Good day and welcome to the Eastman Chemical Company Fourth Quarter Full Year 2016 Conference. Today’s conference is being recorded. This call is being broadcast live on the Eastman’s website at www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Okay. Thank you, Ebony and good morning, everyone and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Curt Espeland, Executive Vice President and CFO; and Louis Reavis, Manager, Investor Relations. Before we begin, I will cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company’s fourth quarter and full year 2016 financial results news release and in our filings with the Securities and Exchange Commission, including its Form 10-Q filed for third quarter 2016 and the Form 10-K to be filed for 2016. Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core costs, charges and gains, adjusted operating cash flow and adjusted free cash flow exclude acceleration pension payments. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the excluded items are available in the fourth quarter and full year 2016 financial results news release, which can be found on our website, www.eastman.com in the Investors section. Projections of future earnings also exclude any non-core, unusual or non-recurring items. With that, I will turn the call over to Mark.

Good morning, everyone. I will start on Slide 3. 2016 was a solid year for Eastman as we made great progress on our strategy to transform towards a specialty portfolio. Our innovative specialty businesses continue to grow strongly, improving product mix and accelerating our overall earnings growth. Strong contributors included many of our premium products, such as Tritan, Saflex acoustics and heads-up display inter-layers, Crystex tire additives, tire resins and performance films. In particular, growth in the premium products has been a key driver for the Advanced Materials segment, which has grown operating earnings for four consecutive years, with a compound annual growth rate of over 20%. On cost management, we did an outstanding job in 2016, reflecting very strong productivity gains. Overall, we were able to offset cost inflation by about $100 million with the actions we took at the beginning of the year. And we will deliver another $100 million to the bottom line in 2017 from the actions we took in the fourth quarter. All of this was achieved without sacrificing our investments in our long-term growth initiatives. We also continued to generate strong cash flow in 2016, with adjusted free cash flow of over $900 million. We increased our dividend by over 10% in 2016, the seventh straight year of increases. Over that time, we have more than doubled our dividend, providing attractive yield to investors. And we improved our debt profile by taking advantage of the European debt market twice, which further strengthened our balance sheet. Finally, we remain committed to returning cash to our stockholders, with over $400 million returned in the combination of dividends and share repurchases. This performance reflects the strength of Eastman’s portfolio, the integration and scale that has been built over decades and our strong team of employees who consistently…

Thanks, Mark and good morning everyone. Since we have a lot to cover today, I will try to be brief as possible with my comments. Starting with our fourth quarter corporate results on Slide 5, we delivered solid earnings despite the challenges we faced during the quarter. The decline in revenue largely reflected lower selling prices attributed to lower raw material and energy costs and lower fiber sales volumes, more than offsetting the higher sale volume in each of our other segments and mix improvement from strong growth in high-margin innovation products. Operating earnings were down slightly. Headwinds include lower selling prices and lower fiber sales volume. Positives included strong volume growth in all other segments and the positive impact from cost reduction actions taken throughout the year. Operating margins for the quarter were flat against the year ago quarter. Next to Slide 6, looking at the full year, we delivered solid results despite significant headwinds reflecting the strength and robustness of our strategy to transform to a specialty portfolio. Overall, sales revenue decreased primarily due to lower selling prices and lower fiber sales volumes more than offsetting higher sales volume in the other segments and mix improvement from strong growth in high-margin innovative products. Our operating earnings declined as an increase in Advanced Materials was more than offset by declines in the other segment. Operating earnings also benefited from cost reduction actions. Our operating margin for the year was 17%, and our adjusted EBITDA margin was over 23%, which is one of the most attractive in our industry. Overall, good results in a challenging business climate. Moving next to the segment results beginning on Slide 7 and starting with Advanced Materials, which had another exceptional year as they continued to deliver impressive growth driven by our innovation platforms. Fourth…

Thanks, Curt. On Slide 17, I will discuss our 2017 outlook. We are doing a great job of executing our strategy in a challenging global business climate. Strong growth of high-value innovative products continues as we benefit from leading positions in attractive niche markets. We are increasing our investment in innovation and product development so we can accelerate around them in the coming years. And we are seeing the benefits of scale and integration, translating this attractive growth into earnings. Additionally, our growth in innovation has leveraged to attractive disruptive macro trends in areas such us health and wellness, energy efficiency and the emerging middle class. This enables us to grow faster than the underlying markets with our new innovative products. At the same time, we are achieving our cost reduction goals. And I can’t say enough about our employees around the world who make this possible. We also benefit this year from the net of propane and currency hedges continuing to roll off and we continue to use all lines in the income statement to support our EPS growth. All of these actions are helping to offset the challenges we continue to face, including sluggish global GDP growth, a stronger dollar, volatile raw material and energy prices and the challenges we face in fibers. Putting all this together, we maintained our prior guidance of 8% to 12% EPS growth. We continue to expect earnings per share to increase at least 8%. Depending how the variables I mentioned play out, EPS could be as high as 12%. We also expect strong free cash flow this year of approximately $1 billion, which is one of the strongest yields in the industry. And we are creating value for our stakeholders with our balanced and disciplined allocation of this cash. You should expect an acceleration of share repurchases continue de-levering at an increasing dividend. In summary, on Slide 18, we have a strong portfolio of specialty businesses. We will continue to drive organic growth, accelerate innovation and improve our product mix. We are committed to using every lever we have in this challenging environment and we will return our strong free cash flow to stockholders. I am confident that 2017 will be a strong year for Eastman with increasing earnings and a record free cash flow. Most importantly, I believe that we are building one of the world’s leading specialty companies to deliver long-term sustainable growth. Thanks for joining us this morning, and I look forward to your questions.

Thanks Mark. We have a lot of people on the line this morning and we’d like to get to as many questions as possible. So please limit yourself to one question and one follow-up. With that, Ebony, we are ready for questions.

Thank you. [Operator Instructions] And we will take our first caller, David Begleiter with Deutsche Bank. Please go ahead.

Thanks. Good morning.

Good morning, Dave.

Mark, you referenced the lag in catching up to the higher propane and propylene prices, can you discuss the impact or how that flows through Q1 versus Q2? I assumed Q1 might be a little bit weaker, but you should catch up in Q2 and Q3?

Hi, David. I think you sort of summarized it well. With the Chemical Intermediates business, we are already seeing prices go up now as we keep track with the way our raw material prices are moving in the marketplace. But when you think about the specialties, whether it’s Advanced Materials or Additives & Functional Products, there is always a bit of lag in how your prices adjust. And it’s usually a 3 to 6-month lag from when Ross moved to when you see prices go up. We are moving aggressively on how we try and do that. But a lot of places, the specialty businesses have quarterly prices. So we feel good about our ability to get the prices up, it just takes a little time. And it’s the same on the downside we benefit a lot when Ross came up for the same reason.

And Mark, just on the free cash, ex the dividends you need to pay, should – most of that cash go to share buybacks?

All the cash will not go to share buybacks. We are extremely happy to set a record in free cash flow this year and looking forward to that number. But you got to remember that a portion of it goes to dividends, which would be about $300 million. And then you have got the remainder being split between share repurchases and de-levering.

And how much de-leveraging do you think you will do in 2017?

David, this is Curt. What Mark is saying is about half of that remaining $700 million roughly free cash flow will be split between share repurchases and de-leveraging.

Thank you very much.

And we will take our next question from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good morning. Thank you. With regard to Advanced Materials, Mark, would you comment on your expected margin trajectory, 2017 versus 2016? Would you expect that to be flat, up or down?

We think that the Advanced Materials margins will be relatively flat. I mean, Advanced Materials has had a phenomenal run. They have had 4 years of compounded growth to 20%, all driven by volume and mix and fixed cost leverage, very little of it has been raw material tailwinds. And so it’s been just a great story. As you look at ‘17, we continue to expect very strong volume and mix growth. We have got so many great things happening on the innovation front there. We expect another year of double-digit growth and Tritan and Saflex acoustics inter-layer products as well as heads up display and performance films, so growing a lot faster in those key products than high margins improving mix. But at the same time, as I just I said to David’s question, you do have raw materials moving up and there is a little bit of lag, prices catch up to Ross just like it would happen in Additives & Functional products, you have also got currency as a headwind and some startup costs around our two growth investments in PVB and Tritan, which are going to be great to support our growth long-term. So when you net it altogether, it moderates the rate of earnings growth and we will expect this year from the prior years, but still a solid year of earnings growth and the way that margins sort of works out with all those moving parts is margins stay about flat.

Okay. And then a follow-up for Curt if I may, on pension. It looks like you injected $150 million in the quarter, making $200 million for 2016. What is your expectation for pension contributions in 2017 please?

That would be – that $150 million was accelerating contributions we would have made in ‘17 and ‘18, maybe a little into ‘19. So we will not be making any pension contributions in the U.S. in 2017.

Excellent. Thank you.

And we will take our next question from John Roberts with UBS. Please go ahead.

Thank you. There is another ethylene asset being sold, do you think we will have to wait for that to be agreed to as a deal before we can get a deal for your Longview operations?

Well, first of all, John, I think it has some impact on our process, but we will continue to have a number of parties actively engaged in our process. And maybe just to recap that, we are continuing to work a variety of options from outright sale partnership and commercial options. Each negotiation has its own scope, structure and timeline. I don’t think that’s – as I think about those negotiations, I don’t think they are dramatically impacted by what’s going on with the competing asset, but we will see. But it’s just not your typical divesture process. So we are going to continue to be a patient seller. We will see how these things play out in the marketplace as we try to create some value with this transaction. So, it’s just going to take some time.

And then in cigarette filter tow, you are going to have a new owner of a competitor do you consider that good, bad or neutral to the competitive dynamics?

Blackstone is a company who has owned us as a tow business before and understands the industry and I think has been a very rational player back in their history, where they saw the value of rationalizing high cost assets to be better positioned to serve their customers. So I think that as a new owner in this industry, I would expect that’s a good thing and more continued rational behavior. I assume they are going to have a decent amount of debt on that deal and be very focused on cash flow generation, which is I think senseful.

Okay, thank you.

And we will take our next question from James Sheehan with SunTrust Robinson Humphrey. Please go ahead.

Good morning. Could you elaborate further on what you are seeing in China in terms of filter tow demand being a little weaker than you expected? What are the dynamics there?

Sure. Before I get to that, I just want to be clear and emphasize something Curt said, nothing has changed outside of China. So we have held our market share and expect volume to be flat. Prices will come off as we defend our market share. So I think that that’s played out. The incremental 5% change in our guidance is really about demand in China. And it really is still more of a de-stocking story more than anything else that we can sort out at this stage. The Chinese National Tobacco Company is extremely focused on destocking, at all levels, whether it’s retail, wholesale or tow and are continuing to that. They intend to hold production rates basically flat to last year of cigarettes. But want to continue pulling down some tow inventory from what we can tell on that gets us to that potential 5% down. I would be clear that, that is not yet finalized. And so we will have to wait and see how those contract negotiations complete. But it seems about the right direction. I would note there is a couple of other things around this business. One is for the first time CNTC has actually published data about the retail inventory level and suggests that it’s declined 30% from where they were a few years ago, which is actually quite good news, assuming the data is accurate. Because if you think about cigarette production, it’s only declined about 5% in that same timeframe, it would suggest that retail demand out there is still healthy sort of for the reinforcing the de-stocking theory about what’s going on in China. Looking forward though, as we look at all of this, we are doing everything we can to stabilize this business. So we are now in a…

Terrific. And following upon this question before on the Longview cracker, are you still focusing on the first half of 2017 of having sort of a permanent arrangement settled for that and also can you update us on the pipeline dispute please?

Sure. I will do that in reverse order. On the pipeline dispute, we continue to win on all fronts, including a favorable ruling we have had on the tariff dispute as well. So the bottom line, the pipeline dispute really doesn’t concern me and there is no longer a rate limiting factor around our efforts to sell this, exit that plant and commodity derivatives. From the timeline, the assets, we are still trying to target something by mid-year. But as I mentioned, these are all unique negotiations going on. Some could be longer or shorter and we will just see how those play out over the next several months.

Thank you.

[Operator Instructions] And we will take our next question from Robert Koort with Goldman Sachs. Please go ahead.

Good morning. This is Ryan Berney on for Bob.

Good morning.

The Additives & Functional Products volumes ticked up decently this quarter and look like it was your best quarter of the year, so I was hoping you could maybe give a little color around the underlying components there around the businesses and individual volume numbers and then maybe how those have trended so far in the first quarter?

Sure. We are quite excited about seeing the improvement in volumes and it really was across many fronts in the fourth quarter. So we saw strength in coatings, saw strength in adhesives and care chemicals. We even had some de-stocking go on in tires, so the growth rate was even better in those other segments when you factor that in and that de-stocking seems to have cleared. So as we look at that momentum going into the first quarter in the year, we continue to expect strong growth. We see very solid orders, actually strong orders in January. And we think that the underlying markets, whenever you think about the key markets we are leveraged to transportation, building construction, and consumables, care chemicals within that, there is a lot of great trends going on, a lot of optimism on the consumer side and you are seeing it from a number of companies where demand is holding up quite well there. So we expect good underlying market growth as we go into this year. On top of that, we are creating our own growth. We have some great innovation happening across AFP and getting traction. We already have double-digit growth happening in tire resins and that will continue. We have other new innovation projects starting to gain traction and we will put some volume points on the board this year in our Tetrashield polyester coatings and our new Aerafin polymers for adhesives. So you have got a number of places where innovation is going to drive more growth like we do in Advanced Materials on top of the market. And in addition to that, we have got specialty fluid having some very large solar fills. They have done some great jobs and winning some of the big projects and those fills are going to happen this year. So we feel really good about growth on the volumes side and AFP this year.

Great. Thank you. And then I also want to follow-up on the comment you had made a little earlier on the call around $20 million in costs between the Additives & Functional Products and Chemical Intermediates business, just I wasn’t sure I heard it right, so I wanted to get more clarity on what exactly that was?

So if you just think about looking at 2016, if that exact cost structure we experienced in 2016 had been reflected in the 2015 recast, there would have been $20 million more costs in 2015 in AFP and thus lowering their 6.60 to 6.40, and the offsetting would have been in Chemical Intermediates, so just a way to think about the year-over-year comp between the 2 years.

Understand. Thank you very much.

And we will take our next question from Frank Mitsch with Wells Fargo Securities. Please go ahead.

Hey, good morning gentlemen.

Good morning.

Good morning Frank.

Hey. One of your Board member’s companies is noted for saying that their EPS growth forecasts are, “commitments not aspirations” and I guess I was a little surprised pleasantly to see that you are reiterating your 8% to 12% growth, especially as you talk about a challenging business climate out there, so I was just curious, what sort of GDP expectations do you have, what are your expectations regionally in terms of growth and how confident are you in that 8% to 12%?

Thanks Frank for the question and obviously, very important one. We feel great about everything that we are doing that’s in our control. So we are delivering and holding on to our core growth in our end markets and those end markets look like they are pretty good. We are delivering a lot of innovation. It’s really starting to happen all over the place in Advanced Materials, AFP and even some in Fibers that gives you some additional growth as well as more importantly, the mix upgrade, because a lot of times, we are shifting asset from a standard product like a core copolyester to Tritan or standard interlayer to heads-up display interlayer, getting more capital efficiency and earnings lift of the same asset, so all that’s going well. The cost management is in there, aggressively reducing cost, the hedges rolling off, as I said. So a lot of those things that you give you tailwind. As we look at the current market conditions, which I will explain in a moment, that gets us being closer to 8% in the range. And what we are assuming there Frank is that the underlying economy around the world is growing similar to last year, maybe slightly better. So solid U.S. growth, Europe sort of recovering, Asia growing better than the rest of the world, but still not a great rate. End markets, also solid growth, nothing too exciting. So that’s sort of what gets into that closer to eight [ph] view of the world. Obviously, there is a lot of optimism about the economy getting better, number of companies talking about that. And if that plays out, that’s going to be upside for us. That’s also translates to the second assumption, which is we are assuming sort of a normal pace of getting prices up in specialties relative to how raws moved. As the economy strengthens, if we can be more successful in pushing those raws through, obviously, that would create some upside relative to sort of where this were eight number. When you think about energy cost, we are using the forward curve on natural gas. Natural gas prices are likely to turn out to be lower than that, that will be some upside. Taxes, another place where right now, with the guidance that Curt gave you, we have got about 200 basis points headwind in tax and we have number of projects we are working hard right now to try and improve that tax rate. So there is a number of different things and we all know that olefins can go in any direction, better or worse, that’s just an uncertainty. So I think that as you look at it, we are driving hard, we like the range that we have. With the world as we see it today, we are closer to 8, but there is clearly a lot of places to have upside.

That’s very helpful. Appreciate it. And you did mention that you are counting on getting pricing up in the specialty side, you outlined the positive trends in AFP in terms of volumes, how is that trending so far in terms of getting pricing in AFP?

Yes. So I think that the AFP side is one that’s had some good trends. So, we obviously had prices come off in the first half of last year as we talked about as we shared some of the raw material benefit that we held on to in 2015. And you can see that on the ‘14 to ‘15 to ‘16 chart that some of that margin expansion was shared, but not all. The good news is price is stabilized from the second quarter through the back half of the year. And that was important. As we move into the first quarter, we have a few places where we can get prices up, but a lot of it is going to lag, the raw materials. And so as I mentioned to Dave earlier, we will see that more in the second and third quarter as prices come up, but these are great products. And for the vast majority of what we have in AFP I think we will be able to sort of recover those raws. There are few places where we don’t have pricing power like adhesives, where it’s been incredibly tight moving to more of a balanced situation and there is a little bit of Crystex prices coming off. But overall, we feel good about it.

Alright, great. Thank you.

And we will take our next question from Duffy Fischer with Barclays. Please go ahead.

Hey, guys. This is Mike Leithead on for Duffy. Just real quick on the currency. Currency and commodities have moved kind of quite a bit in the past 3, 6 months, should we still expect propylene and FX hedges rolling off to be in that $0.30 benefit next year?

Well, sure. So, first of all, let me just remind you, overall we are assuming olefin spreads are the same as last year. However, we are using the forward curve on oil and natural gas. So, the absolute feedstocks are higher than last year as you can see in the marketplace today. So given this assumption, the net benefit or let’s call it tailwind from the reduced commodity hedge costs, has actually increased over $0.50 a share versus the previous $0.40 a share on a year-over-year basis. The offsetting impact is still within the currency hedges that are rolling off, which is still probably now just over $0.10 a share. So, it’s now kind of roughly $0.40 a share net benefit of the hedges rolling off versus our previous outlook. But again, this is offset by the prices catching up the raw material that Mark talked about. Even in Chemical Intermediates, there can be a lag in pricing. We are also assuming higher energy cost and that is not as easily recovered in prices. And again, there is the impact of the stronger dollar on the hedged earnings. And since I am talking about the hedge, I also want to make sure it is a good chance to remind everyone that 80% of the benefit of the feedstock hedges rolling off go to Chemical Intermediates, the remainder will go to AFP and Advanced Materials, but then almost all the currency headwinds that I mentioned are going to be impacting the Advanced Materials and Additives & Functional Product lines.

Yes. Just to pile on, something else I want to say is that we are officially out of the olefin forecasting business. I don’t think anyone has been right in calling it, especially at the quarterly level about what’s happening here. So, we are going to just continue to give you our assumptions that we have made. Obviously, everyone has got their own opinion of where it’s going to go, no matter where you look. And for us, I think we are fortunately headed to a story where this becomes less and less relevant. We have got the transformation where 70% of our earnings are going to the specialties. So, hopefully this is going to be less of a topic for us.

Got it. And then Mark, the tow industry has been quite volatile the past few years, do you think with the new industry contract structures and the new asset owner in the space, the industry is kind of structurally set up better to handle further volatility down the line, let’s say, maybe it was 12, 24 months ago?

Yes, I do. I think that we are highly committed as a key player in the industry to do everything we can to try and drive stability and provide disciplined behavior and we are going to continue doing that. And I do think the long-term contracts helped. Obviously, if someone starts rationalizing high-cost assets, improve their ability to serve their customers that would help. And I have every expectation that Blackstone will be a rationale behavior in the marketplace. So I think all these things help.

Thanks. Appreciate the color.

And we will take our next question from Mike Sison with KeyBanc Capital. Please go ahead.

Hey, guys. Happy New Year.

Hey, same to you.

Mark, when you think about your bridge for 2017, just curious how much of that growth you think will come from your specialty businesses and AFP or maybe another way to look at it is just does the earnings growth of those two businesses kind of mirror the EPS growth potential that you see?

Well, I think that EPS growth is, you got to remember there is other lines of the income statement as you flow from operating earnings to the bottom, right? So we have got things that we are going to do on improving interest costs. And the actions we took, we have things that we are doing to improve share count to keep in mind. But I do think what we are going to see is very solid earnings growth in the two specialty segments and pretty strong recovery in Chemical Intermediates. So, bigger percentage increase there, as the majority of those hedges rolling off flow into that segment. But overall, it’s going to be a great story of the three segments delivering important and valuable earnings growth and a lot of cash flow, obviously offsetting the headwinds we have in fibers.

Great. And then as a quick follow-up, I know the focus initially is stock buyback and debt reduction, but I think you have done a good job of adding high-quality business to your portfolio, any thoughts on acquisitions and continuing to find specialty assets to add to Eastman?

Look, I think we have had a very impressive track record of doing excellent M&A that’s created a lot of value for our shareholders. I am very proud of all the acquisitions we did from Solutia, Taminco to Commonwealth to the DPA aviation turbine business, which has been powerful and tremendous in improving the quality of our earnings, the robustness to sort of withstand some of the headwinds we have seen in the last couple of years. And equally important, by the way, generate a lot of free cash flow. I mean, those businesses are just fantastic. And we didn’t overpay for them, which is something I am quite proud of. Paying 9x EBITDA, with 7 or less after synergies, is a lot better than the way the transaction multiples are playing out these days. So as I have said in the past, we have no intention to do any large M&A at this stage. The multiple is being paid right now are way outside of the range that I think provide attractive return on capital to our shareholders. We are always interested and open to bolt-on M&A that has a very tight strategic fit to a business we are already in. And we will always be looking for those opportunities. I will tell you right now, I don’t have anything in the pipeline that has any near-term possibilities. So, what we are focused on doing right now is what we have been doing, drive growth organic improvements, get all these innovation programs, delivering results, take the cost out where we can, deliver earnings and cash flow growth and return that free cash flow to shareholders and an increasing dividend in share repurchases. So that’s our focus. I would really say for this year, for the great bolt-on M&A comes along that we haven’t thought of. We are always going to be smart and thoughtful about it, if it provides an attractive return.

Great. Thanks Mark.

And we will move to our next question from Laurence Alexander with Jefferies. Please go ahead.

Good morning. This is Dan Rizzo on for Lawrence. You guys mentioned Tritan and Saflex 10% growers, was there any other I mean products that kind of stand out as something that is reaching that level or has the potential to reach that level in the next year or two?

So, as I said, double-digit growth in Tritan, acoustics and heads-up inter-layers, performance films is growing double-digits in North America and China, because we have new channel strategy that allows to grow a lot more, lot faster than the OEM growth rate. Tire resins in AFP is growing at double-digit rates. The solar winds will be very high volume growth rate relative to last year. So, lot of different places where we are seeing volume growth. I know you have got the new products gaining traction in the marketplace, so they are sort of zero, but now starting to add volume to the story, like the Tetrashield polyester coatings had modest amount of volume with our first one, with our first customer last year that we told you about on the first quarter call, and that’s now picking up momentum with several customers. So, we are going to see more of that this year. The new Aerafin polymer that we are launching that is a better performing polymer and adhesives for hot melt adhesive applications we expect value there. So we are starting to see growth all over. I mean what I love about this is it’s an innovation story that’s starting to pop up across various set of end markets and on multiple technology platforms that really sort of proves that we are creating the value that we intended that we are getting the returns on innovation investment. And then we are making that transformation to being a true specialty company.

Then what percentage of your sales of your products are 10% growers or potentially 10% growers?

We don’t actually disclose that data. But I think what you will see as Mark talking about $200 million of new business closed and trying to accelerate that and that’s going to be driven by those innovation programs that he has already mentioned.

It goes back to the guidance we gave a while ago that says that we can sort of grow the core with the underlying markets and then add sort of 1% to 2% revenue growth on top of that. And we have just proved that in ‘16 with the $200 million new business closed and I think it will be a better number this year.

Okay. And then quickly, you said that you gave the raw material and FX functions, but are you assuming FX stays where it is right now or you are assuming any appreciation going for the rest of year or I am just wondering what level we should think of?

Our assumption currency for us, particularly European exchange rate is where it is today.

Thank you very much.

And we will take our next question from P.J. Juvekar with Citi. Please go ahead.

Yes. Hi, good morning.

Good morning.

Good morning.

In Additives & Functional Products, your operating margins were down 200 basis points in 4Q, can you just talk about what happened to Crystex margins and is raw materials an issue for Crystex in 2017?

Well, let me speak to AFP as a whole. First of all, you think – first, if you think about the differences in the cost flow that come up, AFP was down less than 5% from 2015. But AFP’s price declines are in line with our expectations from the beginning of the year as we have already mentioned, they have also been stabilized. And as we look forward, we expect them to continue to be stable and coatings particularly, they are likely to increase with the increasing raw material environment. So despite the price decline, AFP’s operating margins have remained about 20% for the year. And more importantly, our decision to share raw material value with our customers has maintained a strong customer engagement, enabled us to make great progress on our innovation effort. So we have now a more robust and credible growth portfolio in AFP than any other time for all the things we have talked about. So across the portfolio is where I encourage you to look at that. And I think you are going to see continued strong margins in AFP.

Yes. I would note that as you look at ‘17, we expect margins to be more similar to the full year average margins for ‘16. So I wouldn’t read too much into the fourth quarter number.

Okay. Thank you. And then on filter tow, given that China continues to de-stock and demand continues to go down, do you think the industry needs to shutdown capacity and do you have any plans for capacity shutdowns? Thank you.

So as I mentioned earlier, I think that the demand situation in China is certainly not as dramatic as the drop in tow imports. So we see a lot of evidence of substantial de-stocking going on at the retail level, at the wholesale level and the total level that really is the story about why imports have come down as well as don’t forget that we added two significant tow plants between our joint venture with CNTC and Daiso’s joint venture. So a huge amount of the imports was just then backward integrating. So you have to be very careful about interpreting what’s going on in our volume story to a primary demand story. No question, primary demand is not growing as fast as it used to in China. And it may be that it’s moderated by some of these changes on corruption and some other economically driven issues around affordability for the average Chinese consumer. But this recent data about the 30% pull-down inventory, if it’s accurate, would suggest primary demand is actually holding up reasonably well. To your second question, in total, there is no question that there is excess capacity in this industry. And there are a number of high cost standalone assets that our competitors have and it’s their decision obviously about what they are going to doing with those assets. We are going to continue to defend our market share and our marketplace and they are going to have to decide what they want to do. But there is no additional assets for us to take out. We have – were down to one flake asset, which is the largest scale, backward integrated in coal and the lowest cost in the world. We have some tow assets here in Korea that match that flake capacity and so there is absolutely no reason we would reduce our tow capacity relative to our flake capacity, especially as we have these new applications we are developing that can utilize some of those assets into other markets. So we have done everything we can. We shutdown our UK facility to take out tow capacity. We exited the flake joint venture we have with Primester. So we have actually taken actions in the last 2 years to improve our position. Now, we will just have to wait to see what other people do.

Great. Thank you, Mark.

And we will move to our next question from Vincent Andrews with Morgan Stanley. Please go ahead.

Thanks and good morning everyone. Just wanted to try to get a better sense of a few of the dynamics that would be impacting the flow of earnings through the year, if I remember correctly from last year, the hedge, the mechanism of the hedge is such that, I guess there is – it is different effect of it in the first quarter versus later in the year, so I would like to review that. Also in terms of the cost savings, will those flow-through evenly through the year, likewise the risks that you mentioned on tow from China, is that something that’s on the come or will we know about that in the first quarter? And let’s just leave it there for now?

This is Curt, let me start. You are absolutely right on the hedges. Generally speaking, the impact of the hedges is actually felt in second, third and fourth quarters, a little bit more in the fourth. And they don’t see a lot of impact in the first quarter, just because of the hedges reset and how inventory turns occur. So you have got that absolutely right. On cost, yes generally speaking, that’s going to flow even through the year. There are some things we are working on, the indirect procurement side that will accelerate during the course of the year. But if you want to use it on average in the course of the year, you are probably not that far off.

Just on two other points Vincent, one is we have already talked about price versus raw, so there is a little bit of catching up on prices relative to raw that will slow the rate of growth in the first quarter. And on tow, the volume patterns in tow are always a bit chunky, as we have told you before. The first quarter of last year was a little bit strong, this quarter might be a little bit lighter, so there might be a little bit of a difference there, but I wouldn’t read anything into it.

Okay. And then just as a follow-up, you have I think that’s Slide 4, you had a lot of innovation on it, so it sounds like you are making a lot of progression there, but I did notice that our R&D for 2016, at least on the income statement, it appears it declined, is that just sort of a transitory thing or is that part of the cost savings or are you just optimizing your spend?

That’s a great question. We have been making a tremendous amount of investment in our growth capabilities across the company. But the first thing you do is always make sure you are getting the best return on cost for your investors. So we have been shifting the R&D dramatically from a lot of process technology efforts if you think about where we were a number of years ago, being a more diversified mentality to a very focus on innovation and market development. So our top 10 innovation programs within that R&D, we have actually doubled the R&D on those top 10 programs. Within that spend, we have actually shifted our resources working on application development capability from 20% to 40% of the resources and that’s a dramatic change. The secrets of success of specialty company is having application development capability. And for those who don’t know what that is, that’s basically having our customer’s capability to do what they do. So we have paint booths that are state-of-the-art equal to an OEM paint booth for automotive paints in two places, here and Shanghai, where we can formulate our own coatings, prove it out and exactly how they paint it in every environmental condition around the world and show not only our coating customers, but the OEMs what our Tetrashield polyester can do and our other additives can do in coatings. We have the same ability in tires, where we can make tires and road test them and show what our state-of-the-art new proprietary tire resins can do to improve traction on a tire. Same thing we have been doing for years in specialty plastics around making every thing you can make from a thermoplastic. We actually do it. We build molds and set process conditions for our customers because we understand their processes better than they do sometimes, same in inter-layers where we can make a windshield. So significant increases in spend there, significant shift in the SG&A as well in resources towards marketing and sales where we are building some of the world-class marketing capabilities. And our sales forces is just great at carrying a great culture that we have inside Eastman around collaboration and integrity and responsibility of doing what we are saying we are going to do to our customers. But I do think that the spend will increase. So first, we are going to get a good return for you on the money we have and I think we are doing that. Second, we are now going to start increasing R&D spend as we go forward. As these programs are starting to ramp up and become much more significant, it requires more resources to support multiple customers in taking and activating the market. So you will see that’s been the increase.

Okay. Thanks very much. I appreciate it.

Let’s make the next question last question please.

And we will take our next question from Nils Wallin with CLSA.

Great. Thanks for taking in. Thanks for footing [ph] me in. Just a question back on the cadence of the earnings growth, you used – you certainly spoke a lot about the price versus raw and the lag there and some sort of headwinds in the first quarter, the rate of growth growing, should we think about sort of tougher comps in the beginning first half of the year in terms of the year-over-year earnings growth and then improving dramatically in the second half?

Yes. I think about – when I think about the comps, the comp I think that’s going to be tough is the first quarter comp, for the reasons you described. I am not sure we are going to show 8% growth year-over-year, but we will see how the year plays out. But the toughest comp is first quarter. I think you will see good results as we progress through the rest of the year.

Great. And then just a quick follow-up on tow, obviously a lot of discussion about rationalization and what have you, what type of a capacity rationalization does the industry need to make in order to get back to the 90-plus operating rates you enjoyed in the ‘13 through ‘15 time period?

Well, I am not going to get into specific numbers and it’s not even appropriate for me to really comment on specifics because it’s not my assets, I think it’s a more appropriate question for the people who have them. I think that there is enough capacity out there to rationalize to make the industry tight again. It’s just a question of whether or not other people choose to do it.

Thanks very much.

Okay. And thanks again everyone for joining us this morning, really appreciate your interest in Eastman. A web replay will be available on our website later this morning. Have a great day.

And this concludes today’s call. Thank you for your participation. You many now disconnect.