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Eastman Chemical (NYSE:EMN)

Q4 2013 Earnings Call

January 31, 2014 8:00 am ET

Executives

Gregory A. Riddle - Director of Investor Relations

Mark J. Costa - Chief Executive Officer and Director

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

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

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

Vincent Andrews - Morgan Stanley, Research Division

Laurence Alexander - Jefferies LLC, Research Division

P. J. Juvekar - Citigroup Inc, Research Division

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

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

John Roberts - UBS Investment Bank, Research Division

Nils-Bertil Wallin - CLSA Limited, Research Division

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Good day, everyone, and welcome to the Eastman Chemical Company Fourth Quarter Full Year 2013 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on 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

Thank you, Chris. Good morning, everyone, and thanks for joining us. On the call with me today are: Mark Costa, CEO; Curtis Espeland, Executive 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 fourth quarter and full year 2013 financial results news release and our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2013 and the Form 10-K to be filed for 2013.

Second, earnings per share and operating earnings referenced in this presentation exclude certain noncore or nonrecurring costs, charges and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our fourth quarter and full year 2013 financial results news release, which can be found at eastman.com in the Investors section. Projections of future earnings in the presentation also exclude such items as described in the fourth quarter financial results news release.

Third, this presentation includes revenues and operating earnings on a pro forma combined basis, assuming the acquisition of Solutia have been completed January 1, 2012, that compare postacquisition results to preacquisition pro forma combined results. More information on pro forma combined results is in our fourth quarter 2013 financial results news release. And lastly, we have posted slides that accompany our remarks for this morning's call on our website in the Presentations & Events section.

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

Mark J. Costa

Good morning. Thanks for joining us. I'll start on Slide 3. 2013 was an outstanding year at Eastman as we continue to build on our strengths and navigate through challenges. EPS grew by approximately 20% in 2013 and we have now delivered 4 consecutive years of double-digit earnings growth. The CAGR for EPS over the last 4 years is 34%. We had another year of strong free cash flow in 2013 generating $674 million. And Curt will talk more about that in his comments.

In 2013, we made solid progress in growth initiatives throughout the company. Advanced Materials or Eastman Tritan copolyester volume increased by more than 15% in 2013. And we are currently adding additional capacity to serve continued demand growth. In our plasticizers business, Eastman 168 non-phthalate plasticizers volume grew by approximately 25%. And as with Tritan, we are increasing capacity to serve continued demand growth.

With our joint venture partner, China National Tobacco Corporation, we completed construction of 30,000 metric tons of acetate tow capacity. And that plant is running at commercial levels today. We also began construction of a capacity expansion in Wales for our Therminol heat transfer fluids business, which is expected to be operational later this year.

Moving next to the Solutia integration. We began taking steps to ensure a successful integration before we completed the acquisition in July 2012. We have now brought the majority of Solutia's businesses on the SAP system and expect to complete the SAP migration for the remaining businesses around mid-year. We've captured cost synergies we thought we would and expect to realize more here in 2014. We continue to work on revenue and operational synergies in a number of areas and the outlook for those is good. And we operate today as one effective team.

In addition, we continue to deliver cash to stockholders through both the growing dividend and continued share repurchases. In 2003, our stock repurchases totaled $238 million, including $125 million in the fourth quarter. And we now have increased our dividend 4x in the last 3 years. Overall in 2013, we continued our journey of demonstrating the strength and consistency of our company.

Moving next to our fourth quarter corporate results on Slide 4. We had a solid fourth quarter with revenue growth in all but one of our segments, reflecting solid volume growth. Operating earnings are up as strong growth in the Fibers and Advanced Materials segments was offset by declines in Specialty Fluids & Intermediates and the Adhesives & Plasticizers segments. And EPS increased primarily due to solid operating earnings, as well as a lower tax rate.

On Slide 5, our full year earnings. On a corporate basis, revenue increased by 3% in 2013. The primary driver again was volume with increases in all but one segment. Operating earnings increased by over $100 million in 2013, given this higher volume and improved capacity utilization. And operating margin increased by 70 basis points to 17%. This is our highest full year operating margin in the last 5 years, reflecting the strength of our portfolio and end-market diversity.

Now I'll turn it over to Curt, who will take you through our segment results and financial highlights.

Curtis E. Espeland

Thanks, Mark, and good morning, everyone. I'll start with Additives & Functional Products on Slide 6. For fourth quarter, sales revenue increased primarily due to higher sales. Solvents volume increased strongly as demand strengthened in both the durable goods and the building and construction markets. We also added solvents capacity at our Longview facility at the end of the second quarter to serve the demand growth. In addition, volume increased for cellulosic polymers globally and for Crystex rubber additives, particularly in the Asia-Pacific region, both attributed to increased demand in the transportation market.

Operating earnings increased slightly as the higher volume was somewhat offset by higher raw material and energy costs, particularly higher propane. As with the fourth quarter, full year 2013 revenue increased primarily due to higher sales volume. Full year operating earnings increased as the higher volume was somewhat offset by spread compression for antidegradants sold in the tires market and continued growth spending in the segment.

For 2014, we expect continued volume growth for solvents and cellulosic polymers as demand continues to strengthen in the transportation and building and construction markets. However, a contracted olefin spread will be a headwind for our solvents business. We also expect the restock cycle for tires in Asia-Pacific to continue in 2014, but we are not yet projecting a restock cycle for tires in North America or Europe in 2014. Putting this together, we expect another year of solid earnings growth in 2014 with earnings between $410 million and $430 million.

Next on Slide 7 is Adhesives & Plasticizers. Starting with the fourth quarter, sales revenue and operating earnings declined primarily due to lower selling prices for adhesive product lines and lower sales volume for plasticizers with operating earnings also being negatively impacted by higher raw material and energy costs. For the full year, revenue and operating earnings declined primarily due to lower prices throughout this segment and lower volume of adhesive resins product lines with operating earnings also negatively impacted by higher raw material and energy costs.

As we finished the year and start 2014, we are seeing early signs that demand has stabilized. For adhesive resins, demand is projected to strengthen as we believe inventory destocking by our customers has concluded. And we are taking actions to reduce costs here, including reducing overhead costs required to support the business and reducing operating costs at our Middelburg facility. In addition, we are moving forward with our joint venture in China to build a low-cost worldscale hydrogenated hydrocarbon resin facility, which we expect will be online by the end of 2015. For plasticizers, we expect better end-use demand with our customers telling us that commercial building and construction market is improving. However, we expect the competitive environment we faced in 2013 to continue in 2014, resulting in continued pressure on pricing. As a result, we expect 2014 earnings to be between $150 million and $175 million.

Advanced Materials is on Slide 8 and they made good progress in 2013. Fourth quarter revenue increased due to higher volume for Tritan and higher volume for other copolyesters sold into the packaging market. Operating earnings increased as capacity utilization improved year-over-year, leading to lower unit costs. You'll also recall that in the fourth quarter of 2012, we were destocking inventory in a few product lines. For the full year, revenue increased due to higher volume for Tritan and for interlayers with acoustic properties. Full year operating earnings increased as capacity utilization was higher for the year and mix improved as we sold more Tritan, the V-Kool window film and interlayers with acoustic properties.

For 2014, we expect volumes to increase and mix to continue to improve as we grow our premium branded products. We expect volume for our specialty plastics products sold into displays market to be flat as demand continues to be soft in the displays market. Taken together, we expect earnings to be between $280 million and $300 million, which would be solid results for the segment.

Fibers is on Slide 9 and they had another exceptional year. 2013 marks their 10th consecutive year of earnings growth. Full year sales revenue increased due to higher selling prices in response to higher raw material and energy costs, sales of acetate flake to our China acetate tow joint venture and higher acetate yarn sales volume. And earnings were higher as the higher selling prices more than offset raw material and energy costs. Looking forward to 2014, we expect this streak of consecutive earnings growth will continue. We expect operating earnings to be between $500 million and $520 million.

I'll wrap up the segment discussion with Specialty Fluids & Intermediates on Slide 10. In the fourth quarter, sales revenue increased slightly as higher volume, particularly for olefin-based products in North America, more than offset a decline in specialty fluids volume due to the timing of customer project completions. Operating earnings declined as higher raw material and energy costs, particularly for propane, which was up more than 35% year-over-year, more than offset the higher volume for olefin-based products. For full year 2013, both operating earnings and revenue increased slightly. Operating earnings increased as the combination of lower raw material and energy costs, particularly with propane, along with higher volume of olefin-based products more than offset lower selling prices and lower specialty fluids volume.

Looking forward to 2014, we expect operating earnings to be between $330 million and $370 million. The range reflects the volatility of the key raw materials, particularly propane. I'd also remind you that we're expecting revenue from technology licensing in this segment in 2014, which should help negate the impact of raw material volatility. While volumes in specialty fluids are expected to grow, the timing can be impacted quarter-by-quarter by customer sales, especially in the renewable energy market. But all in all, we're expecting solid results from this segment.

On Slide 11, I'll transition to an overview of our cash flow and other financial highlights for 2013. We did an excellent job of generating cash in 2013 with operating cash flow of $1.3 billion. This is a record for cash flow from operations for us. This level of cash generation reflects solid net earnings and discipline on working capital, which was up only slightly year-over-year.

We also utilized just under $300 million of the $1.5 billion of NOLs we acquired as part of the Solutia transaction. Our free cash flow was $674 million for the year. Capital expenditures were $483 million, about in line with the guidance we gave you. And dividends were $140 million for the year. I would just ask you to remember that we only had 3 dividend payments in 2013 since we accelerated the first 2013 dividend payment into the fourth quarter of 2012.

Looking at the balance sheet. We now have repaid the $1.2 billion term loan for the Solutia acquisition. $950 million was repaid in 2013 using a combination of available cash and lower-cost borrowing. Our net debt now stands at approximately $4 billion, a reduction of approximately $500 million for the year. And we are solidly within the metrics for an investment-grade credit rating with a stable outlook.

Fourth quarter results were impacted by a mark-to-market gain of $297 million related to our pension and other postretirement benefits. For the year, the net gain was $380 million -- $383 million, which included an interim remeasurement in the third quarter. Also in the fourth quarter, we had asset impairments and restructuring charges of $52 million. This included charges for the decision to discontinue the Perennial Wood growth initiative. Perennial Wood has been a good -- has had a good response in the marketplace, but we could not get the underlying economics to continue to support this investment. We expect spending and other for 2014 will decline slightly as a result of this decision, offset by increases in spending for other growth initiatives.

Finally, our tax rate for the fourth quarter was 26%. This is lower than our previous expectation, as it reflects the positive impact of integrating the Eastman and Solutia tax structures, as well as a $14 million benefit of favorable foreign tax audit settlements that occurred late in the year. For the full year 2013, the tax rate was approximately 28%. We have sharpened our pencils, given the continued benefits of the Solutia integration and other business changes. And we expect our tax rate for the full year 2014 to be up only slightly to approximately 29% and we're continuing to work hard to improve it even further from there.

So this is just great work by Vince, John and the entire tax team, as well as of those involved with implementing the various initiatives that are required.

So with that, I'll turn it back over to Mark.

Mark J. Costa

Thanks, Curt. I'm on Slide 12 to discuss our 2014 outlook. I mentioned earlier that we've grown earnings for 4 consecutive years. We are confident that 2014 will mark the 5th consecutive year of earnings growth for Eastman.

Our confidence begins because of the Eastman-specific actions we are taking, which we expect will contribute between $0.50 to $0.75 in EPS in 2014. The narrowing of the propane-to-propylene spread will be a headwind in 2014, likely in the range of $0.30 to $0.40. Although there is currently economic uncertainty, we are well positioned to benefit from an improving global economy in 2014. And the combination of share repurchases and acquisitions are also expected to contribute to earnings growth. Bringing all this together, we expect EPS to be between $6.70 and $7 a share in 2014.

We expect to start out the year slower than we did in 2013 as we face narrow olefin spreads, continued challenges in Adhesives & Plasticizers and the buying powder that's associated with certain differentiated product lines like specialty fluids. However, we expect to gain momentum in the second quarter as raw material costs decline, particularly for propane, coatings demand picks up in the building, construction and transportation markets and we see normal seasonal improvement in demand across other areas of our business. In addition, the benefit of the Eastman-specific actions we are taking to increase earnings will build during the course of the year.

With the next few slides, I'll give you some additional details on the factors impacting EPS in 2014, beginning with the actions we are taking to grow earnings. We first showed this slide back in October and remain confident in these actions today. Regarding the capacity additions, the acetate tow JV is at commercial quantities today and both the Tritan and Eastman 168 expansions are expected to be operational later this year. On mix improvement, we made good progress with each of these products in 2013 and expect that will accelerate in 2014. On technology licensing, we expect at least 1 license in 2014 and we expect in the years to come, we will consistent revenue from technology licensing with acetyl and the technology for the production of MEG from synthesis-based feedstocks that we announced in October. Lastly, on cost synergies from Solutia acquisition. We ended 2013 at a run rate slightly above $100 million and expect to add another $20 million of synergies by the end of '14. All-in, we remain confident that these Eastman-specific actions will add between $0.50 and $0.75 to EPS in 2014.

On Slide 14 is a discussion of the expected impact of changes in the olefin spread in 2014 earnings. In the table, you can see the average annual prices we have projected for key olefins as we forecast the impact of narrowing spreads. We are taking actions to offset the narrowing of spreads. First, we are adjusting the ratio of propane and ethane we crack to produce propylene and ethylene from 80% propane and 20% ethane we ran in 2013 to something closer to 70% propane and 30% ethane in 2014. And given the respective prices of propane and ethane, this makes economic sense.

As we've indicated previously, we do have an active hedging program and that we do have propane hedges in place for 2014, which will mitigate some of the impact of the higher prices. We're also taking actions with pricing to attempt to offset as much of the higher feedstock costs as we can. Propane prices are expected to increase in 2014 over 2013, helping us raise our prices for our propylene derivatives. Our more substantial challenge is the propane to ethylene. So given the spike in the propane cost here in 2000 -- early 2014 in the large part due to the cold weather much of the country is currently experiencing, the respective prices of other olefins and the other actions we are taking to offset the headwinds we face, we project a negative impact of $0.30 to $0.40 on EPS.

Next, on Slide 15, is our leverage to improvement of the global economy. And while there's uncertainty about the pace of global economic growth in 2014, I remain very confident that we benefit from the diversity of our end markets and our geographic exposure and that we have good leverage to improving growth. On markets, you can see that we do not have any market that represents more than 20% of our total revenue. And as specific markets improve, we are well positioned. So as the transportation market improves, we benefit through our tire additives and coating businesses in the Additives & Functional Products segment and Saflex demand in Advanced Materials. As building and construction market improves, we benefit through the company, including our coatings and plasticizers businesses. And as the consumer markets improve, including consumer durables and packaging generally, we benefit through our adhesives resins and specialty copolyester businesses.

Looking at geographic regions. In 2013, as you can see, the U.S. and Canada represented 46% of our revenue while Asia was our second-largest region at 28% and then Europe was at 21%. As the U.S. continues to strengthen, we expect to benefit in just about all of our segments. We will also benefit as Asia-Pacific and particularly China, continues to transition from an infrastructure-based investment economy to more of a consumer-based economy since many of our products sold into China go into the more premium goods that consumers in China increasingly want. As European economy begins to improve, we are leveraged for that in each of our segments. We aren't leveraged to one specific geographic region or to one specific market. As global economic growth improves, I think the benefit of our diversity would be clear.

Moving to Slide 16. Another factor impacting our 2014 earnings is our cash flow and how we deploy it. We delivered strong free cash flow in 2013 and we expect to do that again in 2014. Operating cash is expected to be a healthy $1.4 billion. Capital expenditures will be up in 2014 compared with '13 by about $100 million and above the top of our normal range as we have increased infrastructure spending in Kingsport, including converting 2 of our boilers to natural gas from coal. And we're spending on growth initiatives such as the expansion of Therminol heat transfer fluids in Wales, as well as our Tritan and Eastman 168 plasticizer expansions. On dividends, we only had 3 dividend payments in 2013 and we'll have the normal 4 payments in 2014. And the net result is projected free cash flow of about $600 million.

Moving to the next slide. We will remain disciplined and balanced on how we deploy the cash. I mentioned capital expenditures on the previous slide. On debt, we will continue to optimize our debt structure within our investment-grade rating. On joint ventures and acquisitions, we continue to look at bolt-on acquisitions. For example, earlier this week, we announced the acquisition of an aviation turbine oil business from BP. When combined this with our Skydrol aviation fluid, the product from this acquisition, which has annual revenues of approximately $100 million and margins above our corporate average, will enable us to better meet the needs of the global aviation industry. In addition, an acquisition like this provides an opportunity to access the capital markets to continue to take advantage of the attractive debt market.

And on stock repurchases and dividends, we expect to continue to be active as guided by our board. In the fourth quarter, we spent $125 million of share repurchases and we have continued to make repurchases here in January. For full year 2013, we have purchased 3.2 million shares for $238 million and we expect to continue to repurchase shares to more than offset dilution in 2014. On the dividend, we continue to expect our dividend to increase as our earnings increase.

I conclude on Slide 18 with comments about our strategy for delivering consistent and superior value. As you can see, we believe the combination of growing the existing portfolio greater than GDP growth rates plus growing beyond the existing portfolio and a balanced approach to capital allocation will create value for all of our stakeholders. Key levers as we execute this strategy are winning with the customers through innovation and we will bias our SG&A and R&D spending towards innovation going forward, strengthening our competitive position through productivity and leveraging acquisition to improve the portfolio. We're also working to reduce our olefins exposure as we continue to pursue options for our excess ethylene and as we grow the current portfolio of businesses into other areas.

While we have challenges to overcome, I'm excited about the opportunities of are ahead and the great team we have at Eastman that positions us to succeed.

With that, I'll turn it back to Greg.

Gregory A. Riddle

Thanks, Mark. We have a lot of people on the line this morning and we'd like to get to as many questions as possible. [Operator Instructions] .

With that, Chris, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from David Begleiter of Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Mark, in your guidance, what are you assuming for share buybacks? And why weren't you more explicit about buybacks, given that the debt, the term loans were paid and I think you had projected that you would be aggressive on buybacks in 2014?

Mark J. Costa

I'm not exactly shocked that, that might be the first question off the gate. A good question and a fair one. We've been very clear that we've always had a disciplined and balanced approach to capital allocation and we intend to keep it that way. We're prioritizing all of our investments around organic growth opportunities and we're very excited about the strength of our portfolio and we'll continue to make those investments. As we clearly noted, we still have free cash flow available after those organic needs and after being paying the dividend. So the third question to ask, where are we going to go with the capital allocation between sitting on it, which we don't intend to do, we intend to deploy it, or deploying it against M&A and share buybacks. We're going to take a position where we stay flexible on how much of that we're going to do between M&A and buybacks. We think it's a good discipline to look at both the M&A market and the opportunities they present for creating long-term earnings growth, as well as share buybacks. I think it's likely that we're going to buy back shares more than dilution this year. But as always, that's subject to board support.

Curtis E. Espeland

And Mark, if I could just add. David, just to let you know, we started the year with $160 million remaining on our current authorization. As Mark mentioned, we are continuing to repurchased shares to start the year. So we know as part of our normal interactions with our board, we'll be discussing with them the size and timing of our next authorization. You've heard from us in the past, we've had a great relationship with our board and they've been fully supportive of that balanced and disciplined capital allocation strategy that Mark mentioned.

David L. Begleiter - Deutsche Bank AG, Research Division

Very good. And Mark, just on Fibers, given lower raws, higher prices and likely higher volumes, is there an upside to your guidance of $5.20 on the top end for Fibers in 2014?

Mark J. Costa

It's a good question, Dave, especially given how we beat our forecast in 2013 from the beginning of the year. We've put a lot of more effort in trying to get that forecast right this year and thinking through all the elements of price, raws and volume. And I think the guidance we've given you is a good one.

Operator

We'll take our next question from Kevin McCarthy of Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Mark, on Slide 14, you outlined some of your input cost assumptions for the year. It's very helpful. You also indicated, though, that you had some hedges in place. And so if I look at the propane level of $1.18 per gallon, is that on a market price basis? And perhaps you could comment on how hedges helped you or hurt you in the fourth quarter and what your expectations are for 1Q, given some of the distortions related to the so-called polar vortex.

Mark J. Costa

Yes. So I'm going to answer the first half of that question around our view of prices. I'm going to let Curt handle the hedging question. With regards to our view on prices, the $1.18 is based on the forward market curve that we see that's available in the market. So the other prices, like propylene, et cetera and ethylene are based on the IHS. But that's the forward curve for the market as of 2 days ago. In regards to hedging, we do have a very active hedging program, where we try and mitigate a material amount of our exposure on propane. I'll let Curt to add some more comments.

Curtis E. Espeland

Yes. As Mark mentioned, Kevin, we have an active hedging program across commodities, currencies and even interest rates. On the raw material side, we primarily hedge propane, ethane and natural gas. Traditionally, we have hedged to provide some seasonal spike protection, such as the winter or hurricane season and to provide time for our businesses to kind of respond with the appropriate pricing that is needed with that input cost. Given the trends that we've seen over the last 6 months, we've actually gone -- traditionally, I would say we would've hedged out 6 months. We actually are not going be on that timeframe and we might even find ourselves hedging 1 to 2 years out, given some of the volatilities that's out there. As I look at our fourth quarter, normally, we would have put a healthy level of spike protection in for that. As you know, propane moved quickly in that August-September frame, so I'm probably thinking as much into it as I would've preferred. And some of that has continued in the first quarter. But we do have a healthy level of hedging protection that's helped us in fourth quarter, will continue to help us in the first quarter, but, more importantly, will help us in the year at hitting that guidance that we provided.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then a second question, if I may. Mark, you've put out an Adhesives & Plasticizers earnings range of $150 million to $175 million or so. Can you talk about your level of confidence in that range? If I look back at 2009, a credit crisis year, I think you had a 12.8% margin. Do you think that could prove to be a durable low? Or are there factors you're saying that could create a little bit more risk on the downside?

Mark J. Costa

Great question. And we certainly are paying a lot of attention on the Adhesives & Plasticizers business and doing what we can to improve it, Kevin. Right now, what we'd say is the indications are the business is stabilizing. I think from a volume point of view in adhesives, we were sequentially flat in fourth quarter and actually stronger on a year-over-year basis. And as we look at '14 over '13, we expect demand to improve. The destocking appears to be over, so we don't have that as a headwind in this year. Hydrogenated demand is still quite solid especially with hygiene demand. And I think it's fair to assume, given the worldwide global economy, the packaging demand is going to improve, but it's unclear exactly how much. And that's one of the key issues, is getting that demand to improve to stock up some of the excess capacity in Asia, in particular. The key uncertainty for us is really competitive behavior. So there are 2 elements to that as we explained in past calls. One is the substitute material, which is rosins versus our hydrocarbon resins. The prices had gone up a lot as we talked about in the third quarter call and they have stayed up relatively high. So that is reducing the amount of substitution towards rosins from hydrocarbon resins, which is helpful. And those prices are likely to at least stay high for the first half of the year. There's uncertainty about what the rosin crop will be this year and how that will impact prices in the back half of the year. The more significant issue is just what happens on the like competitors and hydrocarbon capacity. And there's still certainly adequate supply in the market to serve demand, so we don't see a lot spread recovery. But if spreads hold and demand improves, then you can see how this business would start stabilizing. And even if demand improves, we have some room for some spread erosion to hit the low end of the guidance on the adhesive side. The plasticizer is a pretty similar story. We see demand recovering in North America with B&C, especially in flooring, so that's going to help this year, which was certainly not there last year. And the non-phthalate substitution, it was expected to continue. We had very strong growth in our non-phthalate 168 plasticizers, and that volume growth will be there. So I think we feel good about the volume side in the plasticizers, and then you're just back to the same conversations in adhesives, which is what's going to be competitive behavior as excess capacity, in particular in Asia, is chasing demand in Europe and the U.S. because China demand has been relatively slow to grow last year and clearly uncertain this year based on all the press. But again, you've got very strong volume growth to absorb some spread compression if it happens. Or if it doesn't happen, then you go towards the higher end of that range. And Kevin, one thing I'd note is that we're not just sitting here waiting for the world to get better. We are taking a number of actions to improve this business. So we are taking a hard look in reducing some costs in SG&A and R&D. We've got a great project in our Middelburg site that's going to improve the cost position of the plant in the late half of the year. And we're very excited about the plant we're building with our joint venture partner in China, which we expect to be online late '15, which will be, by far, the world-class, low-cost plant in the world to serve the hydrogenated resin market, where we have a more differentiated position. So there are other things that we have going on that improve this business versus just waiting for supply-demand to get better.

Operator

We'll take our next question from Robert Koort of Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's actually Brian Maguire on for Bob today. Just back to Slide 14, just as we -- I really appreciate the color on the '14 impact from narrowing olefin spreads. But as we just think about the first quarter impact, just to help us with the modeling, is it -- I think that's where you're going to see the bulk of the impact. Is it going to be about half of that full year number, or anything to kind of figure out the cadence of that $0.30 to $0.40 impact?

Curtis E. Espeland

This is Curt. Yes, our strategy here is to kind of give you inputs on what's coming into our full year guidance. We're not going to sit and try to break down that component quarter-by-quarter. But you can do the math of where that forward curve is and kind of expect a good portion of that headwind is going to be in the first quarter.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And have you already shifted your olefins units to 70% propane today? And if so, does that mean that you have to buy a little bit more propylene from the merchant market?

Mark J. Costa

We have shifted the assets over to that mix and are pushing it as hard as we possibly can. And it doesn't have any material impact on our need to buy propylene.

Operator

And we go next to Frank Mitsch of Wells Fargo Securities.

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

Obviously, very strong volumes in Q4. Can you talk about where you stand on your capacity utilization? Obviously, you've got some expansions going on in the Tritan and the plasticizers, et cetera. Where do you stand there? And what should we expect in terms of overall capacity on a percentage basis additions in 2014 and what your utilization may be?

Mark J. Costa

Sure. I think that the utilization, as we look at '13, was certainly relatively high across the company. And we expect utilization to continue to be high and higher in '14 as demand improves. It's important to keep in mind that looking at absolute utilization is a little deceptive with Eastman because we have a mixture and flexibility of our integrated assets, where we can always run the big engines and the big parts of our capacity quite high and selling off some of the intermediate products. And then what we focus on doing is growing the higher-value specialty products as fast as we can that shifts the utilization towards those higher-value products, improving the mix in our business. And on the specialty products, in a lot of the areas, we still have plenty of capacity and room for growth in that leverage on those assets. So in performance films, we have that. In interlayers, both inside Advanced Materials, we have that leverage. And in copolyesters, we certainly have that leverage as well. Obviously, in some places, we're tight, like Tritan, and that's why we're adding capacity, or in Therminol, where we're adding capacity. So we've got the room to support growth. We've had some great capacity additions that allowed us to grow that we brought online in the fall, like the China JV in tow. The ethylene oxide derivative capacity expansion we did for Additives & Functional Products allowed us to accelerate growth and will support growth this year. So a key part of understanding our earnings is that it's not just about volume growth. You get misled if you just look at the top line revenue. It's about substantial mix improvement, given the high-value products we're growing much faster than some of the intermediates.

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

Is it fair to say that given the volume growth that you are seeing in your businesses that pricing is definitely going to follow?

Mark J. Costa

I think we feel good about our pricing strength in most markets right now. It's always subject to what competitors are doing. Adhesives & Plasticizers is the one place where we obviously have some challenges. But otherwise, we feel pretty good.

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

All right. Great. And then lastly, speaking of how you're feeling, how you're feeling about $8 in 2015?

Mark J. Costa

I'm surprised it took this long to get to this question. I knew I could count on you, Frank. So $8 a share, we remain committed to driving towards $8 a share in 2015. From an organic perspective, clearly we're going to have some challenges in reaching that number. If you go back to Investor Day guidance and look at the earnings that we provided for each of the segments at that time, our largest problem obviously is Adhesives & Plasticizers and we just had a discussion around some of the challenges there, getting it to stabilize and improve. But that's been a big hit as we've already advised in the past. But the strength of our portfolio also shows up here on why we like the diversity of our portfolio because you can also see that Fibers is significantly outperforming what we would have guided at Investor Day, offsetting a good portion of the hit we've taken in Adhesives & Plasticizers. And that's always part of that diversity. You have a view on things at one point in time, but the world never sort of cooperates. Some things do better, some things do worse. But the value that diversity continued to deliver consistent earnings growth. The second part about our organic challenge obviously is at Investor Day, we assumed about 3.5% global GDP compounded from '12 to '15 and that's certainly not worked out in '13 and '14. I think we see that the world may strengthen here. And hopefully, it will help. But that's a bit of a headwind, especially in Europe, with some of our businesses that are focused on building, construction and transportation. And at a lower level, I would say actually relative to those 2 things is the cracking spreads being a headwind. There's certainly a headwind from a '13 to '14 point of view. But if you go back to our view of the world in '12, we had a bit of a different view. And the propane-to-propylene spreads aren't all that different today than what we would've assumed in '12. The real challenge we have is actually propane to ethylene, where both ethylene and ethane prices today are much lower than where we were in 2012 on our expectations. And that's a bit of the challenge that we feel on that side of it. And we do have hedging and pricing and other things that we follow to address some of those cracking spread challenges. So those are some of the challenges. Now we're not just sitting here with that. We're thinking about how we pull every lever we've got in the company to improve our performance and deliver. As we noted, we have a bunch of specific actions we're taking in 2014 to get to $0.50 to $0.75. In addition, we're also taking a variety of cost actions to improve the Adhesives & Plasticizers business. And we're developing a fairly robust set of ideas for 2015 that we'll do that we'll talk to you about later in the year. The other thing that's important to note that we can go back to what Dave asked about at the beginning of the Q&A is that we do have an extremely strong cash flow and balance sheet and we have one of the highest EBITDA margins of our peer set. And so that gives us strength and flexibility to find additional ways to grow earnings beyond organic growth and we certainly intend to do that. As I said, we're going to be balanced and disciplined in this approach. We're not going to get focused on any one lever as a solution. Our job is to create both short- and long-term value creation and consistent earnings over the years. And so we need to be measured and careful about how we make the decisions between acquisition and M&A -- I mean, acquisitions and repurchase. I think we have demonstrated that we're willing to do that. Even in the last quarter, we started buying back some shares beyond dilution and we did an acquisition as well that's going to be a great addition to our SFI business. So I feel very good that we're in a good position here. We've delivered 4 very strong earnings growth years. I think we're well positioned to deliver other earnings growth this year and next year. And if you look at that and think about how many companies in the S&P have delivered sort of 6 years of continuous growth, I think that we're doing relatively well compared to that group. And it all comes back to the strength of our portfolio. We've got leading positions in many of our businesses. We've got strong diversity in our end markets and geographies. We've got world-class technology platforms. And we have the cash. So we feel good about driving towards that number. We're not letting go of that as our goal.

Operator

We'll take our next question from Vincent Andrews of Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

If we take sort of the hypothetical situation, where you've got your $600 million of free cash flow this year. Now let's say there's an M&A opportunity that comes along that would require the entire use of that $600 million. How will you sort of examine and make the decision between M&A and share repurchases? What things would be important to analyze for you to make the decision to go one way or the other?

Mark J. Costa

That's great question and it's one that we're constantly debating and trying to think about, what are always the best things to do for our shareholders. As I noted in my prepared remarks, there's the debt market out there as well, so it's not just what do we with our free cash flow. So we'll look at using and exploiting the debt market, especially how attractive it is right now, as part of funding M&A as we go forward. But the tradeoffs are trying to think through the timing. We look at a robust portfolio of M&A ideas that we have and we're continuing to revise and look at those. Obviously, valuations are a bit high in a lot of opportunities right now, so we need to make sure that we continue to be disciplined and not overpay in chasing M&A ideas. The accretion is important and it's easy to get with cash today. But we need to make sure there's a good ROC above the cost of capital. So we're not going to let go of our discipline. But there are ideas that we think are important to consider. And that then factors into how much stock you want to repurchase this year and be balanced about that. And I think we've got an authorization that allows us to continue to take out dilution this year and think about doing more than dilution on a limited basis. And we're going to continue to make decisions with ourselves and our board about what we should do going beyond that.

Operator

We'll take our next question from Laurence Alexander of Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Two quick questions. First, on pricing, can you give an update on the pricing negotiations or settlements for Saflex and the acetate tow business? And also just on the volume trends in Q4, were there any areas where you think you might have seen any significant prebuying that also affects the bridge into the first half of 2014?

Mark J. Costa

A great set of questions. First, on the pricing, I think with the Fibers guidance we gave you, we're successful in getting what we wanted on pricing and think we're going to have a good volume year there. And so those contracts discussions were successful. With the Saflex business, I would also say we had a successful contracting season with our glass customers in succeeding and improving our position in the marketplace for price and volumes, so we feel good about that business as well. In regards to prebuying, we didn't see that much of it. I was actually concerned we would see quite a bit of prebuying on the propylene side because propylene prices started moving up ahead of January and December. But it wasn't as much as we expected. And I think we did a pretty good job of controlling that.

Operator

We'll take our next question from P.J. Juvekar of Citi.

P. J. Juvekar - Citigroup Inc, Research Division

There was a lot of discussion on propane. But can you talk about propylene and what specific actions are you taking in pricing on propylene derivatives? I think there was an oxo price increase announced. Are you getting any traction on the pricing side?

Mark J. Costa

The propylene side certainly has gone up, as you know, already in December and in January. And I think the expectation is for modest increase in propylene prices for February, as well. We'll have to see how that plays out. But overall, I'd say, on average, we expect propylene prices to be somewhat higher this year than last year. And there's always the wild card of unplanned outages that have a big impact on that story that, obviously, none of us can predict. In regards to the pricing, we have rolled out multiple price increases here in January and for February and we're getting good traction and getting a good portion of those price increases to stick both from the solvents in Additives & Functional Products and the propylene derivatives in SFI.

P. J. Juvekar - Citigroup Inc, Research Division

Okay. And then you mentioned rosin supply earlier. Can you just talk about what are your expectations for rosin supply in China in 2014 because that seems to be impacting and giving, I think, some pricing pressure? And then secondly, just in adhesives, is that a business you want to be in the long term?

Mark J. Costa

In regards to rosin pricing -- you said rosin pricing, I think. In regards to rosin pricing, it went up significantly in the fall and it's staying up and it's expected to come off to some degree when the new crop arrives. The question is, does it go all the way back to 2013 first half levels? Or does it go back to a more normal level, which would have been higher than the beginning half of '13? And most expectations is that middle ground. So the good news about that is, if it stays where it's at and it only comes off a limited amount, the substitution of losing demand from hydrocarbons to rosins is probably mitigated and not as much of a headwind as it was last year. In regards to what the crop will be and how prices will impact the second half of the year, we don't know. When prices are high, more people tend to climb up the hill and seek rosin out of trees in China and it's a bit of a wild card to predict what's going to happen on that front. So we'll just have to see how it plays out. In regards to the business, it's a fair question. I think that if you look at our history, Eastman has always been very disciplined about its portfolio and looking at vesting and grade specialty businesses and continue our journey of being a specialty company and exiting some businesses that we're underperforming in that transition. And we do have a good track record. I wouldn't say Adhesives & Plasticizers is yet in that discussion set. It's a good business. We've had 1 year of tough times and we needed some things play out a little bit here to see how it either recovers or it doesn't. At its current level, though, it's still a very value-creating business. At its current earnings level, even for 2013 or '14, given our guidance, it's still creating value above our cost of capital in a meaningful way. And so we're going to continue to invest in it this year and fixing it and making it more cost-competitive, see how things go and then we'll make the appropriate decisions in the future if necessary.

Operator

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

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

In that $0.30 to $0.40 compression from commodities, does that include the benefits of your hedges? Or is that exclusive of the benefit of your hedges?

Mark J. Costa

Jeff, it includes the benefit of the hedges.

Curtis E. Espeland

As well of our pricing actions that we might take.

Mark J. Costa

Yes. A lot of people are doing this math, just doing how much propane we buy times the cost of propane. And obviously, it's hard to know exactly what our hedges are. But the hedges are in there. But you also remember, pricing actions are also in there. And we have a lot of good products that use that propane into specialty derivatives, where we have some pricing power. And so we use that to offset headwinds like this.

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

Okay. Great. And then you spoke about changing your mix from, I guess, 80% propane to 70% propane. Where are you getting the extra ethane from? Or is your ethane supply now different than it was previously? Because presumably, you could have done this years ago if you chose. What's different?

Curtis E. Espeland

Jeff, what's different is it's not necessarily the supply of propane or ethane, it's more of the front-end part of our cracking operations. And so you had to make modifications to enable that mix change. And I can guarantee the guys are just continuing to look for more ways to have more flexibility with the options of the feedstocks that we crack.

Mark J. Costa

If you go back 2 years ago, propane wasn't a disadvantaged stock relative to ethane. So you had a different mix balance in how you created value between propylene and ethylene. Now we're in this world where ethane is so substantially lower than propane, it's changed how we're think about that and we've been making investments and creating more flexibility in our crackers.

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

Okay. And if I can make a request. In your financial statements, you don't itemize the effect that your pension gains have on your cost of goods sold or R&D on SG&A or at least as I read them. And it makes it very difficult to know what your cost of goods sold or SG&A or R&D actually is and to compare it year-over-year. And if you look at the disclosures of Dow and some of other companies, they itemize that. And so if it's possible, it would be helpful if you guys did that as well.

Curtis E. Espeland

Jeff, thanks for the feedback. And I can guarantee you, our top-notch SEC and reporting group is listening, so they'll come up with good ways to help you out.

Operator

We'll take our next question from Mike Sison of KeyBanc.

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

Mark, in terms of the tire additives business, with your outlook for '14, particularly in North America and Europe, it sounds like if I did the math, it's going to be several years in a row of that business struggling. Maybe just some top-down thoughts, do you still like the business? Is there potential for this business to grow longer term? Just kind of thought of how that business is coming along for you.

Mark J. Costa

Certainly, the tire business is one we like. It's a great market. It's certainly gone through some very difficult demand challenges at the primary demand level over the last couple of years because I think the tire manufacturers had overproduced and loaded the channel with more inventory than needed and it took a long time to sort of destock it back to demand. When we look at 2014 -- 2013, by the way, was actually a decent improvement in demand for us for both Crystex and antidegradants. And we expect '14 to be another solid volume growth year for us in tires. The Crystex business, which is the majority of earnings, is a very solid business, very attractive margins and we're making a lot of investments to continue to grow and innovate in that space. The biggest headwind we had overall for the entire Additives & Functional Products segment was the antidegradants facing a lot of competitive pressure. That's a small part of the earnings, but it was a material earnings headwind as we continue to struggle with prices in benzene prices or struggled to improve market prices and our raw material costs in benzene went up considerably. So that's one we're taking actions to try and improve. But the overall business, we like. And importantly, it's not just about the products we bought from Solutia. We have some great innovation programs going on, leveraging Eastman asset and technologies into this space. And we're getting great traction with the customers in that space. So we see great growth opportunities for cellulose esters being used in tires to improve traction and wear of the tires and getting great feedback from our customers on that. We're also finding very strong interest in our hydrocarbon resins that we sell through the adhesive segment. We also sell them into the tire segment and see great growth opportunities there. They're moving from using resins as a process aid into a functional additive for the tread and performance for traction in the tire. And there's a lot of innovation going on in that area and we're the leader in providing technical innovation in that area because of the breadth and depth of our technical expertise in hydrocarbon resins. So there's a lot going on there. We like the segment and we're going to continue investing.

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

Okay. And real quick on the heat transfer fluids business, you've added a nice asset there with the BP business. So can you talk a little bit about that? And maybe is this sort of another growth business for you to do more acquisitions? And it's always been a good business for Solutia, could be sort of the next platform for you to continue to grow on.

Mark J. Costa

The BP business is a great, high-margin, attractive, stable business. They've got greater than GDP growth rates to it. And importantly, it's a great fit with our Skydrol hydraulic fluid business. The 2 are often sold as a package by our competitor into the marketplace. And now this significantly improves our competitive positioning and what we can offer to the marketplace as well. So we view this as a great business and a great market. So whether there's additional acquisitions or not, that's something we'll continue looking for. But right now, we're just going to focus on integrating this one well.

Curtis E. Espeland

And Mike, I might also add from a financial perspective, this is the kind of deal we like as well. It's got an attractive ROIC. It's going to be accretive in 2014. It's going to be -- when you include synergies in '15, it's going to be high single-digit kind of accretion. So really nice strategic and financial deal. And we really look forward to working with BP to close this deal up.

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

Single-digit EPS is what you...

Curtis E. Espeland

Single-digit EPS, just to be clear, yes.

Operator

We'll take our next question from John Roberts of UBS.

John Roberts - UBS Investment Bank, Research Division

Are your discussions to sell part of your cracker capacity on hold until after the pipeline issues are resolved?

Curtis E. Espeland

This is Curt. As you recall, we are exploring options for monetizing our excess ethylene position. And we previously stated that there are various contractions and other complexities that are involved in the process. In July of 2012, Eastman initiated a challenge before the Texas Railroad Commission because of the change made by Westlake to the tariff for its Longview, Mont Belvieu common carrier ethylene pipeline. Just to give an update, on January 7, the Texas Railroad Commission actually ruled it had the authority to hear Eastman's entire challenge of the Westlake's July 2013 tariff change to the common carrier pipeline. And if you recall, that was affecting rate, bidirectional flow and swaps. So on the same day, the case hearings officer then put Westlake's July tariff change on hold pending resolution of Eastman's challenge. So we're hoping to have a hearing in the next 2 to 3 months and remain confident our challenge to Westlake's proposed tariff, we feel good with our position. But on the question itself, yes, we're still exploring options with various parties. But until this matter is resolved, it's going to take us a while to get this thing concluded.

John Roberts - UBS Investment Bank, Research Division

And as a follow-up here, Westlake has a project to convert its propane cracker to ethane. Their capital cost, I think, is like $140 million. Could we prorate that across your capacity to get an estimate of what it might cost to convert your facilities?

Curtis E. Espeland

So I think you have to look at different cracker operations, the scale of our operations because there are different type of crackers, quite honestly.

Mark J. Costa

Yes. I wouldn't do that because all these crackers are very different beasts.

Operator

We'll take our next question from Nils Wallin of CLSA.

Nils-Bertil Wallin - CLSA Limited, Research Division

I was interested in your choice not to pursue the Perennial Wood initiative. Would you give us some color as to -- I know you said the economics weren't favorable. But would you give us some color as to what you saw specifically? Was the market not as big? Was it too -- did it cost too much to produce? And then given that you're not pursuing it, what type of benefit should we see from the freed-up investment?

Mark J. Costa

Yes. Perennial Wood is probably one of the most frustrating growth platforms I've had to manage in that it was extremely successful from a market point of view but economically not viable. So the market loved the product. We had a great interest and strong adoption-building in the marketplace and it was performing well. But when it really came down to understanding the economics from the price of the raw material to deliver the quality that the market wanted and the yields of the process, the economics were just challenged and it was going to take too long to get to meaningful earnings for our shareholders to continue the venture. So long term, maybe we could have got there, but it just was going to take too long.

Curtis E. Espeland

As it relates to your question around just the impact on that other segment, where it reflects our investments. We -- I think the number is about $74 million investment or loss, however you want to characterize it, in 2013. The impact of this is probably $5 million to $10 million net of some of the other growth investments we're making. And that number will range based on how successful we are with the speed of those other initiatives.

Mark J. Costa

One of the challenges we have is making sure that we always devote our R&D and SG&A efforts to the best growth portfolio. And we have a very robust growth portfolio right now. And so we're shifting a bunch of these resources to higher-value opportunities.

Nils-Bertil Wallin - CLSA Limited, Research Division

Understood. And then another ethylene question. I believe in 2013, you had locked in maybe 50% of your margins on the ethylene side. Did that hurt you at all this year? And are you going to do the same thing next year or choose to not lock in those margins?

Curtis E. Espeland

So as it relates to 2013, I would say what it did was actually probably a slight hurt. But what it actually did is smooth out the earnings profile associated with that revenue during the course of the year. As it relates to 2014, we do not have that kind of hedge in place.

Operator

And we'll take our last question from James Sheehan of SunTrust.

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

Just wondering if you could quantify the impact on 2014 from the technology licensing?

Curtis E. Espeland

We have not had provided that. We're still in negotiations with different parties on different licensings. But it's a component of that $0.50 to $0.75. And we'll let you know more as we're successful with that effort.

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 at approximately 11:00 a.m. Have a great day.

Operator

And this concludes today's presentation. Thank you all for joining, and have a great day.

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