伊士曼化學 (EMN) 2001 Q1 法說會逐字稿

Good day everyone. Welcome to the Eastman Chemical Company first quarter earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Earnest W. Deavenport. Please go ahead sir.

Good morning. I want to welcome you to our first quarter 2001 earnings release conference call this morning. We have a tremendous amount of work going on at Eastman these days, thanks to the dedication of all the Eastman employees worldwide. Just to review, we are the highlights of what we really have going on. First of all, we are in the process, as you know, of implementing SAP R3 web-enabled version on a worldwide basis and that is taking a lot of time, but we are well on schedule for that. We expect to finalize the acquisition of the Hercules Hydrocarbon Resins business in just a few days on May 1, and this is an excellent acquisition with very good value. It fits very well with our current coatings, adhesives, specialty polymers and inks business. Thirdly, we are moving along with a recently announced restructuring of our planned chemicals business. As we said in the press release, it became clear to us that selling the Arkansas, the Wales, and the Hong Kong assets together clearly did not create value for the shareholders. So, now we plan to retain ownership of their Arkansas facility and we will continue operating Tennessee portion of this business, while we continue to evaluate our options regarding our facilities in Wales and in Hong Kong. Next, we are continuing to work through the process of integrating all of our recent acquisitions that we made over the past year, and next, we are on track to meet our extended goal of $300 million in cost reduction by the end of the year 2001. And finally, as all of you know, we are working through the process of spending part of our company, which we anticipate will occur by the end of 2001. Now, I know some of you are anxious to hear additional details of the span. Let me comment on that. We have essentially completed our work on the asset allocation and we expect to be in a position to issue a press release on that to give you an update on the span, which will include the major asset allocation, and we hope today to do that shortly after the annual meeting, and the annual meeting takes place next Thursday of next week. Well, with that out of the way, let me turn to the real purpose of this conference call and that is first quarter results. As you know, economic conditions were essentially all manufacturing companies remain very, very tough around the world. We have noticed that with recent announcements this week. Part of that is due to the slowing of economy in the US and also the slowing economy in Asia, but part of this is due to a higher energy and fixed up cost. And that certainly affects the chemical industry significantly. With that as our background, let me say that we are pleased that the actual results that we achieved met our projections for the first quarter. While the recent acquisitions added revenue in the first quarter, let me assure you that we have not yet realized the full earnings potential of these acquisitions. We expect margins from the acquired assets to improve during the year as the integration process receives. Additionally, we expect raw materials and energy costs to continue to decline in the second and third quarters of 2001, and we expect earnings per share to improve sequentially in the next two quarters and we say that even with a cautious outlook of the global economy in the near term. Now, let me turn the conference over to James P. Rogers for some further comments on our earnings and cash generations.

Thanks Earnest and I do just have a couple of comments. I will get Mary Ann, who has got plenty of time for your questions. As Earnest said, we gave guidance on the last call, which basically we were looking for the high 40's and we did come at 48 cents. We felt pretty good about that. We will hear Mary Ann talk about container plastics performed well in the quarter and volume and price. On the other hand, polyethylene was still quite weak as were the chemical as Earnie alluded to you soft economy and raw materials. Geographically, Europe had a very fine quarter, Latin America also __________00:04:44. The next quarter you will hear we are getting guidance to look sequentially up about 20 cents. In other words, as we look at our business today, we see our earnings come down in high 60 cents per share and as Earnie said chemicals have performed better across the board, and take advantage of the container plastics price increase as we announced __________00:05:12 fibers probably have a little better quarter. So, all in all it would be up sequentially second quarter from first quarter, probably down 20 cents, as an approximate number. One other things that is going to tempt our performance in the second quarter is we do have a plan to shut down of the coal gas facility, that is a biannual maintenance shutdown, but that will be a little bit of a jag in the second quarter, and that's why we are guiding to the high 60s. Just on cash flow, I mentioned a few major items. As you looked into the quarter, you will have some understanding what's going on there. Because of that shutdown, we did have an inventory build in the first quarter, and typically have a bit of an inventory build anywhere going into a stronger quarters in lieu of the second quarter, but because of the shutdown we have more inventory build than normal. We also paid out accrued incentive pay that was accrued for last year, but that came out in the first quarter. I think the folks who control capital expenditure __________00:06:10 to about $55 million in the first quarter, which is below the annual rate we expected. So, I just wanted to touch on those items and Mary Ann can now take us through this.

Thank you James. The Eastern Chemical Company's press release was released to the news service late yesterday, and was also posted to our web site at www.eastman.com in the investor information section. If you are listening by phone, this call is also being broadcast live on our web site. Let us move down to table I, which are statements of earnings about first quarter 2001 and first quarter 2000. Revenue for the first quarter 2001 was $1.3 billion, 10% above the first quarter 2000. Revenue from acquisition and revenue increases for Eastern pack, ET polymer, and container plastics accounted for the increase. For the quarter, volume was up 4% including acquisition, and without acquisitions, volume was down 5%. So, lack of volume growth without acquisitions is due to a slowing of economic demand in North America and Asia. Revenue was down sequentially due to seasonally lower volumes and overall slowing demand in the chemical segment. Cost of sale for the first quarter 2001 was higher than the first quarter of 2000 due to increased raw material and energy costs and sales buying from acquisition. Raw material and energy cost increased for propane, _____00:07:50, and natural gas accounted for about $75 million of the increased cost after the impact of the Feed Stock Hedging Program we had in place in both quarters. The first quarter cost of sales was negatively impacted by product management and was positively impacted by a currency option gain. The first quarter was also positively impacted by $4 million after tax paying resulting from the marked market of foreign exchange in feedback hedges of sending on January 1, 2001. This is a cumulative affect of the exhaustion of SAP 133 in the first quarter 2001. SNGA cost were $98 million in first quarter 2000 versus $80 million to the first quarter 2000. The $18 million increase in SNGA is mainly due to SNGA from the McWhorter acquisition __________00:08:48 and higher costs associated with the spin. If you look at R&D, R&D cost were $38 million; this is 3% of the revenue. Operating earnings for the first quarter were $96 million; operating earnings were $36 million less than the first quarter 2000, while selling prices overall increased in line with raw material cost increases. The lower cost structure resulting from our recent cost reduction efforts was not enough to offset the higher SNGA, higher distribution costs, and the impact of lower volumes without acquisitions. Sequentially, operating earnings were down $7 million. The sequential decline in earnings was mainly due to the higher SNGA, higher distribution costs, and the negative effect of slightly lower volumes. Net interest expense was $35 million in the first quarter 2001. We expect our interest expense to increase slightly as our debt increases to finance the purchase of the Hercules hydrocarbon resins businesses. Other charges were $6 million, which is $8 million greater than the first quarter of 2000. The increase in charges is mainly attributed to foreign exchange losses related to movements in the current phase. Earnings per share for the fourth quarter were 48 cents per share diluted in line with our projections at the end of fourth quarter, but lower than the 88 cents per share diluted in first quarter 2000. Lets move now to Table two and four. Looking at sales by region, if you look at the regional sales revenue and sales volume growth with and without acquisitions, the European and Latin American regions have greater revenues and volumes versus first quarter 2000, and we saw weaker demand in US, Canada, and Asia for the same time period. Volume growth in Europe and Latin America in the first quarter was driven by drawn ET polymer demand and container plastics and higher sales quantity of automotive coding products in Europe in the first quarter. Now, lets move to the operating segments, which are in table 3 and 4. The chemical segment revenue was $637 million for the first quarter 2001, which is 15% above the first quarter 2000. Acquisitions in higher selling prices accounted for the revenue increases while foreign currency exchange had slight negative effect for the first quarter. First quarter operating earnings were $22 million. Operating earnings declined $33 million for the first quarter 2000. Selling price increases were not enough to cover the higher raw material cost. Operating earnings in the chemical segment were also negatively impacted by SNGA and distribution cost. The negative impact of lower volumes excluding acquisitions and lower margin business associated with some of the acquisitions. Volumes for the chemical segment was up over the first quarter 2000 due to acquisitions, but declined 13% from first quarter 2000 without acquisition. Moving to coating, adhesives, specialty polymers, and inks, revenues there increased 44% versus first quarter of 2000 mainly due to acquisition. Operating earnings for the first quarter declined year-over-year and sequentially due to lower volume and higher raw material costs, which were partially mitigated by higher selling prices. Fine chemical revenues were down 6% over first quarter 2000; partially due to lower volumes and partially due to lower selling prices. Operating earnings improved quarter-over-quarter, but declined sequentially. Performance in chemicals and intermediate revenues declined 6% versus first quarter due to lower volume, operating earnings declined versus first quarter 2000 sequentially, higher selling prices and lower maintenance tax-free costs were not enough to offset higher raw material costs. Lets move down to the polymer segment. Polymer segment revenue increased by 7% versus first quarter 2000. Operating earnings were down $3 million versus first quarter 2000, but were up $19 million sequentially, while earnings declined from first quarter 2000 for the polymer segment as a whole, the increase for container plastic. The sequential increase in earnings is primarily attributable to improved margins in container plastics, although, the copolyester, PET products, and especially plastics also contributed to the improvement. Container plastics revenue increased 24% versus first quarter 2000. Higher selling prices were partially offset by the impact of the decline in value of the Euro and higher raw material costs. Volumes for the first quarter for container plastics was up 11% over first quarter 2000 with volumes improvement in all regions. Volume was up 7% sequentially mainly due to strong sales in North America and Latin America. Operating earnings improved substantially in the first quarter, compared to first quarter and fourth quarter of 2000. We have announced price increases for our _____00:14:37 PET polymers and container plastics ranging from 3-7 cents per pound worldwide for the second quarter depending on the countries and the regional market. We expect improved margins in second quarter as we increase selling prices greater than raw material increases and as volumes increase sequentially year-over-year. The level on the increase will be dampened by the amount of pre buying that we saw at the end of first quarter and the cooler weather in April in Europe and North America. Fibers revenue decreased 7% quarter-over-quarter. Buying was down mainly due to the timing of sales in Asia. Operating earnings were down quarter-over-quarter and sequentially due to the lower volumes. We expect revenue and volume in 2000 to be been down slightly for the year. Specialty plastics revenue decreased 1% for the first quarter 2000. The decline in revenue at first quarter is attributable to lower volume for our polyethylene products. Revenue increased for the non-polyethylene products and especially plastics. Operating earnings were down in the first quarter 2001 compared with first quarter 2000 for especially plastics as a whole mainly due to polyethylene margins being lower. Sequentially, operating earnings improved for the non-polyethylene portion of specialty plastics as selling prices increased and raw material costs decreased. Sequentially, operating earnings were also down for polyethylene. Lets move now to table 5, statements of cash flow for first quarter 2001 and 2000. You might remember from previous years, that cash generation is typically low in the first quarter due to the cash paid out in first quarter with the previous year performing states compensation plan. The use of cash is greater in first quarter this year than first quarter 2000 for several reasons. In first quarter 2000, we had a positive impact on cash flow related to a differed gain on currency options settled in that core. In the first quarter of 2001, we decreased the amount of trade payable, due, or decreased liabilities. Net pay fully for foreign plan pay out in 2001 was greater than the pay out in first quarter of 2000 due to improved financial performance in the year 2000 also in the first quarter of 2001 receivables are closely tracking the increased sales near the end of the first quarter as we saw pre buying for our PET products. In the first quarter of 2001, we built inventory for ________00:17:32 in anticipation of a 17-day plan made in shutdown in our coal gas facility. In the second quarter, we expect to complete the Hercules residence business acquisition. We expect to finance that with a combination of commercial paper and short-term note. Capital expenditures for the first quarter of 2001 were $55 million, well below our annual projection of approximately $300 and well below depreciation for the quarter. Depreciation and amortization was $104 million for the first quarter 2001. Moving to table 6, the balance sheet, total borrowings, as a preventive total capital are 55%. Interest current coverage was 2.3 times for the quarter. Eastman annualized return on capital from first quarter of 2001 was 6.3% and annualized return on equity was 8.2%. Now, let me give you an outlook for second quarter 2001 and the rest of the year 2001. We expect the macroeconomic environment to have a negative effect on our earnings in the second quarter in 2001 as a whole. We expect earnings in the second and third quarter to improve sequentially, but we will have tough comparison to get second and third quarter 2000. We expect the second quarter earnings to be approximately 20 cents per share greater than first quarter 2001. For the second quarter of 2000, we anticipate our total cost of purchasing raw materials and energy to decrease over the first quarter of 2001 as the cost of propane begins to come down in the market place. As we have said in the past, one-cent a gallon change in propane affect us by approximately 2 cents per share per quarter. We have announced selling price increases for a number of our products effective in the second quarter of 2001. The increased selling prices, lower raw material costs, and lower cost structure including efficiency gain resulting from the continued digitization of our businesses are expected to improve earnings in second quarter of 2001 over the first quarter of 2001. In the second quarter of 2001, our coal gas facility will be shut down for 17 days for plant maintenance. We have built inventories in the first quarter to cover sales requirements in the second quarter. We do expect to see a negative effect on manufacturing costs in second quarter for the lower production quantity and higher maintenance fees associated with that shutdown. At the end of 2000, we exceeded our goals to take $200 million of labor and non-labor costs out of our cost structure. We continue to keep our focus on cost reduction and are on track to remove in total of $300 million by the yearend 2001. Again, we expect to finalize the Hercules resin business acquisition on May 01, 2001. Year 2000 revenue for this business as reported by Hercules was approximately $219 million. In the last two quarters, we have recognized increases in costs with the implementation of SAP R3. We expect these costs to continue in 2001, as we complete the majority of the implementation in all regions by yearend 2001. We expect ShipChem to incur costs throughout the year as we wield capabilities to take on new customers. We have announced price increases in container plastics for EASTAPAK PET polymer ranging from 3-7 cents per pound worldwide for second quarter depending on countries and regional market. We expect to improve margins in second quarter as we increase selling prices greater and raw material increases as volumes increase sequentially in year-over-year. The level of the increases will be dampened by the amount of pre buying that was done at the end of first quarter and the cooler weather in April in Europe and North America. Let me sequentially go with Q&A let me read these forward-looking statements. During this conference call, we have made certain forward-looking statements concerning our plans and expectations for 2001. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed on the company's first quarter sales and earnings press release. The supplemental information on our web site at www.eastman.com under the investor information section and in our filings with the Securities and Exchange Commission including the form 10-K filed for 2000 and form 10-Q to be filed for first quarter 2001. This concludes our prepared comments. We would like to begin the question and answer session for the investment community. If anyone from the media is looking in, we would you to refrain from asking questions at this time, and direct your question after the conference call to our media contact Nancy Led ward who can be reached at 423 229 5264. We would like to have the investment community to limit themselves to one question and one followup on the same question, until we have heard question from every one. Chester we are ready for the first question.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please signal by firmly pressing the * key followed by the 1 on your telephone. If you find that your question has been asked and you would like to remove yourself from queue do so by pressing the pound sign. We will take as many question as time permits. So, please limit yourself to one question and one followup question. We will pause a moment to _____00:23:35. We will take our first question from John Molten with Deutsche Bank.

Yes. I was wondering if you could give us a sense of what beyond the raw material issues on PET trends and how do you see that unfolding over the next year or so?

On PET?

Yes.

Well, obviously we are in the up turn of the PET business and 2000 was an up turn year, 2001 is going to be another up year and clearly we have projected 2002, 2003 will also be good years. A lot of that is contingent on what happens in the real market where we stand beyond the 2002, 2003, but we as a company are taking a very conservative position on that, and limiting our growth in that market, so we expect that probably 2002 and certainly part of 2003 will be up years, and then we would see another down cycle in that business.

As a followup we are still a lot of discussion for the potential for the beer 00:24:47 market, but how would you compare that against the market opportunity for let's say bottled water, which at least on my numbers appears to be getting faster rates of growth in the beer market?

Well, I am so sure of the rates of growth, the percentage growth is faster, but certainly is of a much, much larger base in the water market, and that _____00:25:06 is consuming a lot more billions of pounds of PET, so certainly the opportunity in the short-term over the next year to import water in terms of moving volumes is much, much greater than the opportunity moving volume of PET and beer. Even though we are starting from a very small base, beer is increasing quite rapidly, but is from just a small base in the _____00:25:29 or that has significant impact on volumes.

Thanks.

We will take our next question from Leslie Ravitz from Morgan Stanley.

It's tied again to what is going on in the coal gas station 00:25:48 plant and the timing of when you are going to file for the official documents?

Leslie, we missed the first part of your question.

The timing on how the coal gas station plant is going to be split between the two business segments and the _____00:26:05 unit and when you will be filing your documents for the 00:26:09______?

Let me address the first part on the coal gas and then let Jim talk about our target date on the RAS letter. We will tell you after the annual meeting next week Leslie about the asset allocation, we have worked through essentially all of that, we still have a few more hours to _____00:26:30 across, but we do not want to talk about the asset allocation today, but we will talk about that at the annual meeting next week. In terms of the minus we are doing on in addition to bi-annual maintenance thing, it comes about very two years, it used to come about every year we have now improved that where we can get it every two years. 17 day down time I was just down in our shops yesterday, the guys have got their starting blocks out and they are ready to go. So, hopefully we can get that shutdown done and back up in record time, this time it will not be down as long. So, we would be releasing some information after the annual meeting next week on the asset allocation that would you an indication of where those coal gas station assets will go.

Could you give us an idea what the maintenance cost shutdown would be?

The cost of the shutdown?

Yes.

The incremental cost, probably less than $5 million. Not in accounting, but it is the cost of inventory build that we have already incurred, and just a quick one on the time, I mean, _____00:27:36 little bit would be due in RAS filings, we have said we want to get the letter from them first before going to head and that will be in the next couple of weeks _____00:27:47 going to be public for UR I guess the first public filings will probably be later in the first quarter ... time permitting we would be looking for that. As Earnest said, we will be releasing information as we have made petitions going forward and we had a little bit of color of rolling as we ... we will talking more about this next week. But, my comfort level has gone up dramatically in terms of execution to this, on this spin as we have looked at working through the assets first then _____00:28:16 etc, as I think that ... I am starting to feel very bullish about the execution risk being quite manageable.

We will take our next question from Nancy Trop from Credit Suisse First Boston.

Good Morning. I wonder if you can give us a little more color on fibers. You said that the timing of the sales impacted volumes and I wonder how the trends look in second quarter?

Nancy, we would expect volume in second quarter and fibers to be similar last year. The only reason first quarter was really down was just the timing of major orders. At the end of 2001, if you took 2001 and 2000 and added them together, we have 3% growth and 2000 will probably have may be like a 1% decline in 2001, but it is mainly this timing of orders at the very end of the year.

On just near terms, probably second quarter might look a little better than first quarter for the fibers business, but I think Mary Ann AUDIO DISTURBANCE.

Okay and no change in pricing?

No. No change in pricing.

Our next question comes from Jeff Tec with Bear Sterns.

Good Morning. I wonder if you could give us an idea of the price increases you ... what kind of prices you realized intact in the first quarter and then your outlook on ethylene glycol and para xylene for the remainder of the year?

Jeff, let me talk about the raw materials first, EGA course _____00:30:03 ethylene to sending on the _____00:30:07 ethylene as the year goes forward. EGA will sort of follow, but you know as we _____00:30:14 more ethylene as we go through 2001. If you look at para xylene, it is high to the price as the gas pump because the alternate use is that we would 00:30:28______ so consensus is a little bit that the gas pump price is raising out there, however earnings situations today and the supply demand balance to PET that we would be able to pass on any raw material increases that we received.

And it is good supply demand balance on volume today in the down market. I will make a comment on the price increase etc, I mean, we have now some pretty healthy price increases effective April 1, Mary I am touched on that and that is a reflection of the supply demand in the market you are taking about how much of it did we get etc. and that is always a question you have to answer in a way because whenever we have announced a price increase, we have full expectation of getting a 100% of it, and I was just talking to the guys yesterday, and the derived market dynamics are out there such that we find levitated at the end of the day _____00:31:25 much of the price increase you really get to peak, but certainly the majority of the price increase, I think, we are sure and on market conditions we are going to have.

Jeff, let me add that we improved margins year over year and sequentially, and keep in mind the price discipline that we had last year.

We will take our next question from P. J. Dukar from Salomon Smith Barney.

Good Morning. I have two questions on PET. Your volume growth of the 11% was quite impressive. But, do you believe that underlying demand is still growing double digits?

P. J. we do believe that the industry worldwide is growing somewhere around 10% for PET the year-over-year increase remember that is a very good increase I mean we really like that increase, but keep in mind we had really strong discipline in first quarter last year, and so we did not have the kind of volume growth in last year that you guys were expecting so, while the 11% growth this year is good you have to remember what the history was. We feel good about the growth in the industry.

The range of numbers out there range anywhere from low of 8 to a high of around 12-13, so you take and average of that and it is somewhere in the low double digits.

Last year your volume growth was flat for the entire year as you were firm on pricing. What is happening on that front, is that still the case? Are you getting those volume gains despite that?

P. J. Again I talked to the guy yesterday and our thinking is we very much won our share the volume this year, in fact I think it was you and I had this discussion last year about this time about our goal for pricing or volume whatever. At that time in the market dynamics, we thought the right thing to do was to really hold quite firm on price that the supply demand was moving our way, I think, that penned out okay the decision we made as we look the market place where we are today we think the right thing to do is to make sure we get our share of that volume growth, that is probably the guidance you should take as you think about our PET business is going forward.

What about change in strategy?

Well, it is the different times, there is different market dynamics out there, different supply demand, you know, but yeah we are trying to be quite what we feel out there, but we want our share of the volume and I was very clear talking to the guys running our business.

More of a change in tactics and strategy out there. Just going to ... we have heard that some packaging companies are making the bottle thinner, the PET bottle, have you heard anything like that?

Well, that is continuous since 1978 when we first went in to this business if you could find all those bottles that we made back then P. J. you would recognize that it would be still thick, so over the years this technology has improved, and as our polymers have improved, the customers that we have gone to _____00:34:39 that is reducing the amount of dead end of bottles, so that they can reduce their costs, this is been something that has been around for decades, and I am sure it is continuing as new containers designs come out, they probably start out little bit thicker than the _____00:34:54 as they go forward. But, I have not heard our people saying a thing about any major new technology breakthrough that the people are going to have the amount of material on the bottle, but it is just still, sort of, continuous thing.

P. J. That is in the projection that we have for 10% worldwide growth, _____00:35:18 the projection.

We will take our next question from Andrew Cash from UBS Warburg.

Good Morning. I will just want to make sure to start this, it sounds like you are indeed giving lower guidance against consensus for the second quarter for about 70 cents a share, which will be about 30% lower than first all consensus, so I was just wondering if indeed this is lower guidance for the second quarter compared to consensus, and if you guys have in the Eastman bag and make up for this, what would be a second quarter disappointment, so that the full year consensus number of 355 is actually possible to be made.

I will just make a couple of comments and then anyone else who wants to go in, but I guess we did not really geared of our first call consensus, we are looking at our business end in running that. We, I think, feel pretty good, given what we see in the economy, and what we see in competitor the other peoples in a chemical industry, and what we are all going through right now in our end market that we are seeing an uptake already first quarter to second quarter that is really sizable, so that is the way I am looking at it. It is not nautical to compare the first call average to the guidance we just paying, which was _____00:36:55 rise is lower that what they have out there. We have ongoing programs in terms of cost cutting etc that is going on. I would not call any of them like a magic trick to come out of the bag, and I further say that I thinking since from the last call we are all quite hopeful for some kind of uptake in the economy towards the end of the year that will make us quite a little better that we are looking very now. But, other than that I cannot really give you more guidance out later in the year.

I would just add Andrew that my personal view is a lot of it really depends on the durable gross market, which is the economy in this country in Asia. If that were to come on stronger than we think we have been watching all those, how it is going to start things like that, if that picks up greater than we think, we could be conservative on our estimate, but given what we see right now that is still not as strong as we would like to see.

Obviously, you guys are aware what is happening with the first call numbers and if you are talking about comparing things to your estimate, and is your estimate in line with the full year number because I am just thinking about you resolved to split up a company, and you know what your actual performance might be, and what your plans are to actually going forward splitting up the company this year.

Again, the first call numbers I am sure continue to change every time. Last year, I commented about the how they started the year course of 288 we ended up with about 380 or 390. So much of it is tied to how the economy comes back, and it is just not only been with this company less than two year, but I look at what the whole industry is going through, and what the durable in this market and end markets look like. This is a pretty decent business we have got. We have still performed this way in such a weak quarter I feel pretty god about that, and to me you re looking out of this one of the worst light you can look in terms of our chemical side, so I do not see any correlation whatsoever between this recent performance and the decision to split the two companies apart. That decision was not based on near term performance, it is very much a longer-term strategic way, thinking quarter to quarter.

We will take our next question from Sergei Vasmasof from Lehman brothers.

Hi. Good Morning. I want to ask a question about your special chemical business. If I am looking at the order decline versus last year, and versus previous quarter, it is quite significant about 7-13%, could be there more than just slowing down of the economy, could be in the credit purchase of the cost machine and if so we believe is that done or is it to continue?

Let me comment first Sergei, I think, it is two reasons. From our ________00:39:37 certainly the economy and the durable goods economy is affecting our coating part of our business, our resins specially plastics for, I think, also the integration of the acquisitions that we made that we are doing right now, and also the home coming acquisition of Hercules, we have not as I said in my initial opening comments, we have not seen the full benefit not far of the earnings that we can get from those businesses. We still have some rationalizations to do. We still have some integration's to do particular in Europe, and we are in the process of doing that. So, I think if we had all that done, I think, our numbers today would be better in the AR and we are doing that. So, I think to the extent that we get that done this year, our numbers would be improved as we go through the year.

I think there will be. But, I was speaking about the volume without acquisitions, which will drop in 7-13%. That is a very large number. Even as I think that you should go back to another yearend. A couple of the best growth you have shown in quarter was 7-10%, and now you have similar amount of decrease.

Yeah, most of the volume decrease I believe were _____00:40:47 I am wrong because in the acquisitions in the McWhorter, Lawter as compared to where they were, our old basic servo-type business. Our volumes are still reasonably strong there if not robust, but most of the decrease in volume comes from the McWhorter and the Lawter acquisitions that we have had.

I mean they all are under some pressure right now, Sergei and I guess one of the things we look for though is as the volumes go down we look to see as you were on the business. Are you leaving a share or is everyone else going down about the same amount, and we really think that we are not leaving any share and that really is the end market that is off as we look at all our businesses, and it is not a share issue, so that tells that is probably a trend in this issue, and that when the markets come back, we will be back right where we are. Like Mary Ann said, it does strike to me that instead of down 33%, we are down around 13% on our old business, which is the one without the acquisitions. I want to correct that. We are not leveled. We are at 14% if you check out the acquisitions. If you throw in the acquisitions from where they were, then that numbers even more specific.

The point is that it is not a share loss. It really is in market. In our opinion, it is not a share loss. It is really an in-market loss and therefore we will hope that trend gets in when the market comes back.

Graham Copley with Stanford Bernstein 00:42:20.

Good morning guys. As I recognized _____00:42:26, on this idea of a split? I mentioned it in the trends in the chemical business. In the 46% sequential decline in operating income, and a 60% year over year decline in operating income, and then add that to what you just said Earnest, which is the acquisitions are showing slower volume or weaker volume than your core businesses, and yet here is a company that is supposed to be stronger because you can grow through acquisitions and give us more consistent earnings. Can you comment on what you were saying today relative to what you think this company should do as an independent sort of entity?

Let me comment on that. I think the results that we are seeing today Graham as Jim has said are really indicative of the pressures on the chemical industry in general. They really do not affect my thinking and that as a senior management team here on the spin-offs. We continue to believe that long term in managing these two very distinct different business, a separate company as well give us a greater possibility of increased growth as we move forward. I6 think I commented on the acquisitions obviously making these acquisitions at a time and economy debts particularly in the durable goods market is not certain to make the numbers look pretty bad, and is not a great time to be looking at that right now. We do believe though that as we spend the companies in early 2002 that the economy should be recovering, a durable goods economist especially, and that this will be a great time to come out with a new company that is less cyclical, that is more focused on durable goods market, and a total company as today. So, we continue to build as Jim iterated that this is a good thing to do. We spent literally dozens of hours re-looking at this as we look at the asset allocation, as we look at the division of cost going forward, we have become even more bullish about the decision to do this.

But, the followup, which you agree at the time of the split. You are not going to be able to show us a standard ProForma history data for this business that shares are consistent earnings. It is going to be volatile based on the last three or four years.

I think it is going to be volatile in the last three to four years, but also I think we would be able to show you a ProForma based on some pretty good evidence that is going to be clear in increasing business in one that will be coming out of the trop as we spend it all in early 2002.

Thank you.

We will take our next question from Duffy Fisher with Goldman Sachs.

Good morning. I was wondering if you could talk about the operating rates in margin trend in the Oxo alcohol business?

Duffy, I don't have up-to-date information on the Oxo alcohol business. Obviously with the volume down on our operating ratios less than there were in the first quarter of last year and that is directly excised to the economy.

Right. So, would they be down on roughly 5-10%? How should we be looking at that?

Well, volumes are down without acquisition for chemical production 13%. But, you could probably find a pretty good correlation to this as operating ratios _____00:45:51.

Okay, and EBITDA margin trends there?

No, we don't break it out by Oxo alcohol. It was similar to what you see changing in the chemical segment year over year.

We will take our next question from Frank Donald with Harvard Management.

This is just a question on the forecast for the second quarter of gaining up 20 cents; seasonally the second quarter is usually stronger than the first quarter. Is this increase anything more than the seasonal increase or less than or about what we would see for next year? Trying to just figure out the underlying strength of the business.

I would just say Mary Ann or any of these ... still pretty common as well. I would have said maybe you would have looked for a little more this quarter. There is couple of things going on, you had fairly sizable price increase in our _____00:46:50 you got some pre buying in the container plastics business filled in March. Don't forget we also have the biannual shutdown that only happens every other year obviously, and that is going to have some effect on our second quarter. So, maybe if it hadn't been for the first couple of things, maybe you would have seen a better sequential move. But, still I think you got to understand, we are not proud in around here. We are feeling okay to the extent of comparing ourselves to others and what is going on in the marketplace out there. We think our businesses are performing pretty well given the environment we are in.

And is the Hercules acquisitions that are going to be added in quarter or ..?

Well, we have said on that it is Hercules through the year will be ... I think ________00:47:40. Hopefully, we are being a little conservative there, but there is so much uncertainty in terms of the environment around us right now especially in that business, the revenues etc that we would like to be a little conservative in our guidance there.

Okay thanks.

We will take our next question from John Roberts with Merrill Lynch & Co.

In the fine chemical business, could you talk a little bit about the differences between the ________00:48:05 plant that you are keeping in the Wales and Hong Kong plant that you still haven't decided what you are going to do with. Can you convert the ________00:48:14 plant to make that more integrative with the rest of the performance chemical businesses?

Yeah John, this is Erni. You are exactly right. You can. The Hong Kong side is an extremely small side, I can get how many employees, less than a 100 employes there and it is entirely 100% Pharma. We make a product there for pharmaceutical company and that is about it in Hong Kong. So, we are looking to cut our sales up so that there is someone who really wants to be and form an immediate business. The big off side in Wales is also a smaller size in ________00:48:52 somewhat larger than the Hong Kong side and again it is essentially 100% Pharma. So, people that want those two sides could be people who want some additional regional presence and some additional capacity in the Pharma area. If you look at the _____00:49:08 side it is a fairly large integrated side making materials for the photographic or the imaging business making intermediate for the agricultural and chemical business, it is making intermediate for the personal care area. It is making some intermediate for the Pharma industry and it has a very large facility that makes the _____00:49:34 benzene, which is raw material that is then shift to this side at Tennessee to make a _____00:49:40. It also has another large business that we have talked about in the past years and that is what we call the Nobs Business. Nob stands for, 'No Natal Obstacle Benzol sulphamate 00:49:53, which is additively goes in the tide and other _____00:49:59. It is a very large-scale custom chemical that we made for PNG and that is at our concerned site. So, from that standpoint, we have a lot more infrastructure and a lot more of capability and flexibilities that convert that site into one that gets more into a pharmacochemical and a specially chemical site side as we probably move away somewhat from a growth in the pharmaceutical there. We have talked about a major expenditure just few years ago enlisting a very massive CTMP plan at our concerned site. We could never make the numbers work on that, so we abandoned that, and that was one reason that we decided that maybe this whole business fine chemical is better off in the hands of someone else other than Eastman. Therefore, we put it on the block to try to sell it. Obviously, timing was very, very bad therefore for that and so we have now restricted that saying we are going to sell these two sites outside the US, and take our concerned site and rationalize that site and flow it in to especially chemicals business that is now part of our performance chemicals business organization.

Secondly, you formed some PET alliances in Asia last year. How is the volume ramping up from those alliances?

I haven't heard in the last few weeks, but my early information on that was that, that was going wildly with qualitative product coming out with these facilities both in Asia and also there is one here in the US, and we have taken access to a lot of _____00:51:40 all of those are going quite well and we are using those to supplement our capacity here in the States and also in Asia.

John, our volume ends up in Asia sequentially in year over year for container plastics.

And we think there is a few more of those to do John as we move forward and I think the spin-off of that part of the company will allow these people to focus on that much more seriously than they had in the past.

We will take our final question, a followup from Duffy Fischer of Goldman Sachs.

Yes, Just one more question on the coating business that you have talked about. The McWhorter and Lawter being down a little bit more than the rest of the business. Are they cash positive, the acquired businesses in coding resins?

Cash positive, I mean, I don't think we really talk about businesses that way Duffy. So, I guess I don't want to start breaking out individual rule segments like that. Frankly, I just haven't looked at it that way lately as compared to looking at the whole capital. Part of the year had to realize that there is more integration to be there. There has been some integration done. It happened to be customers of our before us and stuff that used to be external sales that turned into internal transfers of transfer pricing etc. So, it is not quite as clean as you might think. But, though I mean this industry has a lot of pressure on those two businesses, and they are performing poorly right now, given the environment. So, that the jest of your question is correct in terms of their performing poorly right now in this market.

You may have picked up that we just had a reorganization there and we announced that a gentleman by the name _____00:53:30 from Europe will now be moving to the US and he will be heading up the coating, adhesives, specialty plastics, and inks business.

Well, I guess, the jest of my question was, if they did to EBITDA 0 that is generally about as far as they can go. So, I am just trying to see if there is more room that these can come down or if we have in fact hit bottom.

Well, I don't think we are EBITDA 0, but the point is that we gave the guidance for the overall chemical piece going from the first to second quarter. Hopefully, first quarter was the bottom for these businesses, but so of that can be dependent on what we see for the economy going forward.

Thank you very much.

Chester, I would like to wrap up the conference call.

Okay, at this time, we have no questions in queue. I would like to turn the call back over to Mary Ann Arico.

Okay, if there are any additional questions, please call me at 423 229 4692. A replay of the conference call script and the Q&A will be available this afternoon through the rest of next week. You may hear the replay by calling 719 457 0820. Also, an audio replay of the conference call and Q&A and a copy of the appeared comments can be found at www.eastman.com by going through the investor information section and then the sales and earnings section. I again thank you. We appreciate your interest in Eastman.

This now concludes our conference call. You may disconnect at this time.

Thank you Chester.