伊士曼化學 (EMN) 2007 Q1 法說會逐字稿

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

--let me cover two topics. First, during this call you will hear certain forward-looking statements concerning our plans and expectations for second quarter and full year 2007. 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 2007 financial results news release, on our website, and in our filings with the Securities and Exchange Commission including the Form 10-K filed for full year 2006 and the Form 10-Q to be filed for first quarter 2007.

Second, our comments today will reference non-GAAP financial measures such as earnings per share and operating earnings that exclude restructuring related items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures including a description of the restructuring related items are available on our first quarter financial results news release and the conference call tables accompanying the news release. With that, I'll turn the call over to Brian.

Well, good morning, everybody. Thank you for joining us today. This is my 20th time in a row of doing these quarterly conference calls. The drill will be similar to what you heard in the past. We'll talk about some corporate highlights and segment highlights, some comments on the regions and the second quarter outlook, finally, a corporate strategy update.

Last night, we announced a good first quarter with earnings of $1.19 per share, and the GAAP earnings were $.91 per share including restructuring related items which Rich is going to cover in a few minutes and as you know this is a bit higher than the guidance we gave you in January, primarily due to great results in our PCI and CASPI segments and I'll talk more about those in a few minutes. Sales revenue for the Company was down a bit, primarily reflecting the divestitures and the other strategic actions we've taken. If we exclude the revenue from contract ethylene sales and the divested product lines and just look at the ongoing businesses, the revenues actually increased 10% and on that same basis, the sales volume increased 5%. The volume increase underscores the operational excellence that Eastman men and women have achieved enabling our growth and we thank them for that.

Going on to the raw materials, of course the beat goes on with higher costs. Year-over-year, paraxylene is up over 10% and it looks like it's going to go higher. Propane is up slightly sequentially and it continues to go higher here early in the second quarter. Our gross margin was over 16% and our operating margin was just under 10% and while this is an okay performance, it's below where we would like to be, and that brings me back to a point that I've made previously but I think it's worth repeating again this morning. We've talked about the fact that we have five businesses that four of the five are doing really quite well. If I isolate those four businesses, CASPI, PCI, Specialty Plastics, and Fibers, combined, their revenue was up 10%. Their volume increased 5%, their earnings were up $16 million, and their operating margins stayed very strong at 17%. So we're just doing a great job of sustaining very strong performance in those businesses. That leaves the question about what do we do about fixing PET of course and I'll be saying more about that a bit later in the call here.

Moving on to some segment highlights, beginning with Fibers. Fibers bounced back in the first quarter with operating earnings of $59 million and an operating margin of 25%. This is up $13 million from the fourth quarter of '06. This was due to increased prices and higher volume and acetyl and acetate chemicals. Year-over-year the earnings have declined by $7 million primarily due to lower volumes in acetyl chemicals and acetate yard and some higher raw material and energy costs. Just a general comment on Fibers, they are off to a great start and they are on track for full year 2007 earnings to be at least as good and more likely better than 2006, so no worries about Fibers.

Next is CASPI which reported one of their best ever quarters. I think it's the third best ever quarter for CASPI. Their earnings were $65 million with an operating margin of about 19%. Their revenue was down 1% primarily due to lower volume. You may remember that we sold CASPI's ethylene product line as part of the polyethylene divestiture in the fourth quarter of '06 and so this makes the year-over-year comparison a little more difficult on volumes. And we had some reduced demand on certain lower margin adhesive product lines during the quarter. Now, looking forward in CASPI, we have seen some softening of demand related to housing and autos in North America, but we continue to be very strong in Europe and Asia and I want to remind you that we sell into very diverse market segments, have very diverse customers so combined, all the moving parts we think that CASPI is going to remain very strong and certainly within a 15 to 20% operating margin with GDP type revenue growth which is the way we have characterized CASPI in the past.

Turning next to the specialty plastics segment, we continue to have very good growth in this segment with revenue up 13%, volume up 8%, and the key reason for that is the good work and the progress that we are making with our market development and our product development efforts in this segment. To give you an example, we have amazing growth in our cellulosic products that go into liquid crystal displays. Last year's revenue growth was over 50% and we expect similar growth rates this year. Now, this is off a small base but it doesn't take long at those kinds of growth rates for that to become significant and this is a profitable business. The operating earnings for this p-bos segment were flat year-over-year, as I mentioned earlier, paraxylene cost was up significantly, and as a result, the price increases in this specialty business weren't able to completely offset those higher costs and of course we're continuing to invest for growth in this segment. Just a final comment, we are on track on our efforts to commercialize our new high temperature copolyester product in the second half of 2007.

Now transitioning to our more cyclical segments, performance chemicals and intermediates, PCI, had their best quarter ever in the first quarter of 2007. Operating earnings of $61 million were substantially better than any quarter they have had in their history. Sales revenue of $498 million included $70 million of ethylene contract sales resulting from the polyethylene divestiture that I mentioned earlier. If we exclude those contract sales, the revenue was still up 18% and volume was up 14%. These great result reflect a lot of strength across-the-board in the PCI segment. Strength in oxos, plastisizers, resins, and acetyls. We also had great results regionally. In Asia, we benefited from temporarily tight oxos products markets and that's due to maintenance down time at our competitors facilities and in North America, demand remains strong supporting some price increases. Now looking forward for PCI, propane prices have jumped and that's not good because that's our raw material, but propylene prices have also been trending upward and that generally guides our pricing so we expect continued strong results from PCI but probably a bit below their all-time record performance.

Turning now to performance polymers, while the results for this segment improved sequentially, they were down year-over-year as business conditions for PET remained very difficult in the first quarter. Beginning with North America, the operating results for PET declined year-over-year due to a couple of things. Number one, we had margin compression with higher paraxylene costs that were not completely offset by selling prices and second we had an 8 to $10 million earnings impact related to all of the IntegRex activity which was a combination of production cost associated with the facility becoming fully operational, the time that it takes for customers to qualify a new material and took a little bit longer than we thought, and the sale of off class material during the first quarter. Now looking forward to the second quarter, we expect to run our IntegRex facility at high rates for a good portion of the quarter. We don't expect the costs from the first quarter to recur in the second quarter, and so we therefore expect improved results in the second quarter compared with the first in North America.

Also, I want to make a few comments about the metaxylene outage that has been widely reported and speculated on. First, so far, we have not heard from our customers that they are having any difficulties or any concerns about procuring PET. This is a dynamic situation that we are evaluating but if you think about the math of the PET supply chain, we judge that there was about two to three months of PET inventory in the value chain at the time of this disruption, and that would mean that if we assume the disruption is about 30% of the metaxylene supply an that is a 30% shortfall for roughly two months, the math of that would say that this is not going to be a significant impact in the inventory that was already in the value chain that the customers can be supplied and that that would explain why they are not currently feeling like they are effected. Now this could change of course if the metaxyle outage was for something longer than two months. I think there's speculations by some that to do the math and two month increments and some are thinking about longer times. If it does go longer than two months there could well be an impact on supply of PET to the marketplace. If that were to occur, we're in a great position as an integrated producer we have access to the draws we need and we would be able to supply our customers.

Next is Europe. Short comment, both sales and revenue and operating results improved, primarily due to the strengthening of the euro versus the dollar and in Latin America, our sales revenue increased primarily due to higher sales volume. Operating results declined slightly because of higher raw material and energy costs.

Let me talk about the regions a minute, beginning with North America. First quarter North American revenues declined 11%, mainly due to the divestiture of the polyethylene business. If we look at the ongoing businesses only and excluding the ethylene contract sales, the revenue increased 2% primarily due to increased volume. The percent of revenue that is North American for the Company declined to approximately 54% compared with our history of 60% in '06. Of course, this is due to the divestitures. Profitability in North America declined a bit primarily due to lower results in Performance Polymers. In Europe, revenue increased by 15% driven by the strengthening of the Euro versus the dollar and increased sales volume. The higher sales volume was mostly in the Specialty Plastics segment, profitability in Europe increased with the improvement in performance polymers, CASPI, and PCI. Asia Pacific revenue increased by 20% due to increased sales volume and higher selling prices. The higher volumes were primarily in Specialty Plastics, PCI, and CASPI. Operating increased substantially primarily due to results in PCI.

Lastly, Latin America revenue grew by 4% for the year, as higher volume was offset by lower prices. Now, turning to the second quarter '07 outlook, we expect continued solid results in all of our segments with the exception of performance polymers. We also anticipate continued high end volatile raw material energy costs for the Company. For the performance polymer segment, we anticipate improved results sequentially as the positive impacts of the Company' s IntegRex technology PET facility are partially offset by continued challenging business conditions. Now, adding this all up, we expect second quarter '07 earnings per share excluding items related to ongoing strategic decisions to be between the middle and the low end of the current First Call range of analyst estimates and I think you know that that range is currently $1.14 to $1.64 with a mean of $1.33.

Now, I always close with a corporate strategy update. Today, I'd like to give you some more details on some things that you've been asking about, starting with coal gasification. We are making great progress on the ambitious goals that we set out for you at our Investor Day in November of last year. Some details.

First, GE Energy has given us a gasification license for the Gulf Coast product and we are actively working with GE Energy on the preliminary design package or the PDP. We expect to base load this facility with hydrogen, which is a high value, fast growing commodity in the U.S. Gulf. Concerning the offtake of hydrogen from the project, we are far along in negotiations with potential buyers and expect to complete those negotiations soon.

Now, the hydrogen is the baseload, Eastman will be taking off a significant amount of material from this venture as well. The chemicals that we will produce will have a first quartile cost decision. We see multiple chemical derivative opportunities, and as we mentioned in prior discussions, propylene is one of the products that we will make and we have secured a license for the lurgy methanol to propylene or MTP technology. Looking at raw materials we are in good shape to secure long term contracts for PET Coke supply for the projects and we're confident in the availability of this material for our project. We expect to enter the front end engineering and design, the so-called FEED step on this project this summer. As I mentioned earlier, we expect the gasification project will be located on the Gulf Coast and we currently have a strong preference for Texas where we are focused on a couple of sites. We expect to finalize the site selection very soon and of course the key determinant there is the success we have in negotiating local incentives for the project.

Lastly, we are very far along in discussions with co-investors for the project. I'll have all the details to give you about this project in some weeks, at most a couple of months. I know you want the names, the dates, the times. Those are not available to you right now, but the point is that all the critical pieces of this project are coming together and we are on the way to making these projects happen. By the way, I've reported to you on one project here, this isn't the only project that we are working on. There are others and I expect to give you some more detail about at least one more of those later this year.

Now, next on PET, we've talked about four of our five businesses doing so well, working on the PET business. I attended the opening of our IntegRex manufacturing facility in South Carolina last week with a number of state and local officials where we were recognizing this very significant accomplishment, and as I mentioned earlier, the facility is fully operational at 350,000 metric tons. We have demonstrated we can run it at 120% of that nameplate capacity. We are making Class One product at greater than 98% years. Our ParaStar resin is in use in multiple plants and multiple locations in North America including those of our valued customer Constar International and tens of millions of bottles made with ParaStar PET are available on the shelves for soft drinks and water. We're also moving forward with our transformation of the of South Carolina site. Among a number of actions we're taking will be the rationalization of about 350,000 metric tons of older, less efficient PET capacity, 50,000 metric tons is already down and most of the remaining 300,000 tons will be done by year-end with all of it being completed by the first quarter of 2008. Now, I should remind you that our Specialty Plastics business will be inheriting some of the capacity that is being made idle by the Performance Polymers guys. That is part of the integrated strategy that we have talked about with you in the past so they will be over time taking more and more of this idle capacity and that's a very good story for us.

Also, we're moving ahead with our strategic actions on facilities outside the United States. We recently announced the sale of our Spain facility La Seda and Rich will give you more about that in a minute and we are still very committed to completing the strategic actions for the assets that remain. So to wrap this up, we are on track to execute our coal gasification strategy and to improve our PET profitability. We're making great progress in a number of other areas as well. We just don't have time to talk about today, and at the same time, we continue to report solid earnings, so you should expect continued progress from us during the year while we maintain very solid profitability. With that let me turn it over to Rich.

Thank you, Brian, and good morning, everyone. This morning, I'll discuss our normal agenda, cash flow, interest expense, our tax rate, and overall financial position or net debt. But first I'd like to add some color around our restructuring related items. As we've talked about, we have taken and will continue to take a number of aggressive actions to improve the profitability of the Company. First, in the PET business, as we announced in February, we signed a Definitive Agreement with La Seda to divest our San Roque, Spain PET manufacturing facility and its related assets and product lines. That transaction is scheduled to close very shortly. The overall cash value to Eastman of our decision to divest this business will be approximately $75 million. This total cash value is a combination of the proceeds we'll receive from La Seda for the assets and working capital at closing, but also includes the inventory we've sold and the accounts receivable we've collected since the plant was shut down several months ago.

Looking forward, the divestiture will be slightly accretive to earnings. The major charge related to the transaction was an asset impairment cost of $18 million. As Brian talked about a minute ago, we're also taking actions in transformation of our South Carolina PET facility. These include shutting down certain of our highest cost PET lines or assets and as you'll recall we reported accelerated depreciation costs of $7 million in the fourth quarter related to these actions. We incurred another $7 million of accelerated depreciation costs in the first quarter of this year. We expect to continue to incur these costs at around this level for each of the next three quarters.

In addition to the charges for PET, we also recorded accelerated depreciation costs of $7 million related to the older Cracker assets at our Longview, Texas site which impact the PCI segment. As we announced previously, over time, we'll be shutting down these older Crackers at the Texas facility which is directly related to the divestiture of the polyethylene business in the fourth quarter of last year. We are on track for shutting down one of the Crackers by the end of this year and have another scheduled in the middle of 2008.

As a result, we expect to incur accelerated depreciation costs at about the same level in the second quarter with an additional 5 million in total in the second half of the year. As I discussed briefly during the last conference call, these writedowns were not booked as specific asset impairments and fully recorded in one quarter, since these assets do not have a separately identifiable cash flow to allow for an impairment calculation as defined in Financial Accounting Standard 144; however since these assets are directly linked to the major restructuring actions, we've called them out, we've called out the accelerated depreciation as non-recurring.

Now looking at cash flow, in the first quarter our cash from operations as highlighted in our cash flow table was actually a negative or a use of cash of $66 million. Primary driver was the $100 million contribution we made in January to the U.S. Defined Benefit Pension Plan. If I exclude this contribution, our cash from operations is positive and it's pretty similar to the first quarter of last year. Just as a reminder, with this contribution, we're effectively at a 100% funded level and we don't expect to contribute any additional funds in 2007, and looking forward, it's unlikely that we'll be required to make another contribution over the next several years.

On uses of cash, our Capital Expenditures were $86 million in the first quarter. For the remainder of the year, we expect that they will be higher as compared to 2006. The key drivers of that are the continued transformation of our PET facility in South Carolina, commercialization of our new high temperature co-polyester which is coming on in the second half of the year, and the expansion that's under way at Workington in the UK where we're expanding the acetate facility. Right now, I continue to expect capital expenditures to be approximately $450 million for this year, and that's about $60 million higher than last year.

This total of $450 million is above our expected full year 2007 depreciation and amortization expense which is about $350 million which includes about $50 million of accelerated depreciation as we continue to spend on our growth initiatives. We did get started on the $300 million share repurchase program that was authorized by the Board in February and under this program, we've repurchased purchased 560 shares of stock for $33 million during the first quarter. Going forward, we'll continue to be opportunistic as we re purchase shares and also as we did in the first quarter, and also as we did in the first quarter, we'll have a 10-B 5-1 program in place to continue to execute that plan.

Now looking at net interest expense, our net interest expense was $18 million for the quarter, slightly lower than the first quarter last year. That's primarily as a result of higher interest income on our invested cash balance. We continue to expect our net interest expense to be about $70 million this year. Turning to our effective tax rate, our rate on normalized earnings was 35% for the quarter which was in line with expectations, and we continue to expect our full year effective tax rate to be about that same level, 35%.

Last, on net debt, right now, we're at $762 million. Our financial profile remains very strong with a net debt-to-capital ratio of 27%. Just the usual reminder, our priorities for uses of cash are to continue to support the dividend and we've paid a dividend to shareholders every quarter since we've been a public Company. Obviously, targeting funding these profitable growth initiatives that are under way, and we continue to make good progress on these initiatives with IntegRex, our new high temperature co-polyesters and our efforts in coal gasification as Brian just discussed. Lastly, we'll continue with the share repurchase program to return additional value to shareholders. With that, back to you, Greg.

Thanks, Rich, and this concludes our prepared remarks. We are ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from P.J. Juvekar.

Yes, hi, good morning.

Good morning, P. J, how are you?

PET, you mentioned positive impact sequentially from IntegRex. Can you quantify that impact? We're looking for some guidance on this technology and what you can contribute to the bottom line?

I can, we have quantified the impact of IntegRex for you before saying we can achieve reinvestment economics at Asian cash costs, that gives you a sense of how good the technology is. It is every bit as good as what we said it was when we were characterizing it before. I think what you're looking for is how many millions of dollars will PET grow Q1 to Q2 and I'm really not willing to do that for you specifically. I think you can look at the ongoing businesses as it's already performing pretty darn good, so they are going to be moving more sideways than up, and I think a lot of that improvement is going from quarter to quarter ad the guidance is driven by PET.

Okay. And you gave a nice update on the coal gasification technology. I know you're looking for co-investor. What do you expect your capital outlook to be for this project?

We've -- I'll give you a hypothetical structure that we've used and just a way to talk with people about this. These investments for the first couple of investments are a bit above $1 billion all in, and so the structure that we're imagining is a leveraged project financing kind of structure. Depending on the quality of the contracts for ins and outs, the leverage could be anywhere from 60 to 75%. Let's say that for the sake of argument that there's $400 million of equity that has to be put into this billion plus project, we could be in there for something a bit less than half. We've chosen to stay in the minority here because we want to, we don't want to see all that debt show up on our books, so the co-investors would pick up a bit more than half. We would pick up a bit less than half. And of course then we also sign up for taking material off, so that's roughly the math on the first one and the second one. Some day we'll talk about a third one, but that's how the first couple start out.

Great. Thank you.

We'll take our next question from Jeff Zekauskas, of JPMorgan.

Hi, good morning.

Good morning, Jeff.

A couple of short questions. How much money did you lose in San Roque in the first quarter of '06?

Jeff, we really don't break out all the details plant by plant and business by business across PET, but as I said, it is going to be slightly accretive to earnings when that's completely off our books.

Okay, Slightly accretive to earnings. And slightly accretive to earnings, that is after you factor in I guess the 75 million -- that's after you factor in the benefits you get from the 75 million in proceeds you'll receive, or the 75 million offsets whatever is going on in San Roque and the other steps you've taken? If you could just clarify what slightly accretive means.

Well, we're trying to look forward and imagine what the picture might be in the future, so it's hard for us to put an exact EPS number to it, but the plant itself was losing money and the 75 million will create an opportunity for some interest income.

But part of that 75 million is recovering receivables, Jeff, so when he says slightly accretive, he's talking to EPS and the standard EPS calculation, receivables are cash. They aren't part of your EPS calculation.

Okay. Second thing is, in very rough terms, is IntegRex, I don't know, $0.04 a pound more efficient than the capacity you're closing down in South Carolina?

What we have said is that it's about half the conversion costs and -- half the conversion costs of a standard facility and, Greg?

That would be a full IntegRex. The facility in South Carolina is not the full IntegRex, that doesn't have the PTA part of it so we said it's about a third.

Yes. What we're saying is we're not going to give you cents per pound but it's not one and it's not ten and it's somewhere in the middle. It's a meaningful difference, and we're trying not to be too specific about that for reasons you might understand because this gets into the negotiation with customers and others.

And in terms of the Fibers business, if you stripped out the acetate yarn element from last year and from this year, what would the comparison look like?

That would have been about flat. That's a good question. All of the decline there was driven by the chemicals and the yarn, and so the fibers to the toe was about flat. Remember the word chunky. We've used that word here so this is, fibers, the acetate toe is continuing to grow over time and it will come in chunky bits along the way.

And then lastly from a strategic point of view, do you think you're being a little too bullish about PET this year because paraxylene seems to be going up at an unusually high rate and PET buyers seem to be more interested in buying Asian material or at least that's the sense we get, perhaps we're in our--?

Well, I guess first of all, we are not bullish about the industry structure or the market conditions. We think these are lousy market conditions and a very tough industry structure. There's nothing bullish about our view there. We could look at our order book and see that we're basically sold out on the IntegRex facility and expect to be sold out for as far as we can see into the future. The customers love the quality of this product and that is, and we can be very competitive on the price with whatever the Asians are selling it at, so that's the reason for our view, and when we look at our cost position running that plant flat out, then that gives us this earnings outlook.

Okay, thank you very much.

Moving on, we will take our next question from Frank Mitsch, BB&T Capital Markets.

Happy anniversary, Brian.

Well, and speaking from PCI, Kingsford here, all the crew and staff wants to know what's on your fertile mind this morning.

Actually, PCI is is on my mind. You referenced some business coming up from Asia due to a competitor's outage on the oxos side. Can you size that for us and any of that spill into Q2?

Yes. I can size it for you in that there were two or three plants down that basically allowed us to run flat out at some decent prices in Asia. That pumped up their first quarter a fair bit. Did we say how much, Greg? We didn't. It pumped it up a fair bit. It is going to run into the second quarter some, and probably not quite as large, but it's still running into the second quarter, so we're happy about it.

Well, you basically had a 19 million sequential increase, fourth quarter to first quarter. I know you're not going to size it for us but similar to conversion costs, IntegRex is it a third, is it half?

You're talking about the PCI increase or are you talking about the whole company increase?

No, no, the PCI increase.

Yes, the Asia piece was probably on the order of half of what was going on there.

I'm sorry, and then some of that spills into Q2 and so that gives us a better idea.

Yes.

And you referenced also CASPI's positive results in the face of a slowing North American market. What percent of CASPI is North American Housing and Auto?

To get the size it two ways for you. About 20% of our company, so a broader comment, about 20% of our company sales are in transportation or building construction. About 50% of CASPI sales are in building construction, transportation, but if we start breaking down the very detailed market segments that we are in in CASPI and building construction and transportation, a much smaller fraction of that 50% is OEM, especially North American OEM's because we serve a lot of different OEM's so if there's a shared shift that's going on between auto makers, it doesn't necessarily mean we're heading South, and a lot of our architectural is people repainting, a lot of our auto is refinish, so we're really down to 10 or 20% is exposed to this kind of cyclicality in North America, and so that's why we're not feeling quite as concerned about this kind of economic move here.

All right and then how is the trend in that for the second quarter, that piece?

As we said, that 10 to 20% piece is going to be softer. We think it's going to be offset by some of the strength in Europe and Asia, and some of the very diversified other segments we have. There may be a bit of softness that shows up there but it's not going to be a big deal for CASPI I don't think.

Terrific and lastly, I think you break out that the foreign exchange impact was 2% on your top line. Do you have any ideas as to what currency has added to the bottom line for the quarter and I'd assume that you'd expect that to continue in the second quarter as well?

Frank, the only thing I will say is yes, we expect it to continue into the second quarter, and we don't break out the exact numbers about how much is currency.

And moving on, we will hear from Mike Judd from Greenwich Consultants.

Good morning, Mike.

Mike, are you there?

(OPERATOR INSTRUCTIONS)

Okay, maybe we lost him.

Moving on, we'll hear from Gregg Goodnight from UBS.

Good morning guys.

Good morning, Gregg.

A couple questions. The plants, the PET plants that we're going to start up the Star PET plant, in Vista, do you know the status of those plants? Are they running or trying to run?

I hear the same scuttlebutt hat everybody else hears so I don't have any special insights for you Gregg. You probably have as good a pipeline of what's going on there as I do. Obviously we don't talk to those folks.

Are you feeling them in the market I guess?

Not really. Not yet.

Second question, you mentioned that people have been sizing this BP outages perhaps two months and if it moved past then perhaps it would be more market impact. Do you have any specific information to what the status of that metaxylene plant is?

We don't buy metaxylene from those folks so they don't have a reason to want to talk to us so the answer is no. What our speculation, we speculate that if this thing went four months, now you're starting to chew on the inventory in the supply chain pretty severely so we're like everybody else, just trying to watch and see what happens, but no, they sure don't talk to us because we don't buy from them.

Okay, but the market hasn't, you haven't felt the tightness, you haven't felt a pick up, so--.

No. We have heard our customers are making trips to Asia to make sure that they can cover themselves if something happens but we haven't had any urgent calls from customers saying that they are feeling exposed and they need our help.

Okay, now seasonal order patterns, second quarter tend to get stronger. What is your outlook this year? Is it atypical second quarter so far?

Yes. It is going to be definitely stronger on volume and you can kind of, it's like the rain coming in the Spring time. That's the PET industry.

And you mentioned higher second quarter operating rates for IntegRex. Would you put a percent on that? Is it going to be 120 or is it going to be--?

We don't have, what we've demonstrated the 120, we have to do a little more work on the infrastructure to support that level of production. You may remember we announced a debottleneck before we even had the plant going. This is part of the work we still have to do but basically we're making all we can make. Probably abetter than than 350,000 rate, but we're going to make as much as we can make during this quarter, the order books support that.

Will you have to cut back your other production to balance your system?

Some places we might, absolutely. We get the benefit of the lower conversion costs of course when we do that.

That's all I had. Thanks a lot.

Yes.

Just as a reminder if you do have a question please press star one. (OPERATOR INSTRUCTIONS) We'll now go to Mike Judd, Greenwich Consultants.

Congratulations on a good quarter.

Thanks, Mike.

You mentioned what the net debt to total capital was. That implied a cash balance of about 825 million or so. Is that about right?

It's 833.

Good calculation, Mike.

Okay, all right and a couple other questions. I'm sorry to beat this PET thing to death, but as you look out perhaps further than the second quarter, and I realize there's a lot of moving parts here obviously but you start looking into the September-December quarter, do you think that that business will be breakeven from an operating profit perspective?

Yes, good question. Some of that depends on, I think, yes, we're going in that direction step wise, Greg. Here are the steps to get us to that area of positive performance that we talked about by the middle of '08. We have the strategic actions on the outside U.S. plants. We've already sold Spain. We have to take our actions with the remaining ones. The timing of that factors into your question. The pace that we can get some of these older less efficient lines down, the pace that we can do some of the debottlenecking to make this facility run at 120 or maybe better than 120% performance consistently, all of those are kind of gathering up around the end of the year so it's kind of, by the time you get to the end of year we are well toward the goal that you just talked about, probably moving towards positive territory. What we've said is second half of '08, we're shooting for something in the neighborhood of 10%, and so we're still expecting conditions to be pretty rotten in the marketplace. So it's not a straight line picture between the two but end of the year we start to get some of those pieces in place.

Okay and then you made your big pension contribution in the March quarter of $100 million. You got things in pretty good shape there. The share count continues to creep up here. You got $75 million coming in in the June quarter. Should we expect that the share count is going to remain flattish here or is it going to continue just to creep up?

Yes. We saw some share count creep due to some stock option exercises and obviously that's a reflection of how successful we've been as a company and our share price and our employees which have had some long, good patience holding on to options, so that's difficult to predict, but certainly we would expect some option exercising and we're going to continue with our share repurchase program. Tough to predict exactly how that is going to balance out, but we're just going to keep moving ahead with our repurchase program.

Okay and then just finally, in the fibers area, you commented about how toe did in the first quarter. The other parts of that business, is there a seasonal aspect to that or how should we be thinking about that in June and going forward?

Yes, there is something of a seasonal aspect to it and yarn, for example, this is, the business quality there is according to the whims of fashion choices and fashion choices are not Eastman's forte. We understand that that business will be picking up a bit later in the year here, but this is not going to be a continuing trajectory downward if that's what you're asking, this is one of those things that flops around a little bit based on both the market circumstances and some seasonal issues.

Thanks for the help.

Yes.

We'll take our next question from Kevin McCarthy, Banc of America Securities.

Thanks, good morning.

Good morning, Kevin. Given the volatility, Brian, in the aromatics complex and Para in particular, I am just wondering if there's anything creative you feel you can do on the strategic front to mitigate that volatility? For example, if you look at the oil companies that make Para on the Gulf, do you think any of them would have a strategic interest in moving downstream into the resin business in partnership with you or would you have an interest in exploring that sort of thing? First of all, Kevin, I like the way you think. Your point about the volatility and how it wags us around is a big deal and it's been very much on our mind. So the conversation has been on several fronts. What are the financial instruments that you have that you can use to mitigate that volatility and that goes to all kinds of hedging and proxy hedging kinds of things that you can do where you have a lot of work going around that to minimize that. You didn't mention the olefin stream but the fact that we have reduced our exposure to polyethylene and have some steady olefin derivatives and we've reduced some of of our volatility in that particular business, you're asking about some ability to vertically integrate and get some not only scale, get some volatility reduction.

We said in November, we hinted pretty broadly that that kind of an idea was on our mind. Nothing to report here, but that is a way of reducing your volatility, spreading your exposure, increasing more competitive advantage, and the fact that we have this great IntegRex technology, all of a sudden makes us a more attractive person to be conversing with. If you're in those circles, so those conversations are going on right now, Kevin, and we're thinking very creatively about what can we do to boost this business for the long term.

Interesting, okay, thanks. And then on the CASPI front, Brian, in the past I think you've been very forthright in reminding us there's a commodity solvent component to that business, yet profitability actually increased year-over-year and sequentially there, so I keep waiting for a shoe to drop and you keep posting good numbers. Can you maybe update us on the outlook, maybe following up on Frank's question on some of the macro angles, what's your projected profit outlook next couple of quarters in CASPI?

Yes. What you're pointing out is I called four of the last zero solvent recessions. And we are surprised by the strength of the Asian economies and how much they are able to soak up and that has been a source of good growth. Europe continues, the euro exchange dramatically helps CASPI, so in an environment where the euro exchange is in our favor, Asia continues to boom, and actually, some of the creativity these guys are showing in North America, I guess I'm not prepared to predict the fifth solvent recession. So far, everything looks pretty solid in CASPI. I don't see any near term major fall off in the outlook that I have right now, Kevin.

And finally if I may, I know that cellulosic into LCD is a small base, but what is that base roughly and what is the growth rate off of that base?

Things started essentially at zero a couple years ago, and the market was dominated by Dicell who sells to Fuji and Dicell was casting the films that are these barrier films in LCD displays. All of the LCD TV's that are being sold have these materials in there, and it was basically a one supplier thing for the world in a booming market. Other makers of these films have come to us and they like the quality of our material. They are investing heavily in building LCD screen capability and they are relying on us to supply them. So this is going to be a business that's going to be meaningful. At some point, this is going to be 50 to $100 million of sales. This is going to have a very good profit margin. These are proprietary materials in some cases and not just one product that we are selling, we're selling several and some of them are very profitable, so this is a business that within a few years, growing at 50% a year it doesn't make much of a base before it gets to be significant. Two years from now, this is going to be, I don't know, it's going to be three digit kind of a sales number and it's going to have a healthy healthy margin on it, and it's an exciting, it's just new life for an old product line that we're very excited about.

Okay, thank you very much.

We will now take our next question from Sergey Vasnetsov, Lehman.

Good morning.

Good morning.

Some ten years ago, Eastman invested more than $750 million into four new PET plants which were Wolfscale at the time. Now you're selling them at a combined area of the working capital which is a polite way to say that you're giving away production capacity, technology and customers for free, so if I look at the PET business, for the past ten years, the RONA in this business on average shipments has been 6% and I would assume that the existing plants that you're selling would have been much lower. I don't know what number it is, and so frankly, I don't recall any other examples of such a rapid value destruction in brand new plants so IntegRex sounds like a great technology, I would agree, but it's a terrible market and I don't know how you see it getting any better. I didn't hear anything on that and yet you prepare to put another bid in, so I guess my question is twofold. One, what's the RONA for this new plant, for these four plants have been? Historically you have announced it so you must know that. Secondly what kind of lessons have you learned from that?

Well, first of all, your analysis is spot on, Sergey. I would not dispute your historical view. This is a classic Michael Porter five forces analysis about how available is the technology, how much power you have in buying raw materials, how much power you have as a seller of the product, what is the nature of the competition, every angle of the Porter five forces analysis says that this is a very very tough business and you could really predict looking forward that that would be the case. So your question is exactly on the money. Why would anybody want to build in this business if you have that kind of an outlook. That's exactly what we said to ourselves. What would it take for us to ever have the desire to build in this because frankly, this business has to compete with other choices we have for spending capital. We've been very blunt on that with our business organization.

One thing I can say about the IntegRex investment and the SCO transformation, the south Carolina Operations transformation, we will never regret, ever, the investment that we have made in that new plant and the refurbishment of the facilities down there. The return on that is great. So starting with where we had had, we're going to be very happy with that investment. The fact is is that when we look at the ex-U.S. assets we don't see a good way to keep them in our portfolio as they are today, and so we have to do something different and that is the way that that was. We will never be investing in classic PET plants like that in that kind of a configuration again.

Now, you asked the question, why would you invest in the future? The only way that we can find our way clear to investing in the future is if we have a compelling value proposition, some combination of capital efficiency, because you have some great place where you can put this in low capital areas, some kind of an advantaged input, some kind of a guaranteed output, some kind of a reduced exposure to market volatility, those are the combinations we're looking for, so your point is why would you invest in this the way you have invested in the past. We wouldn't. We wouldn't invest in this the way we have invested in the past so I'm not announcing any new investments today. I don't know when it is we'll be announcing new investments but right now we have no regrets about what we have done. We have no regrets about the actions we're taking ex-U.S.

Second question is on your new gasification plant. I would count a capital debt with its own balance sheet or old balance sheet so lets see some kind of return in round terms, 500 million. What kind of return on capital do you expect from this investment?

These projects are very attractive. The large spread between solid hydrocarbons and liquid and gas hydrocarbons soaks up a lot of capital so we have said that these are at least midteens kind of returns. If you look at lever returns they get better than that, so these are good investments, and if we mitigate some of the market exposure, that makes them even more attractive, so we're expecting IRR's greater than 15% on kind of the base investment and of course if you judge it as a levered return it can get better than that.

Lastly, about so called unusual and accelerated appreciation. Those are been planned in advance, discussed in details on January conference call, will be repeated in several future quarters and similar in nature to many other charges have taken in the past four years and likely future. So the accelerated appreciation works in your favor as usual for your operating cash flow and yet you would like to see it unusual on P&L so given we're dealing with nature, frequency and recurrent items what's unusual about it?

Sergey, we give people the choice. We have, first of all, the things that we have called out are not going to recur. We're not going to have continuing depreciation in the items that we have called out but the point is, you have the choice. We give you all the data. You can look at the GAAP number. You can look at the way we have calculated the pro forma numbers. You have all the data to put pieces and parts in between them at your choosing, and you get to judge the quality of the earnings just as every investor does, and that's all I'd say about that.

Okay, thank you for the question and answers.

This will be the last question, please.

The last question is from Andrew Feinman. Iridian Asset Management.

Thank you.

Good morning, Andy.

Good morning.

Can you just tell me, Rich, how much of of the 75 million is already done, the proceeds from Spain? How much is already booked as of the end of the quarter?

Yes. In round numbers, approximately half. That would be since we announced the shut down, we've been collecting receivables and moving out inventory.

Okay. And I assume it's about that your securitized receivables are about 200 million again?

That's correct.

And the only other question is there was not any insider selling during the quarter that I could find any record of but the proceeds from stock option exercises and other items was 49 million, in flow of cash versus 1 million in flow of cash in last years first quarter, so I wanted to understand what that is and also to understand it, all these people at the Company are exercising and then keeping ing the stock. They aren't just dumping it to take the money. They are actually making an investment in your future.

Andy, part of that's true. We had a program of stock option awards through the years especially some years ago where a broad variety of employees received options, not just the very senior people, so there's a broad participation in this. I don't know how to better describe it other than we've done very well. The Company's stock price shows that, and as a form of compensation, these employees are exercising those options.

Andy, we're washing through an inventory of options that have built up over a period of longer than five or six years , and there was, you remember the history. We've been talking about it for five or six years. There was a long time when people had under water options and now that they're looking good those have been held for a number of years and we're washing through an inventory. This is not a steady state kind of situation. It's kind of about working out inventory that's been there for a long

Great. I tell you if you guys keep doing such a good job, you might even get a buy recommendation from somebody on the sell-side.

We'll just see.

Okay, thanks again, everyone for joining us and an audio replay of this call will be available this afternoon through Friday, May 4. Have a great day,

and that does conclude today's conference. Thank you all for your participation.