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Eastman Chemical: Ready to Grow

The firm has been trimming down for two years and thinks it's fit enough to pursue growth again

September 20, 2004 | A version of this story appeared in Volume 82, Issue 38

Eastman Chemicals' coal gasification plant provides feedstocks for its acetyls business.
Eastman Chemicals' coal gasification plant provides feedstocks for its acetyls business.

He means it ironically. At the time, Eastman had recently completed acquisitions that it would come to regret. And a month after he took office, the firm canceled an ambitious plan to split into two separate publicly traded companies.


Ferguson's role as CEO has been as a reformer, in sharp contrast to his more idealistic and visionary predecessor, Earnest W. Deavenport Jr., who had led the company starting in 1989 and through its spin-off from Eastman Kodak in 1994.

Ferguson has reversed Eastman's strategy of expanding its coatings, adhesives, specialty polymers, and inks (CASPI) division through acquisitions, notably its 1999 purchase of Lawter International and its 2000 buy of McWhorter Technologies. These businesses, for which Eastman shelled out a combined $750 million, weighed on CASPI's earnings and never delivered the expected upside. "This was the classic disconnect between strategy and execution that has occurred more than once and in more than one industry," Ferguson says.

He explains that the strategy behind the deal-making was the common "functionalities" in coatings, inks, and adhesives. For example, they all involve thin films and all have critical surface characteristics. It was natural for Eastman to conclude it could transfer technology from one market, like adhesives, to a closely related one, like coatings.

"A great investment thesis probably could have been executed if we bought the right companies," Ferguson says. "We weren't able to get the companies that could have pulled it off." He says the only acquisition that fit well with this strategy was the 2001 purchase of Hercules' hydrocarbon resins and rosin resins business. "It was the same investment thesis, but they had the right technologies and the wherewithal to make it happen," he says.

Ferguson set out to restructure the CASPI unit, closing 10 plants and reducing costs, but he soon concluded that restructuring wasn't enough. "The first six to nine months of my tenure was fix, fix, fix, fix," he says. "And after I looked at the business for nine months with a bunch of people, we said, 'Screw it! You can't fix it.' That's when we started down the road of divesting it."

Last December, Eastman sold its Accurate Dispersions unit to Sherwin-Williams. Last month, Eastman completed the $215 million sale of a host of product lines--including acrylate esters, unsaturated polyester resins, ink and graphic arts raw materials, liquid resins, powder resins, and textile chemicals--to Apollo Management. Eight of the plants in the deal came from McWhorter, six from Lawter.

But the restructuring hasn't been limited to CASPI. Eastman is also scaling down its developing businesses unit, which nurtures start-up businesses, from 15 platforms to four, and it is shedding information-technology-based businesses in favor of those based on chemical technologies, such as coal gasification. Funding for the developing businesses unit will drop from 1% this year of Eastman's sales to 0.5% in 2005.

MOST NOTABLY, Eastman is shuttering Cendian, a logistics services unit that it started in 2000 as a joint venture called ShipChem with Global Logistics Technology. The company is taking on no new customers, is bringing logistics functions back in-house, and is working with third parties to handle existing customers.

Ferguson says plug-in information technology isn't a core competency of Eastman. "We walked away from those because they are generic services, and we think people like Accenture are better equipped for generic services," he says.

A similar philosophy has also guided Ferguson in chemical deals. In March 2003, Eastman sold its liquid-crystal-polymers business to DuPont. The firm's specialty plastics business sold its color concentrates unit to Colortech last fall. And earlier this month, Eastman announced the sale of its Eastar Bio biodegradable polymer business to green plastics maker Novamont.

Since Ferguson took the reins, Eastman will have shed a total of 20% of its workforce--both through job cuts and divestitures--down to 12,000 employees by year's end. "This is the kind of restructuring and repositioning companies do when they prepare themselves for the next phase of their lives," Ferguson told financial analysts in New York City earlier this month. "They circle back to a core of things that they do well, and that's what we have done."

The company has targeted 11 areas to focus on for new growth. At the top of its list is a new technology called IntegRex, being billed as an integrated process for making polyethylene terephthalate from p-xylene.

PET is normally made from the copolymerization of purified terephthalic acid (PTA)--derived from p-xylene--and ethylene glycol. The company isn't disclosing many details about the technology as it pursues patents on some 100 innovations.

In traditional PET resin manufacturing, a polyester-fiber-type polymer, known as melt-phase, is put through an additional "solid stating" unit to boost its molecular weight enough to meet more demanding PET bottle applications. IntegRex eliminates the solid-state unit. Asked by a reporter how the company is able to get bottle-suitable resin out of a melt-phase reactor, Ferguson replied, "It's a secret."

Eastman will, however, talk about how it came up with the process. Two-and-a-half years ago, says Allan Rothwell, an Eastman executive vice president, about 40 scientists from all parts of the company were "sequestered" in a building and charged with reinventing PET production. They came up with a process that has since been scaled up to a pilot plant and then to a 1-ton-per-hour semicommercial unit.

Eastman says the process has one-half of the normal geographic footprint--thus one-half the capital cost--and two times the output of a normal PET unit. It says the plant will be the lowest cost converter of p-xylene to PET in North America. In fact, the company says eliminating the solid-state reactor alone reduces the cost of converting PTA to PET by 30%.

Unlike DuPont, which has yet to build a commercial plant based on its own novel PET technology, called NG3, Eastman is planning to construct a 350,000-metric-ton-per-year PET unit in Columbia, S.C., based on IntegRex. It is also retrofitting IntegRex technology into its PTA plant at the site. Construction on the more than $100 million project is set to begin next year, with start-up expected for 2006.

Eastman has yet to plot out its long-term strategy for the technology. "Guys like Union Carbide created technologies for polyethylene and went right to the licensing route," Ferguson says. "Other people build it for themselves; others collaborate on it. In all of those cases some people did it well, some people did it badly. We are trying to sort that out so we don't make any dumb mistakes."

According to Ferguson, by drawing from all parts of the company, the new technology illustrates how Eastman is better off for not having split into two entities: one called Voridian, housing its PET, acetate tow, and polyethylene units; and another named Eastman, keeping the rest. "It wouldn't have been possible if we were two different companies," he says.

Another growth platform for Eastman is coal gasification services. The company has 20 years of know-how in running coal-based synthesis gas--hydrogen and carbon monoxide--through turbines at its complex in Kingsport, Tenn. There, coal is the primary raw material for the firm's acetyl chemistry stream. "We run it 365 days a year, 24 hours a day in Kingsport, with 8,000 people relying on this process every day," Ferguson says. "We had to get good at it."

Eastman is aiming at the U.S. power generation industry, which faces the dilemma of opting for clean but expensive natural gas or cheap but dirty coal. Ferguson says Eastman can give the industry coal economics without mercury, sulfur, and other emissions.

Ferguson points out that Eastman uses coal gasification for 20 to 25% of its raw materials, a figure that may increase if it is able to collaborate with power companies (see page 36). "Houston happened because motor fuels came together with chemicals and the infrastructure was shared," he says. "The questions we are mulling are, 'Is there going to be a power infrastructure that is going to be coal based? And can we tag onto that and have a chemical infrastructure to go along with it?' "

Other growth platforms for Eastman include cellulose esters used in liquid-crystal-display polarizers. The company also plans to leverage some of its biotechnology know-how into food safety diagnostics, a $1.5 billion market that is growing at 10% per year.

WHAT REMAINS of CASPI is also now a source of growth, particularly with its focus on Asia. Eastman and China's Sinopec Qilu Petrochemical are building plants to make Texanol ester alcohol and TXIB plasticizer in Zibo, Shandong province, next year. The company is also considering expanding its YEC Eastotac tackifying resins joint venture in Nanjing.

There has always been good underlying growth in CASPI, but it has been obscured by a few underperforming businesses, Ferguson says. In fact, CASPI will soon be a bigger profit generator than Eastman's time-honored cash cow: cellulose acetate tow for cigarette filters.

Analysts, though happy with Eastman's reforms, aren't terribly excited about the conservative growth program the firm announced in New York. "We did not find the ... strategy singularly different from pronouncements made in the past or from strategies outlined by peers," says Kunal Banerjee, an equity analyst with Morgan Stanley.

J.P. Morgan analyst Jeffrey J. Zekauskas has a more upbeat take. "We assess Ferguson's business plan as a sensible and a lower risk, incremental program that should allow Eastman's earnings per share to benefit during the next several years from the global economic recovery and significant cost cutting efforts of recent years," he says.

Analysts are also pleased that Eastman hinted it is still planning to sell its noncore, but financially attractive, 42% stake in enzymes maker Genencor.

But Eastman's strategy, like its reform, isn't meant to be bold. Boldness, after all, is what the company has spent two years recovering from.

Rather, the strategy is meant to focus on those initiatives with the best chance of working--a commonsense approach that, according to Ferguson, is in short supply among big chemical companies. "Most multiproduct, diversified companies fall into the trap of being an inch deep and a mile wide on their initiatives," he says. "You see these thousands of initiatives, and you don't see their aggregate effect."


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