伊士曼化學 (EMN) 2004 Q1 法說會逐字稿

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

Thank you, Matt and good morning everyone and thanks for joining us. 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 second 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 first quarter 2004 financial results news release on our Web site at Eastman.com and in our filings with the Securities and Exchange Commission including the Form 10-K filed for 2003 and the Form 10-Q filed for, to be filed for first quarter 2004.

Now let me turn the call over to Brian.

Well, good morning, everybody. Thanks for joining the call.

Weather forecast here in Kingsport is, it's a sunny, beautiful day, and we expect more sunny beautiful days ahead of us here.

I want to talk to you in four pieces here. We have some highlights from the first quarter I want to address first. I want to touch on some issues that are always asked in these calls that are of interest to investors. Give you some comments on corporate strategy and finally I'll close with the outlook and turn it over to Rich.

On the highlights for this first quarter, as first quarters go this was a pretty good one to get the year started. And if nothing drastic happens in the economy or in the business environment I'm pretty confident we'll have more good quarters coming after this one.

Our earnings of 52 cents per share excluding the restructuring and separation costs clearly reflect that we're making good progress in improving the profitability of the company. We are seeing the combined impacts of strengthening economic conditions and the actions that we have taken internally to improve our earnings, and, and this is important, we are making some very deliberate choices to emphasize or de-emphasize certain products in our portfolio to improve the profitability of the mix.

So as a result the sales volumes in some areas did not grow as much as they would have if we had not managed the sales process so closely. We are, however, experiencing very good volume growth in our preferred products.

Let me remind you of a few of the actions we took in 2003 that get us to this point. We divested three businesses. One in our CASPI segment and two in Specialty Plastics.

We closed five CASPI sites in an effort to move production to more cost-efficient facilities and to discontinue production where returns were never going to be acceptable. And we reduced the number of full-time equivalent employees by over 1000, which is about 5% of the total employee population. So these and many other actions have created these improved results.

We set some records this quarter. Our first quarter sales revenue was the strongest in the company's history, surpassing our second best revenue quarter by about 8% and that's an unusual thing to see in a first quarter.

Our sales volume was also a quarterly record for the company. Our gross margin improved by almost 200 basis points compared with the first quarter of 2003 even as raw material and energy costs increased by more than 10% year-over-year.

Five out of six of our segments showed year-over-year improvement in operating results excluding the charges, so that's great news but with that said we are still not yet setting records for profitability or shareholder equity growth so the champagne is staying in the fridge for now. We recognize there's much more work to be done to achieve the profitability we need to earn the right to grow.

You see some evidence of this continuing work in the actions we've taken so far this year. For instance, we are closing our Hartlepool, England, manufacturing facility to strengthen out global copolyester manufacturing structure.

The Polymers segment has announced a plan to reduce their labor costs without reducing capacity so that they can position for long-term growth. And they're doing this of course in response to the added capacity in North America and the rising raw material costs which together have created delays in getting the prices we need and deserve.

We continue to manage labor costs. We have announced a voluntary separation plan that likely will be followed by an involuntary separation after to meet our 2005 labor targets. You've actually seen some charges related to labor reduction in the first quarter here.

And we are continuing our focus on achieving process improvements throughout the company, and these are collections of many projects that in the aggregate make a significant contribution to cost reduction.

Now let me turn to the issue that I'm often asked about in these sessions, always asked about CASPI. On the subject of CASPI, there was a great improvement there which we can talk about later on. The CASPI divestitures and restructuring is something I'll let Rich Lorraine give you an update on as I turn it over to him. We're making very good progress there.

Regarding Genencor, I'm always asked about that. I'll remind you that we view our stake in Genencor as a financial asset. We have reached conclusions about the options we want to pursue there and we're pursuing those now.

We continue to believe that the value of our stake in Genencor is not reflected in our stock price, and beyond that it really isn't appropriate for me to comment because Genencor is a public company, and when it is appropriate for me to say something I sure will.

Regarding developing businesses, most of the developing business segment is on track and I'm pleased with the progress we're making in some of the new businesses and technologies that could be meaningful to us in the future.

One exception to this is in Cendian, our logistics subsidiary where we had some additional charges this quarter. We've made a number of management changes at Cendian, including their CEO and we expect better results beginning next quarter.

Turning to the subject of corporate strategy now.

Before I start that conversation, I want to make sure that we have set the stage appropriately regarding the baseline performance that you should think of when you think about our company. In my mind I start with three segments that are really very stable and very profitable.

The first in my mind is the so-called top two tiers of CASPI and specifically the adhesive and coatings that are in those top two tiers. You're starting to see the power of the earnings generation in those two areas because the earnings this quarter reflect our work in large part to reduce the drag that the bottom tier of CASPI has had and so the other part is starting to shine through.

That is a very stable and actually growing piece of our business that you should think of as a 10 to 15% kind of a operating margin piece, and it will be on the order of $1 billion when we're all done with the work.

Specialty Plastics is something you see has improved. That's a combination of internal and external factors. And that's again, a pretty stable segment going forward with a 10 to 15% kind of operating margin.

And you all know about fibers. The story on fibers is always that it's pretty chunky quarter-to-quarter but on an annual basis it stays very stable.

You start with those three that generate the bulk of out earnings and then we have significant cyclicality in our Performance Chemicals and Intermediates.

The story there is it's they're leveraged to propylene and ethylene cycle. Maybe more so propylene. And they see a rising trend in their future due to the shortness of propylene and the lack of investment over the last seven years in those kinds of intermediates.

And in the Polymers segment, we have cyclicality, specifically PET. And it has its own cycle based on a number of factors we've talked about but we're making a number of structural improvements there to improve our profitability so I start with that, then I layer on some tactical things that we have mentioned.

These tactical things have to do with divestitures or cost reduction programs, labor reduction, et cetera, and with those actions alone I think of Eastman as a company that should have an earnings rate of around $3 per share with lower debt as we go into 2005. Then I start to layer on top of that the work we're doing now to increase our presence in some markets where we are a medium or small player today.

Our work is turning up some very interesting opportunities that I look forward to discussing with you at the right time. A common theme that is emerging in this work is the better integration of our existing technologies combined with some newly developed or acquired technologies and applying those in different ways in the marketplace.

This is a very customer and market-driven approach that reaches across our entire company. Examples of the markets that are interesting to us include some segments of electronics, building and construction, packaging, energy, health and personal care, and there's a blur between those two markets, and others.

And, of course, we're always looking at the faster growing sub regions in the world as another overlay on top of that. In most cases we already have a presence in these markets or regions already, but we're looking to expand our presence very selectively both taking advantage of the growth in the market itself but also by the displacements that are happening of products inside those markets.

There are a lot of people who just think of Eastman as driven by the performance of PET only and this is a quarter that shows that PET is not the only card we have in our deck and when PET is in better shape to contribute more then that's going to add even more to our story.

The last few times I have spoken with investors I've stated that we would be coming to you with our thoughts and ideas for profitable growth after we have completed the near-term actions that everybody's focused on right now. So while that's going on, we're working to validate our ideas, and we're determining the appropriate path forward, and I expect that in the second half of the year, likely in the fall, we'll be talking with you a lot more about our thoughts on corporate strategy.

Finally on outlook.

We expect our sales volume to be strong in the second quarter due to improving economic conditions and the normal seasonality that we see for several of our businesses in the second quarter. We did not have a huge pre-buying effect of any kind in the first quarter due to pricing actions. We expect to continue to benefit from our efforts to reduce costs throughout the company.

The high raw material and energy costs is a challenge for all of us. It continues on. It goes on unabated, and we have to fight that every day, and so pricing continues to be a key driver of our profitability, a key driver of how we think about what we need to do to be successful.

If I put all this together, typical second quarters are better than typical first quarters. They are typically 40 to 60% better than first quarters.

This looks like that kind of a year, so we're anticipating that the second quarter's going to be in the neighborhood of 40 to 60% better, and that is on the assumptions we have about what's going to be happening with raw materials and business environment. And, of course, that's excluding the special items in both periods when I make those comparisons.

So with that said let me turn it over to Rich Lorraine.

Thanks, Brian. Thank you very much.

I'm going to cover a few items. I want to give you a brief update on our actions on the divestiture of the CASPI segment, the bottom end of that CASPI segment. I want to talk about the highlights in our cash flow, and add a little bit of additional flavor on the asset impairments and restructuring charges.

Getting to CASPI, I'm pleased to report that we're still making good progress. We're encouraged in that we're working with several very qualified people on the project. We still feel pretty strongly that we're on track to complete the actions around mid-year.

Again, it's premature to talk about final results of that, but, again, just very encouraged by the detailed work we're doing with very qualified people.

On the cash flow side, the company used $34 million of cash from operations in the first quarter compared to the use of $168 million in the first quarter of '03. We saw working capital increase by about $110 million in the first quarter, and that was primarily accounts receivable, which, of course, resulted from the higher revenues about 11%, as compared first quarter last year.

That's quite comforting. We look at our accounts receivable, they turn in under 60 days, and very high quality receivables with very low overdues.

Looking at inventory, it declined slightly in the quarter. I think we're doing a good job paying attention to the details and continuing to focus sharply on it and keep our discipline there.

Also, we did not make a contribution to our defined benefit pension plan in the first quarter of this year, and we don't expect to make any contribution this year. In the last call we talked about a possibility of, you know, somewhere between zero and 40, and with the Congressional action we now see that as zero.

In the first quarter of 2003, we made a $90 million contribution, and for the full year 2003 you recall we contributed $234 million.

Looking at capital expenditures for the first quarter here it was well below depreciation and amortization. Again, we focus on that very consistently, and we spend our capital on a just-in-time basis, if you will, and we remain comfortable that the spending level's appropriate for maintenance and replacement, but again, we're being very careful about it and we remain committed to keep capital expenditures below depreciation and amortization for the full year.

We closed 2003 with a significant cash balance and that was in preparation for retiring $500 million of 6-3/8 notes in January. You'll recall we had two $250 million bond offerings in 2003, one at 3.25%, another at 6.3%. That $500 million was retired in January, and we currently have no other notes due until 2008, and beyond that the next notes are due in 2012.

Just to, again, add a little bit of color on the asset impairments and restructuring charges, as Brian said, the asset impairment was related to the closure of the copolyester facility in Hartlepool, England. What this does for us is it allows us to really take better advantage of our overall integrated manufacturing capability and strengthen our position.

The point is that we will be able to serve our customers from our plant here in the U.S. and also in Malaysia, and we don't see any significant revenue loss as a result of this, so it's a significant cost improvement for us. This is, again, just another example of the thorough review we're making of all of our businesses and facilities and product lines, and, you know, with a clear eye toward improving the profitability.

The remainder of the charge was severance, about $26 million, and that's for, you know, obviously for work force reductions throughout the company. It includes actions that we've talked to you about in terms of reducing the corporate overhead associated with the CASPI businesses and product lines that we're in the process of divesting. And we've gotten a head start on that corporate overhang.

We've also made labor reductions where necessary, including the Polymers segment as Brian mentioned earlier. We continue to be very firmly committed to addressing the corporate overhead associated with that bottom tier of CASPI, and we've got our plans put together for that.

Again, I want to reiterate, we expect 2004 to be a good cash flow year, especially given that we don't have the pension funding to consider, and our top priorities for cash continue to be improving our credit position through debt reduction and continuing to pay our dividend, and we're looking forward to making good progress.

Okay. With that, Greg, over to you.

Thanks, Rich.

Last night the Eastman Chemical Company news release announcing first quarter 2004 results was distributed to the news services and posted to our Web site. Included with the news release are a series of financial tables.

Table 1 includes a Statement of Earnings for the first quarter 2004 and the first quarter 2003. Sales revenue for first quarter 2004 was $1.6 billion, an increase of 11% compared with first quarter 2003, primarily due to higher sales volume, favorable foreign currency exchange rates and increased selling prices.

Cost of sales for first quarter 2004 was $1.36 billion, a decline of 2% as a percentage of sales revenue compared with first quarter 2003. The decline is primarily the result of an increased focus on more profitable businesses and product lines and cost reduction measures which were partially offset by higher raw material and energy costs that increased by over 10%.

Selling and general administrative costs for the first quarter 2004 were $110 million, compared with $100 million for first quarter 2003 due primarily to higher employee-related costs, increased costs associated with actions being taken to improve the company's profitability, and the impact of foreign exchange. The increased costs were partially offset by cost reduction measures.

Research and development costs were $43 million in the first quarter compared with $43 million in first quarter 2003. We remain committed to keeping the combined costs of S&GA and R&D at or below 10% of sales revenue. For first quarter 2004 these costs were 9.6% of sales revenue compared with 9.9% of sales revenue for first quarter 2003.

The company reported operating earnings $15 million in first quarter 2004 compared with operating earnings of $59 million in first quarter 2003. First quarter 2004 operating earnings included asset impairments and restructuring charges of $67 million while first quarter 2003 operating earnings included $20 million of other operating income from the sale of assets and $2 million of asset impairments and restructuring charges.

Excluding these items operating earnings improved year-over-year as an increased focus on more profitable businesses and product lines, cost reduction efforts, higher sales volume, and favorable foreign currency exchange rates were partially offset by higher raw material and energy costs.

Interest expense net declined slightly in first quarter 2004 compared with the year-ago period due to a lower average interest rate which more than offset higher average borrowings. Other income net for first quarter 2004 was flat compared with other income net for first quarter 2003.

The company's effective tax rate for first quarter 2004 reflects a combination of the treatment of the asset impairments and restructuring charges resulting in an expected tax benefit in certain foreign jurisdictions lower than the statutory rate. The impact of favorable foreign rate variances and extra territorial income exclusion benefits on normal taxable earnings.

For first quarter 2004 the company reported a loss of 7 cents per diluted share compared with earnings of 27 cents per diluted share for first quarter 2003. Excluding asset impairments and restructuring charges for both periods, other operating income from the sale of certain assets for first quarter 2003 and the cumulative effect of a change in accounting principle for first quarter 2003, earnings per diluted share were 52 cents in first quarter 2004 compared with 9 cents in first quarter 2003.

Table 2, Other Sales Information.

First quarter 2004 sales revenue increased in all regions when compared with first quarter 2003. Sales revenue in the Europe, Middle East, and Africa region increased 20% due primarily to favorable foreign currency exchange rates and strong Polymers segment sales volume.

For the North America region sales revenue increased 5% primarily reflecting increased sales volume and higher selling prices. In Latin America sales revenue increased 18% mainly due to higher sales volume particularly in the Polymers segment.

For Asia Pacific sales revenue increased 16% compared with the year-ago period due to higher sales volume particularly for the Fibers segment, and improved product mix. Sequentially, sales revenue also increased in all regions.

Sales revenue in Europe, Middle East, and Africa increased 22% due primarily to higher sales volume particularly for the Polymers segment and favorable foreign currency exchange rates. Revenue increased by 9% in the North America region due primarily to higher sales volume and improved product mix.

Revenue in the Latin America region was flat as higher selling prices and improved product mix were offset by lower sales volume. Asia Pacific sales revenue increased by 11% due primarily to higher sales volume.

Table 3, Operating Results, Eastman Division.

Excluding asset impairments and restructuring charges in both periods and other operating income from the sale of certain assets in first quarter 2003, operating earnings for Eastman Division improved year-over-year due to an increased focus on more profitable businesses and product lines, continued cost reduction efforts, and favorable foreign currency exchange rates that were partially offset by higher raw material and energy costs.

Sequentially, the division's operating earnings increased due to higher sales volume throughout the segment which was up 7%, an increased focus on more profitable businesses and product lines and continued cost reduction efforts.

Operating earnings in the CASPI segment improved year-over-year due to an increased focus on more profitable businesses and product lines, continued cost reduction efforts and favorable foreign currency exchange rates that were partially offset by higher raw material and energy costs. Sequentially, operating earnings improved due primarily to higher sales volume which was up 6%, an increased focus on more profitable businesses and product lines, cost reduction efforts, and favorable foreign currency exchange rates.

The Performance Chemicals and Intermediates segment operating results improved in first quarter 2004 compared with first quarter 2003 due primarily to higher selling prices and cost reduction efforts which more than offset higher raw material and energy costs. Sequentially, operating results improved due to higher sales volume which increased 7%, cost reduction efforts, improved product mix, and higher selling prices that were partially offset by higher raw material and energy costs.

First quarter 2004 Specialty Plastics segment's operating earnings included asset impairments and restructuring charges of $46 million, primarily related to the closure of the company's Hartlepool, England, facility. First quarter 2003 results included other operating income of $20 million.

Excluding items from both periods, operating earnings improved due to an increased focus on more profitable businesses and product lines, cost reduction efforts, higher selling prices and favorable foreign currency exchange rates. Sequentially, excluding items operating earnings improved due primarily to higher sales volume which increased 9%, cost reduction efforts and favorable foreign currency exchange rates.

The Voridian Division operating results.

Voridian Division earnings from operations for first quarter 2004 included asset impairments and restructuring charges of $11 million. First quarter 2003 results included $14 million from an insurance settlement related to operational disruptions.

Division operating results declined year-over-year as higher sales volume, favorable foreign currency exchange rates and higher selling prices were more than offset by higher raw material and energy costs. Sequentially division operating results declined as higher sales volume was more than offset by higher raw material and energy costs.

Polymers segment first quarter 2004 operating earnings included asset impairments and restructuring charges of $11 million related to severance charges while first quarter 2003 operating earnings included $14 million from an insurance settlement. Operating earnings declined year-over-year and sequentially as higher sales volume, favorable foreign currency exchange rates, and higher selling prices were more than offset by higher raw material and energy costs.

The ability to increase prices sufficient to offset higher raw material and energy costs for PET was limited by the impact of North American capacity additions in the second half of 2003. Fibers segment operating earnings improved year-over-year and sequentially due to higher sales volume throughout the segment.

Developing Businesses division.

Developing Businesses operating results improved in first quarter 2004 compared with first quarter 2003 due primarily to increased revenue at Cendian Corporation. Sequentially, operating earnings declined primarily due to costs related to ongoing implementation of customer contracts at Cendian.

This concludes our prepared remarks. Matt, we're ready for questions.

Thank you, gentlemen. Today's question-and-answer session will be conducted electronically. If you'd like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone telephone. That is star one if you have a question. If you find your question has been answered and you would like to remove yourself from the queue you may do so by pressing the pound key. If you are using a speaker phone today please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many questions as time permits. Once again, that is star one for questions. And we'll take our first question from Frank Mitsch with Fulcrum Global Partners.

Good morning. A nice quarter, guys. Brian, could you expand upon the labor targets for the cost reduction effort that you mentioned that you've got a voluntary effort underway right now and that will be followed by an involuntary? What are your targets there?

Frank, we have the combination of the expectation that we're going to divest the third tier of CASPI, and that has something on the order of 2400 people associated with it. And then we need to eliminate the effect of that, what we call that overhang, which means all the services that are embedded inside the company to serve that 10% of our sales.

Also, beyond that we've looked across the company. You see something that Allan did in the PET area, to make himself more competitive, all across the company we're looking at how do we need to be the most efficient. So in the aggregate, the closest I'm going to come to answering your question is that we are, if I compare how we were last year versus how we'll be next year probably a change of roughly 20% of the employee population all together.

Okay. And can you talk about the costs associated with that? And on the topic of costs obviously you took some charges here in the first quarter. What are your expectations for charges in 2Q and for '04 overall?

I'll let Rich answer some that but the bulk of those people would be working for somebody else and not have the charges associated with them. So we're talking about some smaller number that results in charges. Rich, you want to comment on the charge number?

Yeah. We have not fully reserved for the voluntary program that we've, the voluntary retirement program we've announced. We're also looking at some involuntary potentially beyond that. What the overall number will be, I really don't want to try to predict it exactly, but it could be something similar to what we looked at in the first quarter, maybe somewhat less. Again, depending on the mix of people that sign up for the voluntary program and what has to come beyond. Again, we're focused on the overall number and, you know, what we have to do to get down to it.

Rich, are you talking about 2Q versus 1Q or '04 overall that might be similar?

I'm talking about 2Q versus 1Q.

So we may see a similar level of charges in 2Q, then?

It could be that high.

And potentially you had indicated that you anticipate that most of this action on CASPI being done by mid-year. Does that imply that the balance of the year, the second half of the year we will not see anywhere near the order of magnitude of charges?

Well, I'd like to simply say yes to that. We certainly don't have any major plant actions and what not that are known at this point. But we're continuing to look at everything. So "never" is a long time, but we don't have anything that's directly on the horizon.

We're going from the bigger things to the smaller things as time goes on here, Frank.

Great. And then lastly, Brian, I think you indicated that, you know, you have various assumptions for raw materials in this second quarter which leads to you that 40 to 60% sequential increase. Could you offer us what your assumptions are on the raw material front?

Well, by and large we're assuming they're either stable or rising, and that's pretty much the environment we see. Certainly the environment for the major raw materials like the natural gases, the PX that we use, for the paraxylene we use for the polyester, the ethylene glycol, those things continue to rise, and we're anticipating the pricing actions we'll get as a result.

We go next to P. J. Juvekar with Smith Barney.

Good morning, Brian.

Good morning.

I'm looking at your lack of volume growth in chemicals. Is it because of high-cost assets or is it because of maybe some of your technology like solvent-based paints are losing market share? Can you talk about why you aren't seeing the growth that other companies are seeing?

Actually, P. J., in the areas that we're wanting to grow we're seeing great growth. Remember that we sold three businesses, two in Specialty Plastics, one in CASPI. We shut down five CASPI sites.

We've been really explicit about saying that we're valuing up the product mix. We have always had an ability to run at pretty high rates, but you sacrifice some profitability by moving those things out at contribution margins, and we are valuing up the mix right now as much as anything. We've had very satisfying volume growth in the things that contribute to the profitability of the company and thus the results that we see this quarter.

And we have more opportunity to do that, actually, and as we said, we expect the second quarter volumes to be strong, and they are so far. So this is not something that disappoints us, it's exactly as we had expected. We very deliberately managed the process to achieve this result. And it fits our plan, it fits our strategy, and we expect to have good volume growth in the future.

Can you just expand on one of the points you made about CASPI? The stuff that you want to keep, what was the volume growth in that division?

We don't break them out for you, just so you know, the things that are typically coatings additives, or specialty for industrial or architectural coatings additives, or there is some kind of specialty adhesives, those are growing at a nice clip.

Remember, the way I described CASPI, is I've always said that there's the top two tiers there that are pretty darn stable. I mean they really are very stable in terms of their earnings power and they grow at a nice rate. And we've had this third tier that's always been yanking around the total numbers. You see less of that effect this time and so the rest of that is shining through.

But even that top tier is growing at a nice clip because there's a displacement that goes on within the coating industry that not all parts of coatings are growing at the same rates. So we do well there.

And finally one more quick question on fibers. Why are you selling more acetyl chemicals if the mix shift is unfavorable to you?

What you're seeing there is a very steady number in terms of the filter tow. It just stays pretty much where it is. And then we have the opportunity to sell things like flake on top of that. So it's not like we're sacrificing one or the other. This is a case where we have lots of capacity.

And we sell all the filter tow to all of our good customers, continue to maintain those good relationships, steady filter tow sales. And then on top of that we have the opportunity to sell cellulose acetate flake to other producers who need the flake and that adds to our profitability. So it's not about shifting away from something towards something lower profitability, you maintain the stuff that you have that's the best, then you add some sales of these other products.

Okay. Thank you.

Uh-huh.

We go next to Andrew Katz with UBS.

Hi Brian. How are you doing? The third tier businesses in CASPI, are they making money now?

No, but they're losing a heck of a lot less.

Could part of the strategy be now to, you know, let those businesses, you know, pick up a little more earnings, or, you know, maybe turn to the black before you take final bids?

Probably not. I'll turn to Rich on this, but he's shaking his head no.

We started the process last December and we've been reporting consistently that we're pleased with the progress and we are in very good discussions with several people as I said. We're not going to jerk around the process at this point to slow it down. We're just going to keep on working on it as we have.

And we have some pretty sophisticated buyers here. It's not like, you know, I'm going to surprise them somehow by holding on to this and they're going to say, oh, my gosh, I need to pay more three months from now.

They're sophisticated people understand how things are going to work in the future, they're bringing that into their estimations. I don't think we gain anything. That would be a bad-faith gesture on our part. No, we're going to hold on to the process.

Okay. So final question. Now that you're getting down the road on this process and you mentioned that Genencor is a financial investment for you, would it be possible for you to give us a rough range of how much, you know, free cash flow do you expect from transactions over the next couple of years?

Andy, you know, we're reluctant to talk about transactions before they occur especially on another publicly traded company, but even with the CASPI at this point, we're just very reluctant to try to project what the free cash is going to be out of that.

Maybe I can ask it this way. Looking at your balance sheet, whether you look at total value of EBITDA or, excuse me, debt to EBITDA or debt to total capital, what do you think your balance sheet might look like in a couple of years just from the benefit of transactions, you know, like I said over the next couple of years, not the next couple of quarters?

Well, we don't have a specific target for debt to EBITDA. We do have, you know, good feeling about what we're going to do in the short and medium run on paying down debt and being committed to do it.

If we think about what it's going to take to solidify our credit situation, one could pick a round number, and this is not indicative of the cash we think we're going to get from the CASPI transaction or any other, but if we pick a number out of about $500 million that, you know, that, I think, speaks to our credit situation and improving our credit. Beyond that, it depends on the economy the next couple of years and operating cash flow and what strategic choices we have in front of us.

Andy, we want to be in solid BBB land in the bond world, and we want to have solid access to A2 P2, commercial paper, and there are bands of debt that the ratios that you're talking about, there are bands that you've got to live in in order to be in solid BBB land and that's what we target.

Thanks a lot.

We go next to John Roberts with Buckingham Research.

Good morning, guys.

Hey.

Brian, one of the nice things about the acetyls chain has been that there's no major producers in the Middle East. I don't think there's any world scale capacity there. You had, I think, the first world scale plant announcement there this past quarter. Do you have any comments on whether it's real this time, whether we should worry about that in terms of maybe eroding the acetyls chain a bit?

Not really, because when most people talk about acetyls, they're talking about acetic acid and then they go onto VAM. And that's not our world. It's really big scale stuff, lots of acetic acid.

Acetic acid for us is more of a swing product that where we take excess capacity. But by and large the vast majority of the things that we use in the acetyl chain go into things like solvent esters, they go into coatings esters that are used for industrial paints. They go into pharmaceuticals and cosmetics and personal care. It's a very, very different acetyls chain that we have versus something you hear announced where they're going after acetic acid to vinyl acid, the VAM monomers, and then on to plastics. So I would not, no. That doesn't show up on our radar screen as a concern.

Thank you.

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

Good morning. You did mention how Polymers suffered, particularly here in North America, and you were almost breakeven for the quarter on an operating income basis. Could you kind of tell us a little bit about the outlook as far as pricing and volumes go, at least for the second quarter?

This is the eternal question isn't it, Nancy? I mean every quarter we're having this conversation.

This is again an environment where you can see, you can go to the gas pump and figure out what's happening to paraxylene. And the same thing is happening to ethylene glycol. It's rising, raising, rising as far as we can see. And it's also an environment where we have a little added capacity in North America we've talked about before, so you're fighting a price action all the time. It's a pricing action that where we think we deserve and need more prices there's always typically a lag between the rising raw material costs and the actions that you get in pricing.

All that said we think, you know, typically second quarters and third quarters are better than first quarters. We would expect that to be true. We are optimistic about the pricing actions we have out there. It's always about timing on these things, and we're trying to work on that as hard as we can.

All of the producers are in the same shape that we are in, and for us to be good suppliers to our customers, we're going to need to get those prices up and that's where our focus is.

How much are you working on it as far as, you know, cents per pound?

I think there's a 3-cent increase that's out there discussed openly and after that, I'm not able to comment.

And also in fibers, was the strong showing that you had in the first quarter, is that going to impact the second quarter at all, or is the extra income you received versus last year, is that from the acetyls via acetate flake?

Yeah, again the fibers guys, whatever we expect from the fibers guys is baked into our estimation of what we're going to do in the second quarter first of all. But you remember, fibers on an annual basis is going to be -- It’s good this year, it's going to look a lot like it did last year. I keep on referring to this with the adjective chunky because sometimes we get big lumps of stuff and then we have a little dry hole for awhile and we had a pretty good quarter.

You should think of fibers this year much like you saw it last year. How it comes this year could be ups and downs along the way month by month.

Thank you.

We go next to Kevin McCarthy with Banc of America Securities.

Yes, good morning. Brian, your Polymers volume was up 11% and I think in your prepared remarks you indicated that you're not seeing significant prebuying activity. Can you elaborate on what you're seeing in the marketplace that gives you confidence that that volume is sustainable and not attributable to prebuying?

Yeah, if we look a little beyond just the quarter-to-quarter kind of effects or what's going on in the market basically we see that we're growing with the market and holding our share and sometimes it's larger, sometimes it's smaller but in the aggregate we're growing with the market, that is our strategy, we're holding our share.

We know that the market's growing at the rates that we stated in the past, 8 to 10 in the world something on the bottom end of that range in North America and higher ends of the range someplace else. That is the most important factor that will affect the pricing dynamics as, you know, supply and demand plays out.

And, Rich, I have a question for you on the tax rate. I'm trying to back out these charges, and when I do I'm computing a first quarter tax rate of 24%. Is that math correct? And I think last quarter you suggested it might be 30 to 33. Perhaps if it is correct can you comment on what you expect for the year and what has changed?

Yeah, of course, the first quarter you've got the small numbers there so the percentages are hard to read, and with the special items it's a little hard to read. Looking at, I'll just say looking at the full-year effective tax rate I would adjust our view downward a little bit and think it could be 30% or even slightly less than that.

Okay. And then to follow up on fibers, I think last quarter, if I remember correctly, you had indicated you had backed away from some glacial acetic volume in Asia. Is that back with a vengeance this quarter?

Actually, when we think about acetic acid, that's more of our PCIVO (ph) business.

I'm sorry.

That's okay. The weak dollar is allowing us to export to, if you look at our growth outside the U.S., we had pretty good growth outside the U.S. in all the regions. Often you will turn to big bulk commodities to achieve some of that growth that you can't get in the specialties and so, yeah, there's all kind of things, it's not just acetic acid. There's a number of things that are being sold in higher volumes outside the States because of the dollar situation.

Gotcha. That's very much.

We go next to David Silver with J.P. Morgan.

This is Jeff Zekauskas. Good morning. I have a few questions. The first is a question of clarification. I think, Brian, at the beginning you talked about $3 in core earnings from Eastman. Did that assume zero profits in Polymers?

No, would it not. That core is, as I said, that's kind of like, as we go into 2005 what would you expect? You'd expect these three steady businesses with CASPI and SPIVO (ph) and fibers, and then you would have some improvement in PCI, some improvement in the Polymers area and I bake all of those into something that looks like a $3 a share kind of company.

Remember, we have something we call the turtle chart that kind of topped out in that number. That was the database that kind of led to us to that conclusion. And working on the back end the turtle chart is what gets you to that. And that's what we'll continue to do, all these actions and all these charges that you see.

Okay. Secondly, propane tends to come down seasonally, so what's the difference in the profitability on a per pounds basis of your ethylene cracker during the summer versus during the winter, all things being equal?

If that happens, it's obvious that the profitability of all the derivatives from olefins get better for us in the summertime. What you've got to remember though is natural gas doesn't have, just starting with natural gas, it doesn't have that same, it used to have the same feature, natural gas up in the winter, down in the summer, now with all the power generation it's up in the winter, up in the summer, and I don't think you get a break.

People can do some injection of propane into the natural gas lines to some limitation of BTU. The propane cycles that we used to enjoy probably are not as dramatic as they used to be but your theme is right. I haven't given you the math.

I think Greg has some numbers that we've given in the past about a penny of propane equals so much in some kind of a profitability thing maybe he can give that to you after the call or something like that. Do you remember that offhand, Greg?

Yeah, a penny is 8 cents on an annual basis. Each movement in propane, penny up or down, is 8 cents on an annual base. That's very rough though, Jeff.

It assumes that everything else stays the same, which never happens of course.

I guess lastly, so all things being equal, your earnings per share should go up 50% in the second quarter. Is the right way to think about that, that PET profitability should be substantially better, and, you know, probably your polyethylene profitability should also be better? Is that where the increment comes from?

No, you should really think of everything getting better, Jeff. This is not about, everything will get a little bit better but those two, the PET typically does have a much better second quarter so it's definitely a chunk of that.

There's some cyclicality, entry year cyclicality in PCIVO (ph). The expenditures in developing business ought to decline somewhat because we don't expect to have some of those charges, and the coatings business typically is better in the second quarter. There's an entry year kind of effect ergo in the coatings guys. So I would think there's a lot of the parts that are getting better.

Yeah. I guess lastly, how does that turtle chart of yours look these days. You know where you talk about the businesses that are unprofitable and you don't want to be in those areas? Sort of how has that whole curve changed?

It's funny you asked that because that's been on my mind to redraw that thing but Rich has been so darn busy with so many other things I felt a little guilty lumping that one on to his wagon. What I know is happening is that the back end, I mean I know this from looking at where the numbers. The back end part where it dropped off precipitously is a much shorter tail and the center piece where it was real flat is starting to elevate a little bit as well and I'd say the front end is pretty stable hasn't moved much.

Thanks very much.

As a reminder to our participants it is star one to ask a question. Again, star one for questions. We go next to Chris Willis with Impala. Please go ahead, sir.

Good morning. I just had a quick question about your profitability in Polymers. Can you expand a little bit further on how negative the impact was from paraxylene and ethylene glycol in your PET business and is there something else going on in the cost side within that segment maybe just quantify it a little bit further if you could.

I don't know if I can quantify it for you, Chris. The price actions are going on there for paraxylene and EG are out there into the marketplace and they're rising very steadily. Paraxylene of course is confounded with the gasoline stream and is connected to that so whatever kind of percentage rises you're seeing in gasoline you might guess that's what's happening with PX.

EG is a supply demand driven thing as much as anything plus natural gas and so it's going up even I think a little faster. And all of that, you know, raw materials are a high percentage of our total costs.

Elsewhere our cost structure is coming down, not going up, and that is the story on PET. So it's all, at the end of the day, very important that we get the prices to reflect this so that we can support our customers.

Great. Thanks.

We go next to a follow-up from Nancy Traub with Credit Suisse First Boston.

I wondered if you could quantify for us what the cost reduction efforts did to the bottom line this quarter versus a year ago or fourth quarter?

I've always resisted quantifying cost reductions because people want to build those directly into the models and we all know that in the past when people have bragged about their cost reductions that they were eaten up by giving up productivity away to customers in price or other ways. But I would say that it was significant but there was no one factor that was dominating this story.

There was a combination of, there was currency, there was cost reductions, there was better business conditions, there was choosing better mix of products. And so this is not a story where, you know, cost control was somehow 80% of the story or even 50% of the story, it wasn't.

All those factors kind of come together in a mix and they've all contributed in some minority fraction that adds up to the story that we have here so if you're looking, what I don't want people to leave with in this conference call is, okay, this is all about cost reduction so there's only so far you can go with that, that's not the story. The story is much more complex than that, cost reduction was important, but so were all these other factors. And so I'm giving you a qualitative answer and the answer is, no, I won't quantify it for you I'm sorry.

We'll take another follow-up question from P. J. Juvekar with Smith Barney.

Hey, Brian, these developing businesses, they lost about 20 cents in the quarter, that's annualized 80 cents in the year. At what point would you begin to breakeven?

The baseline expenditure we have there in developing businesses is sort of like a $10 million a quarter kind of an expenditures. And those are some businesses that are fledgling businesses and each of them is on a different path, some are a year away, some are two years away. I expect to be spending in this segment through the balance of this year for sure.

The biggest variation you see there is in the Cendian area where we had some one-time charges and that is an area that needs to get to zero in a hurry, and they understand that. There's a new management team on the ground there starting with the CEO and just about all of his direct reports approaching the business very differently. And they have a clear understanding that their objective is to get to zero and even in the black numbers just as soon as possible.

Okay. Great. Thank you.

There are no further questions at this time, gentlemen. I'd like to turn the call back over to you for any additional or closing comments.

Thanks. If there are any additional questions please feel free to call me directly at 423-229-8692. An audio replay of this conference call will be available this afternoon through Friday May 7th. You can hear the replay by calling 888-203-1112 and entering the passcode 531811 or on Eastman.com in the Investor Information section. Thanks again for your interest in Eastman.

Again that does conclude today's teleconference. Thank you for your participation. You may disconnect at this time.