INSIGHT: Innovation-led value creation helps drive Eastman

04 March 2011 14:14  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--An encouraging feature of this reporting season has been the way in which companies have talked about growth driven by new products and in emerging economies.

Both carry some risk with them - and the risk of encouraging new competition. But the trend demonstrates growing confidence that they can lever long-developed capabilities in recovering markets.

Chemical producers suffered through the bad times but have emerged remarkably strong and increasingly confident that they can turn a tidy profit.

While the received view is that sector growth will be slower in 2011 than it was in 2010, some companies sound as though they will be able to maintain relatively high rates of sales and profits growth with a healthy dose of self help.

Eastman Chemical - a company that has changed a great deal in recent years - perhaps not surprisingly highlighted potential innovation-led value creation at an investor day this week.

Eastman says that the net present value of both business and innovation pipeline projects is increasing, which is good news. The company talks about “significant value creation” from both core and innovation pipeline products - it is targeting operating earnings of $450m at maturity from existing projects.

Eastman has core polyester and cellulosics technologies that are yielding products such as the cellulosic esters used in the liquid crystal display market and the tough, chemically resistant, copolyester Tritan.

The crystal clear polymer has found a ready market in baby bottles, following the bisphenol A (BPA) in polycarbonate scare, and in medical devices. The EU recently gave the green light to the monomer used to make Tritan in food applications.

In an entirely different area, Eastman claims that acetylated wood, produced using its proprietary acetylation technology, is a real breakthrough.

The technology can be used to create wood that is long lasting and change resistant. Eastman claims “70% more resistance to shrinking and swelling”, which means less warping, bowing and cupping over the life of the wood. It can be guaranteed “to provide a physical barrier protection against termites, rot and decay for decades”.

The acetylated wood market is worth more than $2bn, the company says, over a wide range of applications. Eastman is building a plant to produce some acetylated wood products in its home town of Kingsport, Tennessee, so it can test the US market in 2012. A large-scale plant could be built as soon as 2015.

Eastman has other potentially important products and technologies, including the Ceris technology for wood finishing and microfibres for use in the filtration and energy storage markets.

Eastman produced a strong set of fourth-quarter and full-year 2010 financial results and CEO Jim Rogers claimed in January this year that the company had reached a new level of earnings performance.

And at the recent investor day, Rogers was confident enough to raise first-quarter earnings per share guidance.

“Even before putting our strong balance sheet to work, we project significant earnings growth through 2013 and beyond,” he said.

“In 2010, we demonstrated a new level of earnings performance and we are expecting to build on that going forward.

“The strategic shift that we have made has led to an improvement in the company’s portfolio and has resulted in greater strength in our core businesses.”

Eastman makes fibres, coatings, adhesives, specialty polymers and inks, specialty plastics and performance chemicals and intermediates, having divested polyethylene terephthalate (PET).

The focus on core products and technologies has yielded a “dramatic profitability improvement”, the company claims.

For Eastman, end-use market diversity is a source of strength, although the product portfolio is biased towards the tobacco industry and to construction. A great many of its products also are used in packaging and consumer products.

But the current story is really all about having the capability to drive innovative products, not just into established geographic markets but also into emerging economies.

Eastman says that 35% of revenues last year were generated in “fast-expanding regions”.

The company is confident it can benefit from a geographic spread which in 2010 saw 25% of sales and 26% of operating earnings made in Asia. Fifty per cent of sales and 42% of operating earnings were made in North America.

For more on Eastman see ICIS Company Intelligence
Learn more about Asia market trends from John Richardson & Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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