伊士曼化學 (EMN) 2003 Q3 法說會逐字稿

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

Thank you, Rufus. 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 during this call, you will hear certain forward-looking statements concerning our plans and expectations for fourth quarter 2003 and full year 2004. 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 third quarter 2003 sales and earnings news release.

The supplemental information for third quarter 2003, on our Web site at Eastman.com and 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 third quarter 2003.

Now, let me turn the call over to Brian.

Well, good morning everyone. Thank you for joining. I'd like to make some brief comments in three parts.

I'd like to talk about the third quarter performance first. I'd like to bridge into corporate strategy and how we're progressing on that, and then talk about fourth quarter expectations.

The headlines of course that you read right now are about the restructuring charges. When I was talking to you last quarter I indicated that pricing would be the key determinant for our profitability in the second half of 2003. And that is very much turning out to be true.

Due to a number of factors, pricing for the company declined about 5%. In the polymer segment, pricing actually declined 11% because we were unable to hold up the prices there. We had capacity utilization rates drop due to the capacity additions that happened earlier this year, there was some other factors globally.

Also, the performance chemicals and intermediates prices declined 5% sequentially in a very competitive business environment that I'm sure you're all aware of as you listen to other reports from other companies. So while these prices were declining at that same time we had to confront higher raw material costs particularly for propane, paraxylene and ethylene glycol. So as a result, our earnings were not where we wanted them to be.

Bridging to corporate strategy, you saw the actions that we took this quarter related to our corporate strategy at CASPI. I want to put that in perspective.

Recently we shared a chart with you which depicts Eastman's cumulative operating earnings on a corporate basis over the last four years. This was a presentation given at the CSFB chemical conference, it's on our Web site in the presentations area for those of you that haven't seen the chart.

If you haven't seen it, it ends up looking like the outline of a turtle shell, the highest earners rising quickly on the left side of that curve, the curve flattening out and then dropping off at the back. The analysis of that gives you some insight into the first part of our corporate strategy which deals with each of those three parts of the shape of that curve.

The left side of that curve indicates we have a number of businesses that have had strong operating earnings over the last four years, and they frankly tend to be fairly steady. This includes the top tier of the CASPI segment, parts of our specialty plastics business, our acetyles business and performance chemicals and intermediates, actually includes the North American PET segment, and our fiber segment of course which is also very steady.

In those areas, the corporate strategy is about shoring those up and thus supporting them as much as possible making sure that they remain steady and that they continue to grow as much as we can possibly do.

The middle part of the graph, where it's very, very flat, shows we have a number of businesses that have flat operating earnings that are not hurting us much but they're not helping much either. This part of the curve includes the polymer segment outside the U.S., the middle tiers of CASPI, part of the specialty plastics and the cellulosics, some of the older products.

This is an area where we are addressing the performance in a thousand ways through incremental efforts. More minor surgery than major surgery.

The right hand side of the chart shows we have a number of businesses that have been a serious drag on our earnings. We've talked a lot about that. That includes the bottom tier of our CASPI segment where you've seen the announcements this quarter also parts of our performance chemicals and intermediates.

This is where we do more serious surgery on the company and the announcements we have made this quarter are related to that. And these actions that we're taking are frankly a little tactical in nature right now to improve our profitability as soon as possible.

We've told you already about what we're doing in the CASPI segment. We're expecting in the PCI segment a cyclical turn around for many of the PCI businesses,

I had the opportunity to visit with the CMAI President, Gary Adams this past week. Talked to him about his outlook for olefin cycles and propylene specifically, propylene derivatives. We remain convinced that there will be something of a cyclical turn around in the next couple of years on that. In addition we are working on independent efforts to improve the performance chemicals and intermediate segment as well.

In the polymer segment we are looking at ways to improve the performance there as well.

I guess we view the PET performance this quarter as sort of a low water mark for PET because of the fact that we are absorbing new capacity in the marketplace at the same time that raw material prices are increasing. So we would expect the polymer segment to be improving quarter-to-quarter over time here into next year as the market is able to absorb the new capacity.

Now, turning to developing businesses, to remind you why we work on those because going back to the shape of that curve that I described for the existing company, we do not believe we would be satisfied to just fix the shape of that curve and stand pat. We believe we would still need to layer on additional things into our portfolio that would be lower capital intensity, higher margin, take more advantage of the technology capabilities we have in the company.

And that's why we spend some amount of money investing in developing businesses.

We've made progress in that area, a number of those businesses that we are developing there are moving farther down the commercialization curves. And they are using less money, sending as approaching neutral aerials, not using much money.

As we narrow our focus, we're working on fewer platforms as we reject the ones we think that will not move the needle and focus on the ones that we think will. Our expectation next year is that our net spending in the developing business division will be below 1% of sales revenue.

So you remember we were saying 1 to 1.5 earlier, I think this year we're going to finish close to 1%. So a somewhat declining trend quarter-to-quarter this year in the expenditures and developing business and we would expect next would be below 1% of sales.

Turning to fourth quarter expectations. For the fourth quarter, we anticipate that revenues will increase and volumes will be similar to year ago levels. We will continue to have the increased pressure from higher raw material costs.

So as a result, we anticipate the fourth quarter earnings per share will be close to breakeven or slightly positive. That's our best estimate right now with everything we see in the marketplace.

Throughout all of this we're continuing to take actions to improve our company, we'll be doing it all the rest of this quarter and doing it well into next year.

I'm looking forward to talking with you in more detail over the next several quarters about some of the key initiatives we're working on to improve ourselves. And as I look into 2004, this is not the day I'm going to give you an outlook on the 2004 earnings projection but qualitatively, we really do believe 2004 is going to be a better year for a couple reasons.

There's first of all the things that we are doing that have nothing to do with the external economy, things that we know we can do to improve our company by working on the shape of that curve and improving our businesses. Secondly, we do expect that the business environment will be an improved business environment, so we do believe 2004 will be a better year than this year.

So with that said, let me turn it over to Jim to give you some more details.

Thanks, Brian. Good morning, everybody.

I'm going to try and explain the charges, make a comment on asbestos and talk a little bit about cash and get it over to Greg for the script so we can get to your questions.

Just on the goodwill, we told you last quarter that with FAS 142 we've chosen the third quarter as the quarter that we're going to review our goodwill each year and intangibles.

We started quarter with $347 million of goodwill and I guess our original interpretation was that that goodwill would follow the acquisitions we made, that gave rise to the goodwill in the first place and stay with those acquisitions, and that as we evaluated those units that would determine the value of that goodwill.

And hence, we came out with our prerelease on October 3 where we indicated we expected a fairly sizable write-down, even bigger than the one we finally reported. Since that prerelease, though, as you get more into the details of interpreting 142, you see that once we've integrated and aggregated across all of CASPI, you're deemed to be just one reporting unit. And, therefore, the goodwill really follows the value and no longer follows the acquisition that it was attributed to.

And, therefore, if you look at the way we have divided up CASPI into the units that we affectionately call RIMBO, the Resins, Inks and Monifers business and the Adhesives and Coating business, most of that goodwill goes to where the value is, which is in the heritage Eastman businesses, the adhesives and coatings, which by the way is the good news, that there's plenty of value in those businesses to support that goodwill. Therefore, you end up with a much smaller write-down of goodwill.

And we're told that that's it's common. I don't have a lot of examples to give you, but that was the intended consequences of 142 is that goodwill should follow the value and that's exactly where we've ended up. So you see a much smaller write-down of $34 million of goodwill than we would have perhaps all originally thought.

We have $175 million on intangibles written down, of course all the write-downs are broken out in the press release. The fixed assets also get reviewed and valued, use external appraisals to do that and that lead to $194 million write-down for CASPI and $79 million in the PCI segment, mainly in the performance chemicals pieces of that.

And I guess the small silver lining in this dark cloud is that the cash portion of the large charge is only about $14 million and that's related to the severance cost for the labor reductions we've talked about already.

So I guess if you want more detail on that, we can hook you up with our controller or whatever but that is pretty much the gist of the large write-downs we took in the third quarter.

On asbestos, not a whole lot to say, there's been no significant change in the number of claims, we're still around 11,000 and of course anytime you can say that there's little change, that's really good news. Just thought I'd pass that along. And no change in our outlook, by the way, that will have no material impact on the corporation.

I want to get to cash because there's a lot of work done inside the corporation on cash this quarter.

We generated about $141 million in cash from operating activities. We funded our pension, $98 million so we finished the pension funding for the year hitting a total of $238 million and still had about $40 million of cash to pay down net debt with. Obviously, more work to do, and we'll be doing that in the fourth quarter.

We did some of the work in capital work in the third quarter, getting the receivables down nicely, but typically fourth quarter is a strong cash quarter for us. And so there will be more work on working capital and other sources of cash in the fourth quarter.

An offset to that, a little offset to that is typically the fourth quarter is also our largest Capex quarter, it's just the way we run things here where a lot of the projects are finishing up towards the end of the year. But I would still think we'd be towards the low end or even below the low end for Capex for the year that I gave when I said 260 to 300, probably more like 250 to 260. We'll see how that shakes out by year-end but we're trying to be very disciplined there as well.

And, you know, we've been saying that we're going to try and get the debt to about the same level we started the year with. If I talk to treasury they still have that as an objective and a goal. I just watch how well we did on working capital in the third quarter so I'm trying to hedge a little bit and say that I think we'll be no higher than $100 million of where we started the year. Obviously we'd like to be as close to no increase in debt as possible.

And I think frankly funding $238 million in the pension and the kind of earnings year we had that would be pretty good performance on a cash basis if we could hold the debt that close to where we started the year.

Finally, we'll probably be doing another bond issue before year-end. As you know, we have $500 million of debt coming due in January so we're looking at putting up another $250 million before year-end, you know we did 250 earlier. And that would pretty much take care of the maturity that's coming due in January.

I'll just pass along that even with the rating agency actions we're still having great acceptance of our name. They like the name, they appreciate our ability to generate cash. So, for example, even with the A3P2 we're still placing commercial paper in the market which I think is a great thing.

Brian alluded to '04 and I consider '04, again, not to comment on earnings but I think it's going to be a great debt pay-down year as I look at what should be improved performance. Minimal, if any, pension contribution and we're still ballparking that between zero and 40. As well as proceeds, expected proceeds from sale of CASPI assets, I mean, it should be a great debt pay-down year. Greg, why don't I turn it over to you for your comments?

Thank you, Jim.

Yesterday afternoon, the Eastman Chemical Company news release announcing third quarter 2003 results was furnished to the SEC on Form 8-K, distributed to the news services and posted to our Web site. Included with our news release are a series of financial tables.

Table one includes a statement of earnings for third quarter 2003 and third quarter 2002. Sales revenue for third quarter 2003 was $1.44 billion, an increase of 5% compared with third quarter 2002.

The higher sales revenue was due primarily to higher year-over-year selling prices, and the favorable foreign currency exchange rates particularly for the euro. Cost of sales for third quarter 2003 was $1.24 billion, an increase of 6% compared with third quarter 2002. The increase is due primarily to higher raw material and energy costs, especially for propane, paraxylene, ethylene glycol and natural gas.

Selling and general administrative costs for third quarter 2003 were $100 million, flat when compared with third quarter 2002. This performance reflects continued implementation of cost reduction measures across the company.

Research and development cost were $44 million in third quarter 2003 compared with $42 million in third quarter 2002. We expect 2003 R&D costs to increase over 2002 due to the company'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 or below 11% of sales revenue. Third quarter 2003 and year-to-date these cost were approximately 10% of sales revenue.

For third quarter 2003, the company reported an operating loss of $440 million, compared with operating earnings of $61 million in third quarter 2002. The third quarter 2003 operating loss included asset impairments and restructuring charges totaling $496 million.

Excluding the charges, operating earnings declined year-over-year as higher raw material and energy costs were partially offset by higher selling prices and cost reduction measures.

Interest expense net was flat compared with the year ago period. Other charges net for third quarter 2003 was $1 million. Other charges net for third quarter 2002 was $3 million, primarily reflecting remeasurement of foreign currency denominated amounts.

The benefit for income taxes in third quarter 2003 was $135 million. This resulted in a quarter and year-to-date effective tax rate of approximately 28%, primarily due to the impact of the treatment of third quarter asset impairment and restructuring charges. We expect the effective tax rate for full year 2003 to be similar to this effective tax rate.

For third quarter 2003, the company had a net loss of $4.35 per diluted share, compared with net earnings of 31 cents per diluted share for third quarter 2002. Third quarter 2003 net earnings include the impact of the previously mentioned asset impairments and restructuring charges, which were $356 million after tax, or $4.61 per share.

Table 2, other sales information. Third quarter 2003 external sales revenue increased compared with third quarter 2002 in the North America, Europe, Middle East and Africa, and Latin America regions, while declining in the Asia-Pacific region.

Sales revenue in the Europe, Middle East and Africa region increased by 12% primarily due to favorable foreign currency exchange rates. North America sales revenue increased 6% primarily due to higher year-over-year selling prices for the polymers and performance chemicals and intermediate segments.

In Latin America, sales revenue increased slightly, as higher sales prices were mostly offset by lower sales volumes. Sales revenue in Asia-Pacific declined primarily due to lower sales volumes, particularly for the performance chemicals and intermediate segment.

Eastman Division.

Third quarter 2003 compared with third quarter 2002 Eastman Division's external sales revenue declined slightly as lower sales volumes were mostly offset by higher selling prices and favorable foreign currency exchange rates. Sequentially, external sales revenue declined 5% due to lower sales volumes, and selling prices.

Year-over-year, Eastman Division's operating results declined by $511 million including third quarter 2003 asset impairments and restructuring charges of $495 million. Excluding the charges, operating results declined due to higher raw material and energy costs, and lower sales volumes, partially offset by cost reduction measures and higher selling prices.

Sequentially, operating results excluding the asset impairments and restructuring charges for both periods declined primarily due to lower sales volumes and selling prices.

Coatings, adhesives, speciality polymers and inks operating earnings in third quarter 2003 including asset impairment and restructuring charges of $411 million declined by $417 million compared with the year ago period. Excluding the charges, operating earnings declined due to lower sales volumes and higher raw material and energy costs that were partially offset by higher selling prices and cost reduction measures.

Sequentially, operating earnings excluding the charges declined primarily due to lower sales volumes.

The performance chemicals and intermediate segments operating earnings including asset impairments and restructuring charges of $83 million declined by $94 million in third quarter 2003, compared with third quarter 2002. Excluding the charges, operating earnings declined due to higher raw material and energy costs and lower sales volumes, partially offset by higher selling prices and cost reduction measures.

Sequentially, excluding charges in both periods, operating earnings declined due to lower selling prices and sales volumes that were partially offset by cost reduction measures.

Special plastics segments operating earnings were flat for third quarter 2003 compared with third quarter 2002 as a restructuring charge of $1 million and lower sales volumes were offset by cost reduction measures. Sequentially, operating earnings improved as cost reduction measures more than offset the restructuring charge.

Voridian Division.

Third quarter 2003 compared with third quarter 2002 external sales revenue increased 11% primarily due to higher sales volumes, favorable foreign currency exchange rates and higher selling prices which were partially offset by a negative shift in product mix. Compared with second quarter 2003, external sales revenue increased slightly as higher sales volumes were mostly offset by lower selling prices.

Voridian Division's earnings from operations for third quarter 2003 increased by $3 million compared with third quarter 2002, as lower operating costs, increased sales volumes, and higher selling prices were mostly offset by higher raw material and energy costs, and a $1 million restructuring charge.

Sequentially, operating earnings declined primarily due to lower selling prices and higher raw material and energy costs that were partially offset by higher sales volumes and cost reduction measures.

Polymer segment's operating earnings increased year-over-year by $5 million as lower operate costs, higher sales volumes and higher selling prices were partially offset by higher raw material and energy costs and a $1 million restructuring charge. In addition, third quarter 2002 results included increased costs of approximately $23 million related to operational disruptions.

Sequentially, polymer segment operating earnings declined as lower selling prices and higher raw material and energy costs were partially offset by higher sales volumes and cost reduction measures.

Fiber segments operating earnings declined by $2 million, third quarter 2003 compared with third quarter 2002, as an unfavorable shift in product mix was mostly offset by higher sales volumes and favorable foreign currency exchange rates. Sequentially, fiber segments operating earnings declined by $2 million due to an unfavorable shift in product mix and slightly lower selling prices.

Developing Businesses Division.

Third quarter 2003 compared with third quarter 2002 external sales revenue increased by $17 million primarily due to implementation of customer contracts by Sydney Corporation. Compared with second quarter 2003 external sales revenue increased by $5 million.

Operating results for third quarter 2003 improved by $4 million compared with third quarter 2002, as increased sales revenues more than offset higher costs associated with efforts to increase external sales revenue. Sequentially, operating results improved by $3 million.

Table 7, cash flow.

The company generated $141 million in cash from operating activities in third quarter 2003. This includes the company's third quarter contribution of $98 million to its U.S. defined pension plan. We have completed our $238 million contribution to the U.S. defined pension plan for 2003.

Additional outlook.

We expect to fund our U.S. defined pension plan in 2004 in an amount between zero and $40 million. The company expects that it will invest below 1% of sales revenue in new growth opportunities in the developing businesses segment in 2004.

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

Thank you, gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question please firmly press the star key followed by the digit one on your touch-tone telephone. We will come to you in the order that you signal. If you find your question has been asked and answered before you could ask it and you would like to remove yourself from the question roster, please firmly press the pound key. Also if you're on a speaker-phone please make sure that your mute button is disengaged so that your signal can reach our equipment. Again, if you would like to ask a question, press the star key followed by the digit one. And for our first question, we go to P. J. Juvekar with Salomon Smith Barney.

Good morning.

Good morning, P.J.

Brian, I'm concerned about the volume declines in PCI and specialty plastics. Can you be a little more specific on which products you're seeing that decline?

What I can tell you about PCI is that they have a number of bulk liftings at different times and sometimes you choose to do those because they are marginally profitable, sometimes you don't. Those are things like astro solvents, and acetic acid and things that are sort of the swing products at the lowest profitability level for the company.

Some of the volume drop you saw there was just making choices not to accept and take some of those kinds of bulk liftings, which it has a lower, it's not the kind of core business you would worry about, some kind of a volume thing.

Specialty plastics, I guess the specialty plastics engineering plastics segment generally has had a tough quarter. We do see an upturn occurring there in specialty plastics, they are doing better. For the year we don't expect them to be, I guess I'm describing a chunkiness in that that I do not worry about, that I think they are doing what we expect them to do this year.

You're saying oxos and acetyles the main products in PCI are -- the volume was up?

I'm saying that the lowest ends of those, the lowest end of acetyles is acetic acid for us. The more attractive businesses are the anhydrides and some of the other acids are that are not acetic acid. Those are more steady.

The swing products like acetic acid where you have large bulk lifting is where we see the swing on the acetyles. In the oxos, it would be, not all of the oxos, it would just be some of the estrosolvents that are more commodity, global commodities that go in big bulk liftings. Those are the things that swung in PCI.

P.J., if I could add to that, I mean, just as you look across the whole Eastman Division and you think about volumes, you shouldn't just assume that it's volumes across the board or it's in all our product lines. It's really some conscious choices going on in each of those areas trying to improve mix. And so just I'll hit one thing that we were talking about earlier about Asia Pac where we saw a decline there in volumes. Some of that's conscious choice. Earnings are actually going up in Asia Pac quarter-to-quarter. So in any one segment to pull this quarter and look at volumes, you may come to the wrong impression if you're looking for long-term trend.

Okay. And then second quick question, I'm on the restructuring. This restructuring is mostly write-downs. There is not much cost cutting here. Can you comment on that?

Well, I guess I would disagree with that. We've had a number of restructuring actions within the CASPI segment that have been ongoing and some of those don't have as many cash charges with them, but there are a number of cost cutting actions that have gone on there.

Outside of CASPI we have a number of cost cutting actions as well across the corporation. I think you're looking at the $14 million and concluding that that is indicative of the cost cutting action. Let me let Jim comment on that.

I think what Brian was leading to is you're just looking at the charges. As we go to reduced headcount, there's more headcount being reduced through attrition where you don't need to take a charge at all, P.J. So you wouldn't see any charge for the headcounts going down by attrition which is what we said in our earlier announcement. So there's obviously some involuntary separations where you have the severance, those are taking place, probably be done by year-end and they're taking place kind of unit by unit as we go through our budgeting but they're also trying to be smart about it and make sure that you can manage things the most cost effective manner possible and also be responsible to your employees.

The idea of some vary aggressive stands in terms of not replacing people as they retire and leave, this is what's going to be going on for probably the next six to nine months. That's where you get to those numbers we had in the earlier press release. When you look back at the labor piece, that explains that.

There's also a boat load of cost-saving and cost-cutting and things like that going on in terms of all the knobs you can turn but again, you don't nee to charge for it but it's very much what the corporation's all about right now.

I hear what you're saying. Do you believe this is the end of your restructuring or is there more to go in terms of charges?

No, there's more to go. There's absolutely more to go.

So we can expect more charges?

Well, it depends on how it's restructured, P.J. If you go to shut down a line, move out of an unprofitable line, et cetera and you'll have charges against assets, you'll have reductions in force that would require that.

But again we're trying to be smart about it. We're doing it business-by-business rather than just the axe across the whole corporation and it's really associated with the planning process. We're trying to instill some discipline, have the targets, and then show managers that they have all the tools that they need to hit those targets. And that includes reductions of people, it includes shutting down product lines or even plants.

Okay, thank you.

For our next question we go to Graham Copley with Sanford Bernstein.

Good morning, guys. I understand your comments around sort of selective reduced sales to Asia, but with every other industrial company in the country posting marked gains in their Asia business over last, you know, over the last six to nine months isn't this a concern that in the area of the world that's actually growing your revenues are going down?

Let me start and Brian may want to come in. I mean, Graham, I've been around a while and I know you have, too, so one, don't get fooled buy just watching the top line and how well people are doing in Asia. I mean, we're all about profit and trying to make more money.

One of the nuts that I think a lot of people have had trouble cracking is how do they grow business and now listen for the next word, "profitably" in Asia? You always kind of like to have more volume but the assumption is that profit comes with it.

So I think there's a lot more we can do in Asia. I think our business guys have in particular China strategy, they want to do a lot more there. This particular quarter, there was some more of the commodity-like products which we just did not participate in, we were not going to make any money, so we didn't do it. We're trying to have more and more of that philosophy.

When you think about the economic machine there in Asia and China, there's the top line which we do not want to go for, we want to go for it profitably but then there's also all the other ways you want to capture the value there. That goes to strategic sourcing out of that area, you know, trying to decide do you have to manufacture there or can you let someone else manufacture there? All of that is really in the mix when you talk about Asia. So I know you look at more than just the top line.

We want to grow there more aggressively in the future. The trick is how. You would not see our profile look like a Shell or Exxon putting in large integrated facilities to try to basically move your asset base from one region to another, that's not the approach we're going to use.

We have been growing in our specialties and especially plastics and the coating specialties, adhesives, a number of other products quite nicely in Asia Pacific. It's doing quite well from an earnings perspective. We are pleased with the earnings growth that we see there.

Would you expect to see even incrementally capital rise in that part of the world relative to the U.S.?

It would have to at some point and we have made some -- you may know that we have invested in a joint venture in Nanjing, which doing quite well. The plant is sold out and doing quite well. We have another one that is being built in a place called Shilu to make some of our isobutyraldehyde derivatives, we have three that are related to the inks business, we continue to talk about more.

Some wholly-owns ideas, some joint venture ideas, but these are very targeted, tend to be specialty in nature and we have always had a history of making money in Asia. Starting with our filter tow businesses and going to the others. It's our intention to stick with that history and not to go for some kind of a giant market share move that has maybe a longer term outlook on profitability and near-term you bleed a lot.

We're not going to see you raise your capital budget for the next year or so based on Asia?

We don't have any big capital investment plans in Asia-Pacific that's correct.

Thank you.

For our next question we go to Jeff Sakokis (phonetic) with JP Morgan.

Hi, good morning.

Good morning.

Eastman pays $1.76 dividend, is that an appropriate dividend for Eastman over a longer period of time?

The question was framed as over a longer period of time, which I think is important. The actions that we're taking are to shore up our profitability, to get us into a position where we can comfortably support that kind of a dividend, Jeff. And I think over the long haul our earnings capability is well within the range of supporting that kind of dividend.

Secondly, in your examination of the CASPI assets that you wish to sell, is it the case that you would generate capital losses in selling them? From a tax point of view?

Yeah, you just say put that little thing on the end there with the tax point of view. I was going to start with if you think about the process we just went through, we just ended up writing down the assets on an accounting basis.

Right.

And so if I think about accounting gains and losses, I mean, it's just one of those "we'll see" kind of answers because hopefully you find a buyer out there for different assets or all the assets, that sees a higher and better use and a higher value than we do owning them.

On the tax side, you can bet that we will be striving to structure it in such a way that any possible capital loss we can get for tax purposes we will try and achieve, and so yes, I would say that is a possibility.

I guess well, you use the word striving. I couldn't understand whether you said yes to me, Jim, or no?

Yeah, we're going to try and show a capital loss. Whenever you talk about taxes, we're going to follow all the rules, et cetera, but as you know you'll have choices on whether you sell assets or stock for example of different things. So we'll look at the basis in the two, make economic decisions and we will value, you know, potential tax yield from a capital loss, you know, fairly highly. We will be striving to do that.

Okay.

And you can't know for sure until the deal is done, Jeff, as to whether or not you're going to be successful and how much of the, what kind of tax picture you're going to have.

Okay. Thanks. I'll get back in the queue.

For our next question we go to Frank Mitsch with Fulcrum Global Partners.

Good morning. Gentlemen, we've heard about asset sales in CASPI for a while now. Do you think we'll see any meaningful transactions either in CASPI or Genencorp in the fourth quarter and/or in the first quarter of next year?

Well, let me hit CASPI first, and then we both may want to comment in Genencorp here. But on CASPI, we hired a banker, we're in the process of pulling a lot of those numbers together.

Don't underestimate the effort it takes to have, you know, assorted acquisitions that were made over a number of years on different information systems that are now all on R3, but when you try to pull historical numbers together you're going back into companies where you didn't own it, during times you didn't own it, et cetera, so all that is going on right now, pulling that stuff together.

We've had, I would characterize it frankly a strong interest and a strong number of people who have expressed interest in some or and even all of the assets that we have in that group that we are looking at divestitures, restructuring or whatever to improve the performance.

And so, yeah, we have the targets that probably not so much this year but early next year, you know, we hope we have a lot more to say to you about how that's proceeding and really getting it done such that when I kind of do my planning for the second half the next year I do not look at a drag coming within CASPI from these units.

Just on Genencorp, I'll say that once again, I always knock wood, our forefathers blessed us with a great investment there in Genencorp. And you know, that company has just been performing excellently. We like that. I guess the last time we said Brian was probably you made some comments I think last quarter?

Yeah, I guess I should say that the topic of Genencorp has been a much discussed topic among senior management and with our board at the recent board retreat. We have reached some conclusions about the options that we want to pursue there and we are taking initial steps to pursue some of those internal options to create the value that we want to create for our shareholders.

Because they are a publicly owned company it's really not appropriate today for me to say exactly what those internal options are and what it is we are doing. And as soon as it's appropriate to say that, I will.

Remember, I don't want to get out with my independent comments affecting somebody else's stock. So that's where I'll leave you today.

Brian, I understand in terms of talking about the options, et cetera, but when might we see that announcement? What is the timing of you to come back to us with some decisions there?

I would like to get back to you as soon as I can, Frank, but there are some tactical things we have to get done before I can say anything to anybody.

All right. And then talking about the, I guess relatively weak guidance in the fourth quarter, you made a comment I think that, did you indicate that the low water mark in polymers was the third quarter or --

Yes.

The third quarter. So 4Q you would anticipate better results out of the polymers business?

Yeah, I think just to take you to the logic there, this should be the low water mark for two reasons, we have this inertia where raw materials rise before you can recover pricing and we have lower capacity utilization due to new capacity coming on.

And over time as we absorb the capacity, with the growth that continues to happen in PET, that capacity utilization rises. That gives you some more strength in pricing to absorb some of those raw material costs. And we do believe that the situation improves from here forward.

And then lastly are you pleased with the progress in [SENDIAN's] top and bottom line?

No. That's a short answer. No. This is a business where we had originally expected some more sales coming in this year.

We have collared them on making sure that the sales that they bring in are profitable. And that has narrowed the scope of new sales that they were able to take on.

You remember the business model here is one where you can grow yourself broke if you're not careful because the model relies on starting with negative margins moving to positive margins, as you convert contracts. We have slower growth than we want so the priority in [SENDIAN] is to first get them to earnings and cash neutral which we are almost at. Once we get them to earnings and cash neutral allows us to sort out our choices on this because it is no longer dragging the company one way or the other. That's the next critical step here, Frank.

Thank you.

We go next to Sergey Vasnetsov with Lehman Brothers.

Hi. Good morning. I just want to clarify your comments on paying down a load of debts and maybe not verbatim as you said, next year 2004, I'm going through the pieces. And when you say you expect to be up, you know, you'll tell us a little bit more how much you see them going up by, and then we talk about sales of some CASPI restructuring divisions which probably would be significantly offset by cash needs for this restructuring. And finally the big piece is sale of Genencorp, is there any other factor which generates a little cash next year that I missed?

Well, I would not -- the things I referred to, I did not mention Genencorp in what I referred to. I was just looking at the cash flow regenerated this year thinking that a better-performing year would increase that cash flow from operations to start, instead of having to steer it towards pension, I could steer it towards debt reduction.

And further, that there would be proceeds from CASPI divestitures that, and I think the way you asked the question, that maybe I'd have to use that cash for something else. But my expectation is that cash would be going towards debt reduction as well.

So those are the pieces I was adding up and obviously I don't know what the proceeds will be from CASPI. I can see what I spent on pension this year. But you get up into some sizable numbers and you guys can do the math on that.

Jeff said there are a number of ways of raising cash there. As we consider all those ways of raising cash the first priority is debt reduction.

Okay. And so on PET front, once the market stabilizes itself next year and the year after that, however you're going to see higher raw material pressure on EG and paraxylene? PT aside, how do you see to believe to offset this?

Well, I have to break the comment into pieces. North America is our most attractive region and we always make money in North America. Even now, in these difficult times we're making money in North America.

We think that the industry structure in North America and the capacity utilization picture allows to us compensate for the trends you're talking about there, Sergey, in higher raw material costs. And so that one takes care of itself.

Latin America, and Europe, are a slightly different situation. There are trade-related actions for instance in western Europe, anti-dumping actions that have been taking there to provide some amount of relief maybe in Europe next year.

Latin America slightly different situation just on supply/demand but we do believe looking at the world, that even with rising raw material costs, the margin situation should improve for our polymers group going into next year.

Okay. Thank you.

Our next question comes from Duffy Fischer with Goldman Sachs.

Yes, good morning. My question on fibers, you talk about volumes increasing but the mix was going down. Which seems like a different strategy than you took in the other divisions where you said you walked away from some volume that wasn't as high a margin. Can you kind of talk about that difference, why the different strategy in fibers?

That's not a strategy thing, Duffy, that is a consequence of the way business shook out. Strategically you always sell as much fiber, filter tow fiber as you can to all of the customers that you serve. You never waiver from that.

What we have also included in that segment is acetic acid and some acetic anhydride that we sell over to the [inaudible] joint venture, and as those volumes rise, during times of higher business activity, then we dilute the full segment there with lower earnings product.

It's not a strategic choice, it's just a demand-related thing that demands more of those lower profitability simple chemicals like acetic acid and acetic anhydride and the addition of those into the segment dilutes the numbers.

But you should not infer any strategic choicing there. The fibers business is one where you are always very steadily and regularly supplying all those customers. You're not withdrawing product to hold up price or deliberating shifting the mix there.

Okay. Good enough. Then just a follow-up on [SENDIAN]. You said that very shortly here you'll get to cash flow and earnings neutral and all along you've talked at some point there's going to be a decision, does this business work for Eastman or doesn't it? Is that something we should, as investors in our minds think we'll know the answer to by saying mid year next year?

We are approaching that kind of a decision, Duffy, and I'm not going to give you any outlook or foresight into where that's going but this is the time where you have to confront that decision, yes.

All right. Thank you.

We'll go next to Kevin McCarthy with Banc of America.

Good morning. Jim you've injected quite a bit money into the pension plan this year. Can you talk a little bit about how the plan itself has performed and do you have any early read on what the '04 effect could be on your income statement?

I can talk generally. Well, let me start with the end. In terms of on the income statement probably would be a slight increase in pension expense next year but I don't think it's going to be dramatic. I think the last time we ballparked it, we were thinking maybe $10 million or so for pension and OPEB so not a big increase.

Realize when you get to year-end you've got to see where interest rates are in terms of how the liabilities are valued and right now it doesn't look like there's going to be a big shift from the end of last year. Asset performance has been pretty good.

We actually have long duration on our liabilities, it has to do with the fact that Kodak kept the retirees when the company was spun out so our liabilities have fairly long duration which means we can be more in equities than perhaps would be prudent in a plan that had a different retiree active mix. And so therefore, we've had pretty good performance this year being in equities.

I want to return to Asia briefly. It sound like you made a conscious decision to deemphasize certain product lines, you know, in the interests of improving profitability. How much was your profit in Asia up, if at all this quarter?

I'm going to let you talk to Greg. I don't think we dig those numbers out for you separately.

What I can tell you is that we've been emphasizing the pieces that are at the front end of the so-called turtle chart, things like our coalescing aids and our specialty plastics, some of our specialty plasticisers, some of our better adhesives. Those are the things that are typically unique in Asia and those are the things that are the most profitable in our company.

So you can imagine as we grow those we have similar kinds of profitability. That's really all I can tell you right now, Duffy, but I'll let you get with Greg and whatever he can tell you on that.

We won't disclose the earnings by region, but I can tell you, if you just look quarter-to-quarter it can bounce around based upon your tow sales there because as you know, tows a profitable product and that could be kind of chunky, one of Brian's words, I can be kind of chunky from quarter-to-quarter.

But if I just look at a longer term trend, I mean, it's a trend of increasing profits in the region. And that to me is a gate, and certainly on the Eastman Division side it's a little smoother and you see the increase.

And by the way, it wasn't anything specific to Asia that say let's work on our mix in Asia, it's really across the board within the company that we really want volume that has profit attached to it. And so you're probably seeing more of that, you know, hopefully conscious choice being made through all our businesses.

I understand. And finally, can you update us on the CFO search? When does hunting season end in the Smokies?

We've had a lot of really good results there, I hope to say something to you very soon here. No announcement today but I'm feeling pretty good right now. Be talking to you soon.

Thanks very much.

We go next to Andrew Cash with UBS.

Good morning, Brian, Jim, Greg. I have a question on the decision-making process that's in this restructuring. When Ernie left the board, there was one other board member that left with him and as you took over, Brian, three new people joined the board so you're now up to 15.

No, we've had retirements, we only have nine total, eight outside myself. But go ahead.

You only have nine board members left now?

We have nine total and myself and eight outside.

Okay. So how do you convince those board members that were part of Ernie's administration that some of these acquisition that were made under Ernie should be separated out? I could understand they'd probably go along with it if there was a good price to be had but certainly this is not a seller's market.

We've already crossed that bridge, Andy, and I think it was just a matter of, you know, this is a delicate question.

We spent a number of months in dialog in the first part of my administration in 2002 talking through the dynamics of these businesses, and what it is we can do to fix them. And we went through some of that process of attempting to fix them.

And when it became apparent that the fixing options were not going to be satisfactory, it was then a bridge to the other choices that you have for improving the profitability of the company, which is where we're going now. We've crossed the bridge and we're done with that.

I think at this at this point we all are convinced together, unified as a board, that we are going to be very realistic in our expectations of what we should get for these businesses and that leads to us taking action. We will not have unrealistic expectations of what the valuations on these things should be, and that leads us to being able to take the actions we need to take.

Okay. And by the way, I was recently just a couple weeks ago at your Nanjing facility. It's really something for you guys to be proud of.

I'll be darned, I didn't know you were there, Andy.

I was snooping around.

It is a great facility. That's an example of our projecting ourselves across the globe. That was built on time, on budget, it started up the first day we wanted it to start up, it made the product we said it was going to make it sold out and it's in the black. And that's an example of how we will continue to grow in Asia.

After being away on the road for three weeks, it was good to see an Eastman sign. On a plant. Hey, thanks.

Thank you.

We go next to Nancy Traub with Credit Suisse First Boston.

Good morning. I'd like you to elaborate a little more on PCI, the outlook there. We had -- it was pretty much breakeven in the third quarter and down year-over-year and down sequentially What does it look like going forward?

PCI is a tale of two cities again.

Each of our, we look at our corporate turtle chart and we have business turtle charts as well, so PCI has one of those. The acetyles, the things that are derived from coal, typically are the most profitable and remain profitable especially now in a time when natural gas is expensive and coal remains lower valued. So we feel good about those.

The thing that drags down the back end of the curve is the oxo-related products which are oversupplied in the world. The supply to man curve continues to tighten there gradually but it is gradual, there's huge competition there so the margins are low.

The story on that going forward is, as there is a propylene and ethylene cycle, that oxo piece that is dragging down the back end of the curve should improve. I want to be specific here. People are fond of drawing cash curves for crackers, and they draw the picture for ethylene. And they lump us into that cash curve for how we look on ethylene.

We look at it from the standpoint of olefins. We run those crackers primarily to make propylene. And so we look at the cost position for making olefins in general and specifically propylene.

The propylene story in the world is tightening. That has been confirmed by other reports, I mentioned CMAI earlier, I think I got that confirmation again a couple days ago. And as that propylene supply demand story tightens, we believe the propylene derives will recover. That is what I expect to happen in the industry environment.

Structurally, inside the house, we are looking at all the pieces and parts we have there, Nancy and looking at them in many combinations to see what should run and what should not run. I tell you in looking at that, in looking at that, we haven't jumped on to any easy answers so far.

As we look at different combinations of those things, you find a situation your where contribution margins still justify operation, and we have not locked on to easy answers to do restructuring in that PCI segment today. We continue to dig down and look at that in a lot of different ways and we're going to keep on working on that.

As you know, it's much more integrated into the company so it's going to take a little more work to do the unilateral actions, the kind of things that we've done in CASPI, we're a long way of doing those kinds of things in PCI.

Just one other addition. Don't forget that Brian addressed really the intermediate piece of PCI, there is performance chemicals in there, too, which is about a third of the business, that's the olefin chemicals business et cetera. That's where some of those restructuring charges are.

They're working hard to make that a much more profitable business. That has been kind of breakeven to slightly positive, and so you see some of those charges, some things getting shut down, lines, et cetera. That's all about trying to make that a more profitable business, too.

How about price initiatives? Are there any on the table now?

We have price initiatives every quarter, one way or the other, Nancy. It's all about what is the excess capacity in the world, where's the push back and the alternatives for the customers. I don't have anything to report to you.

Let me add, I mean, Brian's given you the external picture, I just one piece of color on what's going on inside the shop.

Like within the Eastman Division we do have a pricing council now because we feel like there probably has been some value left on the table, the interaction with customers and the, you know, particularly in price, and so we're very much trying to tighten up the processes there on price, even have some Six Sigma projects in the pricing area within the company, things where you just want to make sure you're doing everything you can so the value doesn't fall out.

It's not necessarily an announced price increase, but we're trying to improve the efficiency of pricing and that's actually a major effort within the division.

So would you expect earnings to be up somewhat in the fourth quarter for that business unit or not?

We've given guidance for the fourth quarter overall, I'll just say that typically for the Eastman Division and for most of these segments, that seasonally, there's seasonal factors that make the fourth quarter a very tough quarter. If you look traditionally, I'm not talking out of school, you can see our fourth quarters have traditionally been tough and it's usually been on the Eastman Division side and a lot of that is seasonal.

Okay, thanks.

Can we make the next question the last question, please?

And that question comes from Frank Dunal with Adage Capital.

I feel honored. With all the write-downs on the asset impairments, how much will that reduce your depreciation and amortization on an annual basis going forth?

We are looking at that now. But you're probably in the ballpark of about $30 million bucks or so.

Okay. And also, just to try to get this straight, on the pension, given your contribution and your good returns, is pension expense up or down next year from this year?

Up. It will probably up about $10 million. Pension and OPEB.

Okay.

Okay?

Great, thanks.

And with that, Mr. Riddle, I'll turn the conference back over to you for any closing remarks.

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 November 1 on our Web site. You can hear the replay by calling 888-203-1112. Or it will be on our Web site in the Investor Information section.

Also, a summary of the prepared remarks will be available early next week on the Web site. Thanks for your interest in Eastman.

Ladies and gentlemen, this does conclude today's Eastman Chemical Company third quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.