INSIGHT: Eastman drives growth and generates cash

21 September 2010 16:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--US-based Eastman Chemical makes plastics and fibres and has a diverse customer base in construction, transport, health, agriculture and electronics alongside the mainstays of tobacco and packaging.

In diversity lies a degree of strength that currently is helping to drive the group results.

However, the Eastman businesses continue to benefit from a strengthened US and global economy. The signs of the slowdown are not immediately apparent.

At least that was the impression given last week when CEO Jim Rogers spoke at the Credit Suisse Chemical and Ag Science conference.

Eastman Chemical is one of those companies that are able to lift earnings guidance for the year yet again against the backdrop of the global recovery.

It has made significant progress in the year to date.

The company expects to set annual operating earning records in its fibres and coatings, adhesives, specialty polymers and inks (CASPI) segments.

Speciality plastics earnings for the year are projected at more than $90m, which would be the best since 2000. A similar greater than $200m earnings record is likely for the Performance Chemicals & Intermediates (PCI) segment.

That record year will also be built on a stronger than expected third-quarter performance in which fibres and speciality plastics operating profits are expected to improve sequentially.

The seasonal decline in sales across the board was less than expected in the quarter. “Selling prices remain solid, reflecting high industry capacity utilisation rates,” Eastman said in a presentation.

Importantly, Eastman expects earnings per share (EPS) to set a new record in 2010 at near $7. The challenge, clearly, is to sustain that growth from year to year in 2011 and beyond.

The company expected the normal seasonal fall off in demand at the end of the second quarter and as it nears the end of the current quarter it can point to global economic uncertainty and volatility in raw material and energy costs.

There seems to be some softness in solvents, Rogers said, and there have been reports of weakening flat-screen TV sales, but he could not pinpoint anything material to affect the company’s projections for the third quarter. Two record quarters in a row would lift the company beyond its most recent high point.

“It’s really gratifying to see specialty plastics come back like this,” Rogers said, following the work that has been done on selling, general and administration and other costs. PCI has also improved strongly.

Important tailwinds behind the Eastman earnings projections have been self generated. The company will also bring on stream next year an idled cracker. There are costs involved with that but also clear benefits.

Rogers said Eastman expected free cash flow at the end of 2010 to be more than $300m. And, of course, the 2011 and beyond performance depends on how the company spends that cash.

With current capacity utilisation rates in the 90s Eastman will increase capital spending in the second half of 2010 and in 2011. Full-year 2010 capital spending is expected to be about $250m.

Organic capacity-driven growth will help to drive earnings running through 2012, Rogers suggested, including expanding 2-ethyl hexanol capacity for the PCI business, due on line in mid-2012, increased hydrogenated hydrocarbon resins capacity in the Netherlands and Texas in the second half of 2011 and raised polyester co-polymer capacities.

“The hurdle is going to be high next year,” Rogers admitted but suggested that earnings can keep growing through 2012.

“We can do it because we started early," he said. “We have the cash.”

Driving capacities higher in 2011 and further into the future will help sustain growth for the company. No firm can overcome major headwinds but Eastman has proved that as a materials supplier to important downstream, consumer-oriented segments it can thrive in difficult times. Sustaining that growth with the right sort of spending is the key challenge.

For more on Eastman Chemical visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214

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