Download Q4 2016 Eastman Chemical Company Earnings Conference Call

Fourth-Quarter and Full-Year 2016 Financial Results
Mark Costa, Board Chair & CEO
Curt Espeland, EVP & CFO
January 27, 2017
Forward-looking statements
During this presentation, we make certain forward-looking statements concerning plans and expectations for
Eastman Chemical Company. We caution you that actual events or results may differ materially from our plans and
expectations. See our Form 10-Q for third quarter 2016 filed with the Securities and Exchange Commission and
our Form 10-K to be filed for 2016 for risks and uncertainties which could cause actual results to differ materially
from current expectations.
Non-GAAP financial measures
Earnings referenced in this presentation are earnings per share and operating earnings that exclude certain noncore costs, charges and gains. “Adjusted Cash From Operations” is cash provided by operating activities
excluding an accelerated fourth quarter 2016 pension contribution. “Adjusted Free Cash Flow” is Adjusted Cash
From Operations minus cash used for additions to properties and equipment. “Net Debt” is total borrowings less
cash and cash equivalents. “Adjusted EBITDA” is net earnings before interest, taxes, depreciation, and
amortization, adjusted to exclude the same non-core items as are excluded from other non-GAAP earnings
measures; “Adjusted EBITDA Margin” is Adjusted EBITDA divided by the GAAP measure sales revenue.
Reconciliations 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 2016 financial results
news release available in the “Investors” section of our website, in the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” sections of the Forms 10-K and 10-Q filed with the SEC for the
periods for which non-GAAP financial measures are presented, and in the Appendix to these slides. Projections of
future earnings also exclude any non-core, unusual, or non-recurring items.
2
2016 Highlights
Specialty products volume growth in Advanced Materials and Additives & Functional Products
Disciplined cost management with strong productivity gains
Strong free cash flow generation
Improved debt profile
Increased dividend for 7th consecutive year
Returned >$400 million to stockholders
3
Significant progress on organic growth initiatives
TritanTM in
medical
applications
4
Saflex®
acoustic
interlayers
Eastman AerafinTM
low odor adhesives
Next-generation
Crystex®
Eastman Visualize™
material for displays
TetrashieldTM
polyester coatings
4Q 2016 financial results Corporate
($ in millions, except EPS)
4Q16
$2,188
Revenue decreased primarily
due to lower selling prices and
lower Fibers sales volume
more than offsetting higher
sales volume in the other
segments.

Operating earnings declined
as an increase in Chemical
Intermediates and Advanced
Materials was more than
offset by declines in Fibers
and Additives & Functional
Products. Operating earnings
were positively impacted by
cost reduction actions taken
throughout the year.
4Q15
$2,225
$336
$343
(2%)
change
$1.59
$1.51
2% volume/mix effect
(3%) price effect
(1%) FX effect
Sales revenue
5

Operating earnings
EPS
FY 2016 financial results Corporate
($ in millions, except EPS)
FY16

Revenue decreased primarily
due to lower selling prices and
lower Fibers sales volume
more than offsetting higher
sales volume in the other
segments.

Operating earnings declined
as an increase in Advanced
Materials was more than
offset by declines in the other
segments. Operating earnings
were positively impacted by
cost reduction actions taken
throughout the year.
FY15
$9,648
$9,008
$1,717
$1,534
(7%)
change
$7.28
$6.76
1% volume/mix effect
(7%) price effect
(1%) FX effect
Sales revenue
6
Operating earnings
EPS
FY 2016 financial results Advanced Materials
($ in millions)
 Sales revenue increased due to higher sales
FY16
$2,457
FY15
$2,414
$471
$409
2%
change
 Operating earnings increased primarily due
5% volume/mix effect
(3%) price effect
Sales revenue
7
volume of premium products including
Eastman TritanTM copolyester, Saflex®
acoustic interlayers, and performance films.
This was partially offset by lower selling
prices, primarily for other copolyesters,
attributed to lower raw material and energy
costs.
to higher sales volume, improved product
mix of premium products, and lower unit
costs due to higher capacity utilization.
Operating earnings
Advanced Materials: Sectoral leverage combined with diversity of end markets and geographies
enable sustainable growth
2017 growth drivers
2016 revenue by end-use market
Other
 Strong GDP+ volume growth
Electronics
 Strong growth of innovative products, driving product
mix improvement
3%
Transportation
6%
9%
 Fixed cost leverage
Personal Care /
Health & Wellness
33%
15%
 Offset partially by selling prices catching up to higher
raw material costs and a stronger dollar
18%
Consumables
2014-2016 operating earnings
and operating margin1,2
2014-2016 revenue1
2016 revenue by
product line
Consumer Durables
16%
Building &
Construction
2016 revenue by region
Operating earnings
$2,378
$2,414
$2,457
Performance
Films
Operating earnings margin
$471
$409
$293
12%
17%
19%
Specialty
Plastics
16%
32%
50%
34%
5%
Interlayers
2014
8
2015
2016
(1)
(2)
2014
2015
2016
Dollars in millions
“Operating margin” is operating earnings divided by sales revenue
26%
37%
FY 2016 financial results Additives & Functional Products
($ in millions)
FY16
$3,159
FY15
$2,979
$611
$660
lower selling prices more than offsetting
lower raw material and energy costs and
higher sales volume.
1% volume/mix effect
(7%) price effect
9
selling prices, primarily attributed to lower
raw material and energy costs. The impact
of the lower selling prices was partially offset
by higher sales volume across the segment.
 Operating earnings declined primarily due to
(6%)
change
Sales revenue
 Sales revenue decreased due to lower
Operating earnings
Additives & Functional Products Well positioned for GDP+ growth with attractive market
footprint and diverse geographic profile
2017 growth drivers
2016 revenue by end-use market
 Solid GDP+ volume growth
 Diversified application portfolio, well aligned with macro
trends
 Growth platforms that accelerate product mix
improvement
Building & Construction
13%
Food, Feed, &
Agriculture
 Advantaged cost position that supports profitable growth
 Offset partially by selling prices catching up to higher raw
material costs and a stronger dollar
Consumables
23%
Industrial Chemicals
& Processing
10%
8%
Energy, Fuels, & Water
6%
4%
30%
4% 2%
Personal Care / Health & Wellness
Consumer Durables
2014-2016 Operating earnings
and operating margin1,2
2014-2016 revenue1
$3,159
2016 revenue by
product line
Operating earnings margin
$660
$611
Coatings & Inks
Additives
20%
20%
2016
(1)
(2)
2014
2015
38%
35%
37%
21%
21%
Adhesives
Resins
10
2016 revenue by region
Other
24%
$539
2015
Other
Operating earnings
$2,979
$2,640
2014
Transportation
2016
Dollars in millions
“Operating margin” is operating earnings divided by sales revenue
21%
7%
17%
Tire
Additives
FY 2016 financial results Chemical Intermediates
($ in millions)
 Sales revenue decreased due to lower
FY16
$2,811
FY15
$2,534
$294
(10%)
change
$171
2% volume/mix effect
(11%) price effect
(1%) FX effect
Sales revenue
11
Operating earnings
selling prices, partially offset by higher sales
volume of olefin-based and functional
amines products. The lower selling prices
were primarily attributed lower raw material
and energy costs, as well as competitive
pressures due to lower oil prices for most of
the year.
 Operating earnings decreased due to lower
selling prices, which more than offset lower
raw material and energy costs, higher sales
volume, and the reduced impact of
commodity hedge losses on raw material
costs.
Chemical Intermediates Diverse end-markets, with focus in North America
2017 growth drivers
2016 revenue by end-use market
Personal Care /
Health & Wellness
 Solid end-market demand
 Assume olefin spreads stable
Food, Feed,
& Agriculture
 Net benefit from reduction in commodity hedges
18%
10%
Building &
Construction
10%
 Operational excellence
9%
Consumables
26%
Energy, Fuels, & Water
8%
5%
Consumer Durables
Transportation
2014-2016 adj. operating earnings
and operating margin1,2
2014-2016 revenue1
5%
2%
Electronics
2016 revenue by
product line
Industrial Chemicals
& Processing
7%
Other
2016 revenue by region
Operating earnings
$3,034
$2,534
$360
15%
$294
$171
12%
2014
12
12
12
2015
2016
(1)
(2)
Functional
Amines
Intermediates
Operating earnings margin
$2,811
2014
10%
2015
7%
2016
Dollars in millions
“Operating margin” is operating earnings divided by sales revenue
20%
13%
69%
12%
Plasticizers
65%
6%
FY 2016 financial results Fibers
($ in millions)
FY16
FY15
$1,219
$992
$390
$310
(19%)
change
13
lower sales volume and lower selling prices,
particularly for acetate tow. Lower acetate
tow sales volume was primarily due to
reduced sales in China.
 Operating earnings declined due to lower
sales volume and lower selling prices,
partially offset by lower operating costs
resulting from recent actions and lower raw
material and energy costs.
(13%) volume/mix effect
(6%) price effect
Sales revenue
 Sales revenue decreased primarily due to
Operating earnings
2016 cash flow and other financial highlights
$909
million
adjusted free cash flow
Total debt
reduced by
$414
million
Returned
$417
million
to
stockholders:
$272
million
dividend,
$145
million
share
repurchases
14
Tax rate
~21%
Refinanced public debt at attractive interest rates
US Dollar Denominated Debt
US Dollar Denominated Debt Repaid Early
Euro Denominated Debt
Term Loan
1,200
1,000
$ - millions
800
€200 Million Addition to 2023 Notes
1.5% interest rate
600
€500 Million Ten Year Notes
400
1.875% interest rate
200
0
 Refinanced notes due 2017 and 2018, and retired higher interest rate debt, all while retaining pre-payment flexibility to achieve
deleveraging goals
 Reduced weighted average cost of fixed-rate debt from 4% to 3.7% and increased weighted average maturity from 10 to 11 years
 Results in net savings of ~$20 million in 2017 with further savings in following years
15
Disciplined cost reduction initiatives in challenging business environment
2017 projected gross productivity gains
~$200 million
ENTERPRISE
 Labor cost management
 Site optimization
Supply Chain
20%
MANUFACTURING
Enterprise
40%
 Labor cost management
 Energy efficiency
 Yield improvements
Manufacturing
40%
SUPPLY
CHAIN
 Indirect and other procurement savings
 Sales & Operation Planning optimization
Expect cost reduction actions will contribute ~$0.50 to 2017 EPS
16
16
Full-year 2017 outlook
Growth drivers
Near-term headwinds
 Robust portfolio of specialty businesses well
positioned for growth
 Uncertain global economic growth
 Strong growth in high margin, innovative
products expected to accelerate earnings growth
 Volatile raw material and energy prices
 Growth in attractive niche end-markets within
transportation, building & construction,
consumables, and consumer durables
 Stronger dollar
 Challenges in Fibers
 Leveraged to attractive disruptive macro trends
 Aggressive cost reductions
 Net benefit from reduction in hedges
Expect adjusted 2017 EPS to be 8 to 12 percent greater than adjusted 2016 EPS
Expect 2017 free cash flow to be ~ $1 billion
17
Summary
 Strong portfolio of specialty businesses
 Continue to drive organic growth, innovation and product mix
improvement
 Use all available levers in current environment
 Deploy free cash flow to pay an increasing dividend, continue delevering, and accelerate share repurchases
 Well positioned for long-term earnings growth and strong free cash
flow generation
18
Appendix
Corporate:
Diversity of end markets, geographies, and customer base enable more consistent
and sustainable earnings and cash flow growth
2017 Growth Drivers
2016 Revenue by End-use Market
Other: 2%
 Solid portfolio of specialty businesses well positioned
for growth
Electronics
Energy, Fuels, & Water
3%
Transportation
4%
20%
 Strong growth in high margin, specialty products
expected to accelerate earnings growth
6%
Food, Feed & Agriculture
Consumer Durables
7%
 Attractive key end-markets growing: transportation,
building & construction, consumables
7%
16%
Consumables
 Aggressive cost reductions
Personal Care / Health &
Wellness
10%
 Net benefit from reduction in hedges
14%
Industrial Chemicals
& Processing
11%
Building & Construction
Tobacco
2014-2016 Operating earnings
and operating margin1,2
2014-2016 Revenue1
2016 Revenue by
product line
2016 Revenue by Region
Adjusted operating earnings
$9,527
$9,648
Adjusted operating earnings margin
$9,008
$1,613
$1,717
$1,534
Fibers
Additives &
Functional
Products
11%
33%
17%
18%
27%
2014
20
2015
2016
(1)
(2)
2014
2015
2016
Dollars in millions
“Operating margin” is operating earnings divided by sales revenue
24%
28%
17%
Advanced
Materials
25%
45%
Chemical
Intermediates
6%
Adjusted EBITDA to Net Earnings reconciliation
(Dollars in millions, unaudited)
Net Earnings from Continuing Operations Attributable to Eastman
2016
$
Plus:
Depreciation
Amortization
Net interest expense
Provision for income taxes
EBITDA
412
168
255
199
$
Add back:
Mark-to-market pension and other postretirement benefit plans loss (gain), net
Asset impairments and restructuring charges (gains), net
Acquisition integration and transaction costs
Cost of disposition of claims
Gain from sale of Primester
Debt extinguishment
1,900
76
45
9
5
(17)
85
Adjusted EBITDA
$
2,103
Sales
$
9,008
Adjusted EBITDA Margin
See Form 8-K filed January 26, 2017 for 2016.
21
866
23%