division

Operator

Good day, everyone, and welcome to the Eastman Chemical Company First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com.

We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Gregory A. Riddle

Okay, thank you, Michael. And good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and CFO; and Josh Morgan, Manager, Investor Relations.

Before we begin, I'll cover 4 items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are, or will be, detailed in the company's first quarter 2013 financial results news release and in our filings with the SEC, including the Form 10-K filed for 2012 and the Form 10-Q to be filed for first quarter 2013.

Second, earnings per share and operating earnings referenced in this presentation include Solutia acquisition-related costs and charges. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our first quarter financial results news release, which can be found at eastman.com in the Investors section.

Projections of future earnings in the presentation exclude mark-to-market pension and OPEB losses and gains, Solutia integration costs and any asset impairments and restructuring charges.

Third, this presentation includes revenues and operating earnings on a pro forma combined basis, assuming the acquisition of Solutia had been completed prior to first quarter 2012 that compare post-acquisition results to pre-acquisition pro forma combined results. More information on pro forma combined results is in our first quarter 2013 financial results news release.

And lastly, we've posted slides that accompany our remarks for this morning's call on our website in the Presentations and Events section.

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

James P. Rogers

Thanks, Greg. And good morning, everyone. Let's go over to Slide 3. As is my normal practice on these calls, I'll take just a moment upfront to provide an update on our most recent outlook statements.

First of all, we continue to make good progress on the Solutia integration. Curt will provide you with more color in his section, but I just want to reiterate how pleased I am with how the integration is going and how well these businesses and our cultures are coming together to create value.

Next, in February, we raised our full year 2013 EPS expectation to a range of $6.30 to $6.40, which would be a 17% and 19% growth rate over 2012. And today we're reaffirming that guidance as, on balance, our portfolio of businesses continues to perform well despite an uncertain economic environment.

We also said we expected to generate between $600 million and $650 million of free cash flow in 2013 and we're right on track to achieve that target.

Finally, we committed to remain disciplined in our capital allocation. And if you look at how we've put capital to work this quarter and really look at our track record over the last few years, I hope you would agree that we have remained disciplined and focused on the returns.

On Slide 4, I'm reviewing the Eastman corporate results. Operating earnings increased first quarter 2013 versus first quarter 2012 with lower raw material and energy costs more than offset lower selling prices. For example, propane prices declined over 30% year-over-year, while on a corporate basis, total corporate selling prices declined by 1%. Almost all segments had higher year-over-year earnings with the largest increases being in Specialty Fluids & Intermediates and Fibers. And our operating margin increased to 17.5% almost a 200 basis point improvement year-over-year. So first quarter EPS was $1.62, an increase of almost 1/3 compared with the year-ago quarter. First quarter earnings were a strong start to the year in what remains a difficult and unpredictable global economic environment.

On Slide 5, I'll highlight our results by geographic region. As you can see the U.S. and Canada remains our largest region on a percent of revenue basis with Asia Pac, a strong second, and then Europe and Latin America. Revenue in North America was down about 5%, but this was a typical price/raw story. As I mentioned earlier, propane down over 30% year-over-year in the quarter and this resulted in some lower prices for derivatives in the U.S. Asia Pacific revenue was up 11% and the increase was a combination of both volume and price. There was particular strength in our Fibers, Advanced Materials and Specialty Fluids & Intermediates segments, with the SFI improvement coming against an easier comp in first quarter 2012.

Revenue in Europe was down 3%, and given the state of their economy, this was solid performance, in my opinion. And Latin America revenue was down $4 million or about 3% as well. We continue to see our geographic diversity as a source of strength for our portfolio and our first quarter results are indicative of that.

Moving next to the segments in the Slide 6, where I'll begin with Additives & Functional Products. Sales revenue increased, primarily due to higher sales volume. This was particularly true for solvents as we are benefiting from a strengthening U.S. building and construction market. For tire additives, both in soluble sulfurs and anti-degradants, volume was relatively flat. And given our estimate that global tire market demand was about flat year-over-year in the first quarter, we feel good about holding our share here. And this positions us well for when the market inevitably begins to restock inventories as tires need to be replaced. I'd also add for the anti-degradants business that we are in the process of implementing a price increase to try and recover some of the margin loss to significantly higher benzene costs.

Operating earnings for the segment increased slightly as lower raw material and energy costs and the higher sales volume were partially offset by lower selling prices. We also had lower capacity utilization in the first quarter of 2013 for rubber additives as back in the first quarter of 2012 the business was preparing for expected outages and increases in demand. So it was a tough comp for rubber additives.

The operating margin for the quarter remained at just under 24%. And looking at the full year, we continue to expect operating earnings of approximately $410 million, which would be a strong result in a challenging economic environment. So overall, I'd say Bradwick [ph] and his team are doing an excellent job with this segment.

Moving next to Slide 7 in Adhesives & Plasticizers. First quarter results were disappointing in this segment due to several factors. For adhesive resin product lines, unfavorable trends in both demand and supply impacted our results. On the demand side, the consumables market, particularly packaging, continues to be soft. And on the supply side, greater availability of key raw materials helped to loosen the non-hydrogenated market while lower-priced competitive material was also a headwind.

For plasticizers, we are facing aggressive, competitive pricing from both manufacturers of phthalate-based plasticizers trying to defend market share, as well Asian producers who, in response to slower growth at home, have increased exports to Europe and the U.S.

While we expect operating earnings to -- operating earnings to increase sequentially in the second quarter and for first quarter results to be the lowest quarter of the year in 2013, we are reducing our full year operating earnings guidance for this segment to approximately $225 million. With that said, we remain confident in 2 secular trends that will continue to drive growth for this business. First, solid growth from increased use of hygiene products, such as diapers, in fast expending markets, particularly Asia. And increased usage of hydrogenated hydrocarbon resins in case and carton packaging adhesives. And second, substitution of phthalate plasticizers with non-phthalate plasticizers in Europe and the U.S. But to get back to the kind of earnings we expect from this segment, we're also going to need stronger global economic growth to help as well.

Advanced Materials is on Slide 8. And it bounced back from a tough fourth quarter to report solid first quarter results. Year-over-year, sales revenue increased primarily due to higher sales volume particularly for interlayer product lines and Tritan copolyester. And to give you an example, Tritan volume was up about 40% year-over-year, mainly in the durable goods market.

Operating earnings increased due to the higher volume and improved product mix. We're selling more premium products in this segment, acoustic interlayers, Tritan copolyester, V-Kool-branded window films and this is driving mix improvement and earnings growth. The operating margin for the quarter improved year-over-year to just over 11%.

For full year 2013, the Advanced Materials segment continues to be faced with a challenging business climate, including weakness in Europe and lower demand for packaging. Despite that, we expect operating earnings will approach $250 million for the year driven by the improving product mix and higher asset utilization.

Next is Fibers on Slide 9. And it seems each quarter the results set the bar even higher. Revenue increased with both volume and price up. Earnings were a quarterly record at $114 million. In addition, the higher volume in prices, operational performance has been excellent with our asset tail stream running at a very high-level and benefiting from the de-bottlenecks we completed last year, which are resulting in lower unit cost.

For full year 2013, we are raising our earnings expectation to approximately $430 million and we expect earnings to be slightly higher in the first half of the year compared with second half based on how price and raw material and energy costs flow through our accounting system.

Lastly, to update our progress on our joint venture with China National Tobacco Corporation to expand acetate tow capacity in China. I can report that we're on track for the facility to come online during the third quarter. We expect qualification of material will take place through the end of this year. And therefore, we expect to begin seeing earnings through our equity investment in the joint venture in early 2014.

I'll finish up the segments on Slide 10 with Specialty Fluids & Intermediates. Operating earnings increased significantly year-over-year due to lower raw material and energy costs primarily for propane, which were partially offset by lower selling prices. The operating margin for the quarter was just under 16%, an increase of about 400 basis points over the prior year quarter. Sequentially, operating earnings increased slightly going from $93 million in fourth quarter '12 to $95 million in the first quarter this year. You'll recall that we had an operational issue at one of our olefin cracking units in the fourth quarter that had a slight negative impact in those results. Well, we also had a separate issue with one of our crackers in the first quarter that had a slightly larger negative impact on results than in the fourth quarter of last year.

I know this is disappointing, but frankly, I see these types of issues as common across our industry. In addition to the cracker issues, I would add that a lot of the benefit of lower propane costs was already in our numbers in the fourth quarter partly due to LIFO. So although we did benefit from an improvement in the propane and propylene spread in the first quarter, a significant portion of that was already in our fourth quarter numbers.

In 2013, we will also benefit from an additional furnace on our type 4 cracker providing an additional 100 million pounds of ethylene on an annual basis.

Looking at the full year, we continue expect operating earnings will approximate $380 million, which would be very strong performance.

I will end on Slide 11 with an update on our 2013 outlook. We started the year with very solid results from our portfolio of specialty businesses, and we continue to benefit from our leadership position in attractive end markets, from the diversity of the end markets we serve and from our broad geographic footprint. However, global economic uncertainty continues with particular weakness in Europe. And raw material and energy costs continue to be volatile, including for propylene, paraxylene and benzene. And taken all of this together, we are maintaining our full year expectations, which we had increased in January for 2013 EPS of between $6.30 and $6.40. This would be our fourth consecutive year of double-digit earnings growth if we achieve this. And I remain confident we are well-positioned to continue to deliver double-digit earnings growth for the next 2 years and beyond.

With that, let me turn it over to Curt.

Curtis E. Espeland

Thank you, Jim, and good morning, everyone. I'll begin on Slide 13 by reviewing some of the financial highlights for the first quarter.

We generated $5 million of cash from operating activities in the quarter. Net earnings were solid. Working capital increased for normal seasonal requirements. And we made an $11 million contribution to the U.S. defined benefit pension plans.

Moving to free cash flow for the quarter. You see it was a negative $83 million, a good result in what is typically our seasonally lowest quarter for free cash flow. Also keep in mind there was no dividend payment in the first quarter as we elected to pay the dividend to our shareholders in December of last year.

Finally, our cash balance, which includes cash equivalents, was $178 million at the end of first quarter.

Our tax rate for the first quarter was 28.7% reflecting the $10 million benefit we noted in our February guidance resulting from the extension of the R&D tax credit and allowance for the tax retransfer of offshore dividends. We expect our tax rate for the remainder of the year to be approximately 31.5%.

On Slide 13, I'll walk you through our current estimate for free cash flow in 2013.

Consistent with our previous guidance, we project operating cash flow of roughly $1.3 billion. The full year operating cash flow estimate includes our projection for continued strength in earnings, as well as the following items: slightly higher working capital as a result of increased revenue and our broader geographical footprint, with the working capital we built in the first quarter working down through the remainder of the year. Funding the balance sheet accruals, such as the annual environmental funding of approximately $35 million primarily for legacy Solutia sites and restructuring accruals for site closure in Brazil. Any additional restructuring and integration costs are excluded from our earnings projections. And finally, we anticipate contributing approximately $120 million to our U.S. defined benefit plan this year.

Also consistent with our prior guidance, we expect 2013 capital expenditures to total approximately $525 million. This capital spending will be more in the second half of the year due to the normal operational trends, as well as the timing for key growth projects, including our specialty fluids expansion in Wales.

So putting this altogether, we reaffirm our 2013 free cash flow expectation to be between $600 million and $650 million with the midpoint of this range representing a growth rate of greater than 30% over the 2012 total.

Next on Slide 15, I will provide an update on the integration of Solutia. As the slide indicates, we remain well on track to achieve the synergies we expect -- expected when we acquired these businesses last year. We are also on track with the retention of key talent, which is at 93% of what we identified.

We recently achieved one of our key integration milestones with the successful system migration of the rubber additives product lines, which is a part of our Additives & Functional Products segment, over to our SAP system. For those of you familiar with SAP migrations, you know this is a very complicated process. To give you a sense, this migration itself impacted 1,300 people at 19 different sites and locations in 12 countries. The implementation went as well as we could have expected and these businesses are now fully operational in our SAP system with seamless impact to our customers. I just want to recognize all those involved in achieving this outstanding result and milestone. And we are on track to migrate over to the remaining former Solutia businesses into our SAP system later this year or early 2014 time frame. All in all, we continue to make great progress with our integration efforts and our synergy targets.

To closeout on Slide 16, I'll remind you of our disciplined approach to capital allocation. As previously mentioned, we expect capital expenditures of $525 million, which reflects our commitment to pursue organic growth across our portfolio. On the debt side, paying down a significant portion of the Solutia acquisition term loan will continue to be a priority for cash throughout 2013. During the first quarter, we did reduce the term loan balance by $200 million using our strong balance sheet to access attractive funding in the commercial paper market.

Moving next to joint ventures and acquisitions, we will continue to progress with our 2 announced joint ventures, the acetate tow joint venture with China National Tobacco Corporation, expected to be online on the third quarter of this year and our Regalite adhesives project joint venture with Sinopec, expected online in 2014. And we will also continue to evaluate opportunities for strategic bolt-ons.

Lastly, we expect to continue returning cash to our shareholders in the form of dividends and share repurchases. During the first quarter, we repurchased $32 million of Eastman common stock.

With that, thank you for your interest in Eastman Chemical. And I'll turn it back over to Greg.

Gregory A. Riddle

Okay. Thanks, Curt. This concludes our prepared remarks. Michael, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Kevin McCarthy of Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Jim, in Adhesives, I think you mentioned a couple of issues. It sounded like you're experiencing some market-related weakness on the packaging adhesives side. And then I heard you mention an issue on hydrogenated hydrocarbons related to some meaningful cost dynamics. So I'm wondering if you could flesh those out a little bit more and comment on the expected duration of these issues and whether or not there's anything company-specific at work in either category?

James P. Rogers

And Kevin, how did I know the first question might just be on adhesives? Guess what, when we had our business reviewed, guess where we spent some time. Look, long term, I like our position. There's nothing company-specific negative to Eastman, but you do have softness in the packaging market, which is part of it. I think one of the reasons the results were worse than most all of us expected was it wasn't just demand, it was also on the supply side. And the best I can understand it, speaking somewhat generally, if you had probably several years now, tight raw materials where customers can quite often worry about whether they're going to get the supplies, some of your competitors couldn't have certainly make all they wanted to make. And then if those raws loosen up, you have more of availability of supply, customers don't need to keep their safety stocks and inventory. And so, you had a bit of a double whammy. You had soft demand and then you also had more supplier, or at least a comfort level, with customers on supply. That second thing doesn't last forever, so they go ahead and take their inventories down skinnier. They're more comfortable doing that, knowing that they're likely to be able to get product. The overall demand issue is one that you're going to be able to watch as easy as me in terms of when general level of economic activity picks up and packaging in particular picks up again. So it was a disappointment. I think we still like the hydrogenated hydrocarbon outlook. We like the outlook for diapers in the emerging markets, et cetera. And that trend's not going away anytime soon. So long-term, feel fine, short-term, we got caught on both demand and supply.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then second question if I may, Jim, on Specialty Fluids & Intermediates. You referenced the operational issue at Longview. Can you give as a sense of, I guess, the absolute impact to that in the first quarter and remind us of what it was in the fourth quarter? Just trying to get a sense of what the sequential delta might have been in that segment related to the operations side?

James P. Rogers

And I'll probably let Curt chime in on this, too. But I thought you might be the one to ask this question, Kevin, since you're high man on the numbers. And it, obviously, without the upset, we wouldn't have gone all the way to your number, let me just say it that way, but we would have been between your number and our number.

Curtis E. Espeland

Yes, I'd say the impact on the first quarter is roughly $10 million and the fourth quarter's a little less than that.

Operator

And we'll take our next question from Jeff Zekauskas of JPMorgan.

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

Can you update us on your cost-reduction initiatives and what you think the ultimate savings will be from the integration of Solutia?

James P. Rogers

Let me let Curt pick that up, because he's the lead man on that.

Curtis E. Espeland

Well, what we've mentioned in the past, Jeff, and this still holds true. Our target is over a run rate of greater than $100 million by the end of this year on those integration savings. We did talk about there's different levels of probability of other projects we've identified, so that $100 million target we talked about was roughly 5% of the acquired revenues. There is a possibility that could be a 6% number, which would be another roughly $25 million and there's a remote chance that it could be 7%, another $25 million. So it's just a range of probability we're working on. And some of that you won't see until 2015 if it were to come to fruition. In addition, we continue to make good progress on the operational commercial side of Solutia and I think you're starting to see that in the benefits. And then lastly, it's within our culture, we have a culture of continuing to focus on productivity and trying to drive unit costs down and you heard some of that -- Jim talked about today in our asset deal stream to some de-bottlenecks, et cetera. So part of it's still synergies, part of it's just operational excellence we expect and have been able to achieve.

James P. Rogers

And, Jeff, if I could just tag on, I mean a lot of times people look at spread and spread widens out and they say they just got more price so the raws went down. We don't talk a lot about it but we still got all the basic programs going on part of our culture in terms of Six Sigma and cost monitoring the headcount, labor cost, et cetera. So we're trying to fight it on all angles and that's about the only way you can deliver these kind of results.

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

Okay. And then lastly, you had such a nice price raw material margin in your Fibers business. Now selling these shutdowns Spondon [ph] facility late last year, did that tighten up the global supply demand balances efficiently to sort of allow for greater industry pricing? Is that the reason why it widened out so much?

James P. Rogers

I would not point to that because they also added capacity and of course, we're both adding capacity in China. But no denying, we're running at very high utilization rates. The whole industry is. Part of our benefit is, and again we don't always talk a lot about it, but we just operationally ran very well in terms of cost. And then there's also a benefit that comes from in the first quarter, how the pricing flow through versus the cost flow through. So usually, your first quarter, you're getting a little tailwind, if I can, that maybe all of your cost, say higher wood pulp, et cetera, haven't flown through for full 3 months or you've probably gotten more of your pricing. And that's way we tried to guide that for Fibers, the first half of the year is probably going to look better than the second half the year, and not because of any change in the marketplace, simply because of how those costs flow through.

Operator

And we'll take our next question from David Begleiter of Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Jim, I think you also called out some weakness in plasticizers in the quarter. Is that weakness, do you think, permanent structurally? Or is it -- was it temporary going forward?

James P. Rogers

Yes. Beauty is in the eye of the beholder, so how temporary is temporary? I mean, you've got some plasticizers guys who've been losing the share who are reacting trying to use price. We also had, if I remember correctly, kind of soft market in Asia. So they ship more of the stuff to maybe higher-priced markets, Europe and the States. Long term, the non-phthalate trend, it's not going to change, it's not going to go away. It's -- we're not going to see high single-digit growth rates in the non-phthalate plasticizer side. So I still expect growth good growth there. The real weakness came more on the adhesives side this quarter than the plasticizers side, so that's really where more of our focus is right now.

David L. Begleiter - Deutsche Bank AG, Research Division

Okay. And just in SFI, Jim, how should we think about a narrowing of the propane propylene spread in Q2 versus Q1 and how would it impact your numbers?

James P. Rogers

Well, it does it like it's going to narrow, and that's what drives me nuts. When it's widening out, everything thinks I should be raising guidance, et cetera. And we're trying to say, "Guys, it's only 1 or 2 months." and then -- so it's going to come to go back the other way. I try not to look, honestly. I try not to look quarter-to-quarter. I try and think for the year. I think overall, for the next several years, we still got a tailwind here. Let me just point out one other thing though, when you look at that segment, it's not just that spread propane, propylene, I also got a really nice fluids business in there. And the fluids business didn't quite do what we would have hoped in the first quarter and that is more as I'm learning because again, those shipments, when they have major fills, et cetera, can kind of move from one quarter to another. So they should -- the fluids business should do noticeably better next quarter over first quarter. But yes, I would think the spread will come in some. But overall, I think that this segment's going to have a great year.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, any update on the fourth ethylene cracker at Longview?

James P. Rogers

Yes, I mean, I said last time, I have little chagrin. I don't have more to tell you. All I can tell you now is we got site visits going on, we've narrowed the list down to a few parties. Midyear is probably when we'd hope to be out with something. I can honestly say that I worry a little bit that guys are spending too much time or they're building the anticipation up too much on this one. I mean, we're a pretty good-sized company and restarting another cracker or doing something with the excess ethylene that would probably take 2 or 3 years to get in place anyway. I hope they're not buying our stock on that, waiting for that shoe to drop and for us to tell them what to do because we think we got a great portfolio of businesses. But yes, hopefully midyear, we can kind of spell out who we're going to work with and what it's going to look like.

Operator

And we'll take our next question from Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Jim, you mentioned more aggressive competition from Asia in the adhesives business. Is this a function of the weak economy over there and you think this sort of ebbs and flows as their own home cooking improves and they won't have to seek out other markets, or is this just sort of a standard product cycle issue where it's becoming more intense?

James P. Rogers

I think I was mainly talking about plasticizers on that. Yes, that's okay. But let me just talk about Asia in general. And basically, we had pretty much all the segments, but Adhesives & Plasticizers had pretty good results in Asia. And it seemed like we were seeing something a little different, than a lot of the guys were talking as we were going around beginning of the year, our last conference call, et cetera. I don't know that we're that exceptional, except I like our portfolio of products in Asia. So filter tow being such a major product for us in Asia gives us pretty good Asian numbers usually, quarter-in and quarter-out. I know that in -- as I look forward, just to give you some little anecdotal stuff, I think on the oxos, it's going to get fairly competitive there. I think, butanol, for example, under price pressure in Asia right now. So yes, we had a good first quarter in Asia. I would think I'm pleased that it's our second largest region, let me say it that way. But we take nothing for granted in Asia, and I think the hardest thing is figuring out segment-by-segment what's going in with inventory levels in Asia, because I just think they're masters at moving those inventories around when they think it's to their advantage.

Robert Koort - Goldman Sachs Group Inc., Research Division

And could I ask a separate question on Crystex? It seemed like there was some consternation among investors that, that such a great ride that had to end at some point. I didn't get that sense from your comments, so could you talk a little bit about what's going on in the market there and, in particular, pricing?

James P. Rogers

Yes. I disagree that it's something that has to end. I mean, we have the best product in the marketplace. We have the best cost position. The way I look at this -- in fact I went through a few of the Solutia businesses, if you want. But the way I look at this, and this is a great business, and you're seeing it probably at its weakest because of what's going on in the general tire marketplace. So we held volumes in Crystex, which, I think, is a good thing. A year ago, they were running their utilization rates a little harder so the comp was going to be tough for us. They had all kinds of rational why they ran harder a year ago, but let's just say we think we're running it very prudently today in terms of how we're running our plants. When the tire market comes back, I think that's -- we're going to get to see how good this business really is, and also when we pull the trigger and do our Kuantan expansion and get some further cost reductions because of process improvements, I think that's also going to be quite a positive. So people, they should not judge the tire additives business by the way it looks right now. This is fairly tough marketplace for them. I'll just say, similar thing with interlayers where you got Europe so soft. I mean, I just know that's a better business than you're seeing today. But you're seeing it down because of Europe. If I look at the fluids business, sold out, fantastic business. We're going to have the wherewithal to add capacity, and so that's going to meet or exceed our expectations. The films business is probably the highlight. That's one that's doing the highest above our expectations. And we'll -- I think maybe next call or so, we'll try and focus -- and I'm looking over at Greg. I think we'll try and focus in a little more on films to give you some more color. Because I don't want you to ignore that. Some of our best growth rates and great products and some real opportunity, we see there. So I mean -- so you got 2 of the muscle players from Solutia that, I think, you're seeing at low points and the other businesses are performing very well.

Operator

And we'll take our next question from Duffy Fischer with Barclays.

Duffy Fischer - Barclays Capital, Research Division

Just to go back to PVB interlayers, at the Investor Day, you made a comment, you thought the old management had made an error around kind of a price volume decision about a year ago. So as that anniversary-s this year, where you guys or are you guys able to get back the volume you think they lost?

James P. Rogers

Yes, that's a good question. And I think, if I remember correctly, we talked, we kind of had a 2-year game plan for doing that. We've got a long ways in the first year so we're pleased with the contracting strategy we did. We got more price in Asia, we got more volume in Europe and that's exactly what we wanted. So yes, overall, I think we're getting the right response from the major customers. They want a long-term player, somebody's going to work with them. And we've had to accommodate customers where necessary to make sure that we had the market position we wanted with the key players in that industry. But yes, overall I'm pleased with what we've been able to accomplish in 1 year.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then another comment from the Investor Day. I thought you guys had forecast you would grow about half the market in Crystex because you needed to make room for kind of the #2 and #3 player that brought on some capacity, but it seems like you're holding volume. Has their capacity rolled into the market and is it just going smoother than you thought? Or are we still waiting for that capacity to come online?

James P. Rogers

Yes, I'm pleased to what we've been able to do in the Crystex market but let me -- Greg, you want to add some color?

Gregory A. Riddle

I was just going to add that when we talked in Investor Day, we were talking about growth rate that might be in the 5% range for tires. And what we're seeing right now is flat. So when we're talking about growing half of what the market's growing, the market has to be growing and we're not seeing that right now.

James P. Rogers

But we held. I'm pleased with how we did, share-wise, in Crystex.

Duffy Fischer - Barclays Capital, Research Division

But did the capacity from those competitors come online? Or -- because the growth rate will be where it'll be, but if people bring on capacity and they're willing to use price to get into the market, I thought that's why you guys were going to back off and basically just make way for them so that it didn't hit pricing. But that's what I'm trying to figure out. Did they come online or did they not come online?

James P. Rogers

Yes. I understand your question, and I can't remember specifically. I know that the kind of capacity adds we had were small from numerous players, and so I just assumed, honestly, they were coming on...

Gregory A. Riddle

I've not heard any discussion amongst our business about any change in outlook of how that capacity is coming on.

James P. Rogers

So I wasn't aware. It's not like there was one big step function coming on. But I can't give you anymore color than that.

Operator

And we'll go next to Andy Cash with SunTrust Robinson Humphrey.

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Just to follow up on the acetate tow, there's some raw material pressure coming from the cellulose side. Could you give us your index? What you think raw material costs will do for acetate tow over the course of the year. And also, what sort of volume change year-over-year, do you expect for the business, full year?

James P. Rogers

Yes, let me hit the raw materials side and just remind folks on the major wood pulp we do in annual contracts. So we know what the cost is there. I don't see that moving around. What we were trying to say is we didn't get a full 3 month's worth of that cost in the first quarter -- the increase in the first quarter. You also don't get quite a full 3 months of the pricing in the first quarter either, but it slanted a little more to where you get less of the raw material cost. So I don't want to mislead anybody. Obviously, business doing great. We're covering our raw material costs, outperforming due partly to that spread, also partly to just great operational excellence. Fibers is pretty tight right now. So I don't know -- Greg, were we seeing much more volume this year versus last year?

Gregory A. Riddle

Low-single digits, which is pretty consistent with where we were in the first quarter.

James P. Rogers

Okay. By the way the, other piece that moves around there is -- it's small is yarn, but yarn is not causing any swings. It's pretty much steady.

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then some of -- if I could ask one other question about some of your growth businesses. You alluded to V-Kool doing well. Could you talk about -- just give us a ballpark of the range of growth you're seeing for V-Kool films on acoustics and also Tritan side?

James P. Rogers

Yes. They're good numbers. Why don't I let my CFO -- you want to say the percentage increase? Tritan was 40%, V-Kool, I think, was a strong double-digit on. It was at 20% or something like that. I don't -- when we were -- the acoustics, I think, was 30%. I mean, these things, I just wish they were bigger so that these percentages would be off a bigger basis. But yes, it's pretty good growth on that. And that -- but it brings up the bigger point, is that stuff that's growing fast is your higher margin. So you're getting the nice mix improvement like when you sell more acoustics in the interlayers, the same thing with Tritan, same thing with V-Kool. I mean, those are all good trends. And so, if I got a disappointment, I wish we'd had more volume growth this quarter. But I'm very pleased with the mix changes that we're seeing in our businesses.

Gregory A. Riddle

And if I could add Jim, on top of it, what you're getting with those growth rates is we already have the investments made so you're getting the leverage off that.

James P. Rogers

Yes, that's true. That's true.

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Just if I could go back to what Duffy was talking about earlier about the PVB. In the auto area, I mean, shouldn't your business see a better comps going forward if the auto pundits arrive and the European business is less onerous on a year-to-year basis going forward?

James P. Rogers

Yes, that would be -- that would definitely be a help. Remember, the interlayer business is not just the autos. You've also got the building and construction commercial buildings, particularly in Europe. And so that's quite soft and I don't think that's forecast to turnaround any time soon. But you're right on the auto side.

Operator

And we'll go next to Nils Wallin with CLSA.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

On the adhesives business, I know you've got some expansions in Longview and then YPC over the next couple of years. Is there any way, if the market continues to be weak, that you might dial back some of those expansions to keep -- prevent operating rates from declining too significantly?

James P. Rogers

Yes, well for -- the big one would be the one in China. And frankly, I'm not too concerned about the hydrogenated hydrocarbon resins. That's -- we're going to need that volume. And I think we said when we announced it that we also had quite a bit of the output under contract already from that plant. So not going to be a major risk. I don't see it screwing up the market because of the segment it's in, let’s say it that way.

Curtis E. Espeland

And the hygiene market is growing stronger for the hydrogenated. So that trend is still there, Nils.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

Okay. Then on the interlayers business, again. I mean, I think you -- at Investor Day you said that, that business was about 50% Europe and yet, obviously, Asia contributed. So I was just curious as how much of a drag Europe was because of autos and construction?

James P. Rogers

Yes. I don't know how to quantify it for you without trying to get in number by number. I can just tell you that the thing for me on that business was the tough comparison in the last year as well in terms of how they ran the business last year. But Europe's the one we need to turn. When Europe turns, we're going to feel really good because it is the major impact on this segment.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

Just finally, if I may I think sort of year-to-date charges and whatever, from Solutia integration. Or somewhere in the $80 million range, excluding inventory step-ups and everything else, how do you -- how does that compare to what you were expecting and how many more charges do you think you might have to take from Solutia?

James P. Rogers

Well I think when you look at what happened in the first quarter, we had about $10 million of integration costs from restructuring costs. Those will kind of continue at that level through the course of the rest of this year. We'll start to unwind as we finish those major SAP implementations. So it will be pretty much behind us as we finish the year. And it's pretty much in line with what we expected when we announced the deal.

Operator

And we'll go next to Frank Mitsch with Wells Fargo.

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

Jim, in your prepared remarks you said it's a difficult and unpredictable environment out there. So, of course, that begs the question I would like you to do some forecasting here. You did a nice job of talking about the geographies, the Q1 results for the various geographies and the sales movements; this, that and other things. [ph]. Can you give us the state of the -- the current state of affairs whipping around North America, Europe, Asia, what you're seeing there?

James P. Rogers

Yes, thanks Frank. I would say first of all, as we give our guidance. We're not -- we're expecting things to kind of trek along the way it is right now. So if we had a nice surprise, the upside, where somehow, Europe pulls a rabbit out of a hat, we could do better. But odds are, it's going to play out, in our opinion, kind of the way we're seeing it now. So you had, North America, and it's probably the same thing everyone else is in. North America, pretty good, Europe frankly, still just down and don't really see what the light is at the end of the tunnel for Europe. I mean, I guess in a year or 2 they got to come out of it. But in general, our best play there is to keep an improving mix within that region. I'd say Latin America, just not that big for us. But when you look at how we were down a little bit volume-wise, I think Brazil is probably tougher times than Mexico is. And then you get to Asia. And Asia's the one that could make a difference, but harder -- I'd say, the hardest to call. I've pretty good idea where Europe is going to next year, so pretty good idea the States is going to stay good the next year. So Asia is a little bit tougher to see. And there, you have to start getting into the segments. But by and large, I think it kind of keeps trekking along the way it is. So we may have had a little more of a tailwind first quarter, and maybe tougher for Asia to keep up at that level. I don't know, I hope that's helpful.

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

So how would you describe the April pace of business versus the Q1 pace of business in Asia overall?

James P. Rogers

Let me ask Curt because he probably looks at that as well.

Curtis E. Espeland

Yes, I think when we look at the order trends, April, even early part of May, we're seeing that same trend of strength in most of our businesses within Asia. We haven't seen any dramatic upcrease or downwind.

James P. Rogers

The only -- I just said the antidote of some of the oxos pricing pressure there like butanol, et cetera. But that's about the only negative I've heard, change from first to second.

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

Alright. Terrific. And then Curt, you described use of cash on the shareholder bullet. Continued share repurchases to offset dilution, yet I noticed that your share count ticked in, in Q1. Can you expand upon the potential that we might see more of that happen as we go forward?

Curtis E. Espeland

Well, I'm glad you noted that, Frank. If you look at our fully diluted share count, you're right, it did tick down a little bit as we implemented share repurchases. I'd actually point out on an actual share count base, it increased.

James P. Rogers

It's had more to do with the pricing options...

Curtis E. Espeland

Right. Options exercise then we had a few shares issued under the old Solutia warrants. So right now, our strategy continues to be repurchase shares to offset dilution as we make progress on our debt pay down as you've heard before. We'll look at how we deploy that cash further whether we do more share repurchases beyond dilution.

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

Alright, terrific. And then if I could just come back to the Tritan volumes, up 40% year-over-year, which is obviously an eye-popping number. Any color around that? I mean, operating rates for that unit, how is that trending? Do you expect more of that to continue?

James P. Rogers

Yes, I think it's perhaps unrealistic to think it's going to have 40% up comps from here on out. It's had a bang up quarter where market acceptance for the product is just fantastic, which not only gives us the volume, but allows us to concentrate on the segments of the market as I think, things like medical versus some of the other packaging applications that would be less attractive. It's still going to take a little while to fill up the capacity we got, so we're not worried about running out of capacity soon. We've talked in the past about how you add a monomer plant and then you add lines, et cetera. So I think we're still looking at Tritan, not filling up until what? End of next year maybe, something like that? But it's -- that's a good part of what's going on within Eastman right now, it's how Tritan's -- how the market's responding to Tritan.

Operator

And we'll go next to Vincent Andrews with Morgan Stanley Smith Barney.

Vincent Andrews - Morgan Stanley, Research Division

Just a question on the acetate tow business. I know Asia, from a cigarette perspective, is I don't know, almost 60% of your volume. But in the rest of the world, how -- what level of concern do you have over sort of medium or long-term about when President Obama announces the potential for Federal excise tax pretty substantial in the U.S. or you see Philip Morris International's volume down mid-single digits in the quarter, I mean. And the potential for further excise tax increases in Europe or in other places. What level of concern at all is that to you?

James P. Rogers

Well, we're not naive about it. I mean, we can see what part of the world we live in and what the smoking trends are here. We know one is the biggest impacts in the past on smoking has been tax increases. So you're right to focus on one of the levers that can have a almost immediate impact. Interestingly enough a year or 2 later, you lose some of that impact, again. In other words it goes back up. But long term, I think we all know the trend outside of Asia. And it'll be a slow decline. What you're going to want is you're going to want to have the best cost position and you're going to want to have a nice base in Asia, and that's what we're building long-term.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And then, Curtis, if I could just ask you on the free cash flow. Can you just sort of remind me sort of how it sequenced through the year and just let me know if there's any impact from the sort of maybe in the inventory from the weakness in adhesives and sort of how you see that playing out through the year.

Curtis E. Espeland

So let me -- first of all, on the inventory, I can assure that our business and our supply chain guys are keenly aware of kind of our order trends and makes sure we operate consistent with those trends. So that wasn't a factor. And as we look at free cash flow, as we'd expect, we're kind of negative in the first quarter and it starts building through the end of the year. I don't know, maybe our third or fourth quarter will be one of our strongest, the second half of the year is where we'll see a significant generation of our free cash flow.

Operator

And we'll go next to Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Two quick ones. On the tire side, are your customers giving any sense of having a sense for when the market actually turns, or are they still waiting on pins and needles? And on the Fibers business, is there a point -- I mean, how many years can you sort of maintain a good pricing cycle? Or is there a threshold that we should be thinking about where you actually run the risk of creating your own demand destruction separate from tax increases or other government interventions?

James P. Rogers

Yes. So let me start with the tires. We just happened to ask that same question when we were having our review. What are the customers telling you? What can you see? The destocking has been going on in that industry for a while now. More than a quarter or 2, to the best of our knowledge. And we also, by the way, we're humble enough to admit there's other companies who've been dealing with the tire industry a lot longer than us and it's a lot bigger percent of their business. So trust me, there's guys out there who can speak much more intelligently than me about it. But we haven't seen the turn yet in where people have gone the other way and started to feel like they need to build inventories again. And I don't think we're getting a lot of feedback on how soon that's going to be. So, it's just one of those where I'm thankful we got such a diversified portfolio of businesses that one business is soft like adhesives, something else can kick in. On the Fibers business, I don't really worry about things we would do as a supplier that would cause demand destruction. I mean, the filter's actually the cheaper part of the cigarette. So to the extent they lengthen the filters and call it a premium cigarette, their cost goes down and therefore, their margin goes up and we sell more products. So I think it's what we talked about earlier. You can just see the long-term trends in terms of developed world smoking on a very slow decline is still growing though in the developing world. And that -- those are going to be the dominant trends. And taxes, country-by-country, can move things around and in particular, can cause upset, say, in a particular quarter for 1 year, but then the world seems to adjust. So the other thing, I think the industry has been fairly disciplined about looking at their high cost production facilities, and over the years, have gravitated to lower cost and to Asia from higher cost and places like Western Europe.

Operator

And we'll go next to Mike Sison with KeyBanc.

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

In terms of Crystex, I just wanted to -- maybe help us visualize, where are your operating rates now? And once they do sort of recover, is the leverage higher than what we might have seen in the years passed and maybe give us a feel for how that can shape up?

James P. Rogers

Yes, I got plenty of capacity right now. If that's your question. And I think there's a track record -- it was a leader, by far, in this industry, the capacity utilization, Solutia, and now us. We're more likely to move utilization rates around and -- than the small competitors are. But so I'm not going to give you a percentage number on utilization rate, but let's just say I've got capacity. One of the key things to watch for though, and you'll get a signal as soon as anybody when we announce we're going forward with the Kuantan expansion and a newer technology and lowering our cost position. That's going to be a very good sign. And that is the kind of thing that can give you more leverage than you've had in the past that you got a lower cost process that's actually retrofitable. So we'll see. I mean, I never take anything for granted. Don't give you any guarantees. But I think we got some much better times ahead of us for Crystex.

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

Got it. And then just curious, I know it's still early, but there are some companies, when you look at the economic backdrop, particularly in Europe over the next couple of years, sort of the long-term goals seem more difficult and Advanced Materials is one where we needed a pretty big ramp over the next couple of years. Can you sort give us an update of how you think about that business given some of the commentary that Europe could be weaker?

James P. Rogers

Yes, it did have probably the steepest incline in the climb. Maybe now Adhesives & Plasticizers does. But I feel better than I did 6 months ago about them being able to hit their targets. And partly -- remember, I got 3 businesses in there, so I got the specialty plastics business like I think I said on the last call, was going to have a very good year, probably the best year ever. That still seems to be intact. They had a very strong first quarter. Performance films is outperforming our expectations. It has nice growth rates and is becoming a more significant part of that segment, although admittedly, still the smallest. And then the interlayer business is where the upside is. And we do need some improvement in Europe and we do need some global improvement to hit those numbers. We said that back then, so I don't want to pretend like Europe can just stay where it is forever and we're going to be happy. We do need a pickup in the global economic activity, in particular Europe.

Operator

And we'll go next to P.J. Juvekar with Citi.

P. J. Juvekar - Citigroup Inc, Research Division

So I got 2 questions. One on Kingsport and one in Longview. At Kingsport, I think you were working on this project to convert your coal feedstock into partly, a natural gas. Where do you stand on that? And then on Longview, for your fourth cracker startup, do you need a long-term off peak [indiscernible] contract agreement?

James P. Rogers

Let me hit Kingsport. It's not the feedstock. It is for energy, converting our major powerhouse from coal to gas. And so we're going to -- for energy purposes, we're going to be about half coal, half gas. That's proceeding on pace. We haven't started fooling around with steel and concrete, et cetera, but that's going to go in-line with what we would want to have done for regulatory reasons anyway. But remember, the feedstocks coal, we gasify coal, that's always going to stay that way. In Longview, on the -- you were breaking up a little bit, P.J., so I didn't quite understand what you were asking about the fourth cracker.

P. J. Juvekar - Citigroup Inc, Research Division

Yes, do you need a long-term customer agreement for off peak?

James P. Rogers

Yes, let me say it this way, we're not looking to be a bigger merchant player in ethylene. So when you say do we need a long-term agreement, whatever we do with a partner is going to be a long-term -- it's going to be a long-term arrangement, whether we continue to own that cracker and operate it or we sell the cracker or what we do with our excess ethylene. But whatever we do is going to be a long-term solution that's not going to be spot market exposure.

P. J. Juvekar - Citigroup Inc, Research Division

Okay. And there was a lot of discussion on the tire market. Can you just breakdown for us your tire exposure to commercial trucks versus passenger cars?

James P. Rogers

Yes, commercial is larger than passenger. I don't remember it. What do we -- do we use to say 60-40 or something? I mean, obviously, more than that?

Gregory A. Riddle

Yes. It's more than that.

James P. Rogers

More than that, okay. So yes, it's more commercial. But thanks for your question, P.J.

Operator

And we'll take our final question from John Roberts [ph] with UBS.

Unknown Analyst

You've got a core group of people who's doing a great job on the integration activities. Do you disband them back into the organization as you work through that or does this sort of set up a challenge for you to try to find some other things to keep these people active on integrating?

James P. Rogers

Let me just say you guys on that side of the call, you actually do know something about how to run businesses. A lot of the questions you've been asking is exactly the kind of conversations we have had internally and that is -- that's another one where you got some synergy having a group together and then the issue is: Do you think you can keep them fully occupied? Curt -- and this is really Curt's baby, so let me have Curt on the line.

Curtis E. Espeland

What we're thinking through is just different scenarios by which you don't know how your M&A pipeline is going to play out so how do you keep that capability within your house. And there's different ways you can deploy them to keep them busy and if a project comes along, you can put them to work on integration. And I'd have to say, our people are just excited about the integration efforts. They're demonstrating their capabilities and I think we'll keep that talent available should we need it.

Unknown Analyst

And then just as a follow-up, it sounds like you're completely dismissing the e-cigarette phenomena. Which may be correct, but I've got some friends and family who really love the product. And sometimes, electronic devices come down in price really fast because of the learning curve and scale, they go up. And so I just wanted to do a gut check that, that's something that you really don't think is on the horizon anytime soon?

James P. Rogers

Yes. I wouldn't use the word dismissing. We probably look at things at a depth and sooner than just about anybody else would when it comes to our Fibers business. But I would say that there is a comfort level that, in the near to intermediate term, we can pretty much see how demand and supply is going to flow. It's probably the most predictable market we're in. And so again, I never take anything for granted, I don't dismiss it. But I think we're fairly comfortable we're going to need that capacity that we're adding in China.

Gregory A. Riddle

Okay, thanks again for joining us this morning. A web replay and a replay in downloadable MP3 format will be available on our website beginning approximately 11:00 a.m. Thanks again and have a great day.

Operator

And, ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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