伊士曼化學 (EMN) 2003 Q1 法說會逐字稿

Good day, everyone and welcome to the Eastman Chemical Company first-quarter earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's web site at www.Eastman.com.

We will now turn the call over to Mr. Greg Riddle (ph) of Eastman Chemical Company investor relations. Please go ahead, sir.

Thank you, Sylvester. Good morning, everyone. With me today are Brian Ferguson, Chairman and Chief Executive Officer, and Jim Rogers, Senior Vice President and Chief Financial Officer.

Before we begin, let me remind you that this call -- 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 first-quarter 2003 sales and earnings press release, and the supplemental information for first-quarter 2003 on our web site at www.Eastman.com, under the investor information section and in our filings with the Securities and Exchange commission, including the Form 10-K filed for 2002 and the Form 10-Q to be filed for first quarter 2003.

Now let me turn the call over to Brian.

Good morning, everyone, and I hope you are all well. I'd like to take a few minutes to comment on the first-quarter results, and then I'd like to turn my comments to actions we're taking to improve our profitability, and then finally I want to give you some color on the outlook for the second quarter.

Turning to the first-quarter results, as you saw the earnings were 23 cents per share, and in that number are some major items included for a gain on the sale of our high performance crystal and plastics assets and a gain from some settlements, a few other things and so we leave it to you to do the math of a you think the ongoing numbers look like.

A real highlight in these numbers was an increase in sales of about 17% versus the first quarter of last year. This was a combination of price and volume and mix and currency and all of them were contributing to that. We were particularly strong and gratified in the Voridian (ph) polymers growth which includes the polyethylene and the PTD (ph).

Also good growth in the sales of performance chemicals and intermediates and also specially plastics. Very gratifying on all of those.

I should also say that outside of the United States, we had excellent growth in Europe and Asia-Pacific as well.

So this is a picture that actually, for -- in our view shows some potential promise if we can just get the economy back on track and we can stabilize the relationships between raw materials and prices, which is the big story.

Now, turning to that big story, of course, for the whole chemical industry, it's about raw material costs increasing substantially over the first quarter of 2002, and for us that was especially true for propane and paraxylene (ph), ethylene glycol, and natural gas.

Now, overall, the rise in raw materials versus the pricing actions we were going to -- that we were able to take led to a margin compression of about $60 million for the quarter, so as a result, our profitability was below what we had hoped it would be, and it's still below where we'd like it to be.I should stress that, you know, we've seen the raw materials come off a little bit from their really very high peaks that we saw, but let's remember that these raw material prices are still very high. Our pricing still has not caught up to where the raw materials have settled, recently, so coming up into this second quarter, we expect and we need additional sales price increases, and we have announced those all across the company in just about every place except for the fibers area where we have annual kinds of pricing negotiations.

Let me say some things about the actions we're taking to improve our company profitability. I think I mentioned in the last conference call that we came into this year implementing a variety of cost control measures that were above and beyond what we did in Q4, and that included reducing our out-of-pocket expenses and costs associated with contractors and travel and a lot of other discretionary spending.

We got into the mid-quarter time and we saw that the raw materials would stay higher and they would stay high longer than we had expected, and coming -- either coming along with -- because of that or secondary to that, we also saw a weak overall economy, so we chose to take some more aggressive measures to offset the margin squeeze and we took those to have immediate effect.

We reduced our budgets for new business development spending for the balance of the year. We initiated a special project with an outside person helping us to reduce our procurement costs across the company, looking at every area where we spend money outside of the company. And then we took a variety of labor-related measures. We reduced salaries for all employees 3%, and top management took twice that reduction.

Merit increases were delayed, and cancelled for this year and moved into the -- into 2004, would be the soonest we would consider that, and we also changed the way in which we earn our vacation, and this change really just brings us in line with where pretty much everybody else is, but it gives us a gain, nonetheless.Some of these measures had a positive impact on our first-quarter results, but not all of them have kicked in. We expect all of these measures to be positively impacting results going forward.

And I should say this is not the end of the road on cost management, of course. We're working on lots of other things to control costs, and improve productivity further. I'll remind you that last time we said we are considering products and business lines in the 15 to $40 million range that may need to be pruned from the portfolio. That's still true.

One example from this quarter you see there is the sale of the -- of the Crystal and polymer assets, and that's a good example. This is a case where we had really great technology but very limited market presence, and this turned out to be a very good outcome for both Eastman and Dupont alike, so we were very happy with that.

Let me make a couple of more comments before I turn it over to Jim.Specifically, on our CASPE (ph) segment, I have to say that the results in CASPE continue to be unacceptable. As we look at CASPE today, we think about profitability in three parts.

The first part is very profitable. It is double-digit, 10 to 15% kinds of EBIT, and that part just needs some nurturing, but it is a part that we are very pleased with. The middle part is moderately profitable and during this trough, you know, it tends to be, you know, kind of a plus or minus 5 kind of an EBIT number but these are -- these are businesses and products that can be very good. There is some additional work we need to do to turn them around to make them more profitable, and for this segment, this is not major surgery.

And that leaves -- and if we just stop there, the resulting view that we would have of CASPE just on those two pieces would be a very positive view for all of us.If I turn to the third piece, there's about a -- you know, roughly a third of CASPE that is putting a 50 to $75 million per year drag on earnings right now. And I think that's the first time I've told you that number. In this group, we are taking a much more drastic approach of turn-around actions, restructuring, divestitures, et cetera, as needed to change the fortunes of this part of CASPE. This will require some major surgery and we are undertaking those actions in those areas now. We may talk a little bit more about that later.

Now, I have to say, you know, we've identified options that we could take in the short term. Those kinds of options in this kind of a market environment would have significant amounts of pain associated with them, and Jim and some of his new leadership in CASPE are taking a very hard look over the next couple of months at how they might refine these options and come out with the best -- the best combination of value and timing.

But this is all about a trade-off between value and timing. Do you move quickly and leave money on the table? Do you give yourself a little more time and come out with a better financial outcome? And that's the trade-off that we are working on right now.I know you want me to give a lot of details about this. I'd prefer not simply because we haven't settled. We have a couple of more months before we settle on some of these options and frankly if I talk about them in any kind of detail, I kind of hinder the ability to execute on those options and just choose not to do that.

But what I will say to you is that you will have more visibility about these choices we're making in CASPE over the next quarter or two. We will not leave you in the dark about that.

One other thing I want to point out to you is this is the first time we've given you a look at the developing business investments that we are making. You may remember in the past, I had said that we're investing 1 to 1-and-a-half percent of sales on those efforts, and that those numbers were were basically embedded in the SG&A and R&D numbers of the Eastman division, so we have pulled those out so you can look at them separately.

We are now getting some additional revenue in those areas, which is one of the -- one of the reasons for -- one of the several reasons for giving you some visibility on this. One of the reasons for the -- the third-party revenue is due to (inaudible) efforts to execute on bringing in new customers for their logistics business, and we expect, you know, that for that business to have more revenue and therefore lower -- or rising earnings as a result throughout the rest of the year.

One other highlight on the developing businesses. This quarter, we signed an agreement with Chevron Texaco that gives us an ability to be an O and M, an operations and maintenance entity or contractor for licensees of the Texaco gasification process. You know, just in the last couple of months, we've gotten a couple of new service contracts related to Texaco licensees, and in the new Energy Bill that is being passed by Congress, there are a number of incentives that give incentives for considering gasification technology so we're starting to see some traction there that is pleasing to us.

Turning to the outlook, you know, everybody sees a lot of uncertainty out there about the timing of the global economic recovery. The current economic environment is weak today, remains uncertain in the future. As I said before, raw material prices have started to decline, but we don't know where they're going to check up for a while. So we have a lot of moving parts there. But looking at all those moving parts, we've said to you we expect our second-quarter results to be consistent with the current First Call consensus estimate as of what I saw yesterday.

So before I turn it over to Jim, as I think about the whole company here, strategically, if I look all across the company, most of the businesses -- virtually all of the businesses are moving along the way I would expect them to under the current circumstances. The one exception, of course, being CASPE where we've talked about the work we need to do there, and we have, in the developing businesses, a need and a desire to reduce the earnings drag that's coming from that and start picking up some of the growing businesses there.

So -- and my point is that we have some important leverage we can turn, to improve the profitability of the company, and that's encouraging to all of us.

So Jim?

Okay. Thanks, Brian. Good morning, everyone. Greg's going to have a lot of the detailed script around the tables, et cetera, so I'll just comment on two or three things.

First, cash flow. Excuse me. Our debt went up about 200 million, as you see. That's probably a little more than we expected, but -- but really just a little more. And it's because we funded our pension plan for 90 million in the quarter. We had receivables go up about a hundred million, and that's on the higher sales, plus that insurance receivable. And, you know, though we still have another 130 to go this year, which we'll fund in the second and third quarters, and, you know, we'll fund our dividend, et cetera, we'll continue our capex discipline and we're going to work on grinding working capital back down in the second half of the year.

And therefore, we're hopeful that we're going to get the debt back down to about where we started the year, give or take, and that's an objective that we've given treasury and will be monitoring with them closely.Also, we now have a look at our minimum required pension funding for 2004, and it's about 104 million.

It may sound like a big number but probably less than -- than some of the numbers I've seen floated around, so I suspect overall, the cash story will be a little better than some of you are thinking, and of course I always want to caveat, we still have a lot of work to do to make that happen.

Second point, as Brian was talking about, we re-instituted constraints on our SG&A spending during the quarter, bringing it down sequentially about $10 million from the fourth quarter. Some of that decrease is probably just a deferral, but I'd say the -- most of it is true cost avoidance, so SG&A and R&D together were 10.4% of sales, and that's staying below our commitment of 11%.One last point before Greg.

Our folks in performance chemicals had a nice win recently getting the nod for a one-year extension on a custom synthesis product manufacturing contract that we previously thought was going to end this summer, and this is the same contract we've mentioned in previous filings, so it's really rewarding to see success in meeting a major customer's needs in that group.

And now I'll turn it over to Greg.

Thanks, Jim. Yesterday afternoon, the Eastman Chemical Company news release announcing first-quarter 2003 results was furnished to the SEC on Form 8-K, distributed to the news services, and posted to our web site at www.Eastman.com. in the investor information Section and in the news center section. Included with our news release are a series of financial tables.

Table 1 includes a statement of earnings for first quarter 2003 and first quarter 2002. Sales revenue for first quarter 2003 was 1.44 billion, an increase of 17% compared with first quarter 2002. The higher sales revenue was due to a 5% increase in both sales volumes and selling prices, as well as favorable foreign currency exchange rates and improved product mix.

Sequentially, sales revenue increased 10%, primarily due to a 3% increase in both sales volumes and selling prices. Cost of sales for first quarter 2003 was 1.26 billion, an increase of 22% compared with first quarter 2002. The increase is attributed primarily to higher raw material and energy costs, especially for propane, paraxylene, ethylene glycol, and natural gas.Selling and general administrative costs for first quarter 2003 were 100 million, compared with 90 million for first quarter 2002.

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, Sendian.(ph). Research and development costs were 43 million in first quarter 2003, compared with 38 million in first quarter 2002. We expect 2003 R&D costs to increase over 2002 due to Voridian division's efforts to develop operational efficiencies and as a result of the company's increased technology efforts associated with new business initiatives.

We remain committed to keeping the combined costs of SG&A and R&D at approximately 11% of sales revenue.

For first quarter 2003, the company reported operating earnings of 39 million compared with operating earnings of 77 million in first quarter 2002.

First quarter 2003 operating earnings were negatively impacted by higher raw material and energy costs, which were partially offset by higher selling prices.Positively impacting first-quarter 2003 operating earnings was a $14 million insurance settlement for the operational disruptions that occurred in 2002. Results for first quarter 2003 were negatively impacted by a $2 million asset impairment and restructuring charge for the CASPE segment.

Sequentially, operating earnings increased by $50 million, as increased sales volumes and higher selling prices more than offset higher raw material and energy costs.

Fourth quarter 2002 operating earnings were also negatively impacted by asset impairment and restructuring charges of 6 million.

Other income, net, for first quarter 2003 was 21 million, primarily reflecting a gain of approximately 20 million related to the sale of the company's high-performance crystal and plastics assets, which were formerly a part of the company's specialty plastics segment.

Other charges, net, for first quarter 2002 were $14 million, primarily reflecting a $12 million charge related to the devaluation of the Argentine peso.The provision for income taxes in first quarter 2003 was 11 million, compared with 9 million for first quarter 2002. The increased tax rate is primarily due to the statutory tax rate applied to discrete items in the first quarter 2003 being higher than the company's effective tax rate.

We expect the effective tax rate for full-year 2003 to be between 30 and 33%.

Net earnings before the accumulative effect of changes in accounting principles were 23 cents per diluted share for first quarter 2003 compared with net earnings of 30 cents per diluted share for first quarter 2002.

First quarter 2003 earnings per share were positively impacted by the insurance settlement and the gain from the sale of the company's high-performance crystal and plastics assets.

First-quarter 2002 earnings per share were negatively impacted by Eastman's share of a restructuring charge for general encore international and by a charge related to the devaluation of the Argentine peso.

Table 2, Other sales information. First-quarter 2003 external sales revenue increased in all regions when compared to first-quarter 2002. Sales revenue in the Europe, Middle East, and Africa region increased by 26%, primarily due to the positive impact of foreign currency exchange rates. Asia-Pacific sales revenue increased by 16%, reflecting significant sales volume growth, particularly for the Eastman division segments, and higher selling prices.

For the North America region, sales revenues increased 14%, due to higher sales volumes, particularly in the polymers and performance chemicals and intermediates segments and higher prices in the polymers segment.In Latin America, sales revenue increased by 9%, due to higher selling prices, especially in the polymers segment, and a favorable shift in product mix being partially offset by unfavorable foreign currency exchange rates and lower sales volumes.

Eastman division. First-quarter 2003 compared with first quarter 2002, Eastman division's external sales revenue increased 14%, mainly due to higher sales volumes, particularly for the specialty plastics and performance chemicals and intermediates segments and a positive effect of foreign currency exchange rates.

Sequentially, external sales revenues increased 12%, mainly due to increased sales volumes, particularly for the performance chemicals and intermediates segment. For first quarter 2003 versus first quarter 2002, Eastman division operating earnings declined by 23 million, due primarily to higher raw material and energy costs, particularly for propane and paraxylene, which were partially offset by increased sales volumes and higher sales prices.

Sequentially, operating earnings improved by 23 million, as increased sales volume and lower SG&A and R&D costs more than offset the impact of higher raw material and energy costs.

CASPE operating results declined for first quarter 2003 compared with first quarter 2002 by 29 million, due to higher raw material and energy costs, particularly propane and lower sales volumes.First-quarter operating results included restructuring charges of approximately 2 million.

Sequentially, operating results improved by 14 million, as increased sales volumes and lower SG&A and R&D costs more than offset higher raw material and energy costs. In addition, fourth-quarter 2002 operating results were impacted by asset impairment and restructuring costs of 6 million.

The performance chemicals and intermediates segments' operating results improved by 4 million in first quarter 2003 compared with first quarter 2002 due to increased sales volumes and higher sales prices, particularly for intermediate chemicals based on oxo (ph) and asateal (ph) chemistries.

Sequentially operating results improved by 1 million, as higher sales volumes throughout the segment more than offset higher raw material and energy costs.

Fourth-quarter 2002 operating earnings were positively impacted by a $1 million asset impairment and restructuring credit. Specialty plastics segment's operating earnings improved by 2 million, first quarter 2003, compared with first quarter 2002, due to higher sales volumes, which were partially offset by higher raw material and energy costs, particularly for paraxylene and ethylene glycol.Sequentially, operating earnings improved by 8 million as higher sales volumes and lower SG&A and R&D costs more than offset higher raw material and energy costs.

Voridian division. First-quarter 2003 compared with first-quarter 2002 external sales revenue increased 18%, due primarily to higher sales prices in the polymers segment. Compared with fourth quarter 2002, external sales revenue increased by 6%, again due to higher sales prices, particularly for the polymers segment. Voridian division earnings from operations for first quarter 2003 improved by 1 million, compared with first quarter 2002, as the insurance settlement for 2002 operational disruptions, higher selling prices, and increased sales volumes largely offset by higher raw material and energy costs.

Sequentially, operating earnings increased by 43 million, as higher sales prices and the insurance settlement more than offset higher raw material and energy costs.In addition, fourth quarter 2002 operating earnings were negatively impacted by a $11 million charge related to the operational disruptions and a $1 million asset impairment and restructuring charge.

Polymers segment operating earnings improved year over year by 8 million, including the insurance settlement for operational disruptions in 2002. Higher raw material and energy costs, especially for paraxylene, propane, and ethylene glycol, were partially offset by higher sales prices, increased sales volumes, and the effect of efficiency improvements.

Sequentially, polymer segment operating earnings improved by 43 million, due pray customarily to the insurance settlement, higher sales prices, and higher sales volumes, which more than offset higher raw material and energy costs. In addition, fourth quarter 2002 pole mere segment operating results were impacted by a $11 million charge related to the operational disruptions and a $1 million asset impairment and restructuring charge. Fiber segment operating earnings declined by 7 million, first quarter 2003 compared with first quarter 2002 due to the timing of (inaudible) shipments to China and lower (inaudible) chemical sales volumes.

Sequentially, fiber segment operating earnings increased by approximately 1 million. Developing businesses division. Excuse me. First-quarter 2003 compared with first quarter 2002, external sales revenue increased by 12 million primarily due to increased sales for Sendian Corporation.

Compared with fourth quarter 2002 external sales revenue increased by 6 million. Operating results for first quarter 2003 declined by 8 million compared with first quarter 2002, primarily due to costs associated with implementation plans for Sendian's growing customer base.

Sequentially, operating earnings declined by 3 million, also due to costs associated with implementation plans for Sendian's growing customer base.

Table 6. Cash flow. The company used 168 million in cash for operational activities in first quarter 2003, including the company's contribution of 90 million to its U.S. defined pension plan. In addition, accounts receivable increased by 110 million from fourth quarter 2002 due to increased sales revenue and a receivable from the insurance settlement.

Additional outlook for 2003. We expect 2003 funding of the U.S. defined pension plan to be it 220 million. The company continues to expect that it will invest between 1% and 1-and-a-half percent of sales revenue in new growth opportunities in the developing businesses segment.

Profitability in the developing businesses segment is expected to improve in the second half of 2003, primarily based on contracts currently signed and implementation plans in place for Sendian's growing customers base. We expect that our effective tax rate will be between 30% and 33% for full-year 2003. We expect sales of acetate toe to China will be higher in each of the remaining three quarters in 2003 than they were in the first quarter of this year.

This concludes our prepared remarks. Sylvester, we are ready for questions.

+++q-and-a.

Thank you, sir. If you'd like to ask a question on today's call, you may do so by pressing star 1 on your touch-tone telephone. Again, that is star 1 to ask a question. If you're on a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question.

If you find that your question has been answered, you may remove yourself from the queue by pressing the pound sign. Again, are remove yourself from the queue, you may do so by pressing the pound sign.

We'll take our first question from Graham Lyn Copley with Sanford C. Bernstein and Company Limited.

Good morning, guys.

Good morning.

A question about receivables more than anything. Your receivables were up almost 15% versus the end of 2002, I think. Pricing wasn't up that much, so could you give us some idea of, you know, how -- what the break in receivables was in terms of pricing versus volume. And also try and give us some idea of which business segment -- which segments were more affected by it.

Yes. Graham, it was pretty much across the board in receivables. Remember I had an insurance receivable in there. You had some customers who I would say -- let me put this way: I saw there more dressing going on in this quarter than in previous quarters who were looking to pay rate over quarter end instead of paying in the last month of the quarter. But in general, it's not our prices -- I'm sorry, it is our prices that drive a big increase in that. It wasn't all of it, but it was also the fact that we had both volume and price. But I can't really break it down any more. It was really across the board, insurance, and you had some customers stretching a little bit.

Is it right to assume that if you were going to attempt to reduce working capital, that we'll see, you know, some reduction in inventory and some reduction in receivables --

Yes.

-- (inaudible) sales?

Yeah. Graham, we have to do it across the both board. You can get help a number of ways. One, just being more efficient and putting the spotlight there instead of somewhere else, perhaps and also just as prices come off of the raws, et cetera, you should get some help.

Thanks. Oh, lastly, can you tell us what currency did for you in the quarter?

Yes. We had it -- what did we say, about 6, 7%, I think, wasn't it, across the board? About 6, 7%, Graham. Is that right?

4%.

4%?

Yes.

Maybe I'm thinking of the Eastman side.

4%, Graham.

4%.

4% effect on revenue.

What about effect on EBIT?

That's not a number I have in front of me. I'll get back to you with that.

Thanks.

Once again, that is star 1 to ask a question. We'll take our next question from P.J.Juvekar with Smith Barney.

Good morning, Brian.

Good morning.

Brian, since you've become CEO, you've cut costs, you've cut capital spending, restructured CASPE but CASPE seems to be struggling still. You gave us some information today and without getting into details, maybe on a strategic level, can you talk about what is CASPE's real problems? I mean is it the commoditization of products? Is it weak market positions? Is it competition? What's going on there?

Sure. You know, I characterized two parts of CASPE and if you just isolated those two parts, we would all be very happy with the results. And what I see there is not surprisingly generally proprietary products that have a specialty nature, they're priced on value, where you can command enough price to return your cost of capital and more, and create value.

The places where we're not, we're in a "me too" situation. We either have horizontal competition in the marketplace. In some cases, we have in-sourcing competition from our customers, where we're actually competing against their variable costs, you know, and that -- and if you're competing against their "me too" stuff that they that I make for themselves, that's, you know, a very tough row to hoe. The effort over the last 15 months has been sorting out technology choices that you could use to displace some of those "me too" products. I think in the case of some of these markets, the industry structure is such that even if you are successful in some of those cases, the industry may not pay you. I can think of the graphic arts market where we have a high percentage of our market share concentrated in like two customers, and even with some specialization there, you worry about how much you'll get paid for that.

So this is -- this is signaling a slightly different course of action relative to those kinds of assets where we have the "me too" stuff. And you're exactly right, it is -- it's all the things you said. It's global competitors in some cases, horizontally. Sometimes it's your customers competing with you because they have their own capabilities. And it's ultimately about not being different enough with your products to command pricing. So if you -- if you get down the road far enough on some of those things and say, I'm just not going to get there on that, then you have to take a different path.

Right. And do you feel that (inaudible) this restructuring, you can get to sort of 12% operating margins in a normal year?

It's going to be a whole lot better than it is right now, P.J. I mean, remember, we've always said that getting the cost of capital is getting the first step and then going beyond that is the plan. And so you're in the neighborhood. It's timing of when we get there Step-wise. But, you know, I would -- I would sure hope that your number sounds -- you know, double-digit EBIT is what we all look forward to in that business.

Right. The second question I have is: I don't smoke, but my smoker friends tell me that a pack of cigarettes these days in New York City costs like $7, and so more and more people are switching to generic brands from the premium brands. Now, is there a mix shift going on in your (inaudible) business that you're selling more to these generic brands, and what does that mean for pricing?

Yeah. I always make my filter tow business friends nervous when I start commenting on things like you asked. Your observation about share shifting in the consumer market is absolutely true. The consumers are share shifting from one place to another. We -- we have opportunities in all of the markets, whether it's the traditional ones or the new ones, to sell our filter tow. You know, looking at the global situation, the tow business is -- is growing a little bit because on a per capita basis, people are smoking because of the things you talked about, like $7 a pack, but the capita base on that base, the number of people is growing, so in the aggregate, the volumes globally are hanging pretty flat. And as you say, there is some share shifting going on, and we do participate in that.

Thank you.

Once again, that is star 1 to ask a question.

We'll take our next question from Kevin McCarthy (ph) with Banc of America Securities.

Good morning. Questions on developing businesses. When would you expect those to become profitable?

Yeah. There's about 15 different projects in there, Kevin. There are about three of them that are fart evident along so they're all in different stainless of a stage gate. The ones that are earliest in the stage gate, probably a dozen of those, aren't pulling down much money as well. Actually, one of them, Sendian, is pulling down the most money so let me just direct my attention to that one.

We've made most of the investment there. The investment has a lot to do with people and technology, so a lot of fixed costs in that. We have They have signed on, I think, 34 customers in the past year, and they are now in the process of implementing those 34 customers, so we expect the revenues to pick up substantially for the balance of this year in that particular venture.

We-- I don't think we have reported when we expect to get that particular business to cash neutral because we're reporting this as a segment, not reporting it business by business. But, you know, that's one we've been working on for a while and we are -- that one is absolutely under a microscope every quarter, to get it to the point that you're talking about, as soon as possible.

Turning to gasification, that's one that is just now getting some traction. Not spending a lot of money on it. That is -- that is a model. It doesn't require a lot of money, so we don't have to think about that one as pulling down a huge amount of capital or cash before you start making money. That one -- that one actually is cash-positive, I think, right now, because we have a couple of service contracts from people that are licensees, and that one is actually, you know, in the black as we speak.

We have a third one that's kind of -- that's called aerial, it's an HSE model, and it's just, you know, kind of plus or minus a little bit of money. And has a -- the promise of becoming profitable pretty soon. So I guess what I'd say is that all of the negative -- most of the negative number you see there is about the SG&A that it takes to work on the 13 or 15 projects, and getting sendian positive, and we're working very hard on that one as soon as possible, and, you know, that -- you're talking about quarters there, not years, for the kind of results we're talking about.

Great. Jim, you've said in your comments you expect to keep net debt stable year over year. Does that goal incorporate any expected proceeds from divestitures?

Obviously, I'd like to say we can do it without having any divestitures. That would be great performance, I think. And we should get some help. We should get some help on working capital because it -- because -- because of some of the stuff we talked about earlier in terms of how prices have run this year, et cetera, and we ought to be able to get that back. Plus traditionally second half of the year, we're always pulling cash out of working capital. The first quarter is typically our biggest use, as we build for -- for what's usually a good second quarter.

We may -- we may need to get some help from? Small divestitures, but what treasury is being tasked with is balance let's get us back down close to where we started the year. And when I say close, I mean if you got about 2.2 billion of debt, if you can be within 50 million bucks of that, or so, I mean that would -- that would be a pretty good target for the treasury folks to be shooting for.

Fair enough. Final question on fibers. Your competitor is aggressively expanding capacity in China, and Brian, you know, I know you don't want to make your fibers folks too nervous, commenting on all this, but could you talk about the longer term impact of that, if any, on Eastman?

Sure. If we look at the whole market and when that comes on, the increment there -- I'm trying to remember all the numbers here and I'll get it wrong if I start giving you numbers bus in terms of the size of market capacity that's being added there, that is not a huge lump. That is a lump that is manageable within, you know -- you have some growth between now and then, the growth afterwards would help take some of that up, so I don't -- we don't have any expectations that this is a -- this -- that one thing that is being done by -- in one of our competitors in China is a big, big influence.

I think what we think about is this is a global business, and we have rising trends in other parts of the globe, like Eastern Europe and Asia, and we want to make sure that our strategy is consistent with, you know, attending to those markets. But--

Brian, what I remember is -- correct me if I'm wrong here, but that the capacity expansion is roughly equal to the growth -- the expected growth in the marketplace over the time frame that that capacity would come on-line.

That's kind of where I was heading.

Yes.

I think what happens is it actually comes on it and it actually gives a little extra capacity for a few years and within a few years you're taking up that capacity and that's because that part of the world is growing fairly rapidly.

Right.

So it's not like a cracking plan event, Kevin. It's a relatively modest addition to the total supply demand of the world.

Okay. Thanks very much.

Once again, that is star 1 to ask a question.

We'll take our next question from Sergey Vasnetsov with Lehman Brothers.

Sergey Vasnetsov Good morning.

Good morning.

I'm sorry if I missed it, I didn't see it in the text for sure. Could you talk about the other income, 21 million. A pretty big number for the quarter.

Yes. It's the gain on the sale of the businesses, the great majority of that number, Sergey.

Okay. All right. And secondly, if you can talk about within the Voridian division, about the two parts of it. I'm sorry, within the polymers. PTD and polyethylene. I assume that there was not much of the growth year over year in polyethylene so would it be fair to say that your PTD business was growing low double digits Volume-wise?

Well, both parts grew, first of all. The polyethylene and the PTD both grew. And we had -- and polyethylene, by the way, is not a drag on the earnings story over there, these days.

Turning to PTD, remember we're global, and I will give you one additional number here. The -- domestically, we had double-digit growth domestic domestically, and the reason I tell you that is because we said we wanted to take our share of the growth and we are taking our share of the growth. The softness in the PTD market for us was in parts outside of North America, and that softness kind of dampened the total volume for our business a little bit. Also dampened the earnings a little bit. But domestically, the combination of just raw demand and I guess one of our competitors had a little bit of a trouble for -- so we had a one-quarter opportunity to do a little extra business, helped the North American numbers. So I guess what we're seeing here is, Sergey, the market worldwide is growing about the we'd expect. We are taking our share of the growth will there. And our guys work very, very hard to get prices to offset the dramatic increases in paraxylene, and that had something to do with that 26% sales revenue increase you saw in the polymers group.

Okay. And to -- further on the volume in the PDT (inaudible) segment for the rest of the year (inaudible) reports very strong numbers domestically. MGM is coming on stream presumably between May and June. What's your outlook? Are you concerned about maybe a little bit higher inventory level at the customer chain, given such a strong volume in the first quarter, and then competition in the second part of the year?

Yes. Good question about the inventory. You know, we thought it was -- what I would expect is that April should have had a dramatic fall-off in all of our volumes, because we had a lot of pre-buying and it's not obvious to us that there's been an awful lot of pre-buying that would indicate some kind of a second quarter inventory on overhang. But I'm looking at the aggregate of the company there, more than I'm looking at the PET business specifically.

The -- you know, there is going to be some capacity coming on later this year. You know, margins are not huge in this business to begin with. Right now, Sergey. And as I look at just for example how we managed the capacity that we have between us and WellMann (ph) the co-producer relationship that we have there, you have not seen us race to the market with lots of volume there because the margins are already pretty thin, and I don't know how those folks with new capacity are going to react to that but I'd say the margins are already pretty thin, and I don't really expect those margins to thin out dramatically from where they are today. In terms of volume, we see the rest of the busy selling seasons continuing to be strong for the rest of this season here, and, you know, it always falls off at the back end of the year and it will be the same this year.

Okay. And lastly, a question for Jim. You managed to take care of the raw materials spike quite well this quarter. What's the secret?

: Well, I guess that's a qualitative term on how well we took care of it. We would have liked to have done a little better. But you know, there's no bones about it. The main way you take care of raw materials is through pricing and it's through your market connect. It's not through anything else. We do do some hedging. We go out, you know, not long-term but shorter-term, and -- but really, the key is pricing. And that's the focus. And I think, you know, for all those customers who may hear this call, you know, that's not going to let up. There's a lot of effort on pricing, and that is really the only sure way of being able to maintain a margin when the raw materials move around on you.

Okay. Thanks for your help.

We'll take our next question from Frank Mitsch with Bear Stearns.

Frank Mitsch Good morning. The insurance settlement that you received in the -- in the first quarter here, it looked to be a little bit lower than what your initial -- what your initial thoughts were. Can you comment on that?

Yes, Frank. I mean basically we share your -- we share your thought. I mean, when -- you know, you first have the disruption, you don't have all the facts yet, and you -- you know, you know you're insured. When you work through it all and you look at the actual facts of the events that took place, the deductibles and number of times the deductible kicks in, depending upon how many events, et cetera, you get down close other e-you get down to the number we got to. So at the end of the day, it was a fair business settlement ^ with our insurer, but, yeah, I would say -- I would say there was some disappointment the number wasn't higher, but the way we're looking at it, it's behind us and, you know, we're moving on.

Okay. And Jim, you're wearing a couple of hats now, in terms of CFO as well as the head of parts of the Eastman side, as well as the -- as also on the board of directors of General Encore (ph), so a couple of questions. (a) when will you be giving up the CFO role, and secondly, what plans, if any, can you talk about with respect to Eastman's involvement with General Encore?

Yes. I'll start and then Brian may want to comment as well, but just so you know, I mean Brian and I -- it's really a tag-team on the Eastman side still. I mean, he is very much still involved with the Eastman division, and particularly in CASPE and there's -- you know, there's been a game plan that we've been working on for a while and so hopefully we're going to have a smooth turnover there. But I am still the CFO, and frankly, not official heap the head of the P&L division because we just didn't want to put me in any kind of conflict situation, and so Brian's been very good about remaining very much hands-on and and active in the Eastman division. Let me comment on General Encore and then in Brian wants to make any comments on the timing for the CFO.

On general encore, guys, that is still one great company. We -- I mean, maybe I'm so close to it, I don't know, but I am just enamored with the -- with the potential and the possibilities of that company, as well as with biotechnology in general, for that matter, and how it -- how it affects our industry. But I will say that we still realize that General Encore is an investment that Eastman has, and that the shareholders of Eastman Chemical, you know, are interested in the value creation. And so I guess I don't want to go any further down the road than that, other than we think it is a good investment, we think there's real value there, we think that we can, you know, have a direction in that marketplace, both combined with General Encore and outside of General Encore.

Either way.

Jim Rogers Yes, either way. So really like that, and I guess I don't want to go any further than that. And Brian, you may want to make --

Yes. You know, this is a subject that's very much on our minds, Frank, and we're talking an awful lot about it, and I'd like to answer your question but we're -- we're a few quarters away from answering your questions. We're going to -- we're going to have some conclusions about that down the road here, so ... maybe longer.

Regarding the CFO question, that may explain Jim's interest in biotech. Our efforts so far to clone him has been unsuccessful and Jim 38 here is unable to speak. So we -- this is probably the most important decision we will make on senior management in quite some time. We've seen some very good candidates. We've gotten close a couple of times but it wasn't quite right, you know, from our point of view. So we're going to -- you know, we're getting closer and we hope to make a decision here fairly soon, but I -- we take this one very, very seriously, and as Jim said, the situation we're managing right now is still working. It's not like, you know, we're not able to pay attention to the important stuff. I'm still very much in the middle of the oath man division activity. Jim is still very much a CFO and we work together on a lot of the Eastman division issues. So as long as we're able to manage that well, we want to make sure we -- we choose wisely on this CFO selection.

Okay. And then -- and then lastly, can you update us on the number of -- the number of lawsuits with respect to asbestos that you faced in the quarter, versus how it has been trending?

Frank, the good news is, there's been no increase in the number of cases of asbestos, so we're still at about the same number. I think almost exactly the same number we were at year-end. And other than that, I really don't have any more updates on it.

All right. Terrific. Thank you.

We'll take our next question from Chris Willis (ph) with J. P. Morgan.

Good morning. Just had a couple of questions about cash flow. Can you just comment on the line you had in your cash flow statement, the employee benefits and incentive pay? I mean obviously there's 90 million of pension in there. Can you just elaborate a little bit further and is there anything else that's going to go in that number beyond the pension as we move forward and as your pension contribution, is that tax deductible?

Yes, tax -- how we set the 220 target was based upon tax deductibility. The 90 you mentioned is the main thing in there. The other -- I'd say one -- there's a few other components but one of the major things is -- in '02, there were no bonuses paid, and there were bonuses paid in '03 for '02, which is not only management bonuses but also what's basically a profit-sharing plan throughout the company. So that -- that would explain the bigger components of that.

Okay. And you may have respond to do this earlier but how are you thinking about propane going forward in terms of hedging, given the tight natural gas situations and the, you know, sort of dire inventory situation we got into with propane during the winter months?

Yes. I mean we try and -- you can really outsmart yourself as you try and think through this and say, oh, gee, it's -- you know, it looks better, it's come back down, maybe I don't need to do anything, but we try and be fairly disciplined as we look, one, two quarters out, in terms of protecting ourselves on some portion of -- of all our raws, and I don't want to pick just on propane. Do we, you know, stop hedging when we see it run over a dollar and something?

Yes, we don't -- we try not to chase those kind of spikes. We're back down now, obviously, in the low 50s. But still the concept, I'll just keep hammering it on. The con set is -- we're not doing hedging just to make money. We're doing hedging to kind of bridge the movement in the raws, such that the sales folks and our businesses can catch up in terms of the price and give them some flexibility there. And that -- by the way, we're working on that business model. I think Brian hit it before but we continue to work on reducing the basis risk, is the way I think of it in finance terms, between -- between how you're buying your raws and how you're selling in the marketplace, and we continue to look at all the different avenues on price. The price administration, et cetera. To -- to overcome those raw material moves.

I know you don't like to comment on specific feed streams, but could-if -- how much did hedging help you in the quarter? I mean the 60 mind, you know, narrowing between prices and costs, how much greater would that have been if you hadn't been hedging in the first quarter?

Yes. And Chris, I don't want to go there. I mean, there's competitive reasons with customers, and with our competitors in the marketplace. It was a positive number, as you can imagine. The hedges were effective. But, again, I mean the real long-term key is the market dynamics and the pricing. And I don't want to take anything away from the need to -- for us to get that in the marketplace.

Okay. Thanks.

We'll take our next question from Duffy Fischer with Goldman Sachs.

Yes. Good morning, folks.

Good morning, Duffy.

Brian, had you talked about three parts in CASPE. I believe I heard you right in saying that the part 3, the unproductive part today, was about one-third. What was the breakup of, you know, Part 1 and Part 2? And secondarily, if you look at that same breakup and then take the acquisitions over the last, you know, couple years in that division, you know, versus the traditional old business, qualitatively where would the new acquisitions fit into Part 1, 2, and 3?

Yes. I'm reluctant to tell you how 1 and 2 break out except to say that if we had 1 and 2 and you looked at the EBIT numbers, you'd feel really good about the combination of the two.

The-- the third part has a high concentration of the new acquisitions in there, frankly, and that is both good news and bad news. The good news part is you have it identified and now what you need to work on. The bad news part is that that's -- you know, you wish -- you wish it wasn't those parts that were causing you more of the grief. The-- the key here, again, is, you know, where do you think -- instead of thinking about it from the standpoint of what are we buying, what didn't we buy, think about where do we have a proprietary or a differentiated product mix and where do we not? And there's a fair number of legacy Eastman products in that third part as well, where they have just truly been commoditized and they're not taking any money either so it's a mixture of both. But I'd say there's a higher concentration of some of those new acquisitions in that third part for sure.

Fair enough. And then one for Jim. On the developing businesses, my sense is all of that came out of Eastman division, and if I just look at the -- the op income as it was reported one year ago for first quarter '02 versus what you've got in there now, that $15 million difference, is that complete apples to apples if I just subtract those, the subdivisions they came out of?

Yes, pretty much. That's -- we did -- we did just have it in the Eastman division, and now we've broken it out for your visibility and, yeah, that's pretty much how you get to the numbers.

Another point I want to make sure everybody understands is, you know, we talk about keeping SG&A and R&D below 11%, that 1 to 1-and-a-half of new business development was buried in number.

Most of it is down in the SG&A.

Most of it is down in the SG&A so you get some sense of how we're controlling SG&A because basically we had that number just kind of living inside the SGA number of the company, and it gives you some sense of how hard we've been working on the efficiency of our SGA because we have another 1-and-a-half percent in there that's developing business that was in that number.

Fantastic. Thanks, fellows.

Let's make the next question the last one, please.

We'll take our next question from John Moten with Deutsche Bank.

John Moten Hi, guys. Got in under the wire. A couple questions. The first question is in the guidance comments, you indicated that you thought that the filter tow trends would be better in the coming quarters, and I'm trying to get a sense of the seasonality impact of filter tow trends or fiber trends in the second and third quarter and for the balance of the year.

And then my second question has to do with how much of your strategic plans within CASPE depend upon the divestiture of the one-third of the businesses that you seem to think just aren't meeting it. And more importantly, at what point do we start to see some resolution of some of some of these businesses, you know, when the rubber starts to meet the road, because quite frankly, the CASPE business has been a disappointment now for quite some time, and, you know, I'm looking for some resolution because I think that that's going to be a key catalyst in terms of the profit expansion of the business.

All right. Let me take the fibers question. I'll turn the CASPE question over to Jim because we've been talking quite a bit about your question there.

The fibers business, what we've -- what -- the big ringer there is that the China business is always very chunky. We're comparing to a quarter last year where we had China business early in the year, and that showed up in the -- in the first quarter of '02's numbers. Our China business this year is going to be a little later in the year and I think what the -- the comments said is that you should expect that China business to show up, which is what, you know, gets them back to where we expect them to be.

And it's not really about seasonality within a North American market or a European market as much as it is about chunky orders that come from China at different times in the year and you -- at the beginning of the year you annualize that in your planning and your thoughts and it just doesn't happen that way. And what Greg was saying in the outlook is that it's coming in the remaining quarters of the year and it's there.

And, you know, Jim, you --

Sure.

Do you have any contingency planning for that business, or do you see any impacts because of SARS at all?

No, I don't see any impact because of SARS. In fact, worried people smoke more.

Let me just comment on CASPE. I'll have to do it generally. I think you know there's accounting ramifications to the extent a CEO or somebody says, you know, I'm -- we're divesting this or that. And -- but -- so let me just give you a sense about timing and how we'll go at it.

I guess one of the key points to -- or one of the key things you can deduce from what Bryan said is that to the extent the number of acquired businesses might fall in that third category, and that that's where a lot of attention and focus is getting, that is also operations, whatever, that are separable. As well as some of our, you know, Heritage businesses. So you're dealing in the CASPI business, as compared to some of our mainstreams, like oxo or as a teals, you're individual with individual units and separable businesses and therefore when we've talked about smaller divestitures, 10 to 40 million, et cetera, you have something that's doable, if you need to do that and if that's the right answer for a specific situation.

So what we're working through now, and have been working on for some time, is looking at the different options between restructuring, divestiture, you know, what can you trim back, consolidate, et cetera, and, you know, we don't think that we have a couple of years more to play with this. This is kind of a "this year" event and we know that, and I think Brian said, you know, over the next one or two quarters, we're going to be able to speak more clearly about that as the decision gets made and we're comfortable with the accounting following the decisions.

Thanks, Brian. Thanks, Jim.

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 May 2nd. 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 on Eastman.com, in the investor information section, supplemental information, later today. Thank you for your interest in Eastman.

This does conclude today's conference call. At this time you may disconnect.