Jul 31, 2012
Executives
Gregory A. Riddle - Director of Investor Relations James P.
Rogers - Chairman and Chief Executive Officer Curtis E. Espeland - Chief Financial Officer and Senior Vice President
Analysts
David L. Begleiter - Deutsche Bank AG, Research Division P.J.
Juvekar - Citigroup Inc, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division Edlain S.
Rodriguez - Lazard Capital Markets LLC, Research Division Duffy Fischer - Barclays Capital, Research Division Robert Koort - Goldman Sachs Group Inc., Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Frank J.
Mitsch - Wells Fargo Securities, LLC, Research Division Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division Andrew Feinman
Operator
Good day, ladies and gentlemen, and welcome to the Eastman Chemical Company Second Quarter 2012 Earnings Results Conference Call. Just a reminder, today's conference is being recorded.
This call is also being broadcast live on Eastman's website, www.eastman.com. We will now turn the call over, for opening remarks and introductions to Mr.
Greg Riddle of Eastman Chemical Companies Investor Relations. Greg, please go ahead.
Gregory A. Riddle
Okay. Thank you, Debbie, and good morning, everyone, and thanks for joining us.
On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; and Fernando Subijana, Manager of Investor Relations. Before we begin, I'll cover 2 items.
First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. 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 second quarter 2012 financial results news release and in our filings with the Securities and Exchange Commission, including the form 10-K filed for full year 2011 and the form 10-Q to be filed for second quarter 2012. Second, except where otherwise indicated, Eastman financial measures referenced in this presentation are non-GAAP financial measures, such as earnings per share and operating earnings that exclude Solutia acquisition, financing transaction integration costs and the second quarter 2011 gain from the sale of a previously impaired asset.
In addition, Solutia earnings are presented as adjusted EBITDA, which is defined as net income before interest expense, income taxes and depreciation and amortization and certain items that affect comparability and noncash stock compensation expense. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the Solutia acquisition transaction financing integration costs, the gain from the sale of a previously impaired asset and Solutia-adjusted EBITDA, are available in our second quarter financial results news release and the tables accompanying the news release available on our website, eastman.com.
Lastly, we have posted slides that accompany our remarks for this morning's presentation on our website in the Presentations and Events section. With that, I'll turn the call over to Jim.
James P. Rogers
Thanks, Greg, and good morning, everyone. I'm told we got a record number of people on the phone this morning, so thanks for joining us.
That could be because we're doing it on a Tuesday, but more likely, it's because we have a little bit more to talk about with not only our heritage business, but also the Solutia business. So let me start on Slide 3.
As is my normal practice, I'll start by reviewing our key outlook statements. First, when we announced the Solutia acquisition back in January, we indicated we expected to close the transaction midyear 2012.
And thanks to a lot of hard work, we were able to meet that timeline closing on July 2, and we're very happy to have Solutia as part of Eastman. Obviously, I'll talk more about Solutia second quarter results in a few minutes, and then Curt will talk about our progress on integration and synergies in his section.
Next, back in April, we indicated we expected our full year EPS to be approximately $5.30 in 2012, and we are still on track for that target. And I'd remind you that this would be 10% earnings growth.
And lastly, we indicated we expected to generate $1 billion of free cash over the next 2 years. And again, we're on track to deliver on that commitment.
Given all the portfolio work we've done over the last several years, including the acquisition of Solutia, we now have a portfolio of businesses that we expect will generate solid, consistent earnings growth and cash generation for years to come. On Slide 4, I'll cover Eastman corporate results.
Sales revenue declined 2%, driven mostly by the Specialty Plastics and Fibers segments. Operating earnings increased, with particular strength in the CASPI and PCI segments.
Second quarter EPS was $1.40, slightly below second quarter 2011 EPS. And I'd remind you that last year's second quarter EPS was a record for any quarter.
And second quarter 2012 is the second-highest EPS we've ever reported. We also had a higher tax rate year-over-year, up about 300 basis points, primarily due to the mix of earnings being more domestic.
And overall, our heritage Eastman businesses continue to deliver strong results despite an uncertain global economic environment. Before I give some color on the heritage Eastman segments, beginning on Slide 5 with CASPI, I'll remind you that second quarter will be the last time we report on this basis.
When we announced the close of the Solutia transaction, we also announced the new organizational structure with 5 segments, and we will report on that basis beginning with the third quarter. With that said, sales revenue for CASPI was pretty stable year-over-year, down 1%.
Operating earnings increased to a quarterly record of $114 million, up $10 million year-over-year and $16 million sequentially. They were able to increase spread, primarily in solvents, as the decline in raw material and energy costs was only partially offset by lower selling prices, which were down 1%.
And we continue to expect the underlying CASPI business to deliver strong results in 2012, albeit with some seasonal decline in demand. Fibers is next on Slide 6.
Revenue was down 4% year-over-year, with a big driver being an unfavorable shift in product mix. Operating earnings were down slightly year-over-year.
But as you know, operating earnings for the fiber segment can move around quarter-to-quarter based on customer buying patterns. What is more important is the annual earnings growth we've been able to deliver, and we continue to expect that fibers will report a very strong year, increasing earnings for the ninth year in a row.
PCI is on Slide 7. Sales revenue was unchanged, but there were a few moving parts.
Volume increased 4%, and a favorable shift in product mix helped revenue by 2%, both due to higher acetyl sales in the U.S. and the impact of the Sterling and Scandiflex acquisitions, both of which closed in third quarter last year.
Selling prices declined primarily in the olefin derivative product lines due to lower raw material and energy cost. Operating earnings increased both year-over-year and sequentially, primarily due to lower raw material and energy cost and the benefit of producing versus purchasing olefin.
We currently expect olefin frac-ing spreads will be favorable in 2012 compared with 2011 due to both the continued benefit of propane to propylene spread and improvement in ethylene spreads. These spreads are expected to narrow somewhat in third quarter, but PCI's businesses should have a strong second half of the year.
On Slide 8 is Specialty Plastics. Sales revenue year-over-year was down 6%, primarily due to lower sales volume.
That was partially offset by a favorable shift in product mix and higher selling prices. The volume decline was mainly in the U.S.
and Europe and was for copolyester products going into the consumer and durable goods markets. Sequentially, volume was about flat.
Of course, volume in the first half of 2011 was very strong, and we expect the year-over-year comparisons will be a little easier the second half of the year. The favorable shift in mix was primarily due to higher sales of cellulose esters into the LCD market, where we saw some acceleration in the second quarter from fairly low levels in the first quarter.
Operating earnings were down $4 million year-over-year, primarily due to lower sales volume and resulting lower capacity utilization. Sequentially, operating earnings increased $8 million due to the higher sales into the LCD market and lower raw material costs, particularly for paraxylene, which was down slightly from first quarter.
Looking at the year, we expect normal seasonality in the second half of the year but continue to expect Specialty Plastics business to have a solid year. Next up on Slide 9 is the summary of Solutia's second quarter results.
As a reminder, Solutia earnings are not included in our second quarter results since the acquisition closed on July 2, but we thought it obviously made sense to provide you with some color on their performance. Sales revenue declined by 4% year-over-year.
This was driven by the exchange rate effect of the strengthening dollar, primarily versus the euro. Volume overall also declined slightly, with an increase in both the Technical Specialties and Performance Film segments, more than offset by decline in the Advanced Interlayers segments, which includes photovoltaics.
Adjusted EBITDA declined to $115 million from $141 million in the year ago quarter. Most of the EBITDA decline was in the Advanced Interlayers businesses, and there were 3 primary factors.
First, lower sales volume for the Saflex product lines in Europe, and this was for both the architectural and the auto market. Second, lower sales volume and margins for the photovoltaic encapsulants product lines.
And third, cost associated with growth initiatives, particularly for Saflex and Crystex. Curt will talk more in his comments about the favorable financing we obtained for the transaction, the progress we are making on integration and achieving the cost synergies we have targeted and the very strong cash flow we're expecting over the next 2 years.
Turning now to our outlook on Slide 10. There continues to be significant uncertainty regarding the global economy.
Our view is that Europe is near at a recessionary level, but we are not anticipating things to get worse. In Asia Pacific, and particularly in China, growth has slowed, but we don't see signs of further weakening there, either.
And the U.S. remained solid, and we expect that will continue.
Factoring in our strong first half earnings, our expectations from normal seasonality in the second half of the year and our expectation of raw material and energy cost will continue to be less volatile than in past years. We expect to generate earnings growth in 2012 compared with 2011.
This earnings growth is driven primarily by 2 factors: solid performance of our heritage Eastman businesses, which continue to deliver strong earnings; and earnings in the second half from the Solutia businesses. One other factor is the higher tax rate, which, as I mentioned earlier, was up in the second quarter.
We expect this will continue in the second half of the year, and the corporate rate for the remainder of the year will be approximately 34%. And I remind you that we continue to work through purchase accounting related to the Solutia acquisition.
Considering all of these factors, we continue to expect 2012 earnings per share of approximately $5.30, which would be an increase of about 10% compared to 2011 and would be our third consecutive year of double-digit earnings growth. Now I started a practice of having a 1-minute CEO spotlight.
And this time, you'll see it on Page 11, Slide 11, where I wanted to talk about the new joint venture that we're just announcing. And as I do this, I want to compliment the CASPI team for all the work not only for putting up the quarter they put up, but, at the same time, nailing this one down.
And just kudos all around for an excellent 90 days. I'll conclude my comments, then, on Slide 11 by announcing the joint venture with YPC to build a world-scale hydrogenated hydrocarbon resins plant.
Let me remind you that we have a successful JV with our partner, YPC, that has been producing hydrogenated resin since 2001. This new plant at 50,000 net tons will be much larger than the existing Chinese facility.
As you can see in the chart, Eastman has been aggressively expanding its presence in this growing market. We estimate that the global market is growing at 7% on a compound annual basis.
And this explains why although we have been continually adding capacity, we've been on allocation for most of the last several years. Market growth has been fueled by hygiene adhesives, with disposable diapers being the most important driver.
Overall, diaper consumption is only 20% to 25% of potential demand, with high penetration in developed countries, but very low penetration in the rest of the world. Additionally, new, more sophisticated diapers require increased quantities of hydrogenated hydrocarbon resin.
Another growing application is hot-melt packaging adhesives. New formulations enabled by our resins are replacing more traditional adhesives as they reduce downtime and production lines, which, therefore, increases throughput.
As a summary, the capacity that we will be bringing to the market represents 2 years of market growth and will be located in the region of the world that we expect will experience the highest part of that growth. With that, let me turn it over to Curt.
Curtis E. Espeland
Thanks, Jim, and good morning, everyone. I'll start by reviewing our solid cash performance in the second quarter, as highlighted on Slide 13.
Cash from operations was $316 million. This is driven by continued strong net earnings.
Working capital was up slightly in the quarter and is about flat for the first half of the year. Free cash flow for the quarter was a very strong $194 million.
Capital expenditures were $87 million, and I'll talk more about our full year expectations for capital expenditures in a few minutes. And, of course, we paid our dividend in the quarter, which was $35 million.
This solid performance keeps us on track to meet our previous free cash flow expectations for the year for heritage Eastman. Next, on Slide 14, I'll review the financing for the Solutia transaction.
As you can see from the table, we were able to obtain very attractive financing for that acquisition. The notes were significantly oversubscribed, and we ended up increasing the allocation of the 30-year notes from originally $300 million to $500 million.
The weighted average interest rate of 2.8% is better than our previous expectations. Going forward with this new financing, we now have an annualized interest rate cost approaching $190 million for the company, including amortization of some pre-issuance interest rate hedges.
And this level of interest cost will decline as we delever over the coming months. Overall, we were very pleased with the financing for the transaction, and I want to congratulate our treasury team and their partners in achieving such a great outcome.
Next are some comments regarding integration on Slide 15. Even though the acquisition closed on July 2, we began planning our integration efforts shortly after the deal was announced.
We have a number of cross-functional teams leading the integration effort, and they are doing an outstanding job. One of our key priorities is retaining key talent from the acquisition, and we have been successful there to date.
The feedback from our employees on the acquisition has been very positive, and the professionalism exhibited by everyone I've encountered at Solutia sites has been outstanding. As Jim mentioned earlier, we do have a new operating structure with 5 segments.
We have been under way since close to implement this new structure, aligning activities with the new business responsibilities, and, importantly, everyone's remaining focused on serving our customers. We also have a good start on merging the capabilities of the functions of the 2 companies in the areas like finance, HR, IT, supply chain, et cetera.
And lastly, we also have received positive feedback from customers and suppliers that the transition post-closing has gone well. While still early, we're off to a very good start on our integration efforts.
Thus, we remain committed to the cost, tax and revenue synergies we announced back in January, as listed here on Slide 16. Starting with cost.
We have identified cost synergies of approximately $100 million and are now developing specific implementation plans. These include reducing corporate costs, which you would expect with 2 public companies.
About 1/3 of these cost synergies were day 1 synergies that we had targeted, and we've already achieved those synergies, and we'll see the benefit of those in the second half of this year. We also see potential synergies in the purchase of raw materials and working -- we are working through different options and opportunities there.
And we expect this combination will result in improved manufacturing and supply chain processes across all of our businesses. We remain highly confident that we will achieve a $100 million run rate of cost synergies by the end of 2013.
Moving next to tax synergies. These remain a source of value for the acquisition.
Solutia has approximately $1.3 billion of NOLs that we can utilize over the next 15 years, of which 1/2 will be utilized on the next 3 years on an accelerating basis. There are also foreign tax credits well in excess of $150 million that can be utilized over the next 10 years.
And the combination of Solutia's geographical profile and efficient tax planning should still enable us to reduce our corporate tax rate to approximately 31%. On the revenue synergy front, we have been working closely with our businesses since close, and we continue to have the confidence that these are real, but will take some time to realize.
We also believe Eastman will bring strong commercial capabilities to supplement the existing Solutia businesses which will improve overall profitability in the medium and long term. In sum, we are on track to achieve the targeted synergies in each of these areas.
Let's turn to Slide 17 and talk about capital allocation. At first, I'd like you to point to the bottom of the page in the banner listed there.
We are on track to meet or exceed our target of $1 billion of free cash flow over the next 2 years. And you can expect we'll remain balanced in allocating that free cash flow with a bias towards deleveraging over the next 18 months.
While we do so, you can also expect we'll continue to pursue value-creating growth. On capital expenditures, the combined Eastman and Solutia capital expenditures for 2012 should be approximately $500 million, with $400 million for heritage Eastman and about $100 million for the Solutia businesses in the second half of the year.
On debt, I already mentioned that we issued $2.4 billion of public debt and the new $1.2 billion term loan. On joint ventures and acquisitions, besides the new Regalite joint venture that Jim just discussed, we are also on schedule for our joint venture with China National Tobacco Corporation for 30,000 tonne -- met tonne acetate tow capacity, which is scheduled to be online mid-2013.
On the dividend, it continues to be reasonable for investors to expect that as we continue to grow earnings that the dividend would grow also. And of course, that will be a discussion we have with our board.
And as we achieve an acceptable level of deleveraging, share repurchases will be considered as part of our capital allocation choices, just as we've done in the past prior to Solutia acquisition. The main message here is that we are on track to deliver very strong cash over the next several years and beyond, and we will be disciplined in our capital allocation choices.
Finally, turning to Slide 18, I'd like to invite you to join us at our 2012 Investor Day in New York, scheduled for the afternoon of November 5. We're again holding the event at the Sentry Center in New York City.
This meeting is a great opportunity to share with you our vision and our growth plans, showcase the depth of our product lines and our product innovations and give you a chance to interact with senior leaders of Eastman. I'll look forward to seeing you there, and with that, I'll turn it back over to Greg.
Gregory A. Riddle
Okay. Thanks, Curt, and this concludes our prepared remarks.
Debbie, we are ready for questions.
Operator
[Operator Instructions] And we'll take our first question today from Dave Begleiter with Deutsche Bank.
David L. Begleiter - Deutsche Bank AG, Research Division
Jim, just on the Solutia businesses, can you comment on, perhaps, second half expectations? If you did 241 of EBITDA in the first half, what would you expect their EBITDA to be in the back half of the year?
James P. Rogers
First of all, I just want to say what a little smart aleck you are for your head -- for your title on your alert, "guidance reaffirmed corrected." I'm teasing you, because I felt a little funny about that.
I'll get to your question on Solutia, but I felt a little funny about that, because we did beat, and then here we are, we didn't raise our guidance. And I know that goes through people's minds.
And you're kind of getting to it, asking about Solutia's second half. And obviously, we're just getting to know these businesses, getting to see the decisions they've made recently, let me put it that way.
I would guess the second half will look something like the first half, maybe even a little lighter than the first half. We'll -- just talking from an EBITDA perspective.
But I don't have a lot of surety around exactly what those numbers are going to be. That's why we kind of kept it at $5.30.
We can see our businesses are performing quite well, quite strong. We can see the option as we got inside Solutia, how quickly we can get in there and make things happen, we'll see.
But I'm guessing second half, if we use roughly the first half, that's probably not bad.
David L. Begleiter - Deutsche Bank AG, Research Division
That's helpful. And Jim, just on the propane propylene benefit in Q2, can you comment on that?
And you mentioned it will be a little bit narrower in Q3 and Q4 as well?
James P. Rogers
Yes. I mean -- but it's going to be a great year for the spread.
I talked about how I wanted to kind of get away from talking about that. We even sized it for you 1 year just so you could see that it wasn't all that huge for us.
And yet it feels really good when it's going our way, I got to tell you. It is a nice wind at our back, so the spread's going to be there.
Again, the one thing as people think about spread and they look at some of the other names, one of the things they got to remember is the way we go to market. And we're really just exploding through to derivatives, and we're trying to be more stable for our customers in terms of pricing.
So we're not always getting every last penny when the raws go up, and the flip side, we don't always give it back. And so partly what you see, great quarter this quarter, where that lag was probably working for us.
Margins come in a little bit over the next couple of quarters when maybe the lag's working against us. But we've got a little bit different strategy than some of the guys who were a little uptight from us, you might say.
David L. Begleiter - Deutsche Bank AG, Research Division
And just lastly, any restocking, destocking trends you can call out in the businesses in June and/or July?
James P. Rogers
That's a good question. I didn't really see anything that caught my attention.
Curt looked at the orders. I guess the orders were staying fairly strong when we looked at our order book before the conference call.
But that's thinking more of the heritage Eastman businesses. But I didn't really hear a lot of comments on customer destocking, restocking...
Curtis E. Espeland
Yes. David, when we look at -- you've heard us talk about or looking at our order books 3 weeks and 8 weeks out.
Generally speaking, those trends remained to be pretty solid. Probably the only exception where we saw some weakness was some packaging and durable goods in Asia in our Specialty Plastics business.
Operator
And we'll take our next question from P.J. Juvekar with Citi.
P.J. Juvekar - Citigroup Inc, Research Division
Jim, your pricing in PCI was a little weak with -- and that's understandable, given lower propylene prices. The recent oxo contract settled down 10%.
So it just seems that this pricing weakness is likely to persist in second half. So wanted to get your comments on that, and what can you do to offset some of this weakness?
James P. Rogers
Greg is trying to get my attention. So you've got some color you want to...
Gregory A. Riddle
Well, no, I mean, I agree. It was down 5%, and that's very much reflective of the lower propylene prices.
And as we just talked about, in terms of lag, sometimes it takes a little while for the pricing to catch up with the lower raws, and so you might see some of that in the second half of the year.
P.J. Juvekar - Citigroup Inc, Research Division
And the second question was on, again, a little bit to follow up on propane to propylene. You could have a situation where propylene is a bit weak, but as we approach winter, propylene could go up, especially given that you've got new propane export terminals starting up.
So given that, what's your outlook in second half and beyond?
James P. Rogers
I don't -- it seems like you're asking the same thing to try and get a different answer, different ways. I mean, you're right.
The winter can move propane around some. We do typically do some hedging in the wintertime to try and shield you guys from that, to a certain extent, so you don't have to talk that much about it.
I would say, overall, the markets have not done a fantastic job of calling where propane propylene spread's going to go. I remember last year, with some trepidation, we talked about how this -- we ought to have a little bit of a tailwind at our back, and it's probably a pretty decent tailwind at our back this year.
But you're right, no one can predict what the winter's going to do, so that could move your raw material. I'd just, once again, remind people that our pricing strategy on the derivatives really doesn't just track 1x the propane ethane.
And I guess the only other color I'd give you, P.J., is, obviously, it's the ethylene side that is quite beneficial when I look at year-over-year comparisons, propane to propylene, fairly similar as we think about what the year's going to look like. But the ethylene is the one that's outperforming.
And you know we keep half of that internally and sell half.
Operator
We'll take our next question from Kevin McCarthy with Bank of America Merrill Lynch.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Jim, you're expanding Regalite capacity so often, it's becoming a challenge to keep up with the various projects you're in. So with regard to your latest joint venture here with YPC in China, maybe can you just talk a little bit about the relationship with YPC?
What the size of the Regalite business is today, to the extent that you can comment on that, as well as margins? And do you expect this level of growth to continue over the intermediate term?
Just a little bit more color around this hydrogenated hydrocarbon business will be helpful.
James P. Rogers
Yes. I mean it's one of the bright spots.
And when we lay out how we're reorganizing the company and our reporting segments, you're going to have more of a -- you're going to have more visibility into this business, because it's the adhesives piece that's going to be with the plasticizer piece. And you're going to see a couple of really strong growers with decent earnings, decent double-digit earnings.
So overall, one of the bright spots deserves the capital, some of the better returns when you line up all your capital projects. A relationship with YPC is exactly what would you -- what you would want.
You'd want a partner like a Sinopec partner. You'd want to be in China.
The other part you didn't ask but that deserves some credit, we got fantastic relationships with the multinational global customers here, very strong. I mean, it's with them that we're comfortable.
It's our relationship with them that gets us the comfort to go ahead and do this expansion because we can see where the product's going to go that comes out of this plant. We know the -- basically, know the names for who's going to be taking this product, who wants this product, because this market's been so tight.
So I mean, I could go on and on, on this segment. I don't want to size it for you.
You can probably get an indication of size when you look at some of the expansions that were done. I mean, this is more than just a Regalite that's in there.
Do we talk about the revenue for this -- for Regalite specifically? I don't think we ever have, but good growing business, significant.
You're going to see more of it when it's put together with the plasticizer business.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Is it safe to say this is a premium-margin business for you?
James P. Rogers
Oh, yes. The hydrogenated hydrocarbons is the good stuff.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Yes, okay. Then second question, Jim, I understand you're hard at work extracting the various synergies.
But to the extent that the external environment today is presumably weaker than what everyone would've thought several quarters ago, are there additional levers that you can pull in terms of cost extraction, restructuring initiatives, either on the legacy Eastman side or on the legacy Solutia side? And I guess, similar question for CapEx in terms of cash maximization.
How are you thinking about that in terms of contingency planning?
James P. Rogers
The answer is yes. Most smart management teams won't talk exactly about all the different levers that they could pull.
You're right that the economic environment is not quite as good as we'd want them. But let's face it, Europe's pretty much in recession right now, or at least the bulk of Europe is in recession.
And so the way I'm looking at it, I'm seeing what Solutia looks like when one of its major market segments is in recession. And if I think about it, as we head to being more diversified, as we are, so we're not as quite as dependent on North America and get diversified by geographies and by markets, there's always going to be something that's a headwind.
There's always going to be something that's a tailwind. I happen to think that's one of the strengths of Eastman right now, that as you look across the company, there's -- we can talk positively about the frac-ing spreads but then kind of moan together about what Europe looks like.
Long term, I think this is going to steady out our earnings and help us continue that double-digit earnings growth. When I look within Solutia and think about the synergies, I feel really good about the $100 million.
In fact, if you'll let me, just a little back of the envelope, the way I think about this sometimes, if you think about interest expense we've picked up being about $100 million a year and the synergies we're going after being about $100 million a year and then if you get aggressive on your synergy targets over time, and say, maybe we can get a little more out of that and say, "Well, I issued some extra shares. What's the dividend carry on those extra shares I issued?"
you could get to the point with time that your synergies were basically covering your carrying costs of the data buying this thing. So therefore, what you got left is the cash flows off of the business less the CapEx that pay off your debt.
And again, because of the environment, yes, negative economically but strong financial market-wise, this one's going to look really good. I can look inside the businesses and see that some of the stuff, some of the decisions they've had to make, which, admittedly, have had more of a short-term focus, they've been more restrained in terms of coming out of bankruptcy, I can just see things already that we're going to do differently as we focus on a balance between short- and midterm, say, results.
And very confident that you're going to see what these businesses can really do. It will take us a couple of quarters here for a lot of that to kick in.
I agree with Curt. I think it's -- the timing will be through '13 that we'll be able to capture these synergies.
I'm sure we'll be looking at $100 million as a floor and saying, "We've got to do better than that." In terms of other levers, let's be honest.
They've pulled a few levers back in the last recession and did some things. I don't see anything as dramatic as they did 3 or 4 years ago for us.
I think we're going to be able to focus much more on the opportunities, how we can help them in product development, how we can help them in manufacturing, how we're going to accelerate some of the stuff they wanted to get done, capture the value earlier. But having said that, I think we got a bit of a track record, and I think we should get credit for knowing how to handle ourselves in various different economic environments.
And when we say we're going to do 5 30 this year and next year is going to have a 6 in front of it, we're going to be taking the actions necessary to make that happen.
Operator
We'll take our next question from Edlain Rodriguez with Lazard Capital Markets.
Edlain S. Rodriguez - Lazard Capital Markets LLC, Research Division
Just one quick question on CASPI [indiscernible], Jim. Back in April, you had mentioned how on all of CASPI's business lines were up within at high levels with many products now being sold out.
How has that changed since then? And how do you see the domain data mix for the second half of the year?
James P. Rogers
Well, I wish I could go ahead and do this quarter over and over and over again. That would be pretty cool.
I don't remember saying there was a lot sold out. I know, in particular, we were talking about the resins business being on allocation and quite tight.
On some of their other businesses, particularly their polymer, some of the really high-margin stuff, maybe stuff that we're the only ones in the world who make it, we never let the utilization rate get too high without debottlenecking that in some capacity. So it's rare that on the -- I was using the phrase, really good stuff -- the really good stuff, the stuff that we're the only ones who make, it's rare that we would ever get into a sold-out situation.
We just don't want to ever do that to our customers. So we got the juice left to meet it.
I think the issue probably comes down more to the demand we see around the globe in the different end markets. And guys, it's tough out there.
One of the things I'm proud of is that we were able to deliver these results the way the world looks right now. I mean, Europe is a mess.
And then you can go kind of market by market, whether it's building and construction, particularly durable goods, things like that. It's quite soft out there, so we'll see how CASPI does.
I mean, I think last time we gave guidance for the full year, we thought they'd be around 3 80 or so. And I think they're going to do better than that, obviously, with what they've got under the belt already.
But we'll just have to -- we'll have to see how they do. But I'm not worried about capacity or our market share, things like that.
If anything, it's just more that end market demand in places like Europe.
Edlain S. Rodriguez - Lazard Capital Markets LLC, Research Division
Okay, makes sense. All right, one quick question like longer term, like in terms of acquisitions.
I mean now that you have Solutia, like, do you feel that the portfolio is complete now? Or do you still think that there's some more room for more additional bolt-on acquisitions in the Eastman legacy businesses?
And where do you see there's a need for that?
James P. Rogers
Okay. we'll start with our mandate.
Our #1 mandate is to grow the value of the company, and particularly, grow the earnings of the company, so we're going to do that on 2 legs. And of course, there's always the organic growth.
You're asking about the inorganic piece. We just took a really big step with Solutia.
We deserve a little bit of time to get it under our belt. I wanted to echo, by the way, Curt's comments.
The employees of Solutia have just been fantastic. I think they're pretty upbeat about being part of a larger chemical company.
We're not meeting any resistance when it comes to getting synergies and getting things done. In fact, there's a lot of excitement about how we can grow these businesses together.
Part of that excitement comes from -- that we'll have the ability to do bolt-ons in their existing businesses if we see the opportunity, but also in the core businesses. And having said that, we got the opportunity.
We'll have the financial strength to do that. Of course, top priority for cash is paying down debt here in the near term.
But then the issue is, is there really much in the way of bolt-ons out there? And that's kind of where you were coming from.
We'll just have to see. I mean I was -- I got to tell you, I was a little disappointed we didn't see more bolt-ons in the 2010, 2011 timeframe.
We did a few in the plasticizer world. There may be some more out there, but we take such a disciplined approach in terms of what we're willing to pay and does it drive us in the direction we want to go.
But I don't want to pull up a lot of hopes for there's going to be a lot more bolt-ons or something coming. If it makes sense, we'll do it, but I'm not sure how many there are in the core businesses.
Operator
We'll go next to Duffy Fischer with Barclays.
Duffy Fischer - Barclays Capital, Research Division
On the Solutia part itself, I guess, one, it wasn't under your control, but how did that 1 15 number kind of come in relative to your expectations for the business sitting from the outside? And then when you think about moving from a nearer-term view that the Solutia management had to kind of your medium- to longer-term view, does that really mean that margins are going to come down as we're going to have to put some more SG&A, R&D through these businesses to get them to grow more over time?
James P. Rogers
Yes, let me start there. That's not the signal I was trying to send.
Let me start with the beginning of your question, the 1 15. Yes, that was a disappointment, no doubt about it.
I was hoping that they would do a little better. I can understand that 3 months before your company gets sold that you might not expect crackerjack results.
I know that they had some things that I might think of as more onetime, or at least, I hope they're onetime, like some bad debts adding to environmental reserves, things like that. But still, it was a disappointment.
It was mainly around Europe. It was mainly Saflex in the photovoltaic business.
And I think we know how to help both of those businesses. When I talk about short term versus medium term, it doesn't necessarily mean spending more money.
A lot of this has to do with how you approach the market and some of the decisions you make in terms of your contracting, your pricing, either relationships you build with your customers, et cetera. So maybe you're not just going quarter-to-quarter maximizing earnings.
Maybe what you're trying to do was think a little bit longer term with your key customers and take a longer-term approach to value capture out of the marketplace. So I think I said it before, I see opportunities for things we will do differently.
And I'm guessing that you won't be able to see much of that through the rest of this year, that '13 will be a year of transition. And when we get to 2014, you're really going to like the way these businesses look.
Duffy Fischer - Barclays Capital, Research Division
Okay. And then shifting to Specialty Plastics, a little smaller business.
But copolyesters was taking some pretty good market share, so for volumes to be down that significantly was a surprise to me. Do you think there was an inventory effect there?
Can you talk a little bit about -- more about the market share you're taking with copolyesters and what's happening with volumes there?
James P. Rogers
Yes, I can. I mean -- and maybe Curt wants to add some color, because I feel like I'm doing all the talking here.
But I can tell you the place I see that got hit was really the durables. And Mark Costa's given me the example yesterday about, Jim, when the economy's tough, people just aren't out buying new blenders and new durable goods that might have our copoly unit.
You saw a nice pickup in the CT, cellulose triacetate, that goes into the displays in flat screens. That really helped Asia and helped that business sequentially.
But I would say they're very much exposed to the durable goods part of it. They've got a lot of work under way to move their mix to things more like medical, et cetera, but that takes time.
I'd say on the Tritan line, the second line we brought up, we filled that first one out really fast. I'd say we got kind of spoiled on that one.
Tritan, when you think about the markets it's going into, it's fighting the same kind of durable goods battle right now, so that was flat. And it's probably going to take us a little longer to fill that second line now, but that doesn't shake my confidence.
I can see the value proposition. I know we've got a good product.
I know we'll take share from some of the competing materials. I don't know if there's anything...
Curtis E. Espeland
The thing I might add is that some of their businesses are more economically sensitive than others. The great thing about that, we've made the investment.
We have the capacity so when those end markets come back, this business is well positioned to improve its performance.
Operator
We'll go next to Bob Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc., Research Division
I appreciate your comment about you deserve maybe credit for some stuff that you guys have done over time. But I guess when I look at your margin structure, it sort of says specialty.
But when I look at your multiple, it screams commodity. And maybe this is a function of your historic legacy in polyethylene and PET.
But I'm just curious, what can you guys do or how do you think you get to a reasonable shareholder investor regard for your portfolio when it seems stuck sort of in the history?
James P. Rogers
I very much appreciate the question. It's one that, quite often, we ask people on your side of the desk.
Look, we all know multiples are sticky. We know there's lots of CEO's out there who try and jawbone them up, et cetera.
I never thought that really has any kind of lasting impact. I do think it -- a lot depends on how we talk about ourselves and think of ourselves and how we represent our businesses.
So just to be very open, talking about things like volume doesn't sound as much like a specialty business as just talking about end markets and growth in end markets. And as we roll these businesses together and we get our new segments, I think it's going to be clearer to people just the results of all the work that's been done and what we see as our prospects for growth in our margins.
So I always have a hard time if someone says specialty versus commodity. And then you say, "Well, define specialty," and then you get 5 or 6 different answers.
But to us, what we're driving, and I think people are going to have to eventually recognize, is we're driving year-over-year earnings growth. And we're doing it whichever way is the most efficient and makes the most sense.
We have a great financing market. We saw an opportunity with Solutia to pick up some quality businesses and put it into a portfolio of other businesses that have strong cash flows.
So you really don't have to leave opportunities on the table, like maybe you do if you come out of bankruptcy and were pretty inhibited in your cash flows. And I think it's just a matter of time.
But how quickly the market gets there, I'm not sure.
Robert Koort - Goldman Sachs Group Inc., Research Division
Can I ask you on your portfolio, in the quarter, you had a 1% price decline, which was clearly far better than a lot of commodity companies. But it was still a decline.
You mentioned you're trying not to price your products on sort of a cost basis. So for a typical Eastman product, how often do you reset pricing, and how do those contracts look?
James P. Rogers
Yes, I mean as much as I'd love to say, it's just all specialty, part of that is the fact that the raws came up. We actually expanded spreads in the company overall when I look at just price versus raw materials and energy, it actually expanded a little bit.
But much of our markets, much of our businesses, the pricing is more quarterly, annual in some places, like fibers. Probably the correct way to do it is to have pricing formulas that are more monthly, frankly, monthly to quarterly.
But again, it just depends on the product. So that would be true for the more heritage, commodity-like stuff for the more specialty stuff that's priced off of value proposition, some of the stuff in CASPI, for example, will just get repriced once a year.
Fibers is once a year. Some of the Solutia businesses are just once a year.
So we'll try and hit the right mix, the right blend working with our customers and what works for them.
Operator
We'll go next to Jeff Zekauskas with JPMorgan.
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
One of the themes of Eastman since you announced the Solutia transaction has been your tax savings. And yet, in the second half, you now think that the tax rate will be 34%.
So did you run into obstacles that are keeping you from using some of the NOLs or some of the tax strategies that you thought you could employ?
James P. Rogers
I'll let Curt take this one.
Curtis E. Espeland
Jeff, no, the answer to that is no. What you're seeing right now is just simply the effect of a more predominant earnings mix of U.S.
versus outside the U.S. We think, over time, that will correct itself.
As it relates to implementing tax planning or tax efficiency structures, we're in the process of doing that today. A lot of that will be put in place the end of third quarter, some going into fourth quarter.
So we do believe we'll see the benefit of tax structure. And so we will get to those benefits.
And if you get some reasonable return to the mix of domestic and foreign earnings, that's what gives us comfort to get to that 31% rate. On the usage of the NOL, we're still highly confident to use that.
You saw in our S-4, we thought that number's going to be about $675 million. We still feel good about that number.
Maybe it will be even a little bit better.
Robert Koort - Goldman Sachs Group Inc., Research Division
Okay. So I don't think that you expected that your tax rate would be that high for the second quarter.
And I think about the conditions under which you bought Solutia, and that was a world in which ethylene prices were $0.55 a pound. Then order of magnitude, they dropped into the high 30s, now they're in the low 40s.
So presumably, the raw material synergies that you expected from Solutia really should be much larger than what you originally expected. So are you getting more -- because you must have higher pretax income with this higher tax rate.
So are you getting more raw material synergies that you forecast in the second half that's offset by a higher tax rate?
James P. Rogers
Let me start of, then Curt may want to add. But again, the tax rate had more to do with where the earnings are.
And as you know, the way most companies get that lower tax rate is by having more overseas earnings and lower tax jurisdictions. When I think about raw material synergies, it's not what price ethylene is at any one point in time.
It's what we're going to be able to do within our supply chain in terms of buying their raw materials, et cetera, or the swaps that we'll do with other companies. So I don't know, Curt, do you want to...
Curtis E. Espeland
Yes, Jeff, if you're talking about 2 aspects of your question. I think, first of all, as it relates to the tax rate, yes, that tax rate is higher than we'd probably envisioned back in January.
So if you think about just kind of our expectations at that time, what you're seeing is Eastman's businesses are probably doing a little bit better. Solutia's business is doing a little bit worse.
But then offsetting some of that tax rate impact is the better financing that we had in place. As it relates to the $100 million of cost synergies, we have assumed some modest improvement in raw material savings and logistics savings.
I think a year or so from now, we're going to -- when we talk about and report on about how we did against those synergies, I think we'll do better than that, particularly in the raw material side.
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
Okay. And then lastly, in the last conference call, you talked about, I think in 2015, being able to buy 300 million pounds of propylene, or, effectively, something like that from PDH producer.
I guess now it's clear that that's enterprise. So when you did that deal, do you have to pay an upfront fee that gives you cost economics?
And if you do, is it $100 million or $50 million or -- if you don't, why is it rational for them to just give you manufacturing economics in propylene?
James P. Rogers
Yes, actually, Jeff, there's no upfront fee. And in fact, there's a contract that gives us propylene even sooner than the plant being finished that's also advantaged.
So we'll get some benefiting before the plant comes online. Why does it makes sense for them?
Because they have the surety of a nice credit like Eastman taking a big chunk of their offtake, and they build up the plant. I mean, they really could accept a lower return.
It's really a good return, by the way, but they could accept a lower return because they have such a low-risk project. At least, that's the way I would analyze their side of the table.
Operator
[Operator Instructions] We'll go next to Frank Mitsch with Wells Fargo Securities.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
I noted that you said that you guys had the second-highest quarter this past quarter. So that would give you the silver medal, but we're all expecting gold here.
Can we see gold-medal performance in the third quarter?
James P. Rogers
That's going to be tough. That's going to be tough.
My guess, we're not really giving quarter-by-quarter guidance, but if you were a betting man, you would say it's going to look similar to the second quarter. Now realize, we didn't go into it a lot.
There's going to be a lot of noise and confusion, because when you buy a company, you write all their inventories up to market, and there's all that kind of stuff we're going to have to guide you through. But assuming that the world kind of holds together here, you're probably going to have a similar -- speaking just of the heritage businesses, a similar kind of quarter.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
But my guess is, then, there is some level of accretion that comes at Solutia. So I mean you're really only -- you're guiding to an average of 1 34 per quarter the next 2 quarters, is what you're guiding to with that 5 30 number.
James P. Rogers
And realize some of the headwinds here, though. I mean you just -- Curt was talking about one with Jeff on the tax rate being a headwind.
The Solutia businesses are underperforming where we hope they'd be this year. Not worried because we think we see that what we can do with those businesses, and there's still fantastic value in the long term there with those businesses.
The interest expense came in a little better than what we thought. I mean, we've got this mix of headwinds, tailwinds, and we're just trying to give you the straight-up that it's looking like 5 30.
I mean, as one of the reports said, maybe I had a little bit of a cushion the last time we said 5 30. It's -- we got to do a little more work to hit it this time.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Well, let's take a look at Solutia. You said -- I think you say you know how to help those businesses.
So you said Saflex in Europe was obviously difficult. Global auto builds are pretty good.
So globally, I would anticipate Saflex is doing fine as a product, but obviously in Europe, it's suffering. But you're getting growth in the U.S., you're getting growth in Asia.
So then that begs the question, photovoltaics. What's your game plan on that business?
James P. Rogers
Just on Saflex, first of all, Europe's an important market for them, so they -- hopefully, they've talked about that before. But it is their more profitable market.
So $1 of sales in Europe is not the same as $1 of sales in Asia. And so that's -- so it hurts when Europe's down.
You think about the automakers in Europe, et cetera, I don't see that being a long-term trend. We see that coming back.
And in terms of photovoltaic, what can I tell you? We didn't think we paid a lot for it as we value the company.
I think we've said that before. They are definitely under pressure.
We deserve a little bit of time to assess what a turnaround plan would look like, the probability of success on that turnaround plan for that business. And we're not the most patient people.
The shareholders of Eastman are not always the most patient people, and I would expect we'll have more to talk about on that, what our path is going forward, on Investors Day.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Okay, All right. And I was struck by Curt's comment that you expect to spend $500 million this year, of which $100 million is Solutia in the second half of the year.
I mean, that seems like a rather high number for Solutia. Very high number for Solutia.
James P. Rogers
Don't annualize that.
Curtis E. Espeland
Yes, and if I might add, one of the growth aspects that Solutia brings is expansion options in Kuantan, Malaysia to serve the Asian market. Obviously, that is one of the levers we'll look at as we continue to look at how the economies are shaping up.
And we'll see if we have to make adjustments for that. But that's kind of where we're at to start out of the gate.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
All right. My early betting line is that you don't spend $500 million this year, but that's just me.
And lastly, Jim, you flagged out the Fibers' buying pattern being a negative in the second quarter. Is -- were those business just traditionally lumpy good, lumpy bad?
Second half of the year, lumpy good?
James P. Rogers
Yes, I got 0 worries about Fibers, Frank. I mean, if I put my list of worries down on a piece of paper, fibers doesn't even show up on the page.
So it was in Asia, it was the classic customer buying pattern. I think we're going to be close to selling out on tow this year, so I'm not worried about which quarter it comes in.
I think for the year, they're going to have a very good year.
Operator
We'll take our next question from Nils Wallin with CLSA.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Curious about in PCI how much Sterling and Scandiflex added to volumes since you haven't anniversary-ed those 2 acquisitions?
James P. Rogers
Well, it did help. They're not huge.
I don't know, Curt, if you've got any comment.
Curtis E. Espeland
I tell you, it did help, but not as material number on a year-over-year basis.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Okay. And then on your cellulose esters and triacetates and LCD, are your -- is your mix somewhat geared more towards panels than LCD TVs?
Because we saw, certainly, some weakness in LCD TVs in the developed markets. I'm just curious, it seems like you performed a little bit better than the overall market.
What was driving that?
James P. Rogers
Yes, I'm not sure, and I don't know exactly what the mix is between the 2. I know we're in several layers on the screens.
I think that usually what moves our results is more the customers and their inventory positions. And I know they got fairly light in inventories and had a lot of make-up to do after the first quarter.
And so I think that drove it. So I don't if you can extrapolate our results to the end market results, because the way this supply chain works is not always the most logical.
So I think our customers have their inventories get fairly low and then had to play some catch-up and do some buying.
Curtis E. Espeland
Okay. And Nils, if I could, just come back to remind on Sterling.
We talked about the acetic acid business that came with that. That's about $100 million of revenue a year.
The real benefit of that plant acquisition will be, as we start up this new PC asset, plasticizer asset, you'll start seeing that benefit over the coming quarters.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Great. And I think you said you could get to $200 million at some point in a couple of years.
Is that still...
Curtis E. Espeland
Yes, that's still -- that's still the path. Yes, absolutely.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Got it. Just a question on Europe.
It seems from at least your comments during the call, it's a lot worse than expected. And yet, in the prepared kind of slides, you said it doesn't seem to be deteriorating anymore.
So could you help parse those 2? What are you seeing that suggests that it's not getting any worse?
Because it certainly sounds like from your comments that it's not too good.
James P. Rogers
Yes, I hear you. The bit about it being worse than expected, I was really thinking more of Solutia's business and their exposure to Europe and how that went with the auto builds being negative in Europe year-over-year versus the rest of the world.
So for the -- for our heritage business or for the combined entity, I don't think there was that big a difference between first and second quarter if I look at the volumes that -- how they came off, a little bit more in the second quarter than what it was for the whole first half of the year, right?
Curtis E. Espeland
Yes, but a notch.
James P. Rogers
But a notch is like -- difference being 6% for the half and 7% in the quarter, something like that. So I don't know, maybe there's a bit of hope in there as well, but I just -- as we look at the order patterns that we can see, talk to the customers, and I just had 2 weeks in Europe getting -- hitting a bunch of countries and our different locations, et cetera.
It seems to be a disconnect between the talking heads on TV back here and what the guys in the trenches in Europe are seeing. So our best guess, I'll just say it that way, our best guess is that Europe just kind of putters along down here to level it's at through the end of the year.
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Got it. And then just one last question, if I may.
It seems like at least on your currency in Latin America, you didn't suffer nearly as much as a headwind as many of your peers, who saw large single-digit declines. What is -- is there a different exposure to your business that you're able to offset that?
What caused it to be less of a headwind?
Curtis E. Espeland
So you're talking about the euro, I think is what you mentioned?
Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division
Latin America, actually.
Curtis E. Espeland
Latin America? I mean, I think....
James P. Rogers
Instability [ph] in currency, the only thing I can think.
Curtis E. Espeland
Yes, it comes down to how we price some of our products that we export to those marketplaces.
Operator
And we'll take our final question from Andrew Feinman with Iridian.
Andrew Feinman
I was just wondering if you could give us any update on Tritan 2 and acetylated wood?
James P. Rogers
Yes, thanks, Andy. It's exciting stuff.
I mean, I mentioned Tritan a little bit earlier, that it's probably going to take us a little longer to fill out that second line than maybe we first thought. It's not, frankly, hardly anything to do with Tritan, everything to do with the economy and the durables goods markets, et cetera, like I was mentioning before.
But I'd say that's fantastic product, we will fill the line out. It is going to take share from the other materials, it's just going to take us a little bit longer.
On the acetylated wood, and thanks for giving me a chance to talk about it. In the market right now, both pro-channel and big-box channel, getting the results in, obviously still early.
I think we're going to have good customer acceptance. We're learning some stuff about coding versus not coding, et cetera.
But I think we've got a good one there, but we're going to want to do it a measured pace. When you deal with the retail market, you only get one chance to put a good brand out there, so we want to make sure we do it the right way.
I can tell you just from a manufacturing point of view, the little semi works, if you want to call it that, plant that we built here in Kingsport, running very well, getting more capacity out of it than we thought, typical Eastman fashion, people continually finding ways to improve the process, get, in this case, more board feet out of the same plant. Decent market acceptance, but we've got some fine-tuning to do in terms of how we go to market, what the end product looks like, which segments we go into.
So still a bit early, but overall, quite positive.
Gregory A. Riddle
Okay. This concludes -- thanks again for joining us this morning.
A web replay and a replay in downloadable MP3 format will be available on our website beginning at 11 A.M. this morning.
Have a great day, everybody.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's conference.
Have a great rest of your day.