伊士曼化學 (EMN) 2002 Q1 法說會逐字稿

Thank you for standing by. Good day, everyone. Welcome to the Eastman Chemical Company first quarter earnings conference call. This call is being recorded. This call is being broadcast live on Eastman's web site, www.Eastman.Com. Hosting today's presentation will be Mary Ann Arico, Brian Ferguson, Chairman and Chief Executive Officer, James Rogers, Chief Financial Officer, and Al Wargo, Treasurer. At this time, I'd like to turn this conference over to Brian Ferguson.

Thanks, Bill. Good morning. Thanks for calling in today. It's been an active and productive quarter for Eastman Chemical Company. We came off of the most difficult year and difficult quarter in our history in the fourth quarter of 2001. As we started the year, business started out very, very slow. So slow that we took special actions in our company to pull our costs and spending below budget rates. Our employees responded very well to that effort and have done a great job for us there. In February, we were taking actions to cancel the spin and announced that to you sometime early in February. Then following that, we created a structure, a new structure, a divisional structure which we are operating in now that gives us the transparency and accountability you were looking for. You have your first good look at the results of that structure and you can see the kinds of cost structures and results we are getting there. I am pleased with the way that is progressing even though we have some evolution to do in that structure. By the time we got to March, we could see that our earnings would exceed the expectations that had been set, and we announced that we would exceed the highest estimate of 25 or 26 cents at that time. And today, we have or I guess last evening we announced that we made about 35 cents per share excluding the nonrecurring items which was even a little bit above where the street estimates averaged out after our announcements so we're pleased with that result. These results reflect an awful lot of work by all of the Eastman men and women around the world. Some of that work done recently. Some of that work done over the last year or two. In the Caspi organization, we are starting to see the improvements there, for instance, in terms of the cost restructuring and the growth of their gross margins. Generally, the gross margins for the company were up relative to Q4 and close to where we were Q1 last year. That's a marked improvement especially in the environment we're had right now. The volumes continue to be pretty soft in the business through the first quarter and even up to today. We have so far been able to offset that with cost savings, a combination of raw materials and conversion costs and overhead costs all coming together to offset some of the softer volume. The total overhead for the company is in good shape. Can you see the overhead is actually a little lower than it was this time last year. That reflects these efforts to hold the spending back during the first quarter and of course there's some things that were delayed and we'll get back to doing in the later part of the year. As I look at the business environment around us, it is still pretty soft and uncertain in most ways. Prices across the board have been a bit lower in the first quarter than they were last year. The volumes are still fairly soft on average. I think more than that observation, they are highly [INAUDIBLE]. The week to week [INAUDIBLE] is high. So recognizing and confirming a trend in that highly variable week to week environment is a little bit challenging. We see some caution by our customers. We see a good number of orders. Some of the average order rate has dropped somewhat to where the customers are ordering more frequently and ordering less when they do order. So that reflects a little bit of caution in their views. The lower raw materials in quarter one helped us a good bit. That's a concern for Q2 because we have uncertainty in the Middle East that is driving a lot of [INAUDIBLE] in our raw material costs. So as a look at the second quarter expectations, we see a lot of moving parts in there. We have seasonable volume growth which we always get during the second quarter and we're expecting to have again. There is uncertainty, as I said, around the raw materials stream, especially around the raw materials side. We should not expect the Argentina issues again. I think we've dealt with that first quarter but the SG&A run rate may be higher because of some of the things we've delayed. As we look at all of those moving parts, we expect the second quarter to look like the first quarter in terms of the overall profitability. That's the environment. I guess I've said in the official press release, we just don't see the evidence that the economy has completely turned around to give us that real butting optimism that things are just going to get great all of a sudden. So with that said, let me turn it over to Jim and let him have some comments, also.

Thanks, Brian. I'm just going to hit a short list of items that are in the financial statements and get it over to Mary Ann for the earnings script. First thing I want to just mention is we're partway through four FAS-142 and we took 18 until after tax which is related to the trademarks. We have the goodwill part that will be done in the second quarter and this current quarter. That work is continuing, but I don't want to give any color as to the outcome of that. We did have a restatement where we added 5 cents to last year's earnings. It's basically maybe we were a little too conservative. This is related to a licensing fee and historically we've been booking those as we received the cash and not really showing any revenue until we get the cash in our hands. And we did get the cash in, in the first quarter. Looking back on the contract, et cetera, it was really more appropriate to recognize the revenue back in the third quarter, and so we did that. Jenin Corps had a nonrecurring charge one-time item of 5 cents. That was the impact on us was 5 cents, I should say, and that was related to an acquisition we did and we show all of the results for Jenin Corps. Brian mentioned Argentina and these quarter numbers do include about $12 million effect from the currency devaluation and are continuing into the first quarter so the numbers got hit by $12 million. As Brian said, we've got most of that behind us. It's fairly small in country, as a ballpark around $15 million in terms of currency exposure. So, you know, that's been an unpleasant situation for all involved, and particularly for the people there. But most of that is behind us. During the quarter, we completed a 10-year, $400 million bond issue. Very strong reception for our name in the marketplace. Deal was oversubscribed. Driving purpose thought it was prudent given the rate environment and, you know, the amount of floating and short-term debt we had to term out a big chunk of that. So we did so in the quarter. You'll see a lower tax rate in these numbers. And that's due to a couple of things. One that you'll be seeing from everybody, I assume, which is you no longer amortizing the nondeductible goodwill so there's a little reduction in your tax rate for that, as well as we had some international tax structuring that we did contemporaneously. So we could expect that tax rate to continue that that would be the rate we would use throughout the year at least. Cash flow is good in the quarter. That's a result of good working capital discipline. You'll see our inventories are basically flat in a quarter or typically you would be building inventory. Good start on capital expenditures as well. As Brian said, a lot of work on the cost side when particularly held down SG&A. In fact, to a level I wouldn't want to you analyze that SG&A number because there were some differals, et cetera. A lot of progress there and long-term improvement on the SG&A you can count on. Put all that together, we fell comfortable and sticking to a couple of the promises we made. That CAP-X will be less than the appreciation and amortization at around 11% of sales. So that discipline continues. That's all I have. Mary Ann, why don't you take us through your script.

Okay. Good morning. The Eastman Chemical Company press release was released in a new service late yesterday and was also posted to our web site at eastman.Com in the investor relations session. If you are listening by phone, this call is being broadcast live on our web site. Let's look first at table one, the statement of earnings. Table one shows Eastman sales and earnings for the first quarter of 2002 and 2001. Revenue for the first quarter 2002 was 1.2 billion, 8% below first quarter 2001. New sales volumes for the businesses acquired from hercules in the coatings, adhesives and specialty polymers and ink segments and slightly higher volume from other products had a positive effect on revenue, which was more than offset by lower selling prices, the negative effect of mixed and foreign currency exchange. Sequentially, revenue was down 3%. Sales volume increased 2% sequentially but was offset by lower selling prices and foreign currency exchange rates. Cost of sales for the first quarter was $1,31 million. This compares to 1,121 million cost of sales in first quarter 2001. The lower cost of sales resulted from low are raw material costs, partially offset by additional costs associated with the businesses acquired from hercules. Sequentially, raw material costs declined slightly. Selling and general administration costs were $90 million in first quarter 2002 or 7% of sales. Selling and general administration expense is $8 million lower than first quarter 2001, even with the addition of selling and general administration costs associated with the enthusiasm businesses acquired from Hercules. The lower costs reflect the work we have done to control and reduce costs. Research and development costs were $38 million, 3% of revenues. We continue to expect the combined costs relating to selling and general administration expense and research and development costs to be approximately 11% of sales. Operating earnings were 7 $77 million for the first quarter, which includes the effect of $5 million lower amortization in first quarter 2002 from the adoption of FAS-142. Operating earnings were 19 million less than first quarter 2001, including the effect of $5 million lower om amortization in first quarter 2002 for adoption of FAS-142. While ongoing operations improved, first quarter 2002 operating earnings were negatively impacted by lower selling prices. The effect of exchange rates, product mix and lower foreign currency hedging games. Partially offset by lower raw material costs. Sequentially, operating earnings improved by $52 million including the effect of the $5 million lower amortization in first quarter 2002 for the adoption of FAS-142. Sequentially, operating earnings were positively impacted by lower raw material costs and our lower costs resulting from the lower cost structure measures. Net interest expense was $30 million in the first quarter of 2002 due to lower interest rates. Other income and other charges netted to $14 million in charges, including a nonrecurring pretext charge of $5 million that relates to the impact to the company for the previously announced restructuring of Jenin Corps International. The net 14 million in charges also includes a $12 million charge related to the continuing economic crisis in Argentina. Earnings per share for the first quarter 2002 were 35 cents per share diluted excluding the effect of the change in accounting principles and a nonrecurring charge. Compared with 54 cents per diluted share for the same period in 2001, adjusted for the nonamortization provision of FAS-142. Earnings per share were 30 cents per share including the nonrecurring charge. Including the effect of the change in accounting principle and the nonrerecurring charge, diluted earnings per share for the first quarter 2002 were 7 cents per diluted share. Now let's move to table two sales by regions. Revenues declined in all regions except Asia Pacific when compared to first quarter 2001. And Asia Pacific volume increased for both Eastman division and Voridian division products which resulted in higher revenue. In the other regions it was compared to first quarter 2001. Now, looking at tables two and four, other sales and earnings information. Beginning with first quarter 2002, reported sales and operating earnings for Eastman division and Voridian and each of their respective segments include the effect of transactions between the two divisions. In the press release table, the segment information for 2001 does not contain the effective transactions. For the first quarter 2002, we have broken out the effect of revenue and volume which in some cases is significant. In the following discussion and analysis, reference to specific numbers and comparisons exclude the nonrecurring items. Just for clarity, we did not have any nonrecurring items in first quarter of 2001. We did have nonrecurring items in fourth quarter of 2001, and if first quarter of 2002, we had a nonrecurring item but it was below the line. Now let's look at Eastman division. Eastman division contains three segments. The segments are coatings, adhesives, specialty polymers and ink segments which we call Caspi, performance chemicals and specialty plastics segments. Coatings, adhesives, [INAUDIBLE] polymers and ink segment revenues increased 15% versus first quarter 2001 due to sales from hercules 2001. Operating earnings were up by $13 million which includes the effect of $5 million lower amortization in first quarter 2002 for the adoption of FAS-142. While selling prices declined compared with first quarter 2001, lower raw material costs and an improved cost structure led to the increase in operating earnings. Sequentially, operating earnings increased by $10 million, including the effect of $5 million lower amortization and first quarter of FAS-142. Volume increased for Caspi 4% sequentially. We expect Caspi results to be favorably impacted in 2002 from the cost reduction efforts last year and ongoing acquisition integration. Now, let's move to performance chemicals and intermediates. Revenue increase due to interdivisional sales, but revenue was down 13% versus first quarter 2001 without interdivisional sales. Sales revenue declined due to significantly lower selling prices versus first quarter 2001. Volume excluding interdivisional sales volume increased 6% when compared with first quarter 2001. The first quarter operating loss of $7 million was $15 million below the first quarter 2001 operating gains, mainly due to lower selling prices. Sequentially, operating earnings were flat and volume improved by 6%. In second quarter, we have raised prices for both our chemicals. We expect margins in second quarter to be similar as higher selling prices offset higher raw material costs. Specially specialty plastic segment revenue. Revenue was flat versus first quarter 2001. The addition of interdivisional revenues offset the decline of volume. Operating earnings declined $17 million versus first quarter 2001 mainly due to lower volumes for the cellulose plastic product line. Operating earnings were flat sequentially. Now let's move to Voridian division. Voridian division contains two segments, the polymer segment and fiber segment. Polymer segment revenue declined versus first quarter 2001. Volumes were down versus a strong volume quarter in the first quarter of 2001. Operating earnings were down $4 million however, operating earnings did increase $43 million sequentially. However, operating earnings -- however, sequential improvement is attributed to lower manufacturing costs and higher capacity utilization for both EMT and polyethylene terephthalate. In second quarter, polyethylene could experience margin contributions from higher feed stock costs. Our P.E.T. Polymer, we expect good, seasonal demand and high industry operating rates in second quarter and higher P.E.T. selling prices in response to higher raw material costs. The worldwide political climate could result in volatility of raw material costs such as [INAUDIBLE] glycol. We continue to identify and work on the lower cost structure for our P.E.T. polymers and polyethylene operations worldwide. Looking forward, we expect peaks and drops [INAUDIBLE] will be less pronounced in the future leading to less margin fluctuation. Based on industry projections, nameplate capacity utilization will be less in 2003 than in 2002. This is a global business with regional dynamics and capacity utilizations will vary by region. We have updated our P.E.T. presentation and a copy can be found in the investor relations section of our web site. Now, let's look at the fiber segment. Revenues increased 21% quarter over quarter due to the addition of interdivisional sales. Volume was up quarter over quarter due to the sales volume of acetate flow and raw materials. They make up a big part of the volume but a small part of the revenue and earnings. Volumes for the acetate flow were flat when compared to the first quarter of 2001. Operating earnings were down $2 million quarter over quarter. Sequentially, operating earnings declined when compared with a strong volume fourth quarter in 2001. We expect acetate tow volumes to be up in second quarter slightly. The next is a statement of cash flows. The company generated $88 million in cash flow from operating activities, of which $49 million was used for capital expenditures and directed investments. The company continues its emphasis on cash flow and expects capital expenditures and directed investments for small acquisitions and other ventures for 2002 to be no more than expected depreciation and amortization. On the balance sheet there's no significant change to highlight, so I will move on to our forward-looking -- to our outlook for second quarter and beyond. We still have not seen demand improvements that would lead us to believe the economy has turned around. Therefore, we only expect to see seasonal demand improvements in the second quarter. Our expectation is that costs for key raw materials will increase in second quarter compared to first quarter 2001. We continue with our efforts to preserve margins across the company through a combination of higher selling prices and cost control. On balance, we expect second quarter earnings per share to be similar to first quarter 2002 earnings per share excluding nonrecurring items. We expect capital spending and other directed investments for small acquisitions and other ventures to be no more than expected depreciation and amortization which is currently approximately $370 million. We continue to expect the combined costs relating to selling and general administration expense and research and development costs to be approximately 11% of sales. The segments in Eastman division expect to recognize costs related to formally [INAUDIBLE] as it builds new customers. The company expects to continue to pay a quarterly dividend and anticipates the excess available cash will be used to reduce outstanding barrings, fund targeted growth initiatives for small acquisitions and other ventures and repurchase shares. Because of the continuing economic crisis in Argentina, the Peso has continued to devalue during the early part of 2002. The continued devaluation of the Peso could result in additional charges against earnings in the second quarter of 2002. During this conference call, we are made certain forward-looking statements concerning our plans and expectations for the remainder of 2002. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed in the company's first quarter sales and earnings press release. The supplemental information on our web site at eastman.Com under the investors information section and the financial information section. And in our filing for the Security and Exchange Commission, including the form 10-K filed for 2001 and the form 10-Q to be filed for first quarter 2002. 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 listening in, we would like to you refrain from asking questions at this time and direct your questions after the conference call to our media contact Nancy Ledford at 423-229-5264. We would like to ask the investment community toy to limit themselves to one question and one follow-up question on the same question. Until we have heard questions from everyone. Bill, we are ready for the first question. Would you review the procedure for getting in queue.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may press the star key followed by the digit one on your touch-tone telephone. We'll proceed in the order you signal and take as many questions as time permits. If you find that your question has been answered and you want to remove yourself from the queue, please press the pound star. We'll pause just a moment to assemble our roster. We'll take our first question from Frank Mitch, Bear Stearns.

Yes, my question's already been asked. That was a little early morning joke. Question regarding the Caspi unit and price increases that you are seeing there. I think you mentioned that you were getting some in pricing improvement in the PCI section. I wanted to further color on the Caspi side. And I guess my follow-up question on the same topic would be, as it relates to earning for the second quarter, when you started out the first quarter, you had indicated that you thought you guys had come in, I don't know, 10 cents, something along that, and you came in 25 cents above that. Is -- to what extent are you being fairly conservative on your expectations for the second quarter here?

Good morning, Frank. I think I've already answered that question. That's the second joke of the morning. laughter ] Regarding the Caspi pricing, there's some selected products in that group that follow appropriately lean pricing. We were able to pick some of those up. That's both Caspi and PCI that tend to be related and things like that. By and large, it is a real mixed bag in the Caspi area. What's really happening well in the Caspi area is the effects of some of the restructuring work that they have done and their efforts to kind of change their mix a little bit. They are starting to show up. And that's contributing to some of their improvement. Regarding the quarter, Frank, this really is a challenge with all of these moving parts to estimate how this quarter's going to go. I wish I knew how the raw materials situation would sort out. It is moving daily on it. And it really is hard with the -- as I described the week to week variability, so I do remain [INAUDIBLE] and do stand by the comments I made there.

In terms of -- Brian, in terms of the volume trends that you did see in the first quarter, you said it was fairly mixed, but is it fair to say that March was better than January and therefore, you know, we're entering on a little bit of an upswing or is that too generous?

I think it's fair to say that every March is a little better than every January and that was probably the same in this case as well. Again, the week to week variability has us on guard.

We do do one-time items. I don't want people to annualize that. There was some stuff we pushed out in front of us, you know, delaying is a very valid way of controlling costs if you can't eliminate it completely. So you are going to see that line come up a little bit more. I wanted to just jump in a little more color on Caspi. It did have a coatings resin price increase specifically. That's one of the things that's floating through. So they are trying to, like Brian said in selected areas that have price increases, but there's still a lack of visibility out there the same way we've been talking about for months now.

Okay. Thank you.

We'll go next to Graham Copely, Sanford Bernstein.

Hi. Brian, when you talked about Caspi, a while ago, there were a number of units, facilities and even sites that were the subject to rationization shutdown. Can you tell us how far you've progressed within that and how much more there still is to go on the sort of time frame associated with it?

Yeah, I can. We continue to talk about that. I even had a discussion yesterday about our evolving thoughts on that. I guess in my mind, Graham, I'd say we were 75% done and another 25% out there. I'm doing that just loosely in my mind. There are still a few little pieces of work we need to do because we keep on discovering synergies we didn't think about before in certain cases between some of the acquisitions that we made. By and large, though, the big chunks of it are behind us. What we have now is the final -- we've announced most of it. There are pieces of it that still need to be executed. As an example, the Mountainville shut down that we announced last year happens in July of this year so the cost savings that go along with that don't start kicking in until about July. While some of them are out there, we have to finish the transfer of the products and closing of the facilities. And so I'd say about 75% done with some pieces to be completed this year. By the time we get into the fourth quarter of this year, we are basically, you know, everything is announced. There may be just one or two pieces left to be done.

Can I rephrase the question then? If 75% is done in terms of announced, how much of the associated costs do you think are already embedded in the first quarter number?

Embedded in the first quarter number, probably about half.

Okay. So we still have 50% of the cost savings?

Yeah, I think there's still more to show up. Again, I'm doing that roughly, Graham. I'd have to give that some more thought and it would take a little more work for me to be more sophisticated than that.

With six questioners left in the queue, we'll go next to PJ Dukar of Salomon Smith Barney.

Good morning.

Good morning.

I'm looking at your Caspi division. They've gone from 3% to 6% in this quarter. But going back, at one point, they were at 17 and 18%. Are we ever going to get back there, do you believe?

Right.

When you look back, PJ, that was a $16600 million.

I say going back two years.

Oh, two years. Okay. Still didn't have hercules two years ago which are big chunks. So we probably added $800 million or so to the list. I guess the short answer to your question is I don't expect it to be [INAUDIBLE] the way it was. You are talking EBITDA margins?

Yes.

I expect them to be higher than they are now. I expect double digits down the road. There would be a discount to the historical business because we have businesses that are less capital intensive with higher capital rates and lower margins than we bought. That works out to a lower EBITDA margins but you may have a decent return on margins.

Do you have a level in mind where you could potentially go?

I do. I'm not ready to spill it out here on this conference call, but we are definitely thinking double digits in that business.

And one quick question. I wonder if -- one of your European companies has been saying the chains are much better than others. Do you agree with that?

Yes, the chain is a different animal depending on who you are. If you are very heavy into the acid business, you see one thing. If you are a mixture of acidic and all of the various things, we make you see something else. But I guess the answer would be yeah. We have a very diversified mix in the acid stream that helps us. We put a lot of our acid products into cigarette filter and that helps is. So by and large that stream for us is better than the [INAUDIBLE] stream. It's been improving some but it's still a long way from where anybody would like to have it. And we'll continue to improve in future years.

Just to add a little color to that. I agree with what Brian said. When you look year over year, the deterioration of PCI has probably come more from acidtiles coming off.

And that's why.

Okay, thank you.

We'll go next to Nancy Trop from First Boston.

Good morning. I wondered if you could give us a tax rate that we should [INAUDIBLE] going forward?

I think if you work around 28% on a tax rate for the year, that's probably a good number.

Okay. And have you been doing anything different in Argentina with this financial crisis down there looking ahead?

I may let -- we're going to make a comment here, too, but number one, the first concern was to make sure our people are okay and that the plant that's running well in the latest reports we've got is that there's no issues around that, that when you are at our plant site, you wouldn't know that there's problems throughout the country. That was our number one priority. Number two, in terms of how the plant is running and the financials, maybe Al, you might want to make a comment about that.

Nancy, we're doing everything humanly possible about that. We have several people, several banks, several consultants that are helping us think through particularly the financial aspects which is what I'll focus my comments on. We've shortened terms, shifted a lot more of our customers, of our sales to customers on a dollar basis as opposed to Peso basis. We're exporting more from the plant to customers outside Argentina which reduces your credit exposure. We've reduced our cash balances. So, you know, everything you would put on the list of prudent things to do to minimize your exposure, I think we've done, which is why Jim made the comment that, you know, we think we're nearing the end of the road in terms of exposure there.

Very good, thanks.

We'll go next to Abbey Nash of Goldman Sachs.

Good morning. What was your functional currency in Argentina over the last several years? More importantly, could you just go through the -- your operating rates in the first quarter in your Occso chain and then your acidtile chain.

It's the dollar in Argentina.

Is that the way it always was or have you just moved?

No, no, I've been here 2 1/2 years and it's been dollar even before that. Yeah, dollar. A lot of that exposure, Abbey, came from a big [INAUDIBLE] receivable we had, in other words, a tax receivable to the extent you made income you could net against that, which wouldn't have been used up except over a number of years. When we had to write something down, it was something you expected to get into the future now will be worth much less because of the Peso. But in terms of operating rates, I don't think we've ever gone business by business for operating rates. I'll tell you, and Brian may want to comment as well, but the operating rates across the company have come up. They're probably in the low to mid 80s operating rates, and I tie that, whenever I think of operating rates, I also like to look at inventories. I think, again, we've had good inventory control here. So if you will allow me, it's something of a true operating rate. We're pretty much selling what we're making, give or take. But that's a good sense of where the company is.

Is this qualitatively then?

Which ones are higher or lower?

Qualitatively, polymers would be higher as you might expect and some of the organic or pieces of the fine chemicals business that we roll into PCI would be some of the lowest rates.

I meant between acidtiles and Occso.

I'm trying to give you a general picture and I've cut it about as fine as I want to cut it.

Good enough, thanks.

Okay, right.

With five questions remaining in the queue, we'll go to John Roberts with Buckingham Research.

Thank you. Could you update us on the propane hedging position?

Well, John, as you know, we do hedge. We don't give exact, you know, instruments that we're used in the hedge or whatever. I guess, John, I try not to get people to focus on that because you've got to go back to what we're really trying to do, which is really the smoothing effect quarter to quarter. So yes, we do hedge natural gas and propane. We don't think of it so much as a profitmaker as we do just a chance to close that gap between raw material price movements and when we can get our customers to move on price. And there's always a little stickiness there, but I think they understand what's going on in the raw materials market. Hopefully, they're not surprise when had we ask for price improvements. It takes a while, but yes, we do, do some medium hedging. I don't want to be too much more specific than that.

Could you at least tell us whether you expect to be better or worse than what current spot prices are for raw materials in the second quarter?

Based on what prices are today versus what you know you've done.

Where prices are today, our hedges would be an advantage to us.

And selling in Europe hasn't closed yet, but at least the industry's starting to act on these things. Do you have anything currently under way anywhere in the world in your Occso business in terms of restructuring?

No, John. We haven't got anything to say about that. We're aware what's happening there. That's not unexpected. I think you also see some activity here in the States. I believe it was Sunoco. But we don't have anything to say about that.

Thank you.

We'll go next to John Mowden, Deutsche bank.

Yes, good morning. My question is multifold. The first is as it concerns to raw material costs situation. It seems that you all are a little bit more conservative in terms of the outlook in the second quarter. I'm trying to get a handle on why the more cautious view of raw materials and the subsequent second quarter. My second question relates to the, I guess, it was PJ's question, that indicated that you view that going forward, your businesses would be less capital intensive and that you thought you could move the margins higher but not as high as historical levels. My question is, at what point would you expect to see capital turnover ratios for the newly acquired businesses to improve? And what would be the indicators we could look for, for those improvements in light of the enormous amount of restructuring going on in the company?

This is Jim. Let me take the raw material piece. We are looking at where things are today. I don't think we're really trying to call it to get a lot worse or a lot better. We're not that smart, so we did see noticeably lower levels for a very short period of time in the first quarter. And I think we took advantage of that to a certain extent. Going forward, I'm not sure what everyone else is saying. I have no reason, unless you can predict what wail happen in the Middle East, et cetera, where we are currently is not a bad guess for what the quarter would be. Brian?

Regarding your question on margins, my comment was sympathetic to Caspi. As I look across the company, I think about the company's margin. I have a slightly different view. The way we are spending our money, it is in less capital intensive ways to develop new businesses. They tend to be less capital intensive. They have a big bigger component to them. They are young right now. I think I was responding to the core Caspi business and the stuff we make and sell. Can we get the markets up to historical levels on that? Don't know. We're not sure we can get back to the 17 we had before. If I look to the company, we'd like the gross margins to move up to the mid to high 20s. That's our target what we are focusing on. We have a variety of ways to do that. Some relates to costs and building lower capital businesses like what we were doing. You saw us acquire this quarter a company called Ariel. It is a [INAUDIBLE], safety environmental company. We have for some time been working on a logistics outsourcing company. That's got some traction. Those are the kinds of things that will bring up the company's margin. And there are even parts of the Caspi bids that they are working on. Some ancillary business models to get you up to the 17 or higher number.

Thanks.

We'll go next to Les Ravitz of Morgan Stanley.

Good morning. A question to follow on that's [INAUDIBLE] different, how's that?

Yeah.

I'm just trying to get a -- how are you allocating the costs from the cracker between the two business units? How are you transferring the raw materials? I'm just curious about that. And the actual question is Brian, you were talking about having a lot of new product initiatives in the Caspi area. Can you update us on how those are going?

Okay. The just transferred costs is on a cost plus return on capital basis rather than market, Les. For those items it's cost plus return on capital for items coming out of the cracker.

On the new product development it's going well. We've got a bunch of things going on for qualification trials. Things going on in the adhesives area. Things going on in the inches area. There are new products out there in a variety of places. Each of them has their own inertia. The qualification times are long for coatings, short for adhesives and middle for ink. We're expecting some things to happen. But those are the things that start to happen maybe around the end of this year, early part of next year and start showing up in a visible way to you. But I'm encouraged, to be honest with you. I'm encouraged they have really good things. They are excited and focused. They have narrowed the range of things and I think they've picked out good things to work on.

Thank you.

We'll go next to Andrew Cash, UBS Warburg.

I guess if all I had was the cash flow statement, and by the way, I think it's nice that you provide the first quarter 2001. But anyway, if all I had was the cash flow statement, I'm looking at the accounts receivable and your inventories and comparing that to 2001. I would be concerned about, you know, sales growth going forward. So I was wondering if perhaps this is the reason why you're not as optimistic about, you know, the second quarter because? Because if demand was really looking strong, perhaps, you know, your accounts receivable and inventories would be higher right now.

Well, I mean, I can give you a little more color on that. You know, we're trying to be very disciplined. We really took the inventory down in the fourth quarter. If you looked inside the inventory, you would see higher finished goods and lower raw materials inventory. So we are trying to be prepared for what we see as a seasonal, as Brian talked about the typical seasonal pickup in the second quarter. It's not the kind of environment we want to run the plants and create a lot of inventory. We don't think we need to do that to meet customer demand. So, you know, I attribute some of it to the renewed emphasis on good cash discipline and just a caution of, you know, not wanting to get ahead of the curve in terms of using our balance sheet, expecting the upturn in the economy when the upturn in the economy comes, we'll be able to meet the demand.

And what about the accounts receivable?

Well, I'm not sure what your issue is.

I don't have an issue, but I'm just, you know, for example, you know, Dow Chemical had a big increase in their accounts receivable because shipments in March were very, very much stronger than in December. And I was just wondering, you know, as you go through the first quarter as Brian said, the, you know, the things were picking up. March is usually better than January. So I was just wondering if, you know, orders were strong and shipping strongly in March, you know, why aren't your accounts receivable higher?

Yeah. I mean, you have had what's happened with the prices in terms of the general level of receiveables, but, you know, trying to track through, I don't know how efficient that's going to be for you. We dent try to pretend March was a blow out month or anything. It's just typically a better month than January. So I really, you know, you stumped me. I really can't give you any more color than that other than prices.

Year to year volume change was off slightly couple of percentages or so, but sequentially was up. Sequentially up 5, yeah.

I couldn't find that on the web site for the P.E.T. Where did you say that was?

You probably looked ten minutes too early. It's in the investor information section in the presentation section.

Let me just make a comment on that. I mean, last year's first quarter, a very strong quarter for P.E.T., I think first best quarter ever. This was also, by the way, a strong volume quarter for P.E.T. It is up in the top for P.E.T., I believe. The point,we said we wanted our volume. We wanted to grow in the market again which is different for us. When you see that sequential volume turn up, I'm not smart enough to know whether 5% is the right number or not given the marketplace we're in, but we're on the right trend in terms of attacking that from a volume basis. And looking for sequential growth and volume. So that's the track those guys are on. And the strategy they have.

Okay. Thanks.

With three questions remaining in the queue, we'll go to Paul Kristofferson, New Vernon Associates.

Good morning. Could you just restate, please, just briefly restate the discussion you made about P.E.T. capacity utilization in '03? I think you made some comment about that being lower than in '02. And I just didn't quite catch it. On P.E.T., there's been a kind of downward drift in the last year or so in the kind of [INAUDIBLE] the long-term growth rate and demand. It used to be, you know, 10 plus and then it got to be eight to ten and now we're kind of okay with five. What do you think is the long-term demand growth race normally in P.E.T.?

Paul, let me answer that question. What we said in the prepared comments is that we expect nameplate capacity for the global industry to be lower in 2003 than 2002. Now, that will vary by region, but for the worldwide global capacity, we expect it to be lower in 2003. As far as growth rates, industry consultants are still saying that they expect 10% average annual growth for the next several years. So I'm not sure where the 5% came from.

Is that your expectation, 10%?

Well, you know, we may vary a little bit from the industry consultants, but they usually come out good when you add up things in the end of the year.

The 5% comment was I just said the quarter was up sequentially in volume. I wasn't trying to portray that as the market. I just said we're on the right trend.

Oh, the 5% is sequential?

Yeah that was first quarter over fourth quarter.

My mistake. The thing that's on your web site, is that an industry consultant point of view or Eastman's point of view?

Well, it's definitely our presentation. Now, where we use industry, it will note that in the presentation.

Thank you.

We'll go next to Stewart Polvern.

Thanks, but most of the questions I have were answered, thanks.

Thanks, Stewart. That was an easy one.

We'll go next to Andrew Fineman.

Thank you. Can you first of all, just tell me what the net debt was at the end of the quarter? You know, short-term, long-term, minus cash.

I don't have the cash number in front of me. I think we've typically been running $40 million to $60 million. Net debt didn't move a whole lot, Andy, in the quarter. That's after you pay your dividend, et cetera.

Okay. And if you -- I mean, you talked about capital spending being, you said depreciation amortization of 370 and capitol spending plus acquisitions would be no more than that. And so, you know, I guess that means about the same. And then you have this dividend, which is $135 million, so, you know, with the new guidance, your earnings are going to be less than that. So I guess, you know, I thought this was a deleveraging, you know, situation, but it sounds like maybe that's not true anymore?

Well, I think your time frame is what's important. I mean, you know, we're basically saying we haven't seen the rebound in the economy yet. Everyone believes it's ahead of us, but we haven't seen it. So you go through a quarter where you are performing at a low level in terms of worldwide demand and you are in markets and yet we still don't grow the debt much. We did do a small acquisition that Brian mentioned and a couple of little investments. So I hope people weren't expecting a lot of paydown in the first half of the year. In fact, you know, it's probably more the case that we had this quarter where you add about $10 million to your debt. Overall, trying to think of the longer term, if we continue to discipline on the capital and cost structure, Andy, we ought to be able to do some of the delivering that we said was a priority for us.

Nothing's changed in terms of the priorities, Andy. When the business picks up a little bit, we still have the same intentions we talked to you about.

All right. I'm thinking about the full year. I'm not just talking about the quarter.

Things pick up in the back half of the year, we'll do what we said we would do and that is to pay down debt. That hasn't changed.

All right. Okay.

He's not predicting it for you, Andy. We're not predicting what the second half of the year will look like.

Well, I'll tell you, yesterday, Bowl Corporation had a conference call and the guy in charges of packaging there, his into name is Leon Midget, got on and said that P.E.T. is sold out and not only sold out but they've good the more orders than they are able to handle, that they are going to have to buy bottles from other people, but the problem is they think everybody else is sold out, too. And that the demand growth is off the charts. I swear that's what he said yesterday.

Well, I love the sound of that, Andy. If it continues to translate in orders and prices, we're going to love that.

If he's having trouble finding P.E.T., you should have him call us.

No, he's talking about P.E.T. bottles, you know. He's talking about the end product.

Part of that is making bottle capacity more than it is P.E.T. capacity, I don't know. But this is the time of year when you'd expect to hear a comment like that.

Is there enough bottle capacity to make your business good? I mean, is there a problem here that, you know -- I mean, it's also interesting that you said that you think P.E.T. Volume will be down in '03, nameplate capacity will be down. Where does that come from?

I think we meant to say utilization down, not capacity down.

Oh, I see.

Okay? So our mistake on that. Andy, I don't know if we have anybody else in the cue, but you latched into a subject that obviously we couldn't really talk a lot about. But right now, I can tell you that we do have an an annual basis but we have more capacity to sell more P.E.T. And, you know, I can't really comment on the other call since we didn't hear it. But thanks for your questions.

We do have two follow-up questions and the first one comes from Andrew Cash UBS Warburg.

Hi. Just clarification on the way you are reporting your segment volume and revenue. The interdivisional effect, does that have an impact on the volume effect and price effect? I was just assuming volume and price effect was really to the merchant market.

Yeah, we're trying to show the interdivisional -- we're trying to show the complete interdivisional effect in the column interdivisional effect. So the only pieces that aren't on the chart would be mix and that's why they wouldn't add across. The interdivisional should be captured in in that column.

So volume and price effect, that's the impact of those segments with the merchant market?

Correct.

Okay, thanks.

We'll take our final question from Abbey Nash Goldman Sachs.

Yes, good morning. Maybe I'm the only one a little confused about table three and table four. I guess Andy had some questions as well. I'm just trying to relate the volume number in table four to volume number on table three.

Abbey, that's really easy. The first table, if you read underneath the first quarter cash, it says change in revenue due to volume. It's the first one is the effect that volume has on revenue. The second chart is true volume. Okay? So one's kilos and one's expressed in terms of 1% dollars.

All right. Okay. I think I'm with you on that. And just as you have had the footnotes on table four with the three different asterisks, is there an equivalent of that for table three so that we can get the revenue changes without the acquisitions?

Well, we didn't put it in, Abbey. Off the top of my head, I don't know how different it is.

And we did -- the color that we added in the script, in the paragraphs, really gives you that. We noted where the remember knew change was really attributed to the acquisition of the businesses from Hercules. So we'll have the script out on the web site so you can get the additional information from that.

All right. I'll do that. I'm sorry, I'm a little slow this morning. I'll have to absorb all this and call you back, thanks.

There are no further questions remaining in the queue. I'll turn the conference back to you for any additional or closing remarks.

Thank you, Bill. If are think additional questions, please call me. A replay of the conference call script and Q&A will be available this afternoon through the rest of next week. You may hear the replay by calling 888-203-1112, pass code, 555576. Also, an audio replay of the conference call and [INAUDIBLE] and copy of the prepared comments can be found at eastman.Com by going to the investor information section and then the financial information section. Again, thank you. We appreciate your interest in Eastman.

That does conclude today's Eastman Chemical Company. We thank you for your participation.