伊士曼化學 (EMN) 2003 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone and welcome to the Eastman Chemical company fourth quarter year end financial results conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman 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. Good morning, everyone. With me today are Brian Ferguson, Chairman and Chief Executive Officer, and Rich Lorraine, 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 the first quarter 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 fourth quarter 2003 sales and earnings news release and the supplemental information for fourth quarter 2003 on our web site at www.eastman.com, and our filings with the securities and exchange commission including the form 10 q filed from third quarter 2003 and form 10 k to be filed for 2004. Now I'm going to turn the call over to Brian.

Hi, good morning, everyone. Thanks for joining the call today. I'd like to start by making some comments on corporate strategy to set the stage for the rest of the call. After that, I'll make some comments on the fourth quarter. I'll update you on the issues that are of interest to you that we talk about often and give you an outlook for the first quarter of this year, and then I'll introduce Rich.

Going to corporate strategy, I need to remind you that we have a combination of near-term tactical things going on that are very visible to you and then there are some longer range growth things that are also going on in parallel that are not so visible to you. And, I want to kind of put those into perspective.

During 2003, I spoke to many of you in a number of forums about where we make money and where we don't. I used a chart that we affectionately refer to as the turtle chart that depicted our cumulative aggregate earnings looking at the best products to the worst products. At sharp looked like the outline of a turtle shell rising very quickly on the left side; flattening out and then dropping off on the right side And the actions that we have been taking tactically are along the right side of that curve where earnings are being dragged down. That includes the actions we're taking in the bottom tier of our CASPI segment, but it includes actions that we have taken in other businesses as well.

I need to point out that we're a company that is in a transformation. We're transforming our portfolio, and we are very deliberately shrinking the company in places to get down to a core profitability, and we do that through restructuring, divesting, consolidating our businesses and product lines. Sometimes we're walking away deliberately from low margin businesses that won't make sense to us financially in the long term.

We are determined to improve our profitability so that we earn our right to grow, and that is our first and most immediate priority and the one we are working on, the one that's most visible to you.

Some examples of the things---actions we took in 2003: We've recently divested the accurate dispersions, color and product lines which were part of the bottom tier of CASPI. We also divested the high performance crystallin plastics product line. That was our specialty plastics product. Another specialty plastics business was our polyethylene color concentrate that were divested. You may not remember, but we had closed five CASPI sites, which is not insignificant, over the past year, and we've implemented a number of cost reduction actions throughout the company and other little minor consolidations that were not worth mentioning to you.

So these types of actions will continue in 2004 throughout the company and these are the things that position us to be more profitable and improve the balance sheet and earn us the right to grow.

Around the mid year time frame, I'll be speaking to you much more about these actions that are going on in parallel, these plans that are developing, to allow us to grow and grow very profitably into the future.

So turning to the fourth quarter, with that setting the stage, some of the things I said are reflected in our fourth quarter results. As you saw, the earnings per share 13 cents, which is a considerable improvement over what was a very tough fourth quarter in 2002. That reflects the actions that we are taking across the company. Sales revenue for the company improved by 9% both in the fourth quarter and for the year. This was primarily driven by price and currency.

As you know, the volume story was not one of our stronger points. Sales volume was pretty much flat, which is, you know, in part reflects the actions that we are taking.

A few issues that I know will come up in the q & a that I just want to comment on ahead of time: You're all interested in the progress on CASPI, and Richard Lorraine will take you through the progress of our offerings to divest and how we're doing in there. I'll then get to your [n-core] questions. I always do.

I should tell you that, you know, I'm going to say the same things to you in the past relative that it's not reflected -- the value of that ownership is not reflected in our stock rate. That bothers us. We've drawn some conclusions about our past [inaudible]; we're working the plan on that. And it's not something I'm going to comment on until we're done with.

Developing businesses and the spend on developing businesses is always a highlight in these conference calls; a source of questions. The focus typically goes to Sendian pretty quickly. I have to say that Sendian is making progress on their earnings and their revenue. They are becoming less of a feature in the spent of developing business money. They're rapidly approaching a zero effect on the developing business spend, and so the bulk of that money that we're spending there is going in other places to develop future options for the company.

The declining trend of spends will continue there in developing businesses. You saw a declining curve---a little bit of a bump in the fourth quarter. We expect that this year, 2004, our spend--this next spend--and the developing business area will be something south of $45 million. So that's a significant reduction from the 65 we had this year.

Turning to the first quarter, the actions we're taking to improve our profitability will result in better earnings throughout 2004. You see in the beginning of that here in the fourth quarter. We also have hopefully an improving economic environment. We all know that we have a head wind with raw material energy costs that continues at historically high levels and that puts pressure on our margins just as it did last year. That means that we turn our attention to pricing as we always do in this situation and when it is absolutely necessary to obtain the price increases that we need during this quarter and beyond in the year.

So taking all of that into account as we look at the quarter given all of these variables, we expect first quarter results to be in line with the current analyst mean estimate on the first call, which is 22 cents per share.

Now I'd like to introduce Rich Lorraine. This is his first conference call. We're just delighted to have Rich join our company. We have Rich on board, and he's been with us since late November of last year. And, I have to say it's one of the quickest handovers and getting settled into the job situations I think I've ever seen. He comes to us from Oxychem where he was Executive Vice President and Chief Financial Officer. He also spent considerable time in both financial and p & o rolls at ITT. He began his career with Westinghouse.

He's got a great, strong financial background, but he has also a high level of knowledge about the chemical industry, a lot of international experience, and he just brings a great background to our company. He's been a great addition to our team.

So with that, Rich, I'll turn it over to you to give some more details.

Thanks very much for the kind introduction, Brian. I'm very pleased to be here and looking forward to working with the team here at Eastman.

From what I've seen so far, this is a well-run company and we've got the will and the discipline and determination necessary for improving results. I'm personally looking forward to making a good contribution to what I expect will be marked improvement.

I also want to thank you, Brian, for letting me start the day with some very good news, which is the progress we've made on asbestos. We recently reached an agreement to resolve about 90% of the claims in Mississippi. This translates into over 80% of the overall asbestos claims against the company having been resolved.

The resolution of the claims is a great step forward for us, and the financial impact of this resolution is not material to the company. Before we get into q and a, you should know that because of the terms of the agreement being confidential, I won't be able to give you anything in the way of additional detail on that.

The next item I'd like to update you on the actions we're taking to improve the profitability of the bottom tier of the CASPI segment. The offering memorandum on those businesses was issued in the latter part of December. And I have to say, we've all been very encouraged by the number and quality of people that have expressed interest in the assets. We'll be working with these people over the next months, and right now, I can say we remain on schedule and we still target to complete these actions around mid year.

Moving on to cash, Eastman generated $244 million of cash from operations in 2003 compared with about 800 million in 2002. After considering all of the pluses and minuses of the noncash items, operating cash flow was down about $100 million.

The difference is primarily due to two additional major items. First, we made a contribution of 238 million to our U.S. defined pension plan in 2003. Looking ahead into 2004, we expect the contribution to be between 0 and 40 million and we really can't get much closer than that until we see what Congress does in establishing a pension discount rate for '04 and '05.

The other major item in the cash is working capital. We increase by about $120 million year on year, primarily driven by accounts receivable, which increased about 9% -- I'm sorry, revenues increased about 9% in the fourth quarter of '03 compared with the fourth quarter of '04, and that's what drove it up.

On capital expenditures at 230 million, we kept them well below depreciation and amortization in 2003 as we've maintained a tight focus and cash discipline.

In 2004, again, we are focused on the commitment to keep Cap Ex below depreciation and amortization. But we do think it's going to increase over the '03 levels. Depreciation and amortization is expected to decline by approximately $30 million in 2004 compared with 2003.

Moving on to net debt, we had an increase in 2003 of $55 million compared with year end 2002. This is in line with our previous expectations and we feel it's pretty good performance considering the pension contribution we made during the year and the increase in the working capital.

You'll see that cash and cash equivalence ended the year at over $550 million. This is the result of the two $250 million bond offerings we did during the year: One in June and the other in November. And these offerings prepared us for the $500 million of debt which matured in January of 2004, and obviously was successfully refinanced. We expect interest expense to decrease in 2004 as the refinancing was done at lower net interest rates.

On the flip side of that, we expect pension and other post employment benefit expenses to increase in 2004 by about $15 million also due to assumptions on lower interest rates going forward.

Lastly, we expect 2004 to be a stronger cash flow year due to improving operating cash flow and of course potential divestiture proceeds. As I said, we won't have a significant pension contribution during the year. Number one priority for cash continues to be: debt paydown. We expect to make significant progress on this front this year. With that, let me turn it over to Greg.

Thanks, Rich. Yesterday afternoon, the Eastman Chemical news release announcing fourth quarter and full year 2003 results was 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 the fourth quarter 2003, fourth quarter 2002 and full year 2003 and 2002.

Sales revenue for fourth quarter 2003 was 1.4 billion, an increase of 9% compared with fourth quarter 2002 primarily due to increased selling prices, favorable foreign currency exchange rates, and higher sales volumes. Full year 2003 versus full year 2002, revenue increased due primarily to higher selling prices and favorable foreign currency exchange rates.

Costs of sales for fourth quarter 2003 was 1.2 billion, an increase of 7% compared with fourth quarter 2002. Full year 2003 versus 2002, cost of sales increased 10%. In both cases, the increase was due primarily to higher raw material and energy costs partially offset by cost reductions efforts.

Selling and general administrative costs for the fourth quarter 2003 were 106 million compared with 107 million for fourth quarter 2002. Full-year 2003 compared with full year 2002, S&GA costs were slightly higher as additional cost related to our growth initiatives were mostly offset by cost control efforts.

Research and development costs were 44 million in fourth quarter 2003 compared with 41 million in fourth quarter 2002. Full-year 2003 are R&D cost 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 S&GA and R&D at or below 10% of sales revenue. For the full year 2003, these costs were 10.1% of sales revenue.

For fourth quarter 2003, the company reported operating earnings of 39 million compared with an operating loss of 11 million in fourth quarter 2002. Fourth quarter 2003 operating earnings included asset impairments and restructuring charges of 9 million and 13 million of other operating income from the sale of the colored product lines and related assets in the CASPI segment while the fourth quarter 2002 operating loss included 6 million of asset impairments and restructuring charges.

Operating results increased year-over-year as higher selling prices, cost reduction efforts, and favorable foreign currency exchange rates were partially offset by higher raw material and energy costs. Full year 2003 operating results were a loss of 267 million compared with operating earnings of 208 million for full year 2002.

2003 operating results included asset impairments and restructuring charges of 489 million, Good Will impairments of 34 million, and 33 million of other operating income from the sale of the crystallin plastics and [indiscernible] product lines and related assets; while 2002 operating earnings included 5 million of asset impairments and restructuring charges.

Excluding these items for both periods, operating earnings increased as higher selling prices, cost reduction efforts, and favorable foreign currency exchange rates were partially offset by higher raw material and energy costs.

Interest expense net increased slightly in fourth quarter 2003 compared with the year ago period and in 2003 compared with 2002 due to two 250 million debt offerings in 2003 in anticipation of the maturity of the 500 million of six and three-eighth percent notes in January 2004.

Other income net was flat compared with other income net for fourth quarter 2002. Other income net for full year 2003 was 10 million compared with other charges net of 2 million for 2002. The improvement year-over-year is largely related to the positive impact of foreign currency exchange rates.

The provision for income taxes for fourth quarter and full year 2003 versus the comparable periods in 2002 reflect the specific tax treatment of asset impairments and restructuring charges and gains on the sale of certain assets. In addition, the provision from income taxes continues to be favorably impacted by the reduction in international taxes related to the company's divisional structure. And additionally, tax benefits from the extraterritorial income exclusive. For fourth quarter 2003 the company reported earnings of 13 cents per diluted share compared with a loss of 16 cents per diluted share for fourth quarter 2002.

Excluding asset impairments and restructuring charges for both periods and other operating income from the sale of certain assets for fourth quarter 2003, earnings per diluted share for fourth quarter 2003 were 13 cents compared with a loss per diluted share of twelve cents in fourth quarter 2002.

For the year 2003, Eastman reported a loss of $3.50 per share compared with earnings of 79 cents per share for full year 2002. Excluding asset impairments and restructuring charges and the cumulative effect of changes in accounting principle for both periods and good will impairments and other operating income from the sale of certain assets for 2003, earnings per share for 2003 were $1.08 compared with $1.05 for 2002.

Table two: Other Sales Information. Fourth quarter 2003 sales revenue increased in all regions when compared with fourth quarter 2002. Sales revenue in the Europe, Middle East, and Africa region increased 18% due primarily to favorable foreign currency exchange rates.

For the North America region, sales revenue increased 8% primarily reflecting increased sales volume and higher selling prices. In Latin America, sales revenue increased 6% as higher selling prices and favorable foreign currency exchange rates were partially offset by slightly lower volume.

For Asia Pacific, sales revenue was slightly increased with the year ago period as improved product mix, favorable foreign currency exchange rates and higher selling prices were offset by lower sales volumes. The lower volumes primarily resulted from lower glacial acidic acid volumes due to a temporary supply agreement in the Asia Pacific region.

Full year 2003 compared with full year 2002: Sales revenue increased in all regions. Sales revenue in the Europe, Middle East and Africa region increased 17% due primarily to favorable foreign currency exchange rates. Revenue increased by 9% in the North American region due primarily to increased selling prices. Revenue in the Latin America region increased 3% as higher selling prices more than offset lower sales volume. Asia Pacific increased slightly as higher selling prices and improved product mix were mostly offset by lower sales volumes due primarily to the global acidic acid spot sales.

Table three: Operating Results, Eastman Division. For fourth quarter 2003 versus fourth quart 2002, operating results for Eastman division increased by 24 million.

Excluding asset impairments and restructuring charges in both periods and other operating income from the sale of certain assets in fourth quarter 2003, operating earnings increased due to continued cost reduction efforts, favorable foreign currency exchange rates, and higher selling prices that were partially offset by higher raw material and energy costs.

Full year 2003 compared with 2002, operating results declined by 490 million. Excluding asset impairments and restructuring charges in both periods and Good Will impairments and other operating income from the sale of certain assets for 2003, operating results declined slightly due to higher raw material and energy costs that were mostly offset by higher selling prices, cost reduction efforts, and favorable foreign currency exchange rates.

CASPI segment operating results increased by 32 million in fourth quarter 2003 compared with fourth quarter 2002. Excluding asset impairments and restructuring charges in both periods and other operating income from the sale of certain assets in fourth quarter 2003, operating results improved due to continued cost reduction efforts, higher selling prices, and favorable foreign currency exchange rates that were partially offset by higher raw material energy costs.

Full year 2003 compared with full year 2002: CASPI operating results declined by 416 million. Excluding asset impairments and restructuring charges in both years and Good Will impairment and other operating income from the sale of certain assets in 2003. operating earnings declined due to higher raw material and energy costs and lower sales volumes that were partially offset by cost reduction efforts and favorable foreign currency exchange rates.

The Performance Chemicals and Intermediate Segments operating results declined by 14 million in fourth quarter 2003 compared with fourth quarter 2002. Excluding asset impairments and restructuring charge in fourth quarter 2003 and a credit related to previously recognized restructuring carriage charges in 2002, operating results declined due to higher raw material and energy costs and increased research and development expenditures.

Full year 2003 compared with full year 2002: PCI operating results declined by 103 million. Excluding asset impairments and restructuring charges in 2003 and the credit in 2002, operating earnings declined slightly as higher raw material and energy costs were mostly offset by cost reduction efforts and higher selling prices.

Specialty plastic segments operating earnings increased by 6 million in fourth quarter 2003 compared with fourth quarter 2002 due primarily to cost reduction efforts and favorable foreign currency exchange rates that were partially offset by higher raw material and energy costs.

Full year 2003 compared with full year 2002: Operating earnings increased by 29 million. Excluding an asset impairments and restructuring charge and other operating income from the sale of certain assets, operating earnings increased in 2003 due to cost reduction efforts and favorable foreign currency exchange rates that were partially offset by higher raw material and energy costs.

The Voridian division operating results: Voridian division earnings from operations for fourth quarter 2003 increased by 26 million compared with fourth quarter 2002.

Excluding asset impairments and restructuring charges for both periods, operating earnings increased due to lower operating costs, higher selling prices, and increased sales volumes that were partially offset by higher raw material and energy costs.

Full year 2003 compared with full year 2002: Operating earnings increased by 19 million. Excluding asset impairments and restructuring charges for both years, operating earnings increased as higher selling prices, cost reduction efforts, and favorable foreign currency exchange rates were partially offset by higher raw material and energy costs.

2003 operating earnings included a 14 million gain from an insurance settlement related to the previously announced 2002 operational disruptions while 2002 operating earnings were negatively impacted by approximately 39 million in costs relate to the operational disruptions.

Polymer segment operating results improved by 20 million in the fourth quarter 2003 compared with fourth quarter 2002. Excluding an asset impairment and restructuring charge in both periods, operating earnings increased due to higher selling prices, higher sales volume, particularly for polyethylene, and cost reduction efforts that were partially offset by higher raw materials and energy costs.

Fourth quarter 2002 operating results also include approximately 11 million in costs related to the operation operational disruptions.

Full year 2003 operating earnings increased by 27 million compared with 2002. Excluding asset impairments and restructuring charges for both periods, operating earnings improved due to improved conditions in the polyethylene market and cost reduction efforts that were partially offset by higher raw material energy costs and the effects of added P.E.T capacity in North America.

2002 results also include approximately 39 million in costs related to the operational disruptions.

Fibrous segment operating earnings for fourth quarter 2003 increased by 6 million compared with fourth quarter 2002 due to higher sales volume, including increased sales volume for [indiscernible] in the Asia Pacific region and cost reduction efforts.

Full year 2003 operating earnings declined by 8 million compared with 2002 in line with the company's previously communicated expectations. Due to lower demand for [acetate-toe] principally in North America, partially offset outside of North America. Developing businesses division: Developing businesses operating results improved both in fourth quarter 2003 compared with fourth quarter 2002, and for full year 2003 compared with 2002. The improvement is due primarily to the performance of Sindian corporation, a [company logistics subsidiary] partially offset by higher costs associated with other growth initiatives.

Table 8: Cash Flow. The company generated 244 million in cash from operations in 2003. During 2003, the company contributed 238 million to its U.S. defined benefit pension plans. Net debt defined as total borrowings less cash and cash equivalents, at the end of 2003, was 55 million above the net debt at the end of 2002, which is in line with our previously communicated expectation. Additional outlet for 2004: We expect that our effective tax rate will be between 30 and 33% in 2004. This expectation is in part dependent upon the continuation of tax benefits from the extra-territorial income exclusion continuing for full year 2004. We also expect net interest expense of 2004 to be slightly below 2003 levels. 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 compute in the order that you signal and if you find that 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 are on a speaker phone, please make sure your mute button is disengaged so your signal can reach our equipment. Again, if you would like to ask a question, press the star key followed by the digit one. We'll pause for just a moment to assemble the question roster. And for our first question, we go to Frank Mitsch with [Fulcrum Global Partners].

Hey, Brian, I missed Jim's weather forecast he typically does on these calls. What's the weather right now in Kingsport?

The weather is partly cloudy but predicted to improve.

Terrific. That sounds kind of like Eastman. Is that what we should be reading into that?

Jim was always very metaphorical, wasn't he?

Yes. One thing that struck me in respect to developing business is that your sales ticked down 4Q from 3Q, and I guess my sense was the Sendian business was actually expected to continue to move up. Could you clarify that and then furthermore, I guess you said that the spend, can I take your comment to spend meaning that the loss in '04 is expected to be 45 million in that business?

Yes, south of 45, but you have a correct interpretation. The operating loss should drop to something south of 45. I'm not satisfied with the growth of Sendian sales. That's because we only -- they only take on profitable new customers and then have to implement those new customers. Sometimes that's chunky so that is a developing story there, Frank, but the point is, they are not a huge part of that developing business spend anymore. They are rapidly approaching zero. There's some chunkiness in the numbers. Nothing's linear there, so I would not take too much on the number that third to fourth quarter number that you are looking at.

Okay. Then on the PCI business, the profits, it looks like it was very significantly impacted by the R&D project---is that correct, and can you offer some further comment on the project and when would you anticipate that loss to go away?

Are you thinking about Performance Chemicals?

Yeah, the PCI business.

Yeah.

The performance of PCI is largely an artifact of raw material pricing and product mix more anything else you are thinking of there, Frank. This is a business that has been challenged for a long time. We are looking at it very carefully. People ask me, "Are we going to do some kind of a CASPI-like thing relative to PCI?"

It's not possible to do that in PCI because everything they do, all their technologies and products and sites are integral to everything else we do, so we're looking at kind of a comprehensive package that improve their performance in addition to leverage, to an improving raw materials cycle that's coming up here, but no, the numbers you saw in PCI are largely driven by raw materials rising faster than prices and we have to get the lag effect going forward with rising prices.

But just specific to the R&D project that's something that was specific to the fourth quarter, Frank, so you wouldn't see that carried into the first quarter.

Great. Thank you.

For our next question we go to P.J. Juvekar with Smith Barney.

Good morning. I'm looking at your Asia and Latin America results. And you mentioned about some acidic acid contract. It looks like you are the only company losing volumes in most regions. Maybe you can talk about that a little bit.

Yeah, actually what's not so visible to you is the profitability in those regions has been increasing for us. That's why I wanted to set the stage early on in my corporate strategy comments that as we go through this transformation, we are very deliberately shrinking in some ways. Some of those you see in Asia Pacific and Latin America.

Asia's an example where we had two stories there. We had our profitable core products which, by the way, are growing nicely especially in earnings, and doing quite well. We had a bunch of stuff that we used to fill our capacity utilization like glacial acidic acid, like solvents, like alcohols--and we walked away from some of those this year in favor of other choices.

So that's largely what you are seeing there. Your point is still well taken, P. J. I am not satisfied with the overall Asia Pacific strategy we have. Actually, Latin America is moving along pretty well. Asia Pacific is one of the focal points in our corporate strategy discussion, and we'll have more comments on that down the road. Your dissatisfaction with that matches mine. We need to have a rising trajectory there and I expect that we will.

And just quickly. One more question on SG&A. For the total year, SG&A was up with the initiative to cut costs. So why was SG&A up in 2003 over 2002?

There's more going on there than just how many people you have. I should say first of all we start 2004 with about 1,000 fewer people than we started 2003 with, which is about a 5% reduction. Almost all of that was on the SGA side of the house. We benchmark ourselves, we finished the year about -- our overhead--our SG&A, R&D summed up to something about 10% of sales. We benchmark ourselves against 13 other peers. There were only four of the 13 that had lower numbers than we did on the ratio of percentage of sales.

Those four that were low are than us were either significantly larger like a Dow chemical company or they were significantly less complicated companies just making a few products. So we're at neither extreme . We're neither the lowest as the ratio nor are we at the highest. We always walk this line between investing to create a future for ourselves and then the other extreme is stripping it down so you can barely run the stuff you have right now. I'm trying to walk that line, P.J.

The rise that you see there, part of that's -- we bury some developing business kinds of spends into the SGA line, and we had expenditures there. Like I said, we started the year with about 1,000 fewer people in the company. The next big nut there, by the way, as we start to separate the third tier of CASPI, we take out something on the order of 10% of sales for the company. I'm committed to keeping the overall ratio of overhead in the neighborhood of 10%.

So if you take out 10% of the sales and I'm going to keep the ratio, that means there is another big nut of overhead that has to come along with that separation of the bottom tier of CASPI. Again, our timing for that is somewhere around mid year. So the beat goes on. We're continuing to work on that.

Is that the goal, 10% of sales?

It's the interim goal. I'm not sure it is a terminal goal. The question,how do you invest that 10%? Do you invest it to create a good future for yourselves? An interesting observation, you might want to look at companies that look at the overhead ratios and see which ones are the most and the least profitable. There's not a great correlation that the cheapest companies are always the most profitable so we're trying to invest our overhead wisely.

Okay. Thank you.

And for our next question, we go to Duffy Fischer with Goldman Sachs.

Yes, good morning. Two questions. The first--good news on the asbestos front. I realize you can't talk about, you know, the deal that was done, but if you look at the mix of asbestos claims that existed before, you know, asbestosis, mesothelioma, et cetera, and you look at the mix of claims that are remaining, is that mix roughly the same?

No, it's not, Duffy. There is a big chunk of what's remaining that is premises cases. So we dramatically reduced any of the product related cases. I should say that the disease mix that was always there was never an impressive disease mix of any kind there. I don't have any data on that, but I think the thing you should focus on maybe is that we eliminated a large percentage of the product related cases. Now we have a healthy mix between premises and product and we're down to something, I guess in the neighborhood of 2500 claims, something like that.

Excellent. And then the second question: P.E.T., we've had some announcements or some rumors that people are going to build. If you step back one year and look at what your projections were for capacity additions, you know this year and next year in P.E.T. and look at that number today, has that number, you know, risen?

I don't think so, Duffy. We anticipated for sometime the M&G and DAC expansions that occurred last year. We had speculation on timing around those. The timing was a little earlier than we had expected.

M&G may be doing some debottlenecking which is relatively small compared to the size of the marketplace, but we would -- I guess, not only our estimation but the estimation of industry analysts that follow this industry is that demand will rise faster than capacity is added, and that should improve the overall margins---I guess I'm really speaking about North America where we make most of our money. Actually, the European situation is getting a little better as well because of the anti-dumping actions taken by the European union. That is improving the industry structure there as well.

Great. Thanks, fellas.

We go next to Andrew Cash with UBS.

Hi, Brian, Rich and Greg.

Hey.

Brian, you mentioned earning the right to grow profitably. That's a very interesting comment. Are you prepared or can you describe for us, you know, how we might see earning the right to grow expressed on in terms of financial terms?

Measures? Absolutely, I can. What I think of in conversations that I've had in analyst settings is we talk about kind of a minimum earnings level that is steady earnings level. I think the peak of the turtle shot was somewhere in the neighborhood of $3 a share getting to something that looks like that or north of that will be one of the measures you should look for.

Delevering the company through debt paydowns because of operating cash flow and divestiture proceeds would be another measure that you should look for.

Then the third thing you should look for is a credible story of how we're going to spend your money in the future on things that you look at and you say, you know that sounds like Eastman, it sounds like stuff you know how to do. It doesn't sound like you've gone nuts. And now you have enough dry powder to go chase those things. That's the three things we want to put together.

I'm really staying away from the conversation around some of the things we want to do in the future because I want to keep you focused on that tactical things were are doing to improve our situation and get us into that position. And then I can start the conversation mid year about, okay, these are some of the ideas that we have. By the way, none of these are going to be "bet the farm," go down one road and bet the farm with a bunch of money but we're going to start laying those out in front of you in the context of how we have prepared ourselves. With that, you get to make a fair judgment about how do you like this story and do you want to invest in this story.

Is it fair to say that before, you know, Eastman gets, you know, to $3 level of earnings, you won't be making large investments or acquisitions before you achieve that $3 level, base level?

Yes, that's why again we're committing to keep the Cap Ex below D&A as part of the measure of that. We may make a few acquisitions long the way that are small. I guess we're focusing these days more on technology kind of things that fill the gap someplace in the market need, but they are not going to show up as any kind a big thing. The net paydown story also tells you we can't spend a ton of money otherwise we wouldn't be able to do that.

That's fine. Two other small questions if I could. Could you give us, you know a rough idea of what the company's first quarter cost assumption will be for propane?

And the second and last question I have relates to the 1,000 fewer people. Is that on an ongoing Eastman basis or does that include the benefit of asset divestitures?

No, that has nothing to do with divestitures but has a little to do with the shutdown.

Ongoing Eastman?

Yeah that's right. And some in the third year CASPI as well, but the bigger chunk comes later when we separate out that piece. The first part of your question again, Andy?

Propane.

Propane, you know, large percentage, maybe 40, 50% of demand is for home heating. So you know what's happening right now. We expected them to be high and they are high. At the same time, propylene is kind of structurally tightening. And so that gives you room for increasing prices. What we're looking forward to here, Andy, is the time when the home heating demands for propane start to drop off with the winter passing, and that price starts to decline. But, the structural tightening of propylene marches on and that starts to create the marching story for PCI. We're not there yet because those two have both been going in lock step. Propane's just been way up there. We anticipate it for the most part.

So you can't actually give us, you know, a rough idea of what level of cause?

Where it is is about where we guessed it would be. It's not radically different than we guessed it. This is deja vu all over again, compared to last winter; it's just happening earlier than last winter.

Okay. Thank you very much.

Sure.

We go next to Jeff Dukakis with JP Morgan.

Hi, Jeff.

Hi. A few questions. The first is that I thought that the idea with Sendian was to sort of cut its losses to zero by the end of 2004. Have you checked -- is that a correct recollection? And, you know, have you changed your stance on Sendian in terms of holding on to it for a longer period of time because you think you can extract value that way?

Your recollection is exactly right, Jeff, and we miss it by a hair. Didn't quite get there. In terms of the forward position on that, we're evaluating those options at this moment. And the other indication I gave to you is this is the year you decide what you are going to do relative to that asset. That is exactly still the case. This is the year we decide what we're going to do on that. We're in those deliberations absolutely right now. But the objective to get to zero by the end of the year is exactly as you remember it, and we missed it by a hair. Okay?

Second thing is of the thousand people who left Eastman, can you give me kind of a rough idea of the timing through the various quarters of 2003?

I'm not sure. I think I would have to be doing this on a real rough basis, Jeff, but I would say that of probably half of that happened as we were doing the annual business planning process. The annual business planning process where we set lower targets for everybody. They had to get that done before we started the new year. So I'm guessing it was retirements that were driven by the kind of numbers that people were seeing in lump sums and things. So I would say it's probably the majority of that happens a lot in the second half or maybe a big chunk of it in the fourth quarter.

Yeah, I agree with that.

Some of the CASPI site shutdowns were driving some other parts of that. I'd say, working off my memory, probably half to two-thirds of that happened in the latter part of the third quarter or the first part of the fourth quarter.

Last question. Can you just give us sort of your view of how you expect the P.E.T. market to shape up in 2004? You know, there are all kinds of controversies about [paraxylene] and [ethylene glycol] and capacity coming on and demand---can you sort of speak about your view of your business in the industry in general in 2004?

Sure, Jeff. This business has been and continues to be a very regional business. I know there are speculations that are offered out there about what could break through the regionally of that, but all of the dynamics we see continue to say it is a regional business, and we have to describe it that way.

As an example, I think in 2003, we estimate that Chinese imports from China and into North America was less than 1% of U.S. demand. And we don't see anything in the near term that's changing that kind of a situation. The reason is the Asians have to buy paraxylene on a spot base from North America, bring it into Asia, have to convert it and bring it back again. Then they have the logistical hurdle it to get it into the States. They have to land in San Diego, get out of containers into rail cars, get to St. Louis and all of that tends to insulate the region of North America.

Europe is a different story. Lots of competitors. As I have said before, since Marco Polo, people have been trekking from Asia to Europe, so there is a lot of flow of material, but the European Union has established anti-dumping duties to deal with that.

My view is that in North America, there will not be significant incursions at our border. The weaker dollar actually helps that situation somewhat. The domestic supply demand situation is absorbing the capacity that was brought on last year. Rising capacity utilization should occur as the market grows, and so that will be of help.

On the raw materials, we do expect rising paraxylene rising M.E.G. We have pricing increases out there now to deal with that. We have, I guess 6 going into a 3% price increase that happened in January. It rolled back a little bit. Now a March 6 cent price increase out there that we feel very good about. This is an industry that needs repair in its margins.

It also needs to recover those raw material costs and we feel quite good about the likelihood of getting that price increase out there for March. We would expect prices to rise reflecting the raw materials.

The supply demand situation is not expected to be disrupted in any way either by incursions at the border or by new capacity in North America. I think there are debottlenecks that are relatively small that are out there for the future, but they don't have the effect we saw this past year with a large plant in Mexico and the other [indiscernible] on top of that.

Thank you very much.

Uh-huh.

For our next question, we go to Kevin McCarthy with Banc of America Security.

Good morning, Brian. I had a question for you on fibers. Your primary competitor [indiscernible] is being acquired. I understand there is a smaller competitor called the Cordis is talking about selling assets. Is more consolidation needed in that industry? And perhaps you can elaborate on any meaningful changes you see in the competitive landscape over the next couple of years if two of the top six players change hands here.

That is an interesting question because we talk about that a lot. Your observations are correct. There is a new owner out there. That's very oriented towards being profitable every day to pay off debt. We are aware of the statements that Cordis has made.

You ask if there is an industry that should have more consolidation. When you ask people like us, the answer is always yes, on any industry you ever choose, should it be more consolidated? Absolutely.

The question of how you can do that legally----there are limitations. We have our own [indiscernible] limits here in North American the Europeans have their own [indiscernible] limits and there is a limit to how much further consolidation you can see between Europe and North America in the fiber business. There are a few combinations that allow that to occur.

The longer term situation is we do know there is going to be capacity additions in Asia where they have growth. That may or may not be a disruption in worldwide supply demand because we don't know, you know, there are speculations on what might happen in some of the other locations where it's made in the world. While the addition in Asia will definitely have an effect on the Asian situation, we're not sure how it will affect supply and demand. It's not certain that will create an excess of supply in the world. We intend to be strong in all of the region where's we are strong now.

We intend to be strong in all the regions that we are now. We intend to be strong in North America, strong in Europe, strong in Asia. Our primary competitive advantage is we believe we have the lowest cost flake in the world, and it's because of our vertical integration to coal here in Kingsport. Our future strategy is to continue to project ourselves in all of the regions of the world, especially in place where's we can get some growth and to always exploit that advantage that we have of the lowest cost flake in the world.

That's helpful. Rich, welcome aboard first of all. Two questions for you. You commented on the income statement effects from, you know, from pension.

I was wondering if you could also comment on the funded status of the plan. You put 238 million cash in capital markets have cooperated over the past year and it sounds like maybe lowered a discount rate. Maybe you could update us on the status there. Then on capital expenditures, what do you see over the next three years and what are your thoughts on maintenance Cap Ex for Eastman?

Okay. Going back to the pension. We actually funded slightly more than the required amount. We were very pleased with the investment performance during the year, so that was a strong positive. Looking ahead as I said, we see 0 to 40 for this year depending on where the interest rate goes in Congress.

And we're looking very hard at all of the variables that go into the pension liability calculations and we do have some disclosures we are going to be making into 10 k to try to get our hands around that. But for right now, I would say we're fully funded, you know, for now, depending on where the interest rate goes and should have relatively modest increases in '04 if any and '05 is still pretty much unknown.

In terms of Cap Ex, we feel like we're at the right level with maintenance and replacement. EH&S items----obviously we've been focused very intently on investing, you know, where appropriate and where necessary and cutting where it's not necessary.

So, you know, I'd sum up and say we feel comfortable with our level of maintenance replacement health/safety, et cetera, and obviously everything legally required.

On other Cap Ex, where we may look at some volume opportunities or cost improvement opportunities, we have a very rigorous process that we go through, and only pick out the very best projects to invest in. We're being very, very critical and that's, you know, you saw it in 2003, the Cap Ex was very low.

If I look out three years is about 250 to 300 million an appropriate level for Eastman over the intermediate term?

I think if you think about a base level for maintenance replacement, EH&S, you know, I think that's probably, you know, a fair kind of a level. But as Brian very well described a few minutes ago as we pay down debt, as we earn our right to grow, we will be making selective investments in other areas. So I would look for the Cap Ex to increase as we have the financial flexibility to do that and as the ideas that are generated warrant investment.

Got it. Thanks very much.

For our next question, we go to John Roberts with Buckingham Research.

Good morning, guys.

Good morning.

Some of the new capacity that's been added in P.E.T. in North America, I think,in anticipation of the ramp in the 12 ounce container. Do you think that, if it happens, is going to initially cannibalize some of the 16 ounce business or do you think the industry's going to be able to take share from cans without impacting 16 ounce?

Boy, you've been thinking about this, John. I'm impressed with that question. I'm so impressed I'm not sure I can answer it.

The -- our belief is that we're going to grow volume this year, and in spite of the fact that we have to raise prices, we believe we're going to grow volume and grow volume well this year. We don't have a cannibalization effect hurting us, if that's what you were trying to lead to in the expectation of that shift. There's still, as you know, aluminum amount there. This 12 ounce, this targeting has got aluminum square in the cross hairs.

So it's not clear to me the brand owners, I doubt that they've given us the kind of insight that you are talking about. Maybe they have and I just don't have them. I doubt that they are planning on cannibal -- if you say cannibalizing 16 versus 12, you also have to say that they are selling less fluid. And I don't think that's their plan. I think their plan is to sell more fluid, and the surface area to volume is greater than 16. You sell more P.E.T. when you do that.

Okay. Over the past several years, the P.E.T. business has had modest recoveries, and then it falls back. Outside the U.S., there's still a lot of modern polyester fiber capacity. In the U.S., you know, we've all been surprised to see modern polyester fiber capacity go to P.E.T. Do you think you have a recovery outside the U.S. where you still have a modern polyester fiber capacity that you have to the fiber business recover as well, you know, so in Asia or Latin America or other places, do we have to have fiber recovery in order to have those P.E.T. markets eventually recover as well?

Yeah, it doesn't hurt is the answer, John. As you know, the assets are not 100% fungible there. If you have been making fiber, you have to spend some money to convert it over to make a P.E.T. If they had any additives in there, like optical brighteners or something, it's hard to pull all that out. So once you flip, you don't flip back and forth. It's not like this week you will make fibers it, next week you will make P.E.T.

So once you make a decision, you have to go whole hog so that conversion threat you are talking about is usually done with the foresight the fibers market will be lousy for a long time. And so my foresight is I need to convert fiber over to P.E.T. With the rising fiber market, you have less of that thought out there. It absolutely helps the situation.

Thank you.

We'll make the next question the last question, please.

With our last question, we go to Nancy Traub with Credit Suisse First Boston.

Good morning. I have a quick question about foreign exchange. You mentioned how it impacted affected the top line. I wondered how it affected the bottom line.

Foreign exchange helped our bottom line. The top line, of course, it helped a lot more, but we've got quite a few operations where the costs are doe nominated in foreign currencies, so I'd say, you know there is a much more modest net impact than there is on the top line impact.

Sure. Could you be a little more specific?

I'm not sure we've done that before, Nancy. Let's think about your question and if there's any response we can make, we'll make it to everybody in some way, but we usually don't get into the details of that.

Okay, thanks.

Yeah.

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

Thanks very much. Thank you for being with us today. If you would like to listen to this conference call replay, please use the phone number and dial-in code that is in the press release. Thank you for your interest in Eastman.

And ladies and gentlemen, that does conclude today's Eastman Chemical company fourth quarter, year end financial results conference call. We do appreciate your participation and you may disconnect at this time.