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Eastman Chemical expects to double earnings per share by 2012

Sharon Caskey Hayes • Jan 25, 2008 at 12:00 AM

KINGSPORT — Eastman Chemical Co. expects to double its earnings per share by 2012 through strategic initiatives designed to create value for the company and its shareholders.

In a conference call Friday morning with Wall Street analysts, Eastman Chairman and CEO Brian Ferguson said the company expects its annual earnings per share to rise from about $5 today to $10 by 2012.

And the Kingsport-based company expects earnings per share to increase each year from 2008 to 2012. Ferguson projected Eastman’s 2009 earnings to increase 10 percent to 15 percent from its 2008 results.

Ferguson said Eastman’s earnings per share in 2005, 2006 and 2007 combined, excluding restructuring costs, represent the best three-year period of earnings in the company’s history.

“We have a clear strategy for creating significant value. We’re leveraging the biggest strength we have as a company, which is the capabilities of our people to innovate and execute, and that gives us a lot of confidence that we’ll be successful,” Ferguson told analysts.

“How do we get from $5 per share to $10 a share? Let’s look at it in two buckets,” he said.

In the first bucket, Ferguson lumped the company’s new industrial gasification projects in Texas and Louisiana. Eastman expects to complete the front-end engineering and design process in the second half of 2008, and it hopes to obtain financing for the projects by the end of 2008. The company plans to break ground on the projects in early 2009 and start production by 2011.

Ferguson said he expects the industrial gasification projects to contribute about $2 per share to Eastman’s bottom line by 2012.

In the second bucket, Ferguson lumped Eastman’s growth initiatives in existing businesses, saying those projects should add about $3 per share by 2012.

Growth initiatives are planned for the specialty plastics segment, fibers segments, and performance polymers segment.

In the specialty plastics segment, Eastman expects to convert 50,000 metric tons of polyethylene terephthalate (PET) capacity to copolyester by midyear 2008 and convert another 50,000 metric tons by 2010; increase revenue from cellulose esters used in LCD screens to $100 million in 2009 from about $50 million in 2007; and continue its commercialization of its high performance copolyesters, such as its new Tritan copolyester project, which was launched in November.

With those initiatives combined, Eastman expects to increase operating earnings in the specialty plastics segment to nearly $100 million in 2009, with continued improvement in subsequent years.

Eastman also expects to grow its fibers segment by expanding its acetate tow capacity at its plant in Workington, in the United Kingdom, later this year. And it hopes to grow its fibers business in Asia, and plans to announce an initiative in that region later this year.

And in the performance polymers segment, Eastman plans to complete the sale of its remaining PET operations in Europe by the end of the first quarter and divest the rest of its non-strategic PET facilities outside the United States; shut down another 300,000 metric tons of conventional PET capacity at its South Carolina plant by midyear 2008; complete the shutdown of its less efficient DMT intermediates assets in South Carolina and increase its PTA intermediates capacity by mid-2008; eliminate about $30 million in costs a year at its South Carolina site by mid-2008; and expand its PET capacity through its IntegRex technology at the South Carolina facility by 50 percent by the end of 2008.

All these initiatives combined are expected to provide low single digit positive operating margins in the performance polymers segment for the full year 2008. The segment’s operating margins are expected to approach 10 percent for the full year 2009.

Meanwhile, Ferguson said Eastman hopes to begin licensing its new IntegRex technology for the production of PET. The technology produces more than twice as much PET as the older, larger plants, in a much smaller facility, which uses less energy.

Licensing the technology will provide a new revenue and earnings stream for the company, Ferguson said.

“We are not pursuing a new plant of our own. We are not pursuing a JV (joint venture). We have chosen this licensing route because it creates the best combination of value versus risk,” Ferguson said.

He said Eastman will also boost earnings by repurchasing its shares. The company has already purchased about $400 million worth of shares since early 2007 and plans to ultimately buy back $1 billion in shares.

“We’re pretty excited about the value that we have created as a company and about the additional value that we expect to create as we execute this strategy,” Ferguson said.

The analysts questioned Ferguson and Eastman Chief Financial Officer Rich Lorraine on how an economic recession would impact their plans. Ferguson said a recession is a “bump in the road.”

“Recessions are things that play out in months, and this vision we have described to you plays out over many years,” he said.

“If I think about Eastman having to face a recession, I cannot think of a time in our history when we were better positioned than we are now,” he said.

Lorraine said Eastman’s projections do not include a severe recession.

“But we’ve got alternative scenarios which we’ve built internally to try to get our arms around what might the impact be to the company in the face of a significant recession. The question we ask ourselves — can we continue to invest in our strategic initiatives in the way we’ve planned them, and the timing we’ve planned them, if we do hit that bump in the road? My short answer is, we believe very strongly that we will be able to stay the course, and invest in our strategic initiatives as we go forward. We believe that we can withstand a recession,” Lorraine said.

The announcement comes one day after Eastman posted a 3 percent gain in earnings for the fourth quarter 2007 vs. the same period of 2006. Eastman posted net income of $98 million or $1.21 per share in the quarter vs. $95 million or $1.12 per share in the prior year period.

For the full year 2007, earnings from continuing operations were $5.06 per diluted share excluding one-time items vs. $5.21 per share in 2006.

Ferguson said he expects first quarter earnings per share for 2008 to beat the company’s earnings of $1.19 per share in the first quarter 2007. And despite a possible economic downturn, Ferguson projected the company’s earnings per share for full year 2008 will be similar to its 2007 earnings of $5.06 per share.

“With the major economic uncertainties along with all of the work we’re doing internally, we think that would be a very, very good result,” Ferguson said.

Eastman employs 11,000 people worldwide, including 7,500 in Kingsport.

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