Feb 1, 2011
Executives
James Rogers - Chairman, Chief Executive Officer and President Curtis Espeland - Chief Financial Officer and Senior Vice President Gregory Riddle - Director of Investor Relations
Analysts
David Begleiter - Deutsche Bank AG Jeffrey Zekauskas - JP Morgan Chase & Co Luisa Hermann - Dahlman Rose Frank Mitsch - BB&T Capital Markets Andrew Feinman - Iridian Asset Management Edlain Rodriguez - Gleacher & Company, Inc. Kevin McCarthy Paul Mann - Morgan Stanley P.J.
Juvekar - Citigroup Inc
Operator
Good day, everyone, and welcome to the Eastman Chemical Co. Fourth Quarter and Year End 2010 Earnings Conference Call.
[Operator Instructions] This call is being broadcast live on the Eastman website, www.eastman. com.
We will now turn the conference over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations.
Please go ahead, sir.
Gregory Riddle
Okay. Thank you, Candice, and good morning, everyone, and thanks for joining us.
On the call with me today are Jim Rogers, Chairman and CEO; and Curt Espeland, Senior Vice President and Chief Financial Officer. Before we begin, I'll cover three items.
First, during this call, you will hear certain forward-looking statements concerning our plans and expectations for first quarter and full year 2011. Actual results could differ materially from our plans and expectations, certain factors related to future expectations are or will be detailed in the company's fourth quarter and full year 2010 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2010 and the Form 10-K to be filed for full year 2010.
Second, except when otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures, including earnings per share, operating earnings and cash flows from operating activities that exclude asset impairment and restructuring charges, early debt extinguishment costs and the impact of the adoption of amended accounting guidance for transfers of financial assets. Our reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including the description of the asset pairs restructuring charges, debt extinguishment costs and adoption of amended accounting guidance, are available in our fourth quarter and full year 2010 financial results news release and the tables accompanying the release.
Lastly, we've posted slides that accompany our remarks for this morning's call on our website at www.investors. eastman.com in the Presentation and Events section.
With that I'll turn the call over to Jim.
James Rogers
Okay. Thanks, Greg, and good morning, everybody.
Thanks for joining us. I'm going to begin on Page 3.
And 2010 was a tremendous year for Eastman Chemical Co. Our solid core business has demonstrated their earnings potential and established a new level of earnings performance for the company.
Volumes returned for the strengthening global economy and in a number of areas we gained market share due to innovative products. We continue to make progress on our growth initiatives including the acquisition of Genovique Specialties, manufacture of non-phthalate plasticizers in May of 2010, completing an acetate tow expansion in Korea during the first quarter which increased our capacity there by 15% and selling out our first Tritan Copolyster resin line a year ahead of schedule.
Our free cash flow was over $400 million in 2010, and I remind you that we subtract out our dividend from that. And just yesterday we completed the sale of our PET business.
Moving on to Slide 4, and as I normally do on these calls, I'll take just a minute to review how we did against some of the commitments we made to you. In October, we told you that we expected our fourth quarter EPS to be between $1.40 and $1.50 and we came in at the low end of the range and I'll talk more about that in a minute.
For the year, on the last call, we indicated EPS would be above $7 for the year and we were slightly below that. On cash flow, we said we would generate more than $300 million, and as I said, we came in at over $400 million with the outperformance mostly due to the timing of a pension contribution that Curt will cover.
Earlier in the year, we said we would review strategic actions for our PET business and you know the outcome there. And we committed to be in disciplined with our capital allocation.
If you look at how we put capital to work through the year, across the four buckets I've talked about, I hope you would agree we've been disciplined. Overall, 2010 was a terrific year for Eastman and it has positioned us well for profitable growth going forward.
Now turning to Slide 5. Before I go into a discussion of our fourth quarter performance, I want to remind you that Performance Polymers results are presented as discontinued ops.
So you won't see them in our numbers in these slides or in the tables that accompany our release last night. It also means that the residual cost from the business, those costs that stay with Eastman after the sale, have been allocated to the remaining segments.
These costs were approximately $25 million for full year 2010 and we expect they will be approximately $20 million in 2011. And I expect us to grow into these costs in the next year or so.
Specifically, on the fourth quarter performance, year-over-year revenue increased due to higher volume and higher selling prices. These factors drove the improvement in operating earnings in EPS.
Sequentially, revenue declined by 3%, mainly due to a 6% decline in volume due to normal seasonality and some destocking. Operating earnings and EPS declined sequentially due to the lower volume, higher cost for growth and business development initiatives and higher raw material and energy cost.
In a number of cases, we've pulled cost associated with growth forward due to demand returning earlier than expected. There are also a few other factors impacting fourth quarter results that combined had a negative impact on the fourth quarter.
We had some asset write-offs and other charges that weren't fully anticipated. These were partially offset by the last payment from our insurance settlement related to the first quarter power outage at the Longview, Texas facility.
And the EPS from continuing operations were reduced by $0.11 a share due to the non-deductibility of early distributions under the executive deferred compensation plan. There are a lot of moving parts in the fourth quarter, I know, but when you look at the underlying performance, I believe we had a solid quarter, our second highest fourth quarter in fact.
Moving next to the full year on Slide 6. Sales revenue increased by 33% due to higher sales volume and higher selling prices.
Volume increased as demand strengthened in a number of our key end markets including packaging and durable goods, and as benefits from our growth initiatives throughout the company. Selling prices increased mainly due to higher raw material and energy costs.
Operating earnings increased substantially for the year. Primary driver there was the higher sales volume and the resulting higher capacity utilization which led to lower unit costs.
In addition, our higher selling prices more than offset higher raw material and energy costs for the year. And our operating margin of 15% was about 300 basis points higher than 2009.
When I talk about establishing a new level of earnings performance, it begins with our performance in 2010. Our EPS of $6.96 is a new record for the company and we all know records are meant to be broken.
I'll get more into that when I discuss our guidance for 2011 in a few minutes. Moving next to the segments starting with Fibers on Slide 7.
Fibers delivered yet another very strong year in 2010. This is the sixth year out of the last seven that they have reported year-over-year earnings growth.
For the year, revenue increased due to higher volume and a favorable shift in product mix, both of which were attributed to strengthened demand due to global economic recovery. Looking forward to 2011, we expect our selling prices will mostly offset higher raw material and energy costs, particularly higher wood pulp cost and they'll also benefit from the additional acetate tow capacity in Korea.
As a result, we expect operating earnings will be about 5% higher in 2011 compared with 2010, putting Fibers on track for continued year-over-year earnings growth. Next is CASPI, starting with their fourth quarter results.
Sales revenue increased year-over-year due to higher volume and higher selling prices. Sequentially, sales revenue declined by 7% mainly due to lower sales volume which declined due to seasonality and some destocking particularly of specialty products.
Operating earnings declined both year-over-year and sequentially for a few reasons. First, higher raw material and energy cost were only partially offset by higher selling prices during the quarter, and we expect our recent pricing actions to offset the rest of the raw market increase.
In addition, they had higher costs related to growth and business development initiatives as demand has recovered quicker than we expected. This is an example of where we pulled forward some costs to accelerate our growth initiatives.
Looking at the full year, CASPI established a new level of earnings performance, sales revenue increased mainly due to higher sales volume and higher selling prices, operating earnings were $299 million due to the higher sales volume and resulting higher capacity utilization which led to lower unit cost and higher selling prices. Looking forward to 2011, CASPI is on track for another terrific year and we expect operating earnings will be 5% to 10% higher in 2011 compared with 2010 with higher volumes and as they benefit from the olefin cracker restart.
PCI is on Slide 9. In the fourth quarter, sales revenue increased year-over-year due to higher selling prices and higher sales volume.
The higher selling prices were in response to higher raws and energy costs. The higher volume included growth in our Heritage and acquired plasticizer product lines.
Operating earnings increased due to higher selling prices more than offsetting higher raw material and energy costs and higher sales volume. Looking at the full year, operating earnings increased substantially versus the trough level of 2009.
The reasons for the increase were the same as those in the fourth quarter. Looking ahead to 2011, they are well positioned for a very strong year.
The olefin derivative markets remain tight as we start the year, plus they will benefit from the olefin cracker we restarted in December, particularly, with propylene prices recently spiking to levels similar to those we saw in the first part of 2010. As a result, we expect 2011 operating earnings will be greater than $250 million for this business.
Moving next to Specialty Plastics on Slide 10. They had a solid fourth quarter with revenue increasing 26% due to higher sales volume and higher selling prices.
The higher sales volume was attributed to strength in demand for specialty packaging in consumer and durable goods and a positive impact of growth initiatives for copolyester in Eastman Tritan copolyester product lines. Operating earnings increased primarily due to higher sales volume and a resulting increased capacity utilization which led to lower unit costs.
Looking at full year 2010, Specialty Plastics made terrific progress and as ahead of the schedule, we had set for them, and the story is very straightforward. Demand came back quicker than we thought and the growth initiatives are ahead of schedule.
Sales volume was up 32% year-over-year, that's about 15% above that's previous peak volumes set back in 2001. Operating earnings of $93 million were the highest in over a decade.
For 2011, we expect our operating earnings to be slightly higher than in 2010 for a few reasons. One, demand has increased substantially so expect volume will increase, but because Specialty Plastics is capacity constrained in a number of areas, we expect the growth will be at the lower end of their 6% to 8% historical range.
The solution for this is capacity expansions, but they won't be online until 2012. Also they're facing a substantial increase in paraxylene cost primarily due to what is happening with cotton as cotton prices have increased more clothing with polyester fibers being produced, meaning more paraxylene is being used and therefore, paraxylene is tight globally leading to higher prices.
Just in January alone, paraxylene increased 35% and this is on top of a 25% increase in the fourth quarter compared with a third quarter. Since this business mainly sells on product performance or other specialty attributes, this kind of cost increase is extremely difficult to cover in the short term.
We therefore believe only a slight increase in operating earnings in 2011 versus 2010 should be expected and then in 2012, they will have more capacity to meet strong demand and we will be back on an earnings growth pattern. I'll talk about the regions next and throw them on Slide 11.
As we demonstrated in the third quarter, we are seeing revenue growth around the world which is building our earnings growth. Our highest revenue growth in 2010 was outside the U.S., in Europe and Asia.
Previously, we've had about 55% of our revenue in the U.S. and Canada and 45% outside U.S./Canada.
With our portfolio restructuring and faster growth outside the states, this ratio is now closer to 50/50, and the change is even more dramatic with operating earnings instead of the 50/50 split we previously had in 2010, approximately 60% of our operating earnings were outside the U.S. and Canada.
Our geographic diversity both for revenue and operating earnings is a source of strength for the company. I'll conclude this morning with our earnings outlook for first quarter and full year 2011.
As we begin the year, there are clear signs that the global economy continues to strengthen, but we know we'll face some headwinds like raw material and energy costs are expected to continue being volatile. I mentioned paraxylene, when discussing the outlook for Specialty Plastics, higher wood pulp costs impact not just Fibers but products lines in CASPI and Specialty Plastics.
And it isn't just the raw materials and energy costs go higher, but also the potential for them to drop quickly makes pricing more difficult. We will also have higher pension expense this year and we are pulling forward costs as we accelerate our growth initiatives in response to demand being stronger than we expected at this point.
When I put it all together, we expect first quarter 2011 earnings from continuing operations to be between $1.75 and $1.85 per share, and this would be attractive growth both sequentially and year-over-year. And for the full year, we expect EPS from continuing operations will be slightly more than 10% above 2010.
Our focus is on delivering year-over-year earnings growth on a consistent basis and we are well positioned to do that in 2011 and beyond. Now it comes to my favorite part of the call, and that doesn't mean I don't enjoy your questions, I just like this opportunity to talk about one of our execs and so now is when I shine the spotlight on one of those.
So let me mention one of our youngest executive team members, Dr. Greg Nelson.
Greg went to the University of Alabama, Undergrad, so yes, he still pays attention to college football. And he received his PhD from Emory in analytical chemistry.
And that's a good thing because Greg is our Chief Technology Officer, and as such, leads an extremely talented team of scientists and business people in R&D, our licensing group, Six Sigma and most recently, IT. We've made great progress in all of these areas, but with Investor Day coming up soon, I wanted to particularly compliment the progress we've made in our innovation pipeline.
He'll be able to speak about that on March 1 and even have a few samples of new products for show and tell. One of my favorites is a product that goes into the building and construction marketplace, but I don't want to give too much away so I'll stop there.
And with that, I'll turn it over to Curt.
Curtis Espeland
Thanks, Jim, and good morning, everyone. I'm starting on Slide 14 with the review of our 2010 financial highlights.
Cash from operations for 2010 was $575 million. This includes a reduction of $200 million due to the adoption of amended accounting guidance in the first quarter impacting our accounts receivable securitization program.
Excluding that, cash from operations was $775 million, slightly above the $758 million we reported in 2009. Working capital, including the adoption of accounting guidance, increased by $166 million.
This mainly reflects increases in our receivables and inventories, which is consistent with our sales revenue for the year increasing by 33% and with higher raw material and energy costs. In December, all participants in our deferred compensation plan had amounts distributed early under a provision of the plan triggered by certain participants electing early withdrawal.
This resulted in a $37 million reduction in employee liabilities and a use of operating cash flow in fourth quarter 2010. In addition, there was an $8 million increase to the provision for income taxes for the non-deductible portion of these distributions.
This equated to the $0.11 per share impact on fourth quarter and full year results. Capital expenditures for the year were $243 million.
This is above our previous expectation of approximately $225 million for the year as CapEx for the fourth quarter of $110 million reflected the acceleration of the growth efforts we are funding. Free cash flow for the year was $405 million.
Our previous projection of over $300 million of free cash flow for the year included a planned $100 million pension contribution in the fourth quarter at the same time that the PET transaction was anticipated to close. With the PET transaction closing yesterday, we held the pension contribution until the first quarter of 2011 primarily for tax reasons.
All in all, a really great performance for the company. We used these buckets here on Slide 15 throughout 2010 to describe how we are allocating capital.
In the build bucket, as I just mentioned, our capital expenditures were $243 million in 2010. We are continuing to look at value-creating ways to organically grow our businesses, which I'll cover in more detail in a minute.
In the joint venture and acquisitions bucket, we completed the acquisition of Genovique back in May, and in March, we started up the acetate tow facility in Korea that we acquired from SK. During the year, we also acquired a small specialty polymers manufacturing facility and recently entered into a cellulose diacetate compounding joint venture, both of which are in China.
We continue to evaluate multiple opportunities which are in various stages of our joint venture and acquisition pipeline. While not as robust as I would prefer, the M&A pipeline is improving and I would anticipate more activity in this bucket over the course of the next year.
And we have put cash to work in the owners bucket by returning cash to stockholders through both $127 million in dividends and $280 million in share repurchases. We also used $115 million in cash to restructure our debt profile to be more competitive.
Going forward, we'll continue to be disciplined in allocating cash across the best opportunities in each of these buckets. Let me expand on three of these buckets a little further.
Moving to Slide 16. When thinking about the build bucket going on to 2011, a couple of factors we've been looking at.
First, given the strong utilization rates expected with our manufacturing assets, we will spend infrastructure capital at more normalized levels, typically around $200 million a year. Secondly, we will significantly increase growth capital, which was only about $60 million in 2010.
The capital expenditures related to growth are across a variety of projects in each of the businesses. The common characteristics of each of these capacity additions is that they are driven by strong demand growth in attractive markets where Eastman has a competitive advantage and they all have attractive returns well above our cost of capital.
Here are five growth projects we're working on. Starting with the CHDM capacity addition.
CHDM is the monomer used in the manufacture of copolyesters for the Specialty Plastics segment. We expect the 25% increase in CHDM capacity to be online in two phases, well, with the first in mid-2011 and the second in 2012.
Next is the Tritan Copolyester capacity addition. Our second copolyester resin facility is expected to be online the beginning of 2012.
Also on Specialty Plastics is cellulose triacetate, or CTA, which is used in the LCD industry for the manufacture of polarizer films. We are expanding CTA capacity by 70% with the new capacity expected to be online at first quarter 2012.
We are also expanding our 2-EH capacity at our Longview, Texas site. This expansion supports the PCI segment's efforts in the plasticizers market, particularly our non-phthalate plasticizers.
We completed a small debottleneck in the fourth quarter and we have an additional expansion expected to be online in mid-2012. Lastly, we are once again re-expanding our Regalite Hydrocarbon Resin capacity.
We expanded our Middleburg facility 3x since 2006. This latest expansion will add approximately 20% to current capacity and is expected to be online the second half of 2011.
As a result, I expect that capital expenditure run rate of $110 million in the fourth quarter of 2010 will continue throughout 2011. In addition to using cash to grow the company, we remain committed to returning cash to stockholders.
In December, our board authorized a 7% increase to our dividend to $0.47 per share. This is the first dividend increase for the company since 1996; although, we have paid a strong dividend every quarter since we became a public company in 1994.
The increase in the dividend reflects the board's confidence in our ability to deliver consistently strong earnings. It also reflects our strong commitment to provide attractive returns to stockholders.
And recognizing that the dividend is a board decision, this increase is consistent with the philosophy of growing the dividend of the company as earnings expectations increased. We also had $280 million of share repurchases in 2010, of which $212 million was repurchased in the fourth quarter.
This contributed to a $1.8 million net reduction in actual outstanding shares of Eastman. You do not see the full benefit of these repurchases in the fourth quarter diluted shares as many of the repurchases occurred late in the year and we saw an increase in the dilutive effect of stock options and other share-based compensation with our increasing stock-price.
We start 2011 with a fully diluted share count of 72.8 million shares with 70.7 million outstanding. In addition, as of the end of year, we have 116 million remaining on our current authorization which we expect to use during the course of this year.
During the fourth quarter, we restructured our long-term debt to favorably adjust maturities and reduce our future interest costs. We repurchased $500 million of our debt in a tender offer with maturities mainly in 2027 and 2024 timeframe with coupons above 7%.
We recognized a pretax charge of $150 million in the fourth quarter for the early debt retirement. And we issued new debt with five and 10 year maturities and coupons of 3% and 4.5% respectively.
One of the reasons it made sense to restructure our debt this way is illustrated on the chart on Slide 18. Although we had an attractive debt letter, we were left competitive because we had not taken advantage of the lower rates in the market due to the long duration of our debt letter.
You can see with that with these transactions, we have moved meaningfully to the left side and are now much more competitive on borrowing cost relative to our peers without materially impacting our average debt maturities. As a result, the combined impact of these transactions results in an ongoing reduction and interest expense of $17 million or roughly $0.16 per share.
This is another good example of being opportunistic with the debt bucket that creates value and improves our competitive position. Next on Slide 19 is a discussion of the PET transaction.
As Jim mentioned, yesterday we closed the sale of our PET business to DAK Americas. Cash proceeds were approximately $600 million before tax and working capital adjustments.
The cash tax impact of this transaction is approximately $100 million which will negatively impact operating cash flows in 2011 even though it related to the transaction. We recognized a restructuring charge of $18 million in the fourth quarter of 2010 for severance and pension curtailment charges in conjunction with the sale.
In addition, there are some residual costs that stay with Eastman after the sale. These were approximately $25 million in 2010 and are expected to be approximately $20 million in 2011.
These costs represent corporate costs that are allocated to the remaining segments. Since this is the first time we have reported the Performance Polymers segment as a discontinued operation, I thought it would useful to discuss our fourth quarter results before and after such treatment.
If it had been treated as a continuing operation, the Performance Polymers segment in the fourth quarter would have reported $5 million in operating earnings, excluding asset impairments and restructuring charges. This $5 million performance would be net of the $7 million in allocated costs to the business.
These results were better than we had expected primarily due to higher sales volume and higher selling prices. Now moving to discontinued operations.
When you adjust these results for $7 million in residual costs that are now reallocated to other segments, $4 million in asset impairment and restructuring charges directly attributable to the discontinued operations and some discrete tax events, you see the impact of discontinued operations was $0.02 per share in the fourth quarter. This is the same logic that is applied to the other historical reported periods.
With this transaction now closed, I want to thank again the employees at Carolina who have made significant improvements to the site and to the business over the past several years and we wish them the best of luck going forward. Turning next to corporate items here on Slide 20 to help with expectations for 2011.
Depreciation and amortization is expected to be approximately $265 million. It is expected to be lower than 2010 due to the PET divestiture, but this is offset some by the capital expenditures for growth initiatives.
Pension expense is expected to be about $50 million higher in 2011 versus 2010. This is primarily due to the lower discount rate, although the increase in interest rates toward the end of 2010 reduced this impact somewhat.
And we will make the $100 million pension contribution that we originally were going to make in the fourth quarter of 2010 during the first quarter of this year. We expect the effective tax rate will continue to be approximately 33%, reflecting the higher percentage of our assets that are located in the United States.
And then putting all these pieces together, including an increase in capital expenditures and the $100 million pension contribution, we expect to generate approximately $100 million of free cash flow in 2011. This expectation excludes any impact that PET divestiture will have on operating and free cash flows.
So lastly, I'd like to once again invite you to join us at our 2011 Investor Day in New York, scheduled the morning of March 1. We are holding it at the Sentry Center, which is conveniently located on 3rd Avenue between 45th and 46th Streets.
Our broader management team will be well represented, and this year, we'll have a display area so you can learn a little bit more about our product lines and our growth initiatives. I look forward to seeing you there and with that, I'll turn it back over to Greg.
Gregory Riddle
Okay, great. Thanks, Curt.
And this concludes our prepared remarks. Candice, we are ready for our questions.
Operator
[Operator Instructions] And we'll go first to David Begleiter with Deutsche Bank.
David Begleiter - Deutsche Bank AG
Jim, with PET closed and the cash balance high, can you update us on your thoughts on share of buybacks versus acquisitions?
James Rogers
Yes, sure. I mean, it's something we've talked a lot about in the past.
And I think I've said in the past, it's one of the ways we believe we can differentiate ourselves so we're just smart about how we put our cash to work. So we're still in the frame of mind that we should be using all those buckets.
As I look at it, having sold PET, you see we got a little cost that's stuck to our ribs -- very much when we'd be doing more acquisitions. But they've got to be smart and we can't over pay and so you ought to expect us to continue on that at a measured pace.
Odds are that will not be the only use of cash we want do, we want to use the other buckets. You saw what we did in the debt bucket, I imagine we'll fairly quiet in that one.
The equity bucket, with the dividend and with buyback, seems like a prudent way to use a portion of the cash as well. I don't want to get nailed down on a particular number.
You know the board is the one who approves dividend increases and share buyback increases. But when I look across all four buckets, I know the CapEx is going to go up.
I feel very confident we'll be able to do some acquisitions, they may not be real big, they maybe more like Genovique, maybe a little larger, we'll see. And I would guess we'll continue to buy back stock.
David Begleiter - Deutsche Bank AG
And Jim, just in terms of the capacity constraints, at least by quarter, which quarters are you most constrained? Is it Q2 and Q3?
And besides some Specialty Plastics, any capacity constraints in PCI or CASPI?
James Rogers
Yes in all. Yes everywhere because the demand has been so strong.
So by just starting CASPI in the coating side of the specialties, not a constraint there and we hope that we're never constrained there because there's a number of products we're the only ones in the world who make it. But when I get to more the resin side, the old Adhesives business, there we've had some constraints and that's where you've seen this expanding capacity.
When I look at PCI, we've been constrained on 2-EH, which is a precursor we need for plasticizers, so that's another place you see us adding capacity. Specialty Plastics, we've talked a lot about.
Just on that, I mean, if we'd had perfect foresight, we would've started these projects sooner, but I think we've mentioned it was really tough in early '09 to go to your board of directors and say, "Let's start spending a lot on money on capital. " And our industry is such that it takes a while to get it in the ground and running.
Good news is that's true for everybody, so the markets have tightened up and probably through '11, we'll still be able to do fairly well on pricing versus raws and energy.
Operator
Now to Frank Mitsch with BB&T.
Frank Mitsch - BB&T Capital Markets
One thing you didn't mention though is that you guys, on the forecasting front, aren't all that sharp. I mean, you originally guided 2010 at $4.35, you came in at 7%.
Now you're saying that you're going to get 10% above in 2011 or slightly above 10% in 2011. Jim, you listed a heck of a lot of tailwinds here.
If you have to figure out where you were likely to be wrong on your forecast, where are you guessing that it'll be? I mean, on the buying side, you guys are killing it in Europe and elsewhere.
Where can you be surprised on your outlook?
James Rogers
Yes, where is our upside, because we did say better than 10% percent. I might remind people that's assuming that we don't find good ways to put that cash to work.
As I look across the businesses, I guess I don't want to kind of go line by line or business by business, but to the extent the volumes come in strong and to the extent that the raw materials don't screw us over somehow in terms of having a lot of volatility or really shooting up rapidly, we'll do a little better on spread than maybe we thought. But here we are at the beginning of February, looking out the rest of the year, we just had a smash-up year, and in the past, in our industry and for Eastman, we typically went down after a big year like that, and here we're saying we're confident we'll do better than 10% up.
And like I say, if we can put the cash to work, I think we'd do even better than that. I don't know.
Curt, do you want to add anything?
Curtis Espeland
No. I'd agree.
And as we've talked about some of the upside of additional volume will come will come as we put more steel on the ground and get that capital and growth spending.
James Rogers
That's not going to kick in to '12, '13. So we'll talk more about it here in a few weeks when we get to Investor's Day, Frank.
But we're not just bullish on 2011. I mean, we see things down the road for '12 and '13 that we'll be able to talk more about that.
So we want to keep this high rate of earnings growth going.
Frank Mitsch - BB&T Capital Markets
As I look at the CASPI forecast, you have it up 5% to 10% in 2011. I'm not sure a lot of people would say that 2010 was a blowout year in terms of coatings.
What sort of forecast -- what sort of coatings recovery are you forecasting to have that just up 5% to 10% in 2011?
James Rogers
Well, it's not just coatings. There's other parts of the business.
But maybe the industry didn't have a blowout year, but we sure had a record year, a really strong year for CASPI. Frank, we're trying to be prudent in terms of how we're looking at the different segments.
There are some places that are capacity constrained. There are specialties that when the raws move, you don't always get the price right away and that's what happened to CASPI some in the fourth quarter.
Although, I think I mentioned as I look through January, we can see that we do have pricing in place to make up that shortfall that hit us in the fourth quarter in CASPI. So I mean, overall, I'm bullish but I'm not trying to call some big uptick for the coatings marketplace.
Frank Mitsch - BB&T Capital Markets
You did mention that there was some growth spending, additional growth spending in the fourth quarter that may have been pulled forward. Any sense in the order of magnitude that negatively impacted your fourth quarter?
James Rogers
I'll let Curt kind of give some numbers on it. But not just CASPI but across the whole company.
I was a little disappointed in our SG&A discipline in the fourth quarter and I take responsibility for that. We had a strong year.
There was some pent-up demand to do, some things out there on the shop floors and so people spend a little bit of money. I think our discipline is back here in the first and second quarter.
I think, Curt, for CASPI, the gross stuff, we're ball parking at $5 million to $7 million, is that. .
.
Curtis Espeland
Yes. $5 million to $7 million and the nature of that kind of cost is business development costs that we have with some strategic customers as they look at applying products to new markets, some consulting fees as we're looking at around trying to penetrate some of the merging markets, as well as some strategy work.
And even though it's pulled forward to maybe it was on the fourth quarter, the good news is that, that should contribute to the continued growth of CASPI. And we'll spend that money as we continue to see a return on that investment.
Operator
We'll move now to Kevin McCarthy with Bank of America Merrill Lynch.
Kevin McCarthy
First off, just a clarification, if I may, on your earnings guidance with regard to the growth of slightly more than 10% in 2011, am I correct in understanding that the base for that is $6.96 in 2010?
James Rogers
Yes, that's correct.
Kevin McCarthy
And then second, I guess with regard to raw material costs. Jim, you mentioned CASPI, you mentioned paraxylene, as we think about the spread between selling price where realizations have been quite good and then the inflation that you cited, is that spread more likely to become more favorable or unfavorable in 1Q versus 4Q?
James Rogers
I would say more favorable and that's only because I'm looking at the pricing actions we've taken. So I'll just give you an example.
In a specialty product line within CASPI, we are really the only ones in the world who make the product, you just never want to price off a particular raw material moves. And so we can catch you during the quarter, maybe even for a following quarter, we've talked in the past about long supply lines, they saw some destocking, but eventually, you have a right to get that in price.
And so when I look at CASPI, for example, I will say that I know they have more price increases in the first quarter, and so I factored that in and if raws just stayed where they are now or somewhere near now, I'd be fairly confident we'd have expansion in spread.
Kevin McCarthy
Just a follow up on share repurchases. Looks like you bought back $212 million in 4Q.
Can you comment on the remainder on the authorization and -- I think, you already commented on your outlook there, but is it fair to say you need more headwind there soon?
Curtis Espeland
Yes, I think it's fair to say that we'll need more than 116 million of share, that's current authorization as we look at some of the share repurchases and we'll discuss that with our board over the coming year.
Operator
I'll move now to P.J. Juvekar with Citigroup.
P.J. Juvekar - Citigroup Inc
Your CASPI modules declined in the quarter and you mentioned destocking in 4Q. I was wondering if you can elaborate on that.
James Rogers
I mean, you know what destocking is, and it was, I would say, a little bit of a surprise for us. We saw it more towards the end of the quarter.
It was in the coatings additives, the specialty side, think about some of the longer supply lines to, say, Asia, et cetera. And I think the customers just took an opportunity to clean up at year end.
I can tell you in January the volume is back. So I look at it as a kind of one-time blip.
P.J. Juvekar - Citigroup Inc
And then you also mentioned olefins cracker restart as a positive for CASPI going into 2011. I was just wondering if you could quantify what benefit would you see.
James Rogers
Well, not so much in dollars because obviously there's a few moving parts but most people, when they think of the cracker, they think of PCI. PCI will get 60% plus of the benefit, but CASPI will get close to more than a third of the benefit from restarting that cracker just due to the propylene derivatives and their cost position on that.
P.J. Juvekar - Citigroup Inc
Jim, you have that nice propane to propylene spread. With all this gas sitting on the balance sheet, what can you do with your capital to take further advantage of that spread?
James Rogers
Yes. I mean, we think we're doing what is prudent right now in terms of some of the capacity expansions.
I don't know how aggressive we want to get in the marketplaces, the sheer commodity marketplaces that PCI plays into, so we're much more interested in the derivatives and carrying that spread down the value chain into the derivatives. And there, frankly, the capital numbers are typically smaller to expand some of those product lines because they're not as big a marketplace when I look at the derivatives.
So I think we take advantage of that spread for a long time. I think we're being prudent about where we add capacity, but I don't see us making any kind of big plays in the olefin world.
Operator
We'll move now to Robert Koort with Goldman Sachs.
Luisa Hermann - Dahlman Rose
This is Luisa Hermann in for Bob. I just had a one quick question on the Fibers segment.
Specifically when you look at the EBIT margins, looks like they're the lowest now since 2008 and I noticed that you've kind of cited favorable product mix which shifted to higher volumes, but it looks like it contributed to lower profit margins. So could you just give us some more color on this and what the outlook is, I guess, in terms of raw materials going forward?
James Rogers
Yes. I guess, and we've talked about this on other calls.
I don't often think in terms of percentage margin. I know most of the people on the call do.
I think in terms of absolute dollars, and I guess, I just have had the experiences. Raws move around and pricing moves around.
The percentages can fool you, but the absolute dollars never lie. So when I look at our Fibers business, I'm very pleased with the absolute earnings they've brought in, which as you know, were very good.
Specifically on the raws, we talked about that. Wood pulp in particular goes up.
In this industry, a lot of your suppliers will give you a price for the year. Many of us in the tow manufacturing will give our customers a price for the year and try and match that up.
Fairly significant increase in wood pulp this year, we'll see what coal does for us. But what we think is between the pricing that we got at the beginning of the year and the additional volumes that we're expecting, especially having a full year of our Korean joint venture going, that's why we're looking for another up year in this Fibers business.
And I guess, that's about as much as I can say. Like I said I don't particularly focus in on the percent margin for Fibers.
Operator
We'll move to Edlain Rodriguez with Gleacher & Company.
Edlain Rodriguez - Gleacher & Company, Inc.
Jim, you've talked about acquisitions being so-so for use of cash. Can you talk about where you see opportunities in the near term?
Like is it in the U.S.? Or outside of the U.S.?
James Rogers
Yes, it's interesting. I mean, our desire is to be more in the emerging markets to have a greater exposure there but frankly the opportunities come out you from everywhere including just the states and that's a good deal.
We're going to turn it down just because it's a U.S. company.
So we're seeing it both. We're seeing it in the U.S., Europe, some in Latin America, a little bit harder to find them in Asia, frankly.
Maybe that's just us but in my opinion, that seems to be tough for everyone and it has more opportunities under $500 million than over $500 million, so that's why I kind of say, the sweet spot is probably that few hundred million. More than likely what you end up with some company that's global and represented in several regions like Genovique was, so even they had a small U.S.
op, they were big in Eastern Europe and had position in Asia, and that's kind of the ideal scenario in my opinion.
Edlain Rodriguez - Gleacher & Company, Inc.
Also geographically, can you talk about what you're seeing in Europe, any concerns there on the demand side? I don't have things in full status [ph].
James Rogers
At one-time, I thought we were the exception because we were strong in Europe, but I've heard more and more people talk about Europe coming back. I just got --back from Davos last week and I would say the tone there -- and it is very much dominated by Europeans, the tone there was fairly bullish.
For the next several years they think we're at the beginning of an expansion cycle. I do as well.
And I know that there's a lot of crazy stuff going in the world, in North Africa and places like Ireland and Greece, et cetera, but the way they were talking about it and what make sense to me is you just got to hold this in perspective in the large economies like Germany and France and the U.K. are quite strong and it looks like the growth has come back to Eastern Europe.
So I continue to be bullish on Europe as a whole.
Operator
We'll move now to Paul Mann with Morgan Stanley Smith Barney.
Paul Mann - Morgan Stanley
Just looking at your Q1 guidance, just at the midpoint of that, your guidance have $1.80 a share. If we just annualized that flat across the year, it kind of get to your 10% guidance for the year.
In 2010, there's some seasonal strength from Q2 and Q3, did your guidance suggest you're not expecting any seasonal strength this year in Q2 and Q3?
James Rogers
No. I think we will have seasonal strength.
What we were trying to reflect was just the fact that we will be capacity constrained in a few areas that typically as you go across the year, usually the lightest of the three quarters so just to keep your numbers up. But I would expect the middle of the year to be stronger and we did say we hope to do better than 10%, so we'll see how that shakes up.
Paul Mann - Morgan Stanley
And then just in terms of your guidance, what are you assuming in terms of -- hopefully in pricing for the year? Can you give us any guidance on your thoughts on where pricing trends in the U.S.
over the next sort of six month or so? Also can you quantify the effect on Eastman as a whole of the start of the Texas cracker?
James Rogers
I'll let Curt answer the last part. What we see between propane and propylene right now, in general, the trend is going to continue.
There's some other things going on in the marketplace that'll probably make the first half of the year better than the second half of the year and that has to do with competitors and outages, et cetera. But overall, we believe we're going to continue to see a positive spread there, just can't guarantee that it'll be as strong as it is today.
Curtis Espeland
Yes. What I'll just comment on the cracker was a cost obviously in the fourth quarter, part of third quarter and as we start the year particularly the first half of the year, we think CASPI and PCI are going to see them break it out specifically, but I think you'll see in the guidance and then particularly PCI being over $250 million, that reflects a strong first half of the year for CASPI and PCI.
As Jim mentioned, second half of the year, I don't think we're ready to call it yet.
Operator
We'll move now to Andy Feinman with Iridian Asset Management.
Andrew Feinman - Iridian Asset Management
So your pension expense, you said was going to be up $50 million. Was it $50 million for 2010?
Curtis Espeland
Yes, Andy, that's correct. It'll be above $50 million for 2010.
Andrew Feinman - Iridian Asset Management
And the funding was going to be $135 million. So now it's just $35 million?
Curtis Espeland
No, in 2010 we we're going to do $135 million. It will only be $35 million in '10 and will be $100 million in 2011.
Andrew Feinman - Iridian Asset Management
And the $100 million is the whole thing for the year in 2011? I mean.
. .
Curtis Espeland
That's all were committing to at this point.
Andrew Feinman - Iridian Asset Management
And how about the -- you sold the Beaumont plant that you bought from Terra Industries during the first quarter. Can you tell us how much money you got for it?
Curtis Espeland
Well, we signed some agreements, I mean, the Beaumont assets, as part of the former TXE, have three or four different parts. We had some write-downs of those assets some time ago, probably sitting around $50 million plus on our balance sheet today.
I think we'll do a little better then that over the two or three different components that we'll divest over the next first or second quarter.
Andrew Feinman - Iridian Asset Management
So Q1 and Q2 -- and I had estimated it will be worth around $80 million. So I'll just say that, and my boss will kill me for this, but you guys can spend our money anytime.
My hat goes off to the search team because these PET earnings are really great.
James Rogers
They did do a good job, Andy. And I hear you on spending the cash.
Again, the tough part for us is just finding the right stuff. So I appreciate the patience of our shareholders as we sit on some of this cash.
We've seen too many times in the past where guys had run out and just spend it and we want to be really prudent as we do it. So we're going to continue, I hope, buying back stock and building where we're tight on capacity, but then also looking for the right acquisitions.
I'd love to do some more like Genovique.
Operator
We'll move now to Jeff Zekauskas, JP Morgan.
Jeffrey Zekauskas - JP Morgan Chase & Co
Your depreciation and amortization next year are likely to go down $15 million. I guess in part from the divestiture of the PET business.
But you talked about stranded costs being up $20 million to $25 million. So does that mean that the stranded costs are really something more like $35 million or $40 million given that you have this positive offset?
Curtis Espeland
I'm not sure they're additive. The $15 million was some cost distant from the depreciation and just goes with the business, doesn't really affect the cash flow.
The stranded costs are what they are, that we're planning to grow into them.
James Rogers
Yes, Jeff. The way I look at it, I hadn't thought about the depreciation piece, we were just trying to quantify what's mainly labor and you know how that goes.
You have the leverage of one functional department and it's almost like no matter how many operating assets you have, it's kind of a fixed expense. What we did at year end is we had a voluntary where we did have a little less than 200 people decide to retire from the company.
It was a little less than we wanted. Could I have done more in the fourth quarter?
And yes, I guess, I could have. But with a record year, morale being strong and us wanting to grow, having major plants and a headquarters in a small town, you just don't think in terms of so let another 100 people go and you'll just hire them back in the next 12 months.
Our culture is such that we thought the right thing to do was to go ahead and eat those costs for a while and then just really put the pressure on ourselves to grow and grow our core businesses but also do some acquisitions and absorb those costs again.
Curtis Espeland
And Jeff, what I might also add is just to keep in mind that, that assumes we don't do anything with the cash proceeds from that transaction. So while there may be some overhang in the form of cost, we still have the opportunity to create some value and earnings with that cash.
Jeffrey Zekauskas - JP Morgan Chase & Co
You talked about $500 million as being the net proceeds excluding various adjustments. What's the magnitude of the adjustments that you're thinking of?
Is this $50 million or $100 million or $25 million…
Curtis Espeland
No. That would be worked primarily working capital and it maybe single millions to $10 million.
It's not going to be in the $50 million, that magnitude.
Jeffrey Zekauskas - JP Morgan Chase & Co
Lastly, your working capital use excluding the charge for the way you look at your receivables, you're use less about $125 million. Do you think that you're going to have a working capital use in 2011?
Or do you think your working capital will shrink?
Curtis Espeland
I think we will expect to see some use of working capital in 2011, primarily, just because of the increase in sales and so you'll see accounts receivable go up proportionally with the sales. I'm hoping we can keep inventory fairly manages and then the only think worth the mercy of is raw material increases that go into the value of inventory.
But otherwise, it's the quantity. Our guys are starting they year with the expectation of really keeping their inventory tight.
Operator
That concludes our question-and-answer session. I'll turn the conference back over to our speakers for any additional or closing amongst.
Gregory Riddle
Okay. Thank again for joining us this morning.
A replay of this call will be available on our website this afternoon through February 11. Have a great day, everyone.
Operator
That concludes our conference. Thank you all for your participation.