伊士曼化學 (EMN) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company third quarter earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website 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..

Okay, thanks Rufus, and good morning, everyone. With me today are Brian Ferguson, Chairman and CEO, 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 fourth quarter and full year, 2004. Actual results could differ materially from our plans and expectations. Certain factors relating to future expectations are or will be detailed in the company's third quarter 2004 financial results news release, on our website and in our filings with the Securities and Exchange Commission including the Form 10(K) filed for 2003 and the Form 10(Q) to be filed for third quarter 2004. With that let me turn the call over to Brian.

Good morning, everyone. Glad you've joined us today, hope you are all well. I would like to step through several conversation points today. I would like start with some corporate highlights for the third quarter of this year and then some segment highlights after that. I would also like to make some comments about what's going on in our regional performance in various regions of the world, give you a fourth quarter outlook and then finalize with some comments about how our corporate strategy is progressing and what we see there. Starting with the third quarter corporate highlights, as you know for about 2.5 years now Eastman employees have been working diligently to turn around the profitability of our company. And through the first half of 2004 we began to see the results of this work. That trend continued in the third quarter as we reported earnings per share excluding certain items of about -- of 79 cents per share. And we are on track to report full year 2004 results that are the best that we have had since the year 2000, which gets us back to a fundamental baseline performance level that we need to have. Now, to get to where we are today we have taken a number of actions internally which were very difficult but also very necessary. As you know these included divesting underperforming product lines in the CASPI segment, shutting down assets and divesting product lines in the specialty plastics segment and in developing businesses we're reducing the number of options that we are working on and we have shut down a number of efforts. We're in the process of bringing our logistics function back in-house and we're working on options to exit Cendian. We are divesting -- had divested Ariel Corporation which was an HSC related service and we have exited several other small service businesses.

Throughout the company now we have reduced our number of employees to under 12,000 today compared with the more than 15,000 that we had at the start of the year. So that's more than a 20% reduction. And while we have taken actions internally to improve our profitability, the external business environment has been somewhat mixed. Economic growth has strengthened in 2004 compared with last year and that has translated to improved volumes all across the company which I'll talk more about later. These increased volumes have led to a tighter supply demand balance in a number of the markets that we participate in which is internal it is some pricing power although that pricing power is still more limited than we would like. At the same time raw material costs are at historically high levels and don't show signs of abating in the near future, unfortunately, and this is hitting us especially hard in places like propane, parazylene, and ethylene glycol which are at truly historically high levels. Now, despite these high raw material and energy costs we have improved our gross margins. Third quarter '04 gross margin versus third quarter '03 improved by about 175 basis points. This is despite an increase in energy and raw materials of more than $150 million year-over-year. The improvement in gross margins can be attributed to higher volumes and an emphasis on higher margin products and cost reduction actions that we've taken throughout the company. Now, to continue the improvements in gross margins and get our company on a reinvestment economic track we will need to continue to work on our pricing. We have done a great job here under very adverse conditions and we have more work to do and the sales folks are very diligent in that effort. Looking at overhead for the third quarter, our overhead expense which includes SG&A and R&D, declined to 8.6% of sales revenue and that's just a benchmark that I give you this year. This is below the commitment we made to you to keep those expenses below 10%.

Now turning to segments one at a time in the third quarter. We showed improvement in revenue for all of our segments on a year-over-year basis except for CASPI. Now, if you exclude from CASPI the divested product lines CASPI revenues are up 20% year over year. Volumes were also up in all segments year over year except for CASPI and as in the prior comment, if we exclude the impact of the divested businesses, CASPI volumes are up 17%. Now, the CASPI volumes increased due to a combination of new applications for existing products and economic growth. Some examples, we have a coating additive that have gone into automobile coatings for years and years and are now going into electronic applications such as laptops and cellphones. We're also seeing very strong growth in Asia which we expect to continue. In the PCI segment the volume growth was due mainly to economic growth especially in North America. This is a segment that will benefit from the expected upturn in the oliphant cycle and we are starting to see that. Specialty plastics volumes are up due to continued innovation and improvements in marketing. New applications for existing products includes things like cosmetics packaging and housewares and china. In the polymer segment volume growth year over year was mainly due to increased demand for PET in North America driven by economic improvement and continued displacement of other materials such as glass and aluminum and other plastics. Our fibers volumes improved due to increased demand for acetate tow in China and we have continued strong demand for acetyl chemicals which also helped.

Now, one point that I want to make on our volumes is the great work that was done by both our manufacturing and our supply chain employees in somewhat difficult environments. We have been pushing our plants in very strong ways, wheeling to new derivatives that are operating at very high levels in some cases. The manufacturing folks have responded very well to that. The supply chain did an excellent job in a difficult environment both procurement and logistics making sure that the raw materials made it to our plant and that our products made it out to our customers. So my thanks goes to both of those groups. This volume growth combined with our cost reduction efforts and continued focus on pricing led to an improvement in operating earnings for all of our segments except developing businesses. Now as I've talked about before you should think about starting with having three segments that all have double-digit operating margins. Our fiber segment is at 24%, CASPI today is at 15%, and specialty plastics is 13%. Those are the three baseline businesses that make up something like 80% of our earnings. The remaining two are PCI and polymers. In PCI we have made a lot of progress. The margins there are 5% year over year and we are expecting to make progress in the polymer segment despite the historic runup in they're raw material cost. The result in the third quarter is that the corporate operating margin excluding items increased over 300 basis points this quarter compared with the third quarter of '03. Now some comments on the regions here. Looking at our revenues region by region we continue to have just under 60% of our total revenue from North America. This is largely due to the continued strong growth in North America throughout the company. Volumes in North America increased by 9% year over year. In Europe you will notice in the third quarter that our revenue was down slightly and our volume is down significantly.

This is almost all due to the CASPI divestitures. A significant amount of that revenue was based in Europe. As a result the amount of our corporate revenue coming from Europe is down to 20% versus the 23 we had in the prior quarters. With that said we have seen good revenue and operating earnings growth in Europe from the Eastman division and I would expect that to continue. In Asia Pacific revenue grew by over 22% year over year, driven by higher volumes and improved product mix. Now, the story here continues to be that we are growing in the places where we want to grow and that is driving earnings for improvement and we are kind of cannibalizing the lower value businesses that were formerly going to Asia. You can see this by the fact that we've had a 22% revenue growth in Asia but only a 6% volume growth. So, that tells you about a product mix shift that we have orchestrated there. Another example is that CASPI and the specialty plastics segments had volume growth of over 20% year over year in Asia along with very strong growth in their earnings. We are also seeing the resource commitments we have made in Asia beginning to pay off. Our adhesives facility in Nanjing is running flat out. Our copolyester facility in Malaysia is running at high utilization rates. We have a new coatings specialty facility in Chilu, China coming online during this quarter and we expect it to run at pretty high rates. And we've also expanded our sales and marking presence on the ground in Asia which is also supporting strong growth. Lastly in Latin America we saw very strong revenue growth due mostly to higher prices but also volumes in the polymer segment. I make those comments because we often get questions about how we are doing in the regions, we don't emphasize that as much and I wanted to highlight the good progress we are making on this call.

Now, turning to fourth quarter outlook. As you know we have a variety of pluses and minuses that we sort out in the fourth quarter. The pluses that we have are that we continue to benefit from the actions we have taken over the last several years to improve the company's profitability and another plus is that we are benefiting from continued strong economic conditions right now. The minuses are that, as you know, due to both seasonality and the timing of some routine maintenance for our plants, the fourth quarter is normally our lowest earning quarter and we anticipate that prices for raw materials such as propane, parazylene, and ethylene glycol will increase in the fourth quarter compared with the third quarter. So pricing will continue to be a very key driver of our profitability and we always devote a lot of effort to this. So as we cook all of those pluses and minuses together into a bottom line result we expect our fourth quarter earning per share excluding any asset impairments and restructuring items to be within the current first call analyst fourth quarter range of estimates which is 42 cents to 63 cents per share. I will tell you that's just the best guidance we can give you today it really represents our best thinking given all the uncertainties we have with raw materials, the volatility of the economy, geo-political uncertainties, et cetera. I will close with a couple of comments on strategy now. During our Investor Day in September we focused on our strategic efforts over the next several years. A central theme from that day is our transition from focusing exclusively on turnaround efforts to including a few profitable growth platforms that we defined during that presentation. Our third quarter and year-to-date 2004 results confirm that we have made very good progress in turning around the profitability of the company and returning a baseline financial performance. We look forward to continuing the dialogue with you on these new growth platforms and the progress that we are making on them. We know that this company has a lot of room to improve from where we are right now and we're focused on making that happen.

I think I've described that to you in financial terms as saying we were a company that was sort of a 5% operating margin company and we are on the way to becoming a company that is more like a 10% operating margin kind of company. And we will be telling you more about the efforts of about how we get there and then how do we hold on to that as we pass through the cycle. And as always you should expect that we will use the same discipline in pursuing these growth platforms that we have used in turning the company around. Now that's all I have to offer today. I am going to turn the podium now over to Rich Lorraine.

Thank you, Brian, good morning, everybody. I am going to cover 5 items today. I am going to talk a little bit more about the divestiture of certain of the CASPI businesses and product lines, review the cash flow, talk about the asset impairment and restructuring charges that we've recorded into third quarter. I also want to pull apart our third quarter tax rate to help everybody understand it a little bit better. And lastly a brief comment on GeneCore. On the divestiture of certain CASPI businesses, I want to remind you that on July 31st of this year we completed that sale of those product lines to Apollo management. In '03 those product lines had sales of over $700 million and an operating loss of over $90 million. Again just as a reminder we -- the transaction was worth $215 million. We received just over 160 million in cash and 50 million in notes. And that transaction is really the completion of the most significant work around improving the performance of the CASPI segment. And we can now and we have turned our focus to profitable growth for the remaining businesses there. And a lot good progress is being made. Looking at cash flow now, during the first nine months of this year our cash from operating activities is about $300 million compared to 46 million for the first nine months of last year. I do want to point out that during the first nine months of last year we made a contribution to our U.S. defined pension plan of almost $240 million while this year we've only contributed 3 million. Looking at overall working capital our receivables are up by about $150 million in the first nine months of this year compared with only an increase of just under 50 million for nine months last year.

As Brian was describing our revenues going up due to volume, due to pricing, this is manifesting itself, of course, in much higher accounts receivable. Within the receivables we also -- I will also tell you we collected about $40 million of receivables that were held there from the divested product lines of CASPI. So that on an overall basis receivables would have been up over 190 million for the first nine months of 2004. Of course you never really want to see that cash tied up in working capital but in this case it's kind of a high class problem. We've got higher sales revenue, higher pricing. We also have an excellent day sales outstanding and our overdues are well within the normal range. So we look forward to good turnover there. I'd like to also point out that the inventory management that we've focused on over the year is getting the job done. We've seen inventories decline slightly during the first nine months and this in the face of much higher raw material costs and much higher volume requirements. All of that combined we are able to reduce net debt, which is our borrowings less the cash we have and cash equivalents, we've reduced net debt by about 150 million through the first 3 quarters. And we continue to pay -- we will continue to pay down debt in the fourth quarter. Let me turn now to Genencor. Regarding our steak in Genencor, since I know there's going to be -- there would be questions, I can only let you guys know that we continue to view our stake in Genencor as a financial asset. We don't believe that it's reflected in our overall valuation and that of course is disappointing. We really -- you know, we look at the business at the company and that value is not gone. It's there. And we are working to try to realize that value.

We've made choices around what actions we'd like to take and we are pursuing them. Of course we are frustrated by the amount of time this takes but there's a number of stakeholders and, of course, Genencor is a public company and you will have to here from them of any activity. That's really all we were planning to say today about Genencor. So, I really don't -- I won't have anything to add to that in the Q&A. Let me move now to asset impairment and restructuring charges in the quarter. During the third quarter we recognized impairments of $28 million in the performance chemicals segment where we wrote down some assets in our Batesville, Arkansas site and Longview, Texas site. These impairments reflect the impact of global competition on these product lines and there was no significant -- there won't be any significant impact to ongoing PCI revenue and earnings. And it's all part of the focus on profitable businesses and product lines. In addition we recognized $2 million of site closure costs related to previously announced closures in England and also we've taken a $3 million restructuring charge related to the Cendian restructuring that we've talked about. Lastly you'll recall we had a voluntary separation plan here and we told you that the cost of that was going to unfold over the years since some of the people left at various times. We recognized $9 million in severance related to that cost reduction effort in this quarter. Just to comment on an overall basis about impairments and restructuring, over the last several years we've been working on improving the performance of certain marginal businesses and product lines. We've made a lot of progress in this area. Still working on that, but that's really the primary driver of why we have as many one time items as we see. As we know in the way we evaluate these today and monitor triggering events, asset impairments have become very discrete items on a quarter by quarter basis.

Based on prior strategies and what we are looking at. There may be some additional charges over the next quarters. We've got a few plant closures that we are still finalizing and we have the restructuring at Cendian and we do have some last and final impacts of the voluntary separation plan yet to be charged in the fourth quarter. But I don't expect any of these to be major. I'd like to finally look at the tax rate. You will see in the income statement that our overall tax rate was 21%. I don't want anybody to think that that's our ongoing tax rate so let me tear that apart into a couple of pieces. Within that overall tax we recorded a tax benefit of $8 million which you can see on table eight, which is stemming from the divestiture of Aerial and some other asset sales that were made. We also had a tax benefit on the $42 million of impairments recorded in the third quarter which was $11 million. When I take all of that into consideration our effective tax rate on earnings within the quarter alone is 32%. And that, the major driver there was stronger earnings in higher tax jurisdictions within Europe and also higher earnings in the United States. Looking forward at the full year we think the normalized effective tax rate is going to be about 30%. Last point, question might come about the American Jobs Creation Act recently signed into law by President Bush. We really do not have that fully thought through and examined and we would expect to comment on that during our fourth quarter and year-end conference call in January.

Okay, Rufus, that concludes our prepared remarks. We are ready for questions.

Thank you, sir. (Caller Instructions) And for our first question we go to P. J. Juvekar with Smith Barney.

Good morning, Brian.

Good morning.

I'm concerned about the number of charges you are taking and the frequency of the charges. And many of the charges are asset write-downs. Are you just simply writing down some of these assets which speaks to the quality of the assets. Can you comment on that?

P. J., this has been a year of clean up. That shouldn't be surprising to you. We have been cleaning up-- and I think my opening phrase was for the last two and a half years we have been restructuring the company and cleaning things up. We took some massive write-offs last year. These were some remaining pieces that are consistent with the strategies that we are following right now. We are coming to the ends of that but these are things that always end up resulting in the company being more profitable at the end of the day. They are appropriate and I think Rich would tell you that the new accounting rules -- there was time when we could kind of gather all those thing up and make some estimations on them and now it's driven more by triggering events and decision points and you have to kind of rip the bandage off hair at a time sometimes with the decision processes that you go through. You want to add anything to that, Rich?

I would just add, P. J., that we also reviewed all of our goodwill this quarter in detail and found no reason that any of it was impaired. So that was a positive sign that we are getting towards the back-end of this cleanup effort that we've been on.

So we shouldn't expect any big write downs in future quarters?

The strategies that we are on do not indicate that there's any significant write-downs coming in future quarters. This is all part of the clean up. I mean, we have the leftovers from restructuring and people costs. We have some leftovers here in looking at the PCI organization but, no, we don't have anything major coming, P. J.

Can you talk about oxsos and affideals(ph) chains, you've got 24% of volume growth, can you just walk through where that is coming from, which products?

The -- both of those chains reflect a lot of the global economic growth and the fact that a weak dollar allows to us push it to other places in the globe. We've had some share shifting going on. We've actually been taking some share in certain places of the world. I don't know if you were speaking to volume directly or revenue, the revenue growth is in part due to product mix changes where we are choosing to sell the higher value products and cannibalizing some of the lower value products, so all of those -- and there are some new applications out there as well in some cases. In the case of oxsos we've entered into some long-term arrangements that help us get through the cycle in a more healthy fashion and some of those long-term arrangements are adding to our volume story as well. We've done a number of things to improve those businesses.

What are the operating rate in PCI?

Well, it's hard to explain that one, P. J.

Major products.

Yeah, they are high for most derivatives. Remember, we have the basic engines and then have thousands of derivatives and we run the engines at high rates all the time, the big intermediate engines, and that's what PCI basically is, it's one big intermediate engine. And then the derivatives, we have derivative capacity that exceed our intermediates capacity by a significant amount. So some of the derivatives are running flat out and other derivatives have room and it's hard to describe that in the aggregate but we just wheel the big engines over to the most profitable derivatives and that's one of the benefits of being a big integrated company. Great, thank you.

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

Good morning. Based on the number of train whistles I hear in the background it sounds like a pretty good sign for the economy out there.

We are coming to you live from the train yard at Eastman.

Terrific. Brian, as I look at, obviously, the polymer earnings down significantly, we heard yesterday on the Whelming call kind of a mea culpa in terms of not being more forceful in pushing through price increases. Can you talk about the efforts you have underway to improve the profitability of the polymers business and, you know, could we see some of that show through in the fourth quarter?

Yeah, the story there is that nobody has been sitting on their hands relative to pricing. The market pricing has gone up 19 cents per pounds so far this year which is pretty historic. The problem is the raw materials have gone up at least that much if not more. We've gone up 19 cents per pound so far this year. There is a 3 cent per pound increase on the table for November. Again, apiologizing for the train out there. The story there is that we are chasing raws. Someday if raws every find a ceiling we will be able to get to acceptable margins. I think everybody, including ourselves, will tell you that these margins that we have today are unacceptable. Our customers don't like the fact that we have to pass on these raw material cost. The margins are unacceptable, we're going to keep on pushing the pricing. If we're in one of those ever increasing loops where we are pushing pricing at the same time that raws are going up it's hard to catch up, Frank. You have to get to a point where the raws start to peak outs before we can actually catch our breath and get to acceptable margin. I don't know when that day happens, frankly.

Where do you see operating rates right now and how have they been trending.

Operating rates have been high for a long time, Frank, and they continue to be high. We've increased volume 11% so far this year so we are kind of keeping our share of the growth. We're not trying to be too aggressive on taking volume, that's not our -- our strategy is to overly -- be overly aggressive on volume. We've got room to grow with our customers. We've announced the expansions there. So the operating rates are high. This is not -- this is an odd business where the operating rates don't always translate into profitability because everybody's got a flat cost curve. You remember we had that conversation at the Investor Day where the flat cost curve of this industry makes it hard for anybody to make money in good times or bad. Speaking to the cost curve is the thing that needs to be done and that's what we are doing with our new IntegRex technology starting in 2006.

Rich, can you comment on what your targeted debt levels is? How much more debt do you look to paydown before you start looking at other uses of cash?

We've targeted 1.5 billion initially in the horizon that we can see. And we have within our cash flow plans over the next 18 months the projects that we've discussed at Investor Day.

All right. Okay, that you.

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

Good morning, Brian.

Hi, Kevin.

Fibers had an awfully strong quarter and it seems as though your primary competitor announced earlier this week that they are going to be rationalizing capacity for acetate flake and filter tow. Can you comment on the outlook there? You've talked about the businesses as being, you know, flattish or stable, good cash generator but if anything on a steady glide path perhaps downward. Is the outlook improving in a material way in fibers?

You gave me a great set up there Kevin because you made some of the points I would have made. In past questions where people would ask us usually with concern about the China expansions by Celanese, my comments back were that there are a lot of moving parts in this business and when you look at all the moving parts we see a stable outlook and that continues to be the comment that I would make to you. You've seen a couple of the moving parts this it week with the Celanese announcements and that absolutely has a positive effect on our business outlook. There are other moving parts in the world about substitution for polypropylene in China and the length of the filters is also something that is understudy in some parts of the world. We see this as being a nice stable business that operates about where you see it is today. This might be a slightly better than average year because we had a lot of China demands. They were pulling a lot of volume from us this year so this might be a slightly better than average year. I see it as a pretty darn stable business and all those moving parts continue to give me confidence in that.

As a follow up are you happy with your asset base or do you foresee a similar need to rationalize in any areas?

No. I mean, what we have is a remarkably efficient and low cost manufacturing facility for flake here because it starts from coal, it's very vertically integrated. We put together the 2 best parts of technology from Rodia and from Eastman to put together our joint venture making flake here and this is a very key part of the advantage asset base that we have. As far as the spinning capacity and moving the tow around the world we always consider options for how we can do that more efficiently and better, should we be doing it here or there. Fortunately this is a global product where you can move it and afford to move it to where it needs to go in the world and we don't have any big asset issues that we are concerned about here.

Thanks very much.

For our next question we go to Nancy Traub with CSFB.

Hello, Nancy?

Hi, I'm sorry. I'm on now?

Yes.

Okay. I'm sorry. My questions were really answered. Thanks a lot.

Okay.

(Caller Instructions) We go next to Jeff Secaucus with JP Morgan.

Hi, Brian, good morning.

Hey, Jeff, how are you?

Good. A couple things. In general, you know, your-- I mean, I don't really --in general your results are really very strong but in the polymers area they were a little bit soft. And all things being equal everybody's polyethylene margins have really expanded and yours, I assume, expanded sharply year over year and expanded sequentially. So does that mean that PET margins got clobbered in the quarter?

You are a smart guy, Jeff. That's pretty much what happened, the PET margins got clobbered and this is about -- this is the raw material -- chasing raw materials story. I ask you to take a look at EG, look at the kinds of increases that have happened in EG and parazylene, they are really just remarkable and chasing that through our pricing has been the effort here and it's been hard to do. We will continue pushing on that and we will get them back when raw materials take a breath.

Second question is, you know, you talked about getting Eastman's margins to 10%. 10% from where you are now is maybe 250 million in operating profit and 225 a share. It may be that in that number what you assume is some normalized level from the polymers area, that's much higher than where we are now. Is that the case? Are normalized polymer earnings, I don't know, 150 million a year in your model or more?

No. First of all your assumption is right, we assume a better performance than what we see here otherwise we wouldn't want to stay in this business, so we have a lot of ideas for how this business should be improving. You seeing a transhion(ph) effect of raw materials right now that is not sustainable. Nobody could stay in this business with these kinds of margins. So you know that the industry has to catch up. Then we have the unique things that we are doing as a company to make our cost position even better through the investment we are making. But if I go back to your basic how do you get to 10% question you start with three businesses that are very strong. I think I mentioned that we had the fibers business, you know, sitting around 24% operating margins, CASPI at 15, specialty plastics at 13. That's a baseline that you start from. As we go through the cycle PCI should be pushing way on up from where it is right now. It's picked up five percentage points just in the last year, I think, and it should be heading up into the cycle and holding on there for several years. Some of the write downs that you see that we did that P. J. was asking about are about making this segment more profitable so that it will have continuing profitability beyond the cycle. And then the remaining story is what do you in polymers? Well in polymers you have to achieve the lowest cost position and you have to be able to react to the inertia of raw materials and that's what we are reacting to right now. Over the long haul there we expect to -- this dynamic of rising raw materials just cannot continue the way it is. And when it catches its breath we will catch our breath on PET. When I cook those all together into the aggregate for the company and subtract out what we are spending on developing business we should be able to get to 10% and then we have ideas on how we hold onto that longer term beyond the cycle.

Your acetate tow numbers really have been very, very nice this year and I know you guys get there from coal and everybody else gets there by a petroleum route. Is that giving you a competitive advantage or no?

Actually that whole acetyl stream that we manufacture starting with thin gas from coal is an advantage for that reason. It's yes, the answer to your question is yes but it's also flowing to some of the CASPI products. It's flowing to some of the PCI products. It's flowing, actually to specialty plastics product. That acetate stream that derives from coal flows to nearly every business we have and it is a factor in how the performance of the company is improving and how it will be in the future because of that.

And just lastly, in terms of the CASPI business, what's the distribution of revenues by geography? And sort of what were your volume trends by geography?

I'm not sure we give that out. Maybe I could get Greg on the phone with you later on because I would probably give you something wrong on the call. But CASPI is one of those businesses where we have a higher -- it's higher than the corporate average, I think, as a percentage of sales that are nonU.S.

Really?

Certainly, yeah, and I think -- I can't remember if I'm thinking about the volumes in the sales numbers or I'm thinking about the earnings numbers. But we have a couple of products that are high earnings generators that are very, very global in nature and if I had to think about the earnings profile I would almost be certain that it would be more global than the company is in the aggregate. And I would expect that to continue. We see a lot of Asian growth opportunity for our CASPI segment so I would expect that ratio to even climb higher as nonU.S.

Okay, thank you.

We go next to John Roberts with Buckingham Research.

Hello, Brian, I just want to clarify your comments on this being an average year for the fibers business, you wouldn't call this an average quarter, would you?

The quarter was a very good quarter. I said it was little bit better than average year for the fibers segment, a little better than average. This quarter we had, you know, a bunch of China sales and that helped. And we also had acetyl chemical sales. I sometimes forget to mention those. We sell flake, also. We sell cellulose acetate flake and sometimes we're selling that to other people that are making filter tow. Those have ramped up our utilization rates as well.

What I really wanted to ask about was just pulling apart the 6% Asia Pacific growth because the fibers segment was up 12% so fibers in Asia was up more than 12%. You said CASPI was up 20%, I think, in Asia.

And then SPEVO was up 20% plus roughly.

How did the average get to 6?

Because you're cannibalizing a lot of bulk liftings and PCI and other things, John. This is a little bit complicated. I have been trying to communicate this one for some time and it's hard for me to communicate. When you have the high fixed costs that we have in a company like ours or any other chemical company during bad times you do whatever you can to run at high rates. So you make a lot of low value products and they end up showing up as bulk liftings to a place like Asia. So you're selling solvents or acidic acid or something like that in Asia. Then when times get better you shift your product mix to the more profitable things and when we ship stuff to Asia then we don't ship, you know, acetic acid liftings or butanol or something like and instead we send CABs and fibers and a number of other things and that's why you would see a revenue growth of 22% while the volume only grows six because you are cannibalizing the lower value product and increasing your sales of the higher value products. You should also guess that the earnings profile changes pretty dramatically when you do that as well.

Volume and mix, then more properly for the regional?

The regional story is about mix. You are consuming bad volume and putting in good volume. And the mix is improving dramatically to the increase the revenue and the earnings.

You ought to label that volume/mix, I guess.

Yeah.

Thanks.

We go next to Kunal Banerjee with Morgan Stanley.

Hi, good morning.

Good morning.

Just a couple of questions first on the PET issue where you've been trying to pay catch up with costs. Now, the operating rates are pretty tight, so shouldn't you really be able to get past the cost issues, you know, because in a lot of other commodities they have been able to scale the costs.

We have actually been able to push prices along aggressively. I think the thing that's caught everybody is as soon as you successfully push along price increases to reflect last months raw material increases, next months raw material increases hit you and then you are playing catch up again. That's the laddering effect that we've been facing here.

So the flip side would be if costs were to go down would you be able to hang on to these price increases? Or would your customers then push you to kind of give them the concession?

Again, I think the higher operating rev -- that's where the higher operating rates do start to help you because then you can preserve and recover some of those margins that you deserve to get when raw materials start to even stabilize. If they would just even stabilize, forget about falling, you could start getting the margins that you deserve.

Right. And then in terms of -- you know, you've described that PET right now is in kind of the sweet spot regarding anti-materials, substitution, how much higher can you actually go before you start hitting up again say some of the other materials that haven't run up?

Actually we've looked at that math pretty continuously as we've gone through this process. We look at the cost of glass, cost of aluminum, very high energy contents in both of those. Other plastics have functionality issues, barrier properties or molding limitations, et cetera. Long story short we continue to see PET growth at the rates that we've reported which is something in the six to 8% range in North America, more like eight to 10% in the world. In North America that translates to something like 250,000 tons a year of new demand. More than we can address. So we continue -- and it's not just about carbonated soft drinks. Water continues to grow and many other application are now coming into play substituting glass, aluminum and even other plastics in some cases. So lots of room to continue to grow there. So you've hit it right. The issue here, Kunal, is not about opportunity to grow, it's how do you grow profitably and that gets us back to this other story about chasing raw materials.

Okay. Then just on your product mix statement, you talked about going away or walking away from the less value-added parts of the chain or of the business. If you just look at your coatings, CASPI and performance chemicals product mix effect, it's still down about a negative 1%. Were these numbers much higher in earlier periods?

I'm not sure I can -- let me ask Greg to comment on that.

I think one of the things you'd look at is you are looking at revenue, Kunal, and when you look at operating earnings the mix would show a greater impact.

But -- okay, I see what you mean.

Yeah.

Okay. Finally on your developing businesses with the post Cendian moves that you've announced is there any change in terms of how much capital is going to be allocated to your developing businesses?

Two comments, one on capital, one on expense. We've been taking a quarterly expense charge, an earnings charge against developing businesses. They've been losing money. That spend rate is going to come down next year from where it is now because of the fact that we are stepping away from some businesses and concentrating on some. In terms of CapEx we have really not announced any CapEx associated with the developing businesses to speak of. And, so that has not shown up as a big deal yet. The spend rate in developing business -- we are concentrating on about four major things that we think are the most attractive opportunities. The spend rate on those will be much lower than it is this year in 2005. And we will get more specific about all of that as we start finalizing the annual business plan and communicating that to you later on at the end of this quarter, end of this fourth quarter.

Will it be any lower than what you announced at the investor day in September.

No, it won't be any lower than that.

Okay. All right. Thank you.

We go next to Frank Dunal with Adage Capital.

Yeah, how are you guys doing, and I want to point out that Frank Mitsch is wrong, those train whistles are just the celebration for the Red Sox moving west. Just on this PET issue one last time, is there any difference in the rate of speed in which your suppliers can raise their price versus the rate of speed in which you raise your price to your customers?

Yeah. That's one of the problems, Frank, you got it. I mean, that's -- and we are chasing that all the time. Our guys are doing a great job pushing in very difficult circumstances. But I've described us as being stuck in a value chain between Exxon and Wal-Mart and there are differences in inertia when you are stuck in the middle of those. The Exxon side of this can push things about as fast as they want to and there's this huge resistance on the Wal-Mart end of this about how fast prices can go up. And I'm not the only guy facing that kind of a dynamic and it requires a lot of conversation, a lot of understanding, a lot of dialogue. And you have to do that in a way that preserves your relationships and preserves your business.

Okay. And in the press release there was a talk about in the accounts payable some sort of timing difference. Do we get that cash flow back in the fourth quarter or is this a permanent thing that's going on.

No, this is not permanent. It's just a quarter to quarter change.

Okay, thanks. That's it.

We go next to Greg midnight with UBS.

Good morning, gentlemen. Good morning, Greg, how are you? Pretty good, pretty good. A couple questions. You know, straight on the heels of your announcement of the IntegRex, MNG announced a 450,000 metric ton plant which I believe is slated for in the South Americas, someone disclosed a South American location by '06. Do you see any impact of that material in the NAFTA region?

Yes, possibly, but I think it's primarily slated for South America. The math that we did in preparing for our Integrex announcement included estimations of what was going to happen throughout the world. We made some estimations of what was going to happen in Latin America, for example, and what was announced by Image was a little bit more but not terribly different from what we expected to happen in Latin America. The dynamics in North America that you've seen play out are things that we had anticipated as well. The fundamental math that went into our Integrex Technology announcement is not altered by the Image announcement. I think they confirmed some things that are, you know, important confirmations of industry dynamics and industry structure. The fact that this is an industry that's going through its technology and scale evolutions just like other plastics have gone through, that there are going to be winners and loosers that either keep up or don't keep up in that kind of a process. Some conversions and other things may have a harder time keeping up with that, I think that's the kinds of points that they were making but otherwise I'm not anticipating any big effect of their announcement on our plans.

Were you surprised at the $70 million price tag they put on it?

I don't know what that means. They are a private company and you would have to ask them what that means. I don't know what that means, truly.

Okay. Second thing, could you comment on the near-term price increases and how they've been successful or not successful in PET, September 3 cents, October six cents, are those firmly in place now.

What I've said is that the market -- we usually don't comment specifically on how much we got. What I've said is that the market has gone up 19 cents for the year. That tells you there's been a lot of success in pushing through price increases.

Okay.

We got 3 cents on the table for November right now. That one is still out there for discussion. But you know, 19 cents on a product that typically sells for 50, 60 cents, that's a big deal. We haven't quite hit the historical highs for PET in the history of the product but we are starting to get close to the historical highs for this product and that's all driven by this raw material inertia.

In the -- my recollection is in the last fourth quarters of the last two years the market has sort of broken down in terms of discipline and people have had real trouble in getting these price increases through. You don't perceive that that's the situation this fourth quarter?

I would have a hard time, based on how we are feeling and how I perceive everyone else is feeling, I would have a hard time seeing the rationale in that. The industry is facing -- the PET industry needs and deserves better margins than we have today and we need to be able to push on those prices. I would think everyone has that in their minds right now.

And the only thing I would add to that, Greg, is as you know in the fourth quarter of last year there was a pretty good chunk of capacity added to the market. We don't see that this year.

Okay. Last question, if I could, your crackers, at one point in time I believe you were looking at the strategies or alternate things you could do to upgrade your crackers which are sort of small. Is that one of your studies that's ongoing and when would there be some conclusions from those studies.

It is one of the things that's on our mine. We've done some de-bottlenecking there. We run those remarkably efficiently compared to other people that have crackers that size and so we are able to achieve acceptable margins from those raw materials. That whole raw materials supply thing in Texas is on our minds. We have a number of ideas that we are pursuing. They are all green bananas right now, not ready to be discussed. But yeah, it's very much on our mind. We have a couple of years here. We don't have to -- we have a nice runup coming here driven by the oliphant cycle so we have a few years before we need to address this and so I'm going to -- we are going to be working on those green bananas for a little while.

Okay, thank you, gentlemen. (Caller Instructions)

And we return to Jeff Secaucus with JP Morgan.

Just a last question. With your Integrex technology are there applications outside of PET? That is could you license it to other companies to develop other polymers more efficiently?

Well, the first question is the more interesting one, are there other applications? Because this is a brand new technology that fundamentally approaches this very differently. The way we mix ingredients together allows us to think about mixing them together in different ways. We think -- we are just getting started on this technology, I guess, is the point I'm trying to make, Jeff, that we might be able to -- we can imagine functionality that was not possible in the plastics manufactured in their traditional way and that's as far as I want to go. The technology guys are working away on your question. As far as licensing it to other people we've said that we are taking a breath here before we announce how we are going to execute or prosecute a strategy on IntegRex As we go through these next six or eight months we are going to see how the market reacts, see what kinds of conversations we find ourselves in with other interested parties and we will see where this -- what the strategy of this evolves. We said that the strategy could be all the way from, you know, licensing and quick capture to building things to things that are in the middle and I'm just not willing to comment on where we are going to land on the strategy for this. The good news is that however we go after this we see a lot of value creation for our company. And that's still an open question. But your basic question is, can you do something different with the plastic? We think, yeah, you can. And that's still under exploration.

Could you use this in vinyl chloride monomer?

You are talking about replacing PVC, is that what you are talking about.

Just in the changing of the manufacturing of VCM.

I have no way of commenting. You are asking the wrong guy that question, Jeff, that would require one of our technology guys to answer but I doubt it.

That is, you know, which polymers other than PET might this find application with?

Oh, I don't have an answer for that one. We have specifically dye-designed this for a poly condensation kind of a reaction, a condensation reaction, and I'm not smart enough to answer your question, Jeff.

Okay. Thank you.

And, ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr Riddle, I will turn the conference back over to you for any closing remarks.

Okay, thanks. If there are any additional question 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, November 5th and thanks again for your interest in Eastman.

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