伊士曼化學 (EMN) 2002 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day everyone and welcome to the Eastman Chemical company third quarter's earnings conference call. This conference is being recorded. This call is being broadcast live on the Eastman's website www.eastman.com. Hosting today's presentation will be Greg Riddle of Eastman Chemical Company Investor Relation, Brian Ferguson Chairman and Chief Executive Officer, James Rogers Senior Vice President and Chief Financial Officer, and Albert Wargo Voridian's Chief Financial Officer. At this time for opening remarks, I would like to turn the conference over to Brian Ferguson. Please go ahead sir.

Thank you and good morning, everyone. I hope you are all well. As I look at the overall performance for our company this quarter, I think it's relatively good considering the current economic environment that we're in. If you remember the guidance that we gave to you for the third quarter of 2002 about three months ago, we told you that our operating results would be similar to the second quarter of 2002, and if you look at us excluding the impact of the previously announced operating disruptions in Rotterdam, south Carolina, operating earnings for the third quarter are actually slightly better than the second quarter. I hope you pay attention to the great cash generation story we have for our company. We have generated about a little bit over a half billion dollars in cash from operating activities. Jim is going to tell you a little bit how we're putting that to work. We told you we wanted to grow. Year over year, our volumes have increased, and that's on a quarterly basis and for the first thee quarters in a row. That's the good news. The tough news is we continue to face pricing pressures pretty much across the board. It's sometimes a combination of pricing pressures and raw material increases, narrowing out margins, so that is the challenge that we have faced for so long now and we're just looking forward to the day we don't have to face that as much. I want to remind you about some of the commitments we made very early in this year, we told you at a corporate level we wanted to do certain things. For instance, we wanted to hold our overhead below 11% of sales revenue. We've done that. It's at 10.5 or so. We told you we wanted to use our cash wisely, and Jim will tell you more about that, but we've paid down a significant amount of debt through three quarters. We have maintained our discipline on capital expenditures and acquisition, maintained our strong dividends. We've kept that commitment as well. We said we wanted to achieve growth, and as I said earlier, you know, we have lots more work to do here, but through the first nine months of this year, our sales volume has increased 9% compared to the first nine months of 2001, so we like that part. We also told you we wanted to improve gross margins, and this is the one that's been the toughest for us so far in this current economic environment. Looking at us, you'll see we've been able to hold our gross margins without letting them go up or down very much, and that represents -- you might be asking where are all the cost savings coming from, what what's happening to the cost savings, they're actually happening and that's what allowing us to hold those gross margins kind of flat in the face of raw materials and falling prices.

As we begin 2003, or as we think about 2003, I want to let you know that we're going to keep these commitments in place. These commitments for controlling our overhead and managing our cash wisely and trying to grow, expanding our margins, etc..., all of those we'll keep in place as we go into 2003. Looking forward to the fourth quarter, I think everybody tells you that they're faced with an uncertain economic environment. We're not different there. Eastman's history is that in the fourth quarter, we always experience some typical seasonal decline in our container plastics P.E.T. business, and those typically reduce our operating earnings compared with the third quarter, and that's just sort of an his historical fact that we live with. Our fourth quarter results, however, may be helped by a couple of things. We expect that insurance reimbursements could largely offset the impact of the operational disruptions we had this quarter. We're looking at the insurance claims process and the determination of the reimbursement amount. We expect to hopefully get completed in the fourth quarter, but it could spill over into early 2003. We also will be positively impacted in the fourth quarter by the continuation of a strong tax line that we saw in the third quarter tax rate there. I am going to just give you some brief comments on 2003 because I think we're today in a position to say a couple of things about that. Just in the general comment, I think we're pretty well positioned to benefit from any improvement that is start happening in the global economic conditions. We've taken a lot of actions that should help us this year. If I think about strategic directions, strategic issues, the businesses that need to be shedding costs are doing that. The businesses that need to be improving their differentiation are making progress on that. The pace at which they are moving is accelerating rather than slowing in all those areas, so in terms of strategic direction and strategic tactical actions, I am pleased with the direction we're heading.

We have talked to each other about financial performance for next year and we judge collectively that it's not okay for us to consume value yet another year, so our direction in driving all of our annual planning is for us to reach toward the cost of capital in our EPS number next year, which is something close to or maybe a little less than the current first call analyst 2003 consensus earnings per share estimate. So that's the commitment we're making to you today for 2003, and of course that's always based on the expectations that the economic conditions are going to improve, kind of continuously, throughout 2003, and that's the one thing that none of us are entirely always so sure about. So with those overview comments, let me turn it over to Jim for some more details.

Okay. Thanks, Brian. I do just have a few points to make, but just to make sure we remember some of the positives in the quarter here, I remember last quarter we told you that it felt -- that the third quarter felt a lot like the second quarter on operating line, and we said that despite the fact visibility is still pretty poor on the end market, but either we're getting better at forecasting, we did come in with 83 million above income as compared to the 81 last quarter if you make an exception for those operational disruptions that we've talked about. Part of that is driven by the sales volume which increased 5% year over year. In particular in PET, which a number of you have focused on over the past few calls, that's up 9% year-to-date, and so that with the PCI volume performance, we feel pretty good about. And looking geographically, Latin America and especially Asia Pac have good performance year over year. The SGNA line, we tightened up a little more from the quidance las time where I was trying to guide you towards 103 million or so, we came in at 100 million, feel pretty good about that. The 103 to 105 is still probably a better rate going forward. We have salary increases effective October 1, so just as we go to look out, it's probably a little more than that 100 million run rate on the SGA. The other income line we talked about last call as well, so don't expect those currency gains to repeat on the other line, and as you've seen, they did not. By the way, just back on SGA, as we look at that number, that 100 million, there's about 10 of that that is funding things like growth initiatives, so it really is a good cost control story and it's showing up on our SGA line that the company grows. On the cash flow, Brian mentioned that, you know, we generated about $523 million in cash flow from ops, which was good performance, and in particular, we've said we want to difficult differentiate ourselves on how we spend the cash, so we've been pretty tight around here. You see that in the cap ex numbers and being so far below appreciation and amortization, 170 million being the Cap ex plus the investments as compared to 300 million of amortization and depreciation year-to-date. That's allowed us to reduce our borrowings by about 216 million. At the same time, the cash went up a little bit, not a lot. I think it was 10 to $14 million, something like that. We also paid down a little bit of our receivables facility, so good cash flow performance, and we very much expect that to continue in the 2003 as we maintain our strong dividend.

Two more points, then I'll get it over to Greg. Now you can see what we expect to be the total amount of funding required for our pension in 2003. It will be between 135 and 140 million. That's moved up in the other current liabilities that will be on our balance sheet. And just on the operational issues, Rotterdam is up and running, Carolina is in the final stages of coming back up. In the fourth quarter, there will be about 8 to 10 million of expenses due to those operational issues and I want to make sure we're up front about that while we're working through our insurance claim. I think that's all I had on my list. Greg, why don't you take us through your points?