伊士曼化學 (EMN) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company fourth quarter earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website at www.Eastman.com. We will now turn the call over to Mr. Greg Riddle for Eastman Company Investor Relations. Please go ahead, sir.

Thank you, Lisa, and good morning, everyone. With me today with Brian Ferguson, Chairman and Chief Executive Officer, Jim Rogus, Senior Vice President and Chief Financial Officer, and Allan Rothwell, Voridian Division Chief Financial Officer.

Before we begin, let me remind you that during this call you will hear certain forward-looking statements concerning our plans and expectations for the first quarter and full year 2003. 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 fourth quarter 2002 sales and earnings news release and the supplemental information for fourth quarter 2002 on our website at www.eastman.com under the Investor Information section. And in our filings with the Securities and Exchange Commission, including a Form 10-K filed for 2001, a Form 10-Q filed for third quarter 2002, and a Form 10-K to be filed for 2002. Now let me turn the call over to Brian.

Well, good morning, everyone, and thank you for joining the call. I would like to take a few minutes here to hit several important points from an overview standpoint. I would like to characterize our financial results for you, update you on the commitments we made to you this time last year, offer some thoughts on how we view our businesses today, maybe tell you some more about actions we're taking this year to improve our performance and then finally to give you an outlook for the first quarter. And that's a lot to do in a few minutes but I'll be brief.

Overall our performance for the fourth quarter of 2002 and for the full year 2002 was frankly disappointing. We were severely impacted by lower selling prices across all of our businesses which more than offset the volume gains and the cost savings we made during the year.

These lower selling prices are indicative of a lack of pricing power for some of our products but, of course, it also points to a persistently sluggish global economy and that's particularly true for manufacturers. You may remember this time last year, we made some high-level commitments to you, and I want to take a moment to review how we did on those.

We said we would keep our overhead defined as SG&A added together with R&D at or below 11% of sales, which is a pretty low benchmark in the industry and for 2002 it was 10.6% of sales. So we accomplished that goal.

We said we would keep our net capital expenditures at or below depreciation and amortization, and we did that. We said we would pay down our debt, and we paid down approximately $150 million in 2002.

Now, some perspective on that, we also brought some off-balance financing onto our books, something on the order of $160 million. So the net effect is as if we had paid more like $300 million in debt but I'll let Jim explain that in more detail. We said we would maintain our strong dividend, and we have, and we remain committed to that strong dividend, in case you are going to ask that.

We have also said we would improve the gross margin, and this, of course, is my biggest disappointment, and the one where we have more work to do. I want to tell you that we maintain each of these commitments to you for the year 2003.

Looking out in the first quarter, we are again facing a challenging business environment that is compounded by sharply higher raw material costs. Now, you all know what that story looks like. The price of oil today is about $33 a barrel and natural gas is over $5 per million BTU. Propane which you may not watch as closely is above 70 cents per gallon which is very high premium compared to what we normally would see.

And just recently the quotations we received for paraxylene as an example -- you know, paraxylene is a key raw material for PET, those quotations increased more than 25% between the months of January and February. Now, we planned for increases in raw material costs for the first quarter of 2003, but these increases are significantly higher than we or just about anyone else maybe anticipated. I've heard the word "unprecedented" used by a number of our purchasing folks.

We also continue to experience pricing pressure in some of our products in some businesses. So despite all of that, we're pulling out the stops everywhere to raise our prices in nearly every business in response to these rising raw materials. We are seeing some lower volumes in the early in the first quarter due to the general economic weakness in some areas as well. So there's some background on snapshot.

Let me make some observations about our businesses going forward with that kind of a stage-setting perspective. Beginning with the Voridian Division, the fiber segment has been, and we expect it's going to continue to be, a very strong cash generator for the company. We expect flat to slightly lower revenues but continued strong operating earnings in this business. This has been a steady business for us, and we expect it to continue to be a steady business.

For the Polymer segment, we continue to have global leadership with a strong cost position in PET. Remember that we're the largest producer, we have the newest manufacturing facilities, we're the most vertically integrated and we continue to focus on technology and innovation to drive costs lower.

We all know that PET is a very competitive business. We have capacity additions in North America expected over the next few years, continued competition from Asia and all the raw material things we just talked about. But with all that said, we expect continued profitability in this business as we maintain our focus on lowering costs and taking our share of the growth.

On the PET pricing front, we usually don't discuss prices for individual businesses, as you know, but I will tell you that we pushed prices up in January and we expect to push additional price increases during the first quarter in our effort to offset these raw material effects.

Moving to the Eastman division. The Specialty Plastics segment has gone through a transition adjusting to new competitors from Asia and Europe. We talked about that before. The fundamentals of their markets and their product differentiation remains very good. They continue their work on reducing costs and they're focused on innovating and entering new markets. So their prospects for improving performance are very good.

The Performance Chemicals and intermediates business continues to operate in a pretty difficult environment. You may remember they are pretty sensitive, very sensitive to the multiyear supply/demand cycles for capital-intensive commodities like the off sell products and the acetyl products. They are currently experiencing and going through one of those periods of oversupply for some of their commodities but we're nearing the end of those in hopefully the next year or two.

Increasing competition from Asia in their specialty and performance product areas has also impacted their results over the last couple of years. This year we continued to manage costs pretty aggressively in this business to position ourselves, to take full advantage of the upturn expected in 2004 and 2005.

In the CASPI segment, we have achieved significant quality improvements and we've rationalized and consolidated manufacturing facilities where necessary. We're not totally done with the consolidation piece of it. This has given us lower manufacturing costs and other cost savings.

We're also growing in areas such as waterborne products, coating specialties, certain kinds of solvents. If I think about this regionally, we've seen very strong growth for CASPI in Asia Pacific and Latin America and particularly for adhesives. We see a lot of opportunity in these regions this year and in the future.

The improved performance for CASPI in 2003 will be driven by price increases, improved product mix, and lower costs. So the CASPI story for 2003 will be more about improved margins and profitability than about sales volume gains.

All across our company we're taking actions to improve near-term and long-term profitability. Some examples, we're taking immediate corporate actions to reduce costs in the areas of labor, travel, contractors, fees, and out-of-pocket purchases of all kinds.

We're also pursuing other sources of income, some of which will be more nonoperating in nature. We're implementing organizational changes that were just announced two days ago to improve efficiency and better enable strategy execution. We're reviewing the portfolio of products and businesses across the company, but primarily in the Eastman division.

Some may need to be pruned from the portfolio to improve our profitability and right now these are typically in the 10 to $40 million size just to give you some perspective on those ongoing efforts there.

Now turning to our outlook for the first quarter of 2003, we expect to see high raw material costs and a sluggish global economy in the quarter. To offset these effects, we're raising prices wherever we can and we're reducing costs across the company.

When we assess the mix of, you know, the global, political, and economic risks, the actions that we can take unilaterally and our current business outlook, we think the first quarter 2003 will be similar to the first quarter 2002. Now, with that said let me turn it over to Jim.

Thanks, Brian. Good morning, everybody. Usually when you are on the call, with the CEO, he takes all the good stuff but I get to start out with one of the good ones and that was cash flow. And as you'll see in the numbers for the year 2002, we generated $760 million or so cash from operations compared with about two thirds of that in 2001. Free cash flow for the year at $312 million compared to using cash in '01 of $64 million.

The real proof in the pudding as far as I'm concerned when you start talking about cash is how did you do on paying down your obligations and your debt, and you will see the net borrowing on the books went down by $147 million. But as Brian mentioned, in the fourth quarter, cash flow continued strong and we took advantage of that and had a decision on rolling over an off balance sheet lease on some operating assets, the terms of such and the economics that made more sense with our cash flow to just go ahead and pay that off and so we did that, and that was the $160 million that Brian talked about.

So when I think about that, I don't think of that as -- while it shows up as an addition to capital in our CAPEX line, it was really a financing decision. The assets were already here, been here for a long time and we just determined to finance them on books instead of off books because it was the right financial decision. So net/net like Brian said, good paydown year, good use of cash, source of cash and use of cash, and that shows up, too, in, of course, funding our dividend.

Priorities of cash include continuing that strong dividend, making the necessary contribution, in fact, making more than the necessary contribution to the pension plan, and I'll talk about that in a minute. Continuing debt paydown, still want to fund our targeted growth initiatives such as the small acquisitions if we see things that we really like, and I do mean small, and other ventures, and potentially repurchase shares.

Just on the pension, last call I talked about how the minimum pension funding would be $135 million, and that was our intent. As we looked at that, we could actually get the max tax benefit by going up to $220 million.

We expect to have the cash flow to do that. It's probably, time-wise, not a bad time to be increasing your funding into your pension plan and so we're going to step that up to $220 million this year, and you'll see that in the current liabilities on our balance sheet. The increase in pension and post retirement liability expense year-over-year is still around the $30 million range, and that's roughly equivalent to the decrease in depreciation we're seeing, or expect to see.

Touch on the operational issues that we had at Voridian in both Rotterdam and Columbia and it's good to say, we do have those behind us. The plants are up and running. The costs are behind us. If you tax those costs, the impact on 2002 is about $24 million after tax or 31 cents a share, depending on how you want to think about the business. That's 31 cents that these issues cost us in 2002 that we would not expect to continue going forward.

As far as the insurance goes, it is a complicated insurance claim, but we're working this through with the insurance company and we would expect to have the decision, you know, and agreement in the first half of 2003 on the amount.

Let me just now skip over and mention asbestos. And on the topic of asbestos, you know from our third quarter disclosures that we recently received a significant number of claims related to asbestos exposure, and we mentioned that in that filing. There's currently over 6,000 claims in Mississippi from a couple of plaintiff law firms. I think you know this is new for us and for a lot of others.

Over the past couple of decades we've been defendants in a relatively small number of premises cases that have been dismissed or settled for small amounts. Now based on our legal investigations to date, there is information that we did manufacture a plastic product containing asbestos from the mid-Sixties to the early '70s.

Based on our review of the allegations in these claims of the product we manufactured and of our insurance, we continue to believe that the asbestos claims will not have a material impact on the company's financial condition.

And, you know, before we get into the Q&A, you should know that this is as far as I can go on the asbestos issue since we are in ongoing litigation. So I'm sure there's a bunch of creative ways to ask us for more information or whatever, but this is the full extent of what we can say on this conference call.

On to SG&A and R&D. SG&A for the full year 2002 was flat compared to 2001 which was actually a pretty good story when you figure that we're funding our growth initiatives to the tune of about $50 million on this line, which is approximately $15 million more in '02 than it was in '01. So we had growth in the funding of our initiatives like Cindien and yet we held the total dollars flat.

Cindien has had to increase their capacity, incur some costs because they have been adding new customers and expect revenues to be ramping up through the year and they have been adding customers that have been previously announced like Albemarle, Safety Cleaning, Haupt International.

So just looking at some of the positives in the quarter, something we don't always talk about with the shareholders but gets a lot of press inside the company is our safety record, and I've really been honored to work with that group this year. They continued to make strong improvement.

Some of you may not understand what these measures are, but we had roughly 40% improvement in our OSHA recordable and days away-from work measures, which are kind of the standard measures for our industry. They measure safety. We think we've just had cracker jack performance there. So we feel really good about that.

We've had revenue in Asia Pac increase by 15% year-over-year and that was due to strong sales and performance chemicals, CASPI and the Voridian Division. Strong volume gains for all our segments in '02 compared to '01 with polymers having a gain of 8% including PET involving increasing 9% and performance chemicals intermediate volume increasing 8%. So it indicates we have a good story around maintaining and increasing market share.

If we have time, Al can talk more about the polyethylene performance but that's been in the Q&A, but that has been great performance operationally, good business decisions there to simplify product offerings. A lot of strong work by, you know, Allan Rothwell and T.H. [INAUDIBLE] down there in Texas, and so they have also been helped some on the pricing dynamics this past year. So some good news in a number of areas.

On our commitments, Brian touched on those and we are reaffirming those in terms of keeping CAPEX and directed investments at or below depreciation and amortization. And you know that depreciation and amortization level is stepping down maybe 20 to $30 million '02 to '03. Reaffirming our commitment to keep SG&A and R&D at or below 11%, and this was 10.6 in '02. And, of course, maintaining our commitment to a strong dividend.

So in summary, good strong cash flow generation in '02, holding our commitments for '03, good volume gains, hopefully maintaining share, maybe even increasing share in some businesses, good job of reducing costs like Brian talked about, although it didn't overcome the lower prices we endured, I guess you would say. And we're making progress on our growth initiatives line Cindien. So with that I'll let Greg take us through some of the business-by-business numbers.

Thank, Jim. Last night our news release announcing fourth quarter and full year 2002 results was distributed to the news services and posted to our website at www.eastman.com in the Investor Information section. Included with our news release are a series of financial tables.

Table 1 includes a statement of earnings for the fourth quarter 2002, fourth quarter 2001, and full year 2002 and 2001. Sales revenue for fourth quarter 2002 was $1.3 billion, an increase of 4% compared with fourth quarter 2001. Increased sales volumes were partially offset by lower selling prices. Full year 2002 versus full year 2001, revenue declined 1% as lower selling prices and a unfavorable shift in product mix were mostly offset by higher sales volumes.

Cost of sales for fourth quarter 2002 was $1.2 billion, an increase of 6% compared with fourth quarter 2001. The increase is attributable primarily to costs associated with increased sales volume.

The 2002 figure includes approximately $17 million of previously announced asset charges relating primarily to equipment dismantlements and other writeoffs and approximately $7 million of additional costs related to post-employment benefits. Full year 2002 versus full year 2001, cost of sales increased 1% as the impact on cost of sales from higher sales volumes were offset by lower raw material costs.

Selling and general administrative costs for the fourth quarter 2002 were $107 million compared with $102 million for fourth quarter 2001. The increase is due primarily to higher costs year-over-year associated with our growth initiatives, including the business-building efforts of our logistics subsidiary Cindien. Full year 2002 compared with full year 2001, SG&A costs were flat as additional costs related to our growth initiatives were offset by cost control efforts.

Research and development costs were $41 million in fourth quarter 2002 compared with $42 million fourth quarter 2001. We remain committed to keeping the combined costs of SG&A and R&D at approximately 11% of sales revenue.

Fourth quarter 2002, the company reported a loss from operations of $11 million that includes costs of approximately $11 million related to an operational disruption at our Columbia, South Carolina facility, and $6 million in asset impairment restructuring charges listed in Table 4 of the financial tables accompanying the news release.

In fourth quarter 2001, the company reported an operating loss of $86 million. That included $111 million of asset impairment and restructuring charges and other nonrecurring items as listed in Table 4.

After taking into consideration the above items for both periods, underlying operating earnings further declined as the effect of higher sales volumes were more than offset by lower selling prices, approximately $17 million of previously announced asset charges relating primarily to equipment dismantlements and other writeoffs and approximately $7 million of additional costs related to post-employment benefits.

Earnings from operations for full year 2002 were $208 million which include costs of approximately $39 million for operational disruptions at the company's Columbia, South Carolina and Rotterdam facilities as well as $5 million in nonrecurring charges listed in Table 4.

The company reported an operating loss of $120 million for 2001, including asset impairment restructuring charges and other nonrecurring operating items totaling $446 million as listed in Table 4 and the effect of FAS 142 on amortization of goodwill and indefinite life intangibles totaling approximately $20 million.

After taking into consideration the above items for both periods, underlying operating earnings declined due to lower selling prices and an unfavorable shift in product mix, partially offset by higher sales volumes and lower unit costs, resulting from increased capacity utilization and lower raw material cost.

Net interest expense was $31 million in fourth quarter 2002, a 3% decline when compared with the same period in 2001. For full year 2002, net interest expense was $122 million compared with $140 million in full year 2001. The decrease is due to a reduction in borrowings and decreases in market interest rates.

Other income net for fourth quarter 2002 was $5 million, primarily reflecting the positive impact of foreign currency exchange rates. Other charges net for full year 2002 was $2 million compared with other charges net of $11 million for 2001. The improvement year-over-year is largely related to the positive impact of foreign currency exchange rates, primarily in the second and fourth quarters of 2002.

The provision for income taxes for fourth quarter and full year 2002 versus the comparable periods in 2001 were favorably impacted as a result of the resolution of certain income tax contingencies by the reduction in international taxes related to the implementation of the company's divisional structure, and additionally reflect the impact of FAS 142 on amortization.

Fourth quarter 2002, the company reported a loss of 16 cents per diluted share compared with the loss of $1.20 per diluted share for fourth quarter 2001. Excluding asset impairments and restructuring charges, other nonrecurring items and the impacts of adopting FAS 142 as listed Table 5, the fourth quarter 2002 loss per share was 12 cents compared with a loss per share of 10 cents in the fourth quarter for 2001.

For the year 2002 Eastman reported earnings of 79 cents per share compared with a loss of $2.28 per share for full year 2001. Excluding asset impairments and restructuring charges, other nonrecurring items, and the impacts of adopting FAS 142 as listed in Table 5, earnings per share were $1.10 for full year 2002 compared with $1.71 for full year 2001.

Table 2, other sales information. Fourth quarter 2002 sales revenue increased in all regions except Latin America when compared to fourth quarter 2001. Sales revenue in the Europe, Middle East, and Africa region increased due to the positive impacts of foreign currency exchange rates, partially offset by lower selling prices.

For Asia Pacific, increased sales revenue primarily reflected strong sales volume growth, particularly for the Eastman division segments, slightly offset by an unfavorable shift in product mix.

In Latin America, sales revenue decreased due to lower selling prices and the unfavorable effect of foreign currency exchange rates which were partially offset by a favorable shift in product mix.

For the North America region, moderately higher sales revenues, primarily reflected higher sales volumes, partially offset by lower selling prices. Full year 2002 compared with full year 2001, sales revenue increased in the Asia Pacific and Europe, Middle East, and Africa regions while declining in North America, and Latin America.

Asia Pacific revenues increased 15% due to strong sales volume gains which were slightly offset by lower selling prices. Europe, Middle East, and Africa revenue increased slightly due to sales volume gains and the favorable movement in foreign currency exchange rates, largely offset by lower selling prices.

Revenue declined in North America due to a decline in selling prices and an unfavorable shift in product mix, partially offset by higher sales volumes. Revenue in the Latin America region declined slightly as selling price declines were mostly offset by higher sales volumes.

The divisional and segment financial results for fourth quarter and full year 2002 but not for prior periods reflect a divisional cost structure implemented by Eastman at the beginning of 2002. Divisional segment performance, including interdivisional sales, the effective of identified asset impairments and restructuring charges and other nonrecurring items in fourth quarter and full year 2002 and fourth quarter and full year 2001, and the effect of FAS 142 on amortization in 2001 are listed in Table 4.

Highlights of the divisional segment results excluding the interdivisional transactions follows. Eastman division. Fourth quarter 2002 compared with fourth quarter 2001, Eastman division's revenue increased 3%, mainly due to higher sales volumes, particularly for the specialty plastics and performance chemicals in the intermediate segments and the positive effect of foreign currency exchange rates partially offset by lower selling prices in the specialty plastics and CASPI segments.

Full year 2002 compared with full year 2001, revenue was flat as sales volume gains were mostly offset by lower selling prices.

For fourth quarter 2002 versus fourth quarter 2001, after taking into consideration the asset impairment restructuring charges and other nonrecurring operating items for both periods, as listed in Table 4, and the effect of FAS 142 on amortization in fourth quarter 2001, underlying operating results further declined due to lower selling prices, other asset charges, additional benefit costs, and slightly higher operating costs and SG&A expenses.

Full year 2002 compared with full year 2001 after taking into consideration the asset impairments and restructuring charges and other nonrecurring operating items for both periods as listed in Table 4 and the effect of FAS 142 on amortization in fourth quarter 2001, underline operating earnings further declined due to lower selling prices for all segments and an unfavorable shift in product mix, particularly for performance chemicals and intermediates.

CASPI segment underlying operating results after taking into consideration the asset impairments and restructuring charges and other nonrecurring operating items for all compared periods as list in Table 4, declined for fourth quarter 2002 compared with fourth quarter 2001 due to lower sales volumes and lower selling prices. Year over year, CASPI operating earnings decreased due to lower selling prices partially offset by higher sales volumes.

The Performance Chemicals and intermediate segments' underlying operating results after taking into consideration the asset impairments and restructuring charges and other nonrecurring operating items for all compared periods as listed in table 4 improved slightly in fourth quarter 2002 compared with fourth quarter 2001 due to higher sales volumes and selling prices.

Full year 2002 compared with full year 2001, TCI operating results declined as lower selling prices and an unfavorable shift in product mix were partially offset by increased sales volumes.

Specialty Plastics segments underlying operating earnings after taking into consideration the asset impairments and restructuring charges and other nonrecurring operating items for all compared periods as listed in Table 4, declined fourth quarter 2002 compared with fourth quarter 2001, due to lower selling prices and slightly higher SG&A costs, partially offset by higher sales volumes.

Full year 2002 compared with full year 2001, operating earnings declined due to lower selling prices and slightly higher SG&A costs and offset by increased sales volumes.

Voridian Division. Fourth quarter 2002 compared with fourth quarter 2001, revenue increased 4% as the sales volume increased 6%, mainly attributable to the polymer segment, partially offset by lower selling prices. Full year 2002 compared with full year 2001, revenue declined 3% as increased sales volumes were more than offset by lower selling prices. Volumes for PET products improved by 9% over 2001.

Voridian Division earnings from operations for fourth quarter 2002 after taking into consideration the costs related to the operational disruptions, asset impairments and restructuring charges, and other nonrecurring operating items for all compared periods as listed in Table 4 improved slightly compared with fourth quarter 2001 due to higher sales volumes, partially offset by lower selling prices.

Full year 2002 compared with full year 2001, underlying operating earnings after taking into consideration the costs related to the operational disruptions, asset impairments and restructuring charges, and other nonrecurring operating items, improved slightly compared with full year 2001 as higher sales volumes and lower raw material prices were mostly offset by lower selling prices.

Polymers segment operating results. After taking into consideration the costs related to the operational disruption, asset impairments and restructuring charges, and other nonrecurring operating items for all compared periods as listed in Table 4, improved fourth quarter 2002 compared with fourth quarter 2001 primarily due to improved PET volumes and improved operational and utilization of polyethylene assets.

In spite of lower prices for both polyethylene and PET products, full year 2002 compared with full year 2001 operating earnings, after taking into consideration the operational disruptions, asset impairments and restructuring charges and other nonrecurring operating items, improved due to increased PET volumes, lower raw material prices, and better operation and utilization of polyethylene assets.

Fiber segment operating earnings. After taking into consideration the other nonrecurring operating items for fourth quarter and full year 2002, decreased fourth quarter 2002 compared with fourth quarter 2001 due to an unfavorable shift in product mix and lower selling prices. Full year 2002 compared with full year 2001 fiber segment operating earnings declined due to higher costs associated with the activity-based allocation of costs across divisions. Volumes and prices for filter tow products improved over 2001.

Table 8, cash flow. The company generated $761 million in cash flow from operating activities in 2002, of which $449 million was used for net capital expenditures and directed investments and $147 million was used for reductions and net borrowings. During fourth quarter, the company took advantage of its strong cash position to terminate an operating lease of machinery and equipment and to purchase the related assets for $161 million.

This action will have a slightly positive impact on future cash flows and net earnings, beginning in 2003 as the company brings these assets onto its balance sheet and reduces its off-balance sheet commitments.

Additional outlook for 2003. We expect to increase 2003 pension funding from the previously announced $135 million to approximately $220 million. We expect pension and other post-employment benefit expenses in 2003 to increase over 2002 due primarily to declining interest rates and unfavorable asset market performance. We expect to continue to spend approximately 1% to 1.5% of sales revenue on new business development activities.

We expect that our effective tax rate will return to a more normal tax rate in 2003, just at the low end of the rates experienced by companies in the chemical industry. We expect the insurance claims process associated with the operational disruptions at our Rotterdam and Columbia, South Carolina facilities to be settled in 2003. This concludes our prepared remarks. Lisa, we are ready for questions.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. That is star 1 if you have a question. If you find that your question has been answered and would like to remove yourself from the queue, you may do so by pressing the pound sign. If you are using a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our commitment. We will take as many questions as time permits. Once again, it is star 1 to ask a question. I will pause for just a moment. Our first question comes from Duffy Fisher.

Yes, good morning. Jim, towards the end of your prepared remarks you had mentioned that you thought you had gained share in several businesses. Can you talk about, you know, the businesses where you gained share and then on the flip side, you know, any businesses where you lost share?

I guess Duffy, you know, what I was doing was painting kind of a broad picture in terms of if you just look at our volume growth and you think about, we've had issues, for example, in PET in the past where we had a conscious decision to favor, say, price over share, and when you see us growing in that 8% to 9% region in those kind of markets, I think it's safe to assume that we definitely held our share in that marketplace.

There's other places and now you kind of get within the segments where if you had strong volume growth, then you can pretty much assume the market was flat, you know, you obviously gained some shares. The key thing wasn't so much that we're gaining share across the company as I don't think there are places where we are really losing share, and you can judge that by our overall volume growth. Is that --

That's fair. I think there are always segments inside businesses where you are losing a little others or you are gaining some. And on balance, Jim's point that we're holding our own I think is the key point there.

Okay. So on a secular basis there's really not, you know, any businesses where you are gaining or losing share then?

I would say in the case of specialty plastics, that's always a gain share business because you are going head to head with polycarbonate and acrylic. So every day you have volume, you are taking it away from one of those other materials. That's always every day a gain share situation. There are segments in CASPI where there is always the dislocation of one material for another.

So when you gain in waterborne materials, you dislocate solvent borne materials. When you gain in powder, you dislocate solvent borne materials. So this intermaterial plays out all over the place, Duffy, and there are many, many places where we are gaining share, either canibalizing our own materials or somebody else's. It's a big soup and it's kind of hard to say generally without drilling down a lot further.

Fair enough. Thank you.

And, gentlemen, there are ten questions remaining in our queue at this time. And we'll take our next question from Les Ravitz from Morgan Stanley.

Morning. I've got two questions. They are intertwined but they are different.

So the first one is, given the rapid rise in hydrocarbons and the fact that you have a significant business based on coal gasification, should not you be seeing significant improvements in profitability in those businesses and can you talk a little bit about where that might show up?

And then the second question which is a "when did you quit beating your wife" question is, you know in the past, particularly when you guys were going to split into two companies, you were going to leave the cracker with the specialty businesses saying that you need the byproducts to upgrade into the products that you are making particularly for CASPI. And I'm looking at your gross margins and I'm looking at your profitability and I still think you look like an ethylene company. Could you talk about that? Sure, Les.

Let's start with your coal gas question. We are a company that is -- let me think here -- about 25% petrochemically derived raw materials and maybe 25% coal-derived raw materials and then a whole mish mash of cellulose and a lot of other things. I think we've laid those things out for you before. The businesses that are not seeing the dramatic rise are those that are related to what we call our acetyl chemistry.

So the fibers business has a definite advantage in this environment where their raw materials are derived from coal almost exclusively, coal and cellulose, two materials which are really not moving very much right now in this environment. That flows over into the CASPI area as well as prices are driven up by hydrocarbons. hydrocarbons. The CASPI, there are a lot of CASPI products that are made from two ends, an olefin end and an acetyl end, and the acetyl end has the benefit of the coal. We have some plastics, cellulose ester plastics that benefit from this as well, and these cellulose ester plastics go head to head with higher end engineering materials that are clear and chemically resistant and tough.

So there are a variety of those that are helped by this situation. Looking at the crackers, I mean, everybody -- yeah, there's a lot of our business that looks like a cracker company. That is the root of the propolyne derivatives primarily, polyethylene as well but the propolyne derivatives are all the oxyl-related materials that go into PCI and go into CASPI.

That is one of the cycles that should be heading toward the end of its valley and start climbing here. We are -- we are seeing price increases and higher demands in those olefin-derived oxyl products and I think I made reference to a 2004 to 2005 kind of time frame when we should start feeling better about that.

I know that Dow made some announcements that they are pulling down some crackers. That may have some kind of supply/demand impact on the world of oxyl products and other kinds of olefin derivatives. So your observation is correct. It doesn't mean that they are forever in that valley and that they ought to be heading out of that. Does that mean that they are also exposed to a longer term cycle? Yeah, and we think about that and we think about options for dealing with that.

Okay. Thank you.

Sure.

We'll now move to Frank Mitsch with Bear Stearns.

Good morning. Brian, I thought I heard you mention that volumes starting off the year have been a bit of an issue. If you could give me some clarification on that, where might that be, where are you seeing a, perhaps a slower start to the year than perhaps you had anticipated?

And then secondly, I'm curious with respect to the timing that management became aware of having an issue with producing a product that had asbestos, you know, how long ago did you folks know, and along those lines, Brian, you've said in the past that with respect to litigation, you can sleep well at night. Given that it's the CFO's obligation to be the worrier, Jim, how are you sleeping today?

I'm well rested. I actually got up at -- I got to bed at around 10:00 last night and I got up at 5:15, worked out, did skip breakfast, I'm on my second cup of coffee, but that's not unusual, and, you know, we're not going to go down the trail of discussing asbestos. We said what we said and that's all we can say today. I'll let Brian talk about volumes if he wants. Realize, by the way, the year did just start and while it's the last day of the month, we haven't even closed January yet. So anything we would say about this quarter is very preliminary.

Yeah, that was kind of a targeted comment in just a couple of places. By and large as we look at the forecast for the first quarter, the volumes are going to be where we expect them to be. It was a slow start I guess is what I was talking about but as we look forward, we are not expecting the volumes to be an issue this quarter. This quarter is about raw materials and having prices chase those. So I wouldn't want you to focus on volumes and things that are kind of a huge worry. There are a couple of targeted places where we have some work there but it's not the story for the company.

Thank you.

We'll now go to Graham Copley with Sanford Bernstein.

Good morning, guys. I have a question and then sort of a comment. The question really resolves around CASPI. I mean, clearly selling more volume isn't helping the profitability. What sort of size of core business do you think you have there that's actually sustainable long term? By the time the dust settles, how much smaller do you think that business has to be to have a reasonable growth trajectory?

Go ahead, Jim.

Well, just, Graham, as you know, I'm going to be working very closely with that soon. Of course, I'm in the CFO role now. I just want to make a comment and then let Brian complete the thought. I mean, as we look at CASPI, there is a whole collection of things there that we've done from past acquisitions, a number of technologies, et cetera, and I think one of the keys is going to be to help the folks to simplify what they are trying to achieve, really understand where they make money and how they make money and focus on that, and not get distracted by a whole lot of different things because it could be very confusing if you let it be that way. So I think we're going to have a simplification strategy.

I think Brian talked about, in terms of management, I think Brian talked about small divestitures, and frankly that applies to a number of places in the company. It's a discipline every company ought to be going through. But if you look at little things that are maybe $15 million to $20 million, sometimes things, the assets don't even have to leave. It's the kind of an agreement you can strike with another company where perhaps you are still running assets but they got a better market connect, something like that.

I mean, small scale pruning improvement, improvement optimization efforts like that I think is more what we have in mind when you look at our businesses on the Eastman side and it's all driven towards improving the profitability.

And, Graham, let me kind of reflect on a couple of things. I said the story on CASPI would be price and mix and costs. Let me just give you some perspective on the power of the price issue. If I just -- forget CASPI and look at the Eastman division because that's the way I would like to characterize this and just look at what did the price erosion in 2002 mean to the bottom line if all other things had stayed the same. It's on the order of $150 million. And if I throw in mix on top of that, it pushes close tor $180 million.

Now, of course, raw materials track down to offset a good bit of that, but there was just an awful lot of cost savings effort going on in there and other things that didn't quite overcome that big wheel of pricing. It gives you some sense of how large that lever is on pricing and mix. And what Jim was saying to you is, you know, you look at last year, you saw a rising volume environment.

I said that this year it's more about profitability than rising volume. This will be a rising volume environment for some people this year. I think we have a chance to make some choices about what we're going to be more of, what we're going to be less of, and that is some combination of price and mix improvement that is the source of CASPI improvement by and large. I know you are wanting us to focus and comment on the degree of any kind of asset moves we might make and, you know, it's just not, not going to go there.

Okay. Separately, this is more of a comment and please take this constructively rather than destructively. I'm putting myself in the position of an investor looking at your stock. What I've got is a series of quarters where you have missed your own expectations. So that's a cause for concern. But separately I've got a quarterly report, two quarters running now, which is incredibly complex.

And if you guys go back and listen to the replay of the call you've just given, the question I would ask is, why would any investor actually take the time to work their way through the levels of complexity to actually take an interest in Eastman? You've really got to simplify this stuff, guys, because it's very, very complex and people are just going to walk away.

Yeah, let me just -- we finished up the year here with something around $1.10 or higher depending on how you do the math and what's in and what's out. And last year at this time I think you guys had us at about $1.40, $1.50, Graham. So I just, if I -- things you don't budget for like operational difficulties in Voridian. If I just included those back, I would see that the earnings this year were pretty much where you guys had the consensus last year at this time. So I guess what I would say is that's what I would say to an investor. We pretty much came close to the consensus that you guys were looking at.

Now a lot of that complexity you are referring to is very much SEC driven and regulatory driven and, you know, fair disclosure driven, and there's a certain amount of obligation of things that we need to put in there. Maybe you want to comment on that, Jim.

I just, as complex as we are, Graham, we appreciate the fact that you still take the time to follow us.

Thank you, Jim.

We'll now go to Don Roberts with Buckingham Research.

Morning, guys.

Morning.

It sounds like the January 1 PET price increase has gone reasonably well here but you indicated paraxylene is up 25% in February. So you are behind the curve again. Have you notified your customers of any additional increases to try to get ahead of this paraxylene issue you are facing?

We have never been more aggressive in our history in moving on prices, John. I can assure you. There is more activity and discussion and negotiation and unique approaches to pricing than I have ever seen in the history of the PET business. So the answer is absolutely yes, and it's not like it's waiting for the second quarter to happen. It's happening right now all around us.

So we're getting -- is the pricing structure changing? Are we going to get temporary surcharges or something for February?

You know, rather than me comment on that, let me kind of comment that the PET capacity utilizations that continue to be in the mid-90s roughly. The growth continues to march on. Capacity additions are expected by some later on this year but those are always questionable depending on how people work their schedules and how easily they can do things to get things up. I would expect that we are going to -- there is a momentum here, a positive momentum here that should allow us to continue to have profitable performance in the PET business this year.

Okay. Secondly, you mentioned 70-cent propane costs. How have you been hedging recently? I would assume we're in a range here where for some time you've probably decided hedging is just too expensive?

Well, we've -- you know I won't comment on exactly how we do on hedging. We did that profitable hedging last year. I would expect we'll have profitable hedging this year, but what you are pointing to is correct.

I mean, there gets to a point where you start to say that further hedging is unattractive. And so I'm not going to say -- I will say we did have some hedges for this year for the early part of this year. You know, I'm not going to say how much or at what level, expect them to be profitable but that's not the big story.

The big story is, you know, with these kind of raw material increases, you have to have the pricing power and you have to push the prices through the marketplace to recapture it, and that's what you've got to rely on. But if that's any hedging will ever do for you is just a little bit of smoothing. You know, I wouldn't want the story to focus on hedging. It's really pricing and how the market has to respond with prices to cover these raw material costs.

Thank you.

We'll take a question from Greg Ransom with J.P. Morgan Good morning, guys.

Jim, I know you said you didn't want discuss the asbestos but I'd like to take one more crack at it. Can you at least describe the product it was in at all?

No, unfortunately I cannot. We are very much following our lawyer's guidance. We said it was a plastics product. Yeah, we did but I can't say anything more than what we said which was it was a plastics product containing asbestos but that's all we can say. I hate to see you guys shoot your questions like this. It's like naming letter on Wheel of Fortune that's already been called. There's nothing more I can tell you.

Okay. Thank you.

And, gentlemen, there are seven questions remaining in our queue today. And we'll take our next question from Andrew Feinman from Meridian.

Thank you. I think you are doing a great job. I just want to start with that. But how do you get to $1.10? I mean, you have -- you ate you will all those segments for the year and you take out all the one-time stuff, you get $209 million, and then you said interest was $122, and other income of minus 2. So that gets you to pretax of $85. To get from there to $1.10, you know, I just don't know how to do the math. So maybe you can tell me.

Yeah. Andy, the $1.10 will be right on the face of the income statement. It will be -- you'll take the 79 cents and simply add back two things. The accounting, change in accounting, which I think was about 23 cents at the beginning of the year, first quarter. That was the, you know, looking at your long life intangibles and writing those at their value, and that takes you up to $1.02 and then it was simply eight cents in the year for nonrecurring items. That's $1.10.

Just one of the things we try and do, and I guess it's the new environment, as we try and lay more and more stuff out there and we think it's up to you. You know, you get to add back what you want to add back. If you think of that 31 cents of the Voridian disruption and you want to add that back, that's kind of what Brian was doing earlier. When he said, gee, we started the year we thought maybe $1.40 or so. If we hadn't had the disruptions in those two plants, it would have hit around that.

Can I interrupt? My income statement is not, you know, done on a per-share basis. You know, I don't have your sales on a per-share basis or your divisional profit on a per-share basis. So, you know, I'm trying to get from the numbers that are laid out on Table 4 which add up to $209 million of operating profit, not including nonrecurring items, to $1.10. And I -- you know, so that's what I was trying to do because I understand. I mean, I can do the earnings per share, but I've got to have an income statement that shows it so that I can give that to my boss and he can see it, you know, on a --

Andy, what we can do is get you together with Greg and of course we'll stick just to the publicly available information in the release, but maybe that's the best use of time if we let Greg kind of get you there. But the $1.10 is the correct number with the items I just said. But we'll let Greg work that through and make sure we understand your issue. But thanks for the kind comment up front, Andy.

All right. I have some other questions. I appreciate it. You said that your first quarter would be similar to last year's first quarter. Can you estimate how much your raw material costs in the first quarter will be up over last year's first quarter? I think Dow said a billion dollars was the amount that their raw material costs were up year-over-year for -- and I think they said at the fourth quarter it was $400 million. I mean, so I don't know whether you've thought about just, you know, obviously your numbers are smaller, you're a smaller company.

Yeah, that was going to be my answer. I guarantee you that he won't be up a billion dollars, but, you know, we're not going to go piece by piece into the quarter. We're trying to give general guidance in terms of, you know, we made 35 cents last year first quarter. So we're saying that is, for what we see sitting in the end of January, what we know about raws are now, and obviously if they have moved, you know 20% in 30 days, you know, tell me what's going to happen in the rest of the world and that's how we would do a forecast, but we're not going to put another peg in the ground. I do -- we have other questions behind you, Andy. So I'm going to hold you to that being your last question.

Andy, let me just follow up.

Okay. Well, you haven't answered either one of my questions and I'm a pretty substantial shareholder. So, and I was trying to give you an opportunity to show how dramatic a flat first quarter would be if you enabled the cover the increased cost of raw material and still have a flat quarter.

Andy, I answered the $1.10. I think most people can -- you asked me about how you get to the EPS. That's the $1.10. I'm not going to work through it on the conference call with sixty people in terms of trying to get through on a net income fashion through your model, but we're more than willing to do that with you or anyone else on the call. In terms of the raw materials, we don't try and predict a change in raw materials. You are absolutely right in terms of the direction of the raw.

Andy, as a matter of process, we did absolutely sit down. In fact, we did it about two weeks ago and looked at, we got the best estimate of how much raws would go up, and it is, it's a substantial number. The thing we did after that is, so how do we get that back throughout the company. We made a long list of things we were all doing this quarter and notified the employees about to offset that. And that's -- that effort is what is allowing us to predict a first quarter that looks like last year. You should not go away unsatisfied on your answers. If you want to talk, we can talk later.

Okay. If you, either Jim or Brian, could call me back, I would appreciate it.

Okay.

Thank you.

And Andrew Cash from UBS Warburg has our next question.

Hi. Just a couple of questions. First of all, could you talk about your level of exports from the United States in 2002, and if you could put that in perspective as to what sort of trend you are seeing in '02 versus the last few years?

Yeah. Interesting question, Andy. I would say on balance the industry, of course, sees declining exports. You can see the trade balance for the whole chemistry used to be a huge positive, heading the other direction. That was a strong dollar effect that had a lot to do with that.

For us we've had -- if it's not so much a story of decline in export volumes, it's been more about pricing challenges because of local competitors showing up in those local, those Asian regions. You see this thing going in cycles, or actually step-wise. The first thing you see is people challenging who, where you were exporting to them and they start challenging you on the home turf where you are exporting to. That shows up as price first, volume second. Then they start reversing the flow and coming the other direction.

I would say the biggest effect we have seen is domestic volume related issues where finished goods have come in from the outside, finished goods downstream from us coming from the outside to this place the people we sell to domestically. I 'd say that is more of an international effect rather than just the direct exports that we have. A lot of our direct exports are in specialties, fibers for cigarette filter tow, and those have been stable. You have to look deeper to see the effect and this effect of international competition is absolutely a big deal.

Okay. Can you actually give me your sales number, exported from the United States in '02?

I don't think we report that one, Andy. We'll take a look and see if there's something that we can call you and tell you about there but I'm not sure that we have ever disclosed kind of the import/export balance in the past and we would have to talk about that.

Well, I don't know if it's a material financial issue but could you give us a percentage, you know, just a rough idea?

Oh, gosh. My memory is, the way I think about this is we have about, what, 60% of our business roughly that's domestic and about 40% that is nondomestic, is outside the states. And of that 40% that's outside the States, you know probably something on the order of half of that maybe is self-supplied in the regions where we work, and that's a rough estimate, Andy.

And I would say that self-supplied number keeps on going up as we, you know, increase our capacity and capabilities offshore and that reduces the amount you move over.

Okay. Well, let me ask you another question, if I could, just a couple more. Filter tow, I heard that the volume increased in '02 compared to '01. Is that correct?

Let me let Al answer that.

I just want to -- yes, volume was up slightly in '02 than '01.

Was that -- I mean, if you look back at the last few years is filter tow flat up or down in just a trend line basis?

In fact, Andy, in preparation for the call I was looking over the historical data for fibers, and if you look at, gee, any of the measures, volumes, sales revenues, profitability, we're about the same this year as we were the last couple of years which, you know, in this environment and for that particular product that people have told me back in the sixties people were predicting the demise of our fibers business to be flat for volumes, revenues, and earnings from operations over those three years is pretty good accomplishment.

Is there any outlook comments for '03 about filter tow?

And we expect that to continue in '03.

Okay. My final question, if you would be so kind, is if you look at the polyethylene business, a few years ago there was a major push on Eastman to produce many more specialty polyethylenes as a percentage of their overall mix. I was wondering if you could just update me on how that program is going and if you could also just say what your overall operating rate for polyethylene is because you did mention it was improving.

Yeah, and actually I would like to answer that by putting an end to a bigger context.

Greg covered a lot of ground in his prepared remarks with a lot of SEC lingo, and I want to highlight a couple of things he mentioned in there that get to your question, Andy, and one is that for the Voridian Division, the underlying earnings for Voridian improved in the fourth quarter and in the year-to-date over last year, and that was true also of the polymers segment. And that's due to a couple of things.

It's due to the volume increases in PET that we've already talked about, up 9% year over year. Brian mentioned the change in strategy that we did in 2001. But it's also due to operational improvements in our polyethylene operation, and I'll use a nonofficial SEC term. The folks in Texas, polyethylene operation really kicked butt in 2002. It's due to a combination of less downtime, product rationalization, fewer products running through the process, which means that they have quicker turnaround time between runs, just overall better operating efficiency.

T.A. Smith did a little analysis, and the earnings improvement we had in 2002, over 50%, almost three quarters actually, was due to operational improvements, not margin improvement or price improvement or anything of that nature. So a real good story down there, and part of that is the product rationalization as I mentioned. So coming back to your question, Andy, we're trying to run fewer products at a faster pace to keep those plants running as fast as we can.

So just in summary, the specialties is no longer a major, you know, push for the company as a percentage of overall polyethylene?

The functionality was there. People weren't willing to pay the extra price for it. And so that's what Al was saying about getting back to the ones that they are willing to pay the extra. There are some still that it's a matter of, you know, SKU choices.

Okay. Well, thank you very much.

Can we make the next question the last one, please? Sure. We'll take our last question from Sergei Vastenov with Lehman Brothers.

I am lucky today. So I just want to ask you a question about raw materials once again. I think what people might be missing is that really it's more than just the overall index of fallen gas if you like I think for Eastman Company. So I just want to walk through the assumptions for 2003, you tell me if I'm getting this right. Propane is linked to oil should be coming down. Paraxylene linked to oil is up now, should be coming down. Ethylene glycol has its own cycle and initially gas should be coming down, propolyne as well. But my question, as far as paraxylene, ethylene and glycol, do you foresee cyclical strength toward the year end and given that specifically quiet time for the PET pricing time frame, what sort of actions could you do to offset that?

Okay, first of all, you asked about your assumptions. All your assumptions are pretty good I think except the one difference would be in PX, there's actually something of a shortage of PX right now. It's not just oil related. There's a compounding factor that has to do with supply/demand and availability.

Okay.

So you need to throw that into the mix. I think all the rest of the assumptions that you made are pretty good. You want to take the rest of that Al?

On the paraxylene, I think that sums it up. We did not, in the fourth quarter, Sergei see much impact from paraxylene. Much of the impact on raws last year was in the ethylene glycol area and it is now in the first quarter that we're starting to see paraxylene and as Brian said earlier, we are responding as aggressively as we can with the price increase.

On propane, that doesn't necessarily track oil. Propane kind of has a life of its own by seasonal effects and home heating and a lot of other things. So it is even more volatile than oil would be. And coal's been fairly steady for us and that's fortunate.

I'm sorry, Brian. My question was about the fourth quarter of 2003. My question is if we see it strengthening cyclically in both ethylenglycol and paraxylene and yet your constraint by your price initiatives specifically in PET, how with you going to deal with this?

Okay. The fourth quarter of 2003. I guess what we would assume is that if the raw material situation improves, as you and I kind of assume and the way you set up the question, that there would be some opportunity for healthier margins in the latter part of the year. That is part of the planning process that we were -- that we have built into our plan. Yeah, we expect that. Now, do we -- I guess I'm not ready to comment, are we going to see expanding or contracting margins in some of those areas. I want to give it some more thought, a more thoughtful answer before I just rattle it off here.

Yeah. And Sergi, on PET be careful making the assumption. In raws go up and stay up, we're going to continue to aggressively press price. To assume that we'll be stuck on price, I'm not sure if that will play itself out.

Okay. Thank you.

Okay. Thanks. If there are any additional questions, please feel free to call me at 423-229-8692. An audio replay of this conference call will be available this afternoon through the rest of next week. You can hear the replay by calling 888-203-1112 or on Eastman.com in the Investor Information section. Also a transcript of the prepared remarks will be available today on Eastman.com in the Investor Relations section. Thanks for your interest in Eastman.

That does conclude today's conference call. We thank you for your participation.