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Business

Eastman Finds Its Stride

Executives have sworn off reinvention, instead focusing on what they think the company does best

by Alexander H. Tullo
June 7, 2010 | A version of this story appeared in Volume 88, Issue 23

SPECIALTY PLASTIC
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Credit: Eastman
Eastman recently started up a plant in Tennessee that makes the polyester copolymer Tritan.
Credit: Eastman
Eastman recently started up a plant in Tennessee that makes the polyester copolymer Tritan.

Until fairly recently, Eastman Chemical executives pursued every fad going around the chemical industry like a pack of preteens loitering at a mall.

A decade ago, it was Eastman’s chief executive officer, Earnest W. Deavenport Jr., who jumped on the specialty chemical bandwagon. He spent a combined $850 million, including debt, to buy the ink raw material producer Lawter International and the coatings resin maker McWhorter Technologies. His aim was to create a formidable force in coatings, adhesives, specialty polymers, and ink—a sector known as CASPI.

Deavenport next planned to split Eastman into separate commodity and specialty chemical companies. Back then, the fashionable thinking was that the stock market was pigeonholing diverse firms like Eastman as commodity makers. Forming independent specialty companies would, in a phrase popular at the time, “unlock hidden value.”

When J. Brian Ferguson took Eastman’s helm in 2002, job number one was triage. He canceled the split after only a month in office and ended up selling most of McWhorter and Lawter for a mere $215 million. He even shut down another quintessential turn-of-the-millennium foray: the company’s Cendian Internet commerce and logistics services business.

Eastman At A Glance

Headquarters: Kingsport, Tenn.

Sales: $5.0 billion

Net earnings: $136 million

R&D spending: $137 million

Capital spending: $310 million

Employees: 10,000

BUSINESSES (% of total sales):

Performance chemicals and intermediates (26%): Agriculture and pharma intermediates, food and beverage ingredients, photographic chemicals, and ethylene

CASPI (24%): Hydrocarbon resins, rosins, and rosin esters; solvents; coatings additives; cellulosic polymers; and ester alcohols

Fibers (21%): Acetyl chemicals and acetate tow, yarn, and flake

Specialty plastics (15%): Polyester copolymers and cellulosic plastics

Performance polymers (14%): Polyethylene terephthalate intermediates and polymers

Website: www.eastman.com

But Ferguson had his own big ideas for transforming Eastman. Seizing on the rage for alternative energy and feedstocks at the end of the past decade, he signed on to participate in a pair of $1.6 billion projects in Texas and Louisiana to make methanol, methanol derivatives, and ammonia from petroleum coke. He also converted part of Eastman’s specialty chemical plant in Batesville, Ark., to produce biodiesel. Neither plan worked out. The firm ended up pulling out of the Gulf Coast projects and selling the Batesville plant.

Through all the trend-chasing, Eastman’s core is the same as it has always been. The firm’s main plant is still the massive complex in Kingsport, Tenn., set up in 1920 by Eastman Kodak founder George Eastman to make methanol. The 858-acre facility is home to about 7,000 of Eastman’s 10,000 employees. There, buildings clad in Tennessee brick evoke mid-20th-century industrial progress. Some of the site’s earliest structures are still being used.

And in Kingsport, the company still transforms some 56 railcars of coal per day, via methanol, into acetyl chemicals and acetate tow for cigarette filters. In fact, the acetate products business has been a consistent cash generator for Eastman. Last year, it generated about 21% of the firm’s sales and more than half of its operating profits.

James P. Rogers, Eastman’s CEO today, said the company is now comfortable in its own skin. “We know who we are, and we like who we are,” he recently told an audience gathered in Kingsport to mark the opening of a new plant.

That plant is one of Eastman’s current growth initiatives. It makes a new polymer, Tritan, that builds on Eastman’s polyester expertise. It is a copolymer of dimethyl terephthalate, 1,4-cyclohexanedimethanol, and 2,2,4,4-tetramethyl-1,3-cyclobutanediol, a new monomer developed by Eastman.

Tritan was launched in 2007 to address the cracking that develops in polycarbonate housewares when they are run through a dishwasher (C&EN, Aug. 31, 2009, page 20). The timing proved impeccable. Concerns over the estrogenic effects of bisphenol A, a polycarbonate raw material, boiled over at around the same time, leading retailers such as Walmart to ban polycarbonate in baby products. Tritan quickly took off as a substitute. Late last year, Eastman started up a 30,000-metric-ton-per-year Tritan plant and a facility to make the new monomer.

The Tritan plant’s capacity can readily be doubled, and Eastman might need the capacity before long. At the Kingsport event, Dante J. Rutstrom, the firm’s vice president of specialty plastics, said Tritan sales have quadrupled over the past 12 months. And the company is still poaching big game from the polycarbonate market. Industrial packaging maker Greif began making 5-gal water jugs—the kind found in many offices—from Tritan earlier this year.

Although it’s getting into new polyester, Eastman has been exiting traditional polyethylene terephthalate resins, a business it has been in for more than 50 years. In April, the company disclosed that it is pursuing “strategic options” for its PET business.

Eastman had already been backing out of PET: In 2007 and 2008, the company sold its plants in Latin America and Europe. But it had decided to stick to its home market, making PET with a new process that closely integrates PET and purified terephthalic acid production. Yet the business hasn’t turned a profit for the past three years. And at its plant in Columbia, S.C., Eastman spent more than a year trying to resolve operational difficulties that were fixed only recently.

As a result, Eastman lost face in a tough market where the likes of Coca-Cola and Pepsi are key clients. “Whenever you disappoint a customer, they remember that,” Rogers said. “Our share of the carbonated soft-drink market isn’t what it should be. We have been pushed down to some lower value segments.”

And the business has changed, Rogers added. The venerable competitors that Eastman grew up with—DuPont and Shell—sold out to companies such as Mexico’s Alpek and Italy’s Mossi & Ghisolfi long ago. “We are the last U.S. public company involved in the marketplace,” he pointed out.

Gregg Goodnight, principal of Sugarland, Texas-based ChemAnalysis, said the PET business enjoyed exceptional growth—averaging 7% per year—between 1997 and 2007. But the business stalled in 2008 and 2009. And with thinner-walled bottles, environmental concerns over bottled water, and recycling, “the years of strong PET growth are likely over,” Goodnight said.

Meanwhile, the technology to make PET has been commoditized, allowing more companies to enter the business with bigger and bigger plants. “The capital costs keep going down on a per-unit-of-capacity basis,” undermining profitability for existing producers, Goodnight said.

Despite Eastman’s newfound appreciation for its core operations, Rogers hasn’t sworn off making acquisitions. In March, the company purchased Genovique Specialties from the New York City-based private equity firm Arsenal Capital. With 2009 revenues of $135 million, Genovique is a maker of sodium benzoate, benzoic acid, and specialty nonphthalate plasticizers.

Eastman, in contrast, makes phthalate plasticizers, which are being shunned because of mounting concerns over their effects on human health. In response, Eastman has been developing a nonphthalate plasticizer business with materials such as dibutyl terephthalate, trimethyl pentanyl diisobutyrate, and a newer product dubbed Eastman 168.

“We like a lot of things about Genovique,” Rogers said about the deal. “We like that it is integrated back to benzoic acid. We like that it is a nice sustainability play. We are already present in the plasticizer market, so it was easy for us to do our homework in terms of what is going on in the marketplace. And finally, we think it is financially an attractive deal.”

Rogers regards the Genovique purchase as a model for how Eastman will conduct future acquisitions. “It hit on all cylinders,” he said, “and I am trying to warn people that every acquisition that we do won’t always be as nice a fit as Genovique.”

Still, he’s confident he will find other attractive deals. “We believe that we are on the front end of this business cycle, so we have several years of growth ahead of us and the industry in general. Now is the time to be looking at acquisitions,” he said.

In particular, Rogers is looking for acquisitions that are more than “bolt on,” a buzzword common among executives who maintain they are seeking small, sensible deals. “Frankly, I would have loved it if Genovique had been two to three times bigger,” Rogers said. “The very nature of saying ‘bolt-on acquisition’ implies that it is going to be less than what you are bolting it on to.” He said that the purchases he has in mind would run in the “few hundred million range.”

Yet Rogers insists he isn’t on a shopping spree. “You should always expect us to be somewhat conservative in how we approach acquisitions,” he said. In his view, a smart deal was the purchase of Hercules’ hydrocarbon resin and rosin business, bought just after the purchase of McWhorter and Lawter. Unlike those firms, Eastman has held on to the Hercules business. “It is setting record earnings now,” Rogers said. Another acquisition he likes is the specialty cellulosic polymer plant Eastman bought in Shanghai earlier this year.

Aware of Eastman’s checkered past with big, bold initiatives, Rogers said that the firm’s priority is to build on what it does well. “I see a really bright future for Eastman sticking to what we know and driving our core businesses,” he said. “It really is a very simple strategy. I think you can win with a simple strategy, as long as you execute it very well.”

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