Eastman Chemical Co. (EMN)
December 12, 2012 1:00 pm ET
James P. Rogers - Chairman and Chief Executive Officer
Mark J. Costa - Chief Marketing Officer and Executive Vice President
Ronald C. Lindsay - Executive Vice President
Gregory W. Nelson - Chief Technology Officer and Senior Vice President
Curtis E. Espeland - Chief Financial Officer and Senior Vice President
David L. Begleiter - Deutsche Bank AG, Research Division
P.J. Juvekar - Citigroup Inc, Research Division
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
Brian Maguire - Goldman Sachs Group Inc., Research Division
Gregg A. Goodnight - UBS Investment Bank, Research Division
Robert Walker - Jefferies & Company, Inc., Research Division
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
Christopher J. Nocella - RBC Capital Markets, LLC, Research Division
Duffy Fischer - Barclays Capital, Research Division
James P. Rogers
Welcome. Thank you for coming to Eastman's Investor Day. We wanted to do this a little bit earlier but you guys aren't used to that rough weather called Sandy, and so we thought we'd take it easy on you and reschedule it. Seriously, I hope all your lives are back to normal. I hope you had a chance to see the exhibits. If you didn't get to see it upfront, they'll be there on break and when we finish up, and we have a little reception and have time to be -- to walk through the exhibit. Those of you on the phone, you're really missing something because these are pretty cool display of our products. Before I really get cranking, I want to do some introductions. Let's see if -- can I read this without my glasses. Yes? Okay, good.
Let me introduce some of the Eastman executive team that's here today. You may, after you hear all the names, wonder who's running the shop. Trust me, we've go a lot of talented people back in Kingsport as well. But if I could, and I'm pointing these folks out, so if you have specific questions, you can find them on break or afterwards. So Tim Dell, who is Vice President of Innovation, Marketing, Sales and Pricing, stands up. Let me go through my VP GMs and the next 3 are VP GMs within Advanced Materials. Travis Smith with the Window Films business; Eric Nichols with the PVB Resins; Lucian Boldea, Copolyester and Cellulose Esters; then, Erwin Dijkman with Adhesives and Plasticizers; Linda Hensley with the all-powerful Fibers. Now that I've said it that way, every VP GM is going to want to have an all-powerful business; Mike Humby with the Specialty Fluids and Intermediates; and Brad Lich with the Additives and Functional Products. And then for my direct reports that aren't presenting, you'll see the presenters, Earl, you did show up, thank you. You'll see the presenters with the exec team that's not presenting. Let me just hit this quickly. Perry Stuckey is in charge of HR. Just stand up, Perry, if you would. Godefroy Motte who heads the Regions and Supply Chain; Michael Chung, who's our International Ventures Officer; and David Golden, who will be our Chief Legal Officer. I think that catches just about everyone I wanted to introduce. Oh, except Theresa Lee, who has been our General Counsel and has worked for Eastman for 25 years. And Theresa, please stand up. Theresa has chosen to retire at the end of this year over my strong objection, so we are sorely going to miss you Theresa and thank you for everything you've done for Eastman, thank you. Just like every investors day, I have a retirement. Last time, it was Rick Johnson. I don't know if this is a -- not a pattern I want to set up.
Okay, for the next 17 minutes or so, I'm going to give you an overview, and then we're going to turn it over to the team to give you all the real information. First, while the speed readers in the crowd go, and stop. Okay, that was your forward-looking statement. Thank you, Evelyn Wood. Hopefully, you all took your class.
The agenda, you see the names up there. I'm going to ask the speakers to stay on their time so that we have plenty of time for questions at the end. I promise you, we'll give you a break and then there is a reception that we invite all of you to afterwards. And remember, again, you can go look at the exhibits any time during the break or the reception. Okay. What's the punchline today? We believe we're a specialty chemical company, and we believe that not because we're -- we just have one special product or one special market or one special technology, but we have a portfolio of specialty businesses. And intelligent people can disagree with what makes something a specialty, I understand that. We laid out for you 4 attributes, there's obviously more but 4 attributes that are important to us that we always want to do well on, and that we think specialty companies should do well on. Now we're not so full of ourselves that we put ourselves all the way over to the right, right on top of Specialty as if we're 100% Specialty. Remember, we're an integrated company as well. Anytime you have integrations, you're going to take a lot of extremes off upstream and sell them out and by definition, they are going to be more commodity-like. But we like our position and we think we're about as special as anyone, and it has taken a lot of hard work to get there. And this slide shows you some of that hard work.
Okay. So we've been working within the businesses but we've also been working with the portfolio of businesses. You see the divestitures, about $3.5 billion of sales, not much in a way of margins that we'd like to go with those names, unfortunately. But then, look what we added in. The addition of solutions, we added another $1 billion or so of revenue, and all those things we added taken together are higher margins to what the corporate margin was before. So we think with this portfolio upgrade in particular, we're going to have more consistent earnings growth and feel much more like a specialty company.
The strategy. People, a lot of times are looking for a complicated strategy. Ours is fairly simple. You can read the words on the chart but if I could just sum it down to the way I like to talk about it. We run our core businesses as well as we can and maximize the cash that comes into the corporations, and then we think we can differentiate ourselves by making smart choices at how we spend our cash. We're either pursuing the organic growth opportunities, pursuing acquisitions, we're giving back the cash to shareholders. That focus in cash, in our opinion, is how you grow a company. It comes from a strong foundation of cash flow. And we think a simple strategy like that is something you can execute well on. And a well-executed, simple strategy is a complicated strategy that is only halfway done every time. When you do that and you have that kind of strategy and you can execute, you get to talk about financial objectives like these. I feel pretty good to be able to stand up and say, we are targeting $8 a share in 2015, which would mean 6 years of double-digit earnings growth if we can achieve that, and that feels pretty good to us. You see a couple more targets up there in terms of revenue and free cash flow that. You'll hear something about that when the rest of the team speaks. But I also just wanted to mention ROIC. You can't take your eyes off the ball and return on capital, that's what keeps management teams on it. You got to have a good spread between your cost of capital which we pegged between 8% and 9% and return you want. What you ought to be listening for in my opinion, when you hear all those folks talk is how is the senior team compensated. Two measures that are most important to the senior team in terms of our personal compensation are the total shareholder return on a relative basis, you can judge for yourself until you get what you paid for when you see that; and the return on capital of over cost of capital. Those are the 2 that have the biggest impact on the senior leadership team. I think our interests are aligned. Okay. All that work we did with the portfolio and I'll go through -- quickly through some of these. This spurred a lot more diversity to our end markets. 2005, our top market was 44% of sales. You see the diversity we have there. Within those markets, each of our business units have strong #1 or #2 positions on a majority of the revenue. That's the kind of thing you expect to see with a specialty company.
Let me hit a couple of the market segments. The point of this slide and the next slide is just to show you not only are we diverse across markets, but even within a market, we're just not tied to one product. So we have a nice portfolio of products within each market. And you see the combination of heritage Eastman and Solutia in transportation with the OEMs and the refinished remodeling, as well as in building the construction, we have the new builds and then you have the rebuilds and remodeling. And again, products from both heritage Eastman and Solutia. I don't want to lose sight of what's helping drive our growth. Again, we didn't just tire ourselves to one particular trend, there are several trends that are important to us. Energy efficiency, think about light weighting cars, think about being able to take glass out the window screens. Emerging middle classes is where you'll reach your belt [ph] for disposable diapers, higher income going to disposable diapers which is our adhesives. Health and wellness, that's the little medical test strips or the non-phthalates plasticizers. We're taking advantage of all these global trends and it's helping drive our growth.
I can't help but look at this chart and think about the old Risk game. Anybody remember playing Risk? Now look at this, and it looks like Europe's got a power play from Kamchatka to Congo or something like that. Seriously, if you remember our history, we were Eastman Kodak, North American-centric, noticeably higher percentage of sales in North America through acquisitions, how we run our business, how we build our assets. You've seen us move more revenue outside of North America. I take some comfort in the fact that our 2 largest regions now are North America and Asia. To me, they're the most attractive and I like the fact they're about 75% of our sales.
Zero in a little bit more on some of that international growth, and there's 7 countries that are represented on this chart. So it's the BRIC countries, it's Indonesia, it's Mexico and it's Turkey. We look at these separately. We think they're special to us. We think we can drive growth there. Historical growth, 11%. If I took out the PET business that's in its earlier years, we're growing about 15% in these 7 countries. Because EMEA seems reasonable to think we can grow at 13%, you can get it to $3 billion in revenue by 2015 in these countries.
Okay, this is the money chart. Curt is going to talk more about our numbers and what we're expecting and what this is based on. I can tell you I need a little bit better global growth than we have today. We need more like 3% global growth over the 3-year period. But today, we're reaffirming $5.30 to $5.40 for this quarter. I know some of you guys want to jawbone me up but folks, I'm sitting in the middle of December, I get to see everything. I'm telling you, it feels like about $5.30 to $5.40. Next year, $6.25. It's a big number to me on this chart. What I pray for is to do the $8 on 2015. I don't want you to miss the little bubble at the top there above the $8 because we're going to be generating some serious cash over these next 3 years, and we'll see how smart we are and how we can put some of that cash to work besides paying down debt. I do think that as we get into this period, there's a good chance we're going to see some upside on the $8.
Talk more about Solutia. But one of the things Solutia clearly did for us is move us in the right direction on 2 key measures. One, the size of our operating earnings; and two, the margins. You see on this chart, a simple representation that has moved us into the better half in both of those, and that's based on 2011 as if we had the whole thing. Now forgive me for a second, I'm just drawing a blank. Can anybody help me out on what message I might have been trying to make? What the -- Oh, yes, you want to be on the red line, I remember. Seriously, we don't take anything for granted. We know we've got to earn it every day. We start every month thinking we're back at 0, and at that mindset, it enables you to deliver that performance. Okay. So we've been making some changes in the company, and some of us may think that not everyone has picked up on some of the stuff that's changed at Eastman. So I think of that analogy about how do you boil a frog, you do it very slowly. Maybe it's our fault. We've been just taking these steps and haven't really talked about it and the temperature of the water has been going up. We haven't had a chance to really look back and see what we've accomplished. So we thought we have some fun. Forgive me in these next couple of slides, but go back and look at total shareholder return and compare it to the commodity diversified players, S&P 500. In fact, in that early time frame, before a lot of the work got done, and frankly, you could have predicted our performance pretty well, just knowing what those other names did but started to part company. They stayed at C level. We pretty much doubled. And so you might say, in our opinion, we left that neighborhood and it's not such a good predictor of our performance to still look at those names. And in fact, there's probably other names that you would have been much better predicting our performance, if you've been comparing us to some like an SMC[ph]. So you can decide how hot the water is getting right now for you.
Let me take another shot. This is something I think is worthwhile to pay attention to. I don't know if you guys typically do this kind of analysis. I guess you can look at whatever metrics you want, but let me just ground you first. So the horizontal axis, that's earnings growth from '06, last 12 months, compound average growth rate. Vertical axis, a little harder and we got a slide in the back that explains the methodology, but what we tried to do, look at quarterly EPS volatility, smooth out the seasonality. So if you know your fourth quarter is always worse, don't count that as volatility. You can predict the fact fourth quarter is always worst. You can do that for all the names, and again, I think it's Page 124 if something shows how we did it. However, you want to do it, whatever methodology you want to use I think as I put the dots up, it'll be intuitively obvious or you'll tend agree. But if I look at diversified and commodity names, you would see them spread across the chart like this in terms of the earnings growth, volatility. The numbers in the boxes is the PE, that's the price from November 30, so what I think Bloomberg had or -- I'm looking at Greg, was it Bloomberg? It's probably in the footnote. What Bloomberg had for 2013 earnings. You see on average, the industry was 10.6 on a PE of forward earnings. I put up another group of companies and I'll remember where is good on this chart, on the bottom and to the right. I put up what you might call more specialty companies. I think you would recognize those names and probably intuitively obvious that you would expect them higher earnings growth, maybe less volatility, higher multiples. Here you see an average 14.4. So what am I leading up to guys? What's the question? Where would Eastman be on the chart? Eastman would be right there, over that time period, '06. So obviously, it would be better if didn't count on those stuff we used to own further back but it's history as it is. And then a final question and then I'll turn it over to Mark. By now, the water is just about boiling. So at the end of November, you got us cheaper than the diversified and commodity names, and you got to be in that part of chart. Let me call up Mark Costa.
Mark J. Costa
Good afternoon. A pleasure to be here and talk to you about how we have both the strategy and a lot of capabilities in place to deliver that compelling earnings growth, and I can convince you that we deserve a better multiple and can deliver $8 a share. We've been on a great journey here of evolving our portfolio with Eastman, and it's not just selling some businesses, but it's also how we've improved the businesses that we still have, where the margins and the stability of the margins and the quality of the market positions we have continue to improve. And then the combination of solutions really accelerated our journey onto that -- being that specialty chemical company. So it's exciting to see that. The 2 segments that report to me, which is Additives and Functional Products and Advanced Materials really is a combination of a lot of our specialty businesses with the Solutia specialty businesses where we saw some great synergy.
Let me start out by talking about Additives and Functional Products. And I thought I should first define what the segment is in case anyone's still not familiar with it yet. This is really a combination of Eastman's legacy CASPI coatings business, so our polymers and our solvents. We took the adhesive and put it in a different segment that Ron will discuss. Combined with the rubber additives business from Tech Specialties and Solutia. We brought these together because they really share a common business model around how you serve formulation companies. The tire formulator and the coatings formulator aren't that vastly different in how do they need support with a wide range of both commodity products but more importantly for us, additives that deliver very critical functionality to the performance of that formulation at a low percentage of the cost. It really requires very deep application, development capability, very deep market insight capability and working through both the OEMs and the formulators to do that. And bringing these businesses together especially with the end-market alignment we had in transportation between coatings and in rubber additives. It's really a great opportunity. We have already seen great advantages from it and in this business model where they're helping us think about some tires opportunities, we're helping them on some of the commercial front, so reinforcing already. So you can see that coatings still would be the largest segment from a revenue point of view but tires now being the second largest.
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