伊士曼化學 (EMN) 2007 Q2 法說會逐字稿

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

Okay, thank you, and good morning, everyone, and thank you for joining us. On the call with me today are Brian Ferguson, Chairman and CEO; Rich Lorraine, Senior Vice President and Chief Financial Officer; and Jennifer Boyney, Manager of Investor Relations.

Before we begin let me cover two items. First, during this call you will hear certain forward-looking statements concerning our plans and expectations for third 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 second 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 second quarter 2007.

The second item is 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 in our second quarter financial results news release and in the conference call tables accompanying in the news release. With that I'll turn the call over to Brian.

Well, good morning everybody, and thanks for joining us. Glad you're here. We all had such a dandy day in the markets yesterday we thought we would change the order of our remarks around today to see if we could bring a little bit of luck to all of us so I'm going to start today talking about some of the strategic initiatives and at the second half of my comments I'm going to talk about the quarter. One of the reasons I'm doing that, there's been some late breaking news that we just released here at 7:00 this morning. I'm not sure that everybody has had a chance to hear about it, so I thought I'd start there.

Over the last couple of years, we've had an ongoing dialogue with you about our strategy for leveraging our expertise in coal gasification to create value. We're at the point now where significant progress has been made on the first two gasification projects that we will be involved with and I want to give you more details today.

Beginning with our Texas gasification project, Eastman will be the developer, Operator, co-investor and customer of this project. Just last night about 8:00 p.m. Central, local officials in Beaumont Texas gave preliminary approval to a package of incentives. So based on this action and our other project development work, we plan to locate the project in Beaumont. You may have seen an announcement last week by Terra Industries that we have acquired an option to purchase their existing methanol and ammonia assets located in Beaumont. We expect the Terra assets will fit in well with this project to make derivatives from the synthesis gas and the result is much reduced capital cost to compared to building greenfield methanol and ammonia facilities. We are currently working with Fleur on the front end engineering and design process and we expect to have it completed during the Summer of 2008. As I previously mentioned we will be using the GE Energy gasification technology which we've operated successfully for about 25 years in Kingsport, and our process design package is well under way and on schedule.

We will be the operations and maintenance provider to the project. The primary raw material for the project will be PET Coke and we have access to supply from a number of refinery producers located in the Gulf. The product portfolio for the project is defined and the full slate of products for this project will be sold under long term contracts before we go forward with construction. This is a new wrinkle in the way we are doing business and a very important change for us. The primary base load product will be hydrogen and Air Products has signed a Letter of Intent to purchase hydrogen from the project on a long term basis. Air Products will also construct and operate air separation units to produce oxygen for the project. We've worked with Air Products for many many years and they've been associated with our gasification facility in Kingsport so we're looking forward to continuing that very successful relationship going forward.

Another base load product will be advantaged methanol. We have several avenues for creating value for methanol and we are making great progress with our internal R&D on ways to take methanol through to chemical derivatives that are strategic to us.

Environmental stewardship is a very important part of this project. We expect to sell nearly all of the carbon dioxide produced into the enhanced oil recovery market in the Gulf Coast. Additionally the advanced gasification process that we are using is essentially free of sulfur, free of mercury, and free of arsenic emissions. The preliminary capital number for the project is $1.6 billion, but this needs to be validated during the front end design process. We have a private equity investor. Today is not the day we will name them but they are a very respected name that you will know when you hear them. Eastman's equity position in the project will be 50%. The project will rely on non-recourse project financing with a target of 65 to 70% commercial debt. Now, this is a project that is attractive enough to encourage private equity investors to invest in the project. It has a business profile that encourages banks to lend to it and so that gives you some idea about the attractiveness and the return potential of the project. This project should break ground in the first part of 2009 and is expected to be online in 2011.

Moving on to our second project which is our involvement with the Faustina hydrogen products gasification project that was announced about a month ago. First, we expect to be at least a 25% equity investor in this project. To that end we have provided developmental capital and we'll provide to do so as the project moves forward. We also will be the operations and maintenance provider to this project and we will purchase Advantaged Methanol under a long term supply agreement, so we will be the Operator, a co-investor and a customer of this project and as Faustina indicated in their announcement the project is expected to be completed in 2010.

The bottom line is we're moving forward on executing our strategy in gasification and the first two projects are in and of themselves very significant and large for Eastman, while these two projects are our primary focus today, we are working on other early stage opportunities as well that could be interesting to us and we'll talk more about those at another time. as I said we've issued a press release at 7:00 a.m. this morning that has more color on the comments that I just made.

So next I'll give you a quick update on the progress we're making in improving the profitability of our PET business. First, our IntegRex PET facility in South Carolina is running very well. We have been able to run it as high as 120% of name plate and it routinely operates above the name plate value. We are selling all of the material that we make there as prime material at market prices. We continue to qualify customers one at a time on our ParaStar PET going from customer to customer and machine to machine. We are in the process of converting a 50,000 metric ton PET line to co-polyester and expect to do more conversions as we continue to shut down PET lines over the next 12 months in South Carolina. And lastly, we continue to make excellent progress with the strategic actions we're taking with our PET sites outside the U.S. We're very close to a resolution on a couple of the properties and we're on track to get the others done in a timely manner.

Of course, there are a number of other strategic initiatives where we're making great progress, for instance in Specialty Plastics our new high temperature co-polyester and in Fibers the acetate tow expansion that we are adding in England. Just to summarize we're doing a great job of executing on our corporate strategy and I'm very confident that it's going to lead to a very profitable and successful future.

Now I will switch to the comments for the second quarter. it should be clear to all of you that even with all of the activity on the strategic initiatives we have not taken our eye off the ball. Last night we reported GAAP earnings per share of $1.22 and if you exclude accelerated appreciation cost of $14 million and asset impairments and restructuring charges of 2 million both of which are related to actions are taking to improve profitability, our second quarter EPS was $1.34. Our sales revenue at $1.9 billion was down slightly year-over-year and as in the first quarter, this primarily reflects divestitures and other strategic actions we've taken.

If we exclude the transitional ethylene sales and the divested product lines our revenues actually increased by 6% and this was primarily due to higher selling prices that were needed to offset higher and volatile raw material and energy costs which for us increased about $50 million in the second quarter over the year ago period. The operating margin for the quarter after excluding the ethylene sales and the other items I mentioned was 10%, and so this reflects strong results in four out of five of our segments, and as I mentioned earlier, we're making great progress toward improving the results of our fifth segment which is PET.

Next up is our segment comments for the second quarter, a segment at a time. Our strong base of businesses which as you know consists of Fibers, CASPI, and Specialty Plastics, is maintaining a high level of performance. Combined, those three businesses had an operating margin of 17% in the second quarter. Looking at them individually starting with Fibers, Fibers operating earnings were $51 million in the second quarter of 2007 with an operating margin of 21%. Volumes were down year-over-year due to the usual chunkiness we see in acetate tow demand and a short-term operational issue at a customer which impacted our acetyl chemicals volumes. As a result the operating earnings were down a bit year-over-year; however, we expect Fibers to have a strong second half. We expect that full year earnings for Fibers will be at least as good if not better than last years earnings.

Next is CASPI, where second quarter operating earnings were very strong at $66 million, and the first half results for 2007 were the same as the record level from 2006. Their operating margin for the second quarter and the first half was 18% at the high end of the 15 to 20% operating margin range that we usually ascribe to them. Sales revenue increased by 4% mostly due to increased prices needed to offset the higher raws and energy. Volumes were down mainly due to the divestiture of ethylene last year. We anticipate CASPI will have a strong second half of the year and they continue to offset softness in the domestic housing and auto markets with strength in Europe and Asia and a very diverse set of products and markets across the globe.

Turning to Specialty Plastics segments, sales revenue increased by 7%. Volume was up slightly for the segment as a whole. I should break that out for you a little bit. We had cellulosics volume growth of 14%, as they continue to grow in the LCD market. Our co-polyester volume growth was 7% as we continued to benefit from our market development efforts, but other demand declined significantly for polyester products used in traditional photographic and optical film markets, and that mostly offset the volume growth in co-polyesters and cellulosics, so that effect will play out for another year or more masking the overall growth in the segments that we are investing in in Specialty Plastics.

Operating earnings improved to $20 million for the second quarter as we had some margin expansion, and we're on track to begin commercializing our new, high temperature co- polyester in the second half of the year.

Next is Performance Chemicals and Intermediates. They had another great quarter with operating earnings of $64 million. Revenue was $552 million, that includes $74 million of contract ethylene sales and you remember these are related to the sale of polyethylene and supplying that plant, excluding the contract ethylene sales, revenue was up 19% and sales volume increased 13%. The great results reflect continued strength across-the-board for the segment, for Oxos, resins, plasticizers and acetyls. Looking forward, we see continued strength for this segment and we expect the competitors of acetic acid to limit some softness we might have expected in derivatives in the second half of this year.

Next is the Performance Polymers segment. Operating results were down year-over-year. Second quarter '06 results included $15 million of operating earnings from polyethylene which are now gone. Excluding the PE results and accelerated depreciation costs, PET operating results declined by 5 million year-over-year. In North America, the decline was the result of lower industry operating rates that led to compressed margins and volatile paraxylene prices certainly played a role as well. In Europe, our results were actually up year over year as we benefited from both strong end market demand and the divestiture of our Spain site in April.

Sequentially, results improved significantly for PET. The primary driver was North America where results improved by about $20 million as we benefited from higher operating rates at our IntegRex facility and from the lack of cost associated with the start-up of that facility. Looking forward, we think we can maintain much of the improvement in our North American PET results, although the volatility of paraxylene is a key variable, but we also expect results in Europe and Latin America will decline in the second half due to the usual seasonality in Europe and volatile raw material and energy costs.

Results in North America will improve further after we complete work to facilitate the transformation at our South Carolina site and we continue to move customers over to ParaStar, so as I mentioned earlier we're making progress with the strategic actions with our PET facilities outside the U.S. Also.

Some comments on the regions, beginning with North America. Second quarter North American revenues declined 3% mainly due to the divestiture of polyethylene. If we look at the ongoing businesses and excluding the contract ethylene sales, revenue increased 9% primarily due to increased volume. The percent of our revenue that comes from North America now has declined to 54% of the Company's revenue compared to about 57% of the Company's revenue in the second quarter of '06. This is primarily due to the divested product lines, particularly polyethylene.

Profitability in North America declined primarily due to lower results in Performance Polymers, CASPI, and Fibers. In Europe, revenue declined 2% driven by lower PET volumes and the divestiture in Spain. Partially offset by higher volumes in other segments. Profitability in Europe increased with improvements in Performance Polymers, CASPI, and Specialty Plastics. Asia Pacific revenue increased by 9% due to higher selling prices. Volumes were down slightly with the decline in PCI partially offset by higher volumes for CASPI. Operating earnings increased substantially due to -- primarily due to results in PCI. Lastly, Latin America revenue declined by 10% year-over-year primarily due to lower volumes for Performance Polymers.

Now the third quarter outlook. First, we expect continued great performance from our solid base of earnings and our PCI segment. Sequentially, we expect Performance Polymers results to decline somewhat particularly outside the U.S. And we continue to expect raw materials and energy costs to remain high and volatile. As a result, we expect our earnings per share excluding items to be slightly above the $1.24 per share we reported in last years third quarter. With that I'll turn it over to Rich.

Thanks, Brian, and good morning, everyone. This morning I'll discuss our normal agenda of cash flow, interest expense, our tax rate, and our overall financial position or net debt. First though, I'd like to add some color around our restructuring related items. As we've talked about in previous calls, we have taken and will continue to take a number of aggressive actions in executing against our strategy and improving the profitability of the Company, and these actions have resulted in a number of restructuring related items.

First, in PET. As you are already aware, we completed the sale of our Spain PET facility in April and as Brian mentioned in his remarks, we continue to make good progress on strategic actions for our other under performing PET sites. These actions will result in non-recurring charges but the size of these charges shouldn't be anywhere near the size of the charges we took back when we divested the CASPI businesses a few years ago.

We are continuing our actions to transform our South Carolina PET site. These include shutting down our highest cost PET lines and we have already shut down 100,000 met tons. In the first quarter we reported accelerated depreciation costs of $7 million related to these actions. We incurred another $7 million of accelerated depreciation in the second quarter And we'll incur these costs in each of the next two quarters as well at about the same level.

In addition to the actions we're taking in the PET business, we're also moving ahead with our plan to shut down Crackers at our Longview, Texas facility related to the divestiture of the PE business that we concluded in November of last year. We're on track and we'll be looking to shut down one of the Crackers by the end of this year and a second in the middle of next year. As a result we're taking accelerated depreciation costs. That's been $7 million in both the first and the second quarter and we expect to incur additional accelerated depreciation costs of about 5 million in total for the second half of the year.

Moving on to cash flow. Our cash flow from operations for the second quarter was 165 million, and through six months, it's 99 million. Within the net number for the first half, we made $100 million contribution in the first quarter to our U.S. Defined Benefit Pension Plan bringing that plan to a funded level of about 100%. In looking forward, it's unlikely that we'll be required to make any additional pension contributions for the next several years.

Looking out to the second half of the year, we feel good about our cash flow generation with continued strong earnings and we expect to drawdown working capital which is the normal pattern for us. On the uses of cash, our capital expenditures totaled $112 million for the second quarter and that total is $198 million for the first half of the year. I expect our second half capital expenditures to be higher than the first half, again, which is a pretty normal pattern for us. Capital expenditures for the year are expected to be higher as compared to 2006. As a result of our strategic actions, namely the transformation of our PET facility in South Carolina, the investments we're making in support of our new high temperature co-polyester which we will be commercializing in the second half of the year, and also the expansion at our Workington UK acetate tow facility.

As a result net-net and with the timing of capital expenditures for this year, we expect CapEx to be approaching 500 million for the year which is about $100 million higher than last year. This is above our full year 2007 depreciation and amortization expense which is now projected at approximately $335 million, and that includes about $50 million of accelerated depreciation as we continue to go forward.

Moving on to share repurchase, during the quarter, we re purchased 810,000 shares of common stock, investing about $53 million. Cumulatively through the end of the second quarter, we've repurchased about 1.4 million shares of stock. We've continued to repurchase shares throughout July and have now invested over 100 million in repurchases and our average price has been just under $64 per share. Looking forward, we'll continue to be in the market buying back shares in the third quarter and with a somewhat more aggressive program.

Looking at our net interest expense, our interest expense was $15 million for the quarter and $33 million for the first half of the year. Interest expense in the second quarter and first half of the year were slightly lower than last year as a result of somewhat higher interest income on our invested cash balance. We continue to expect our net interest expense to be at approximately $70 million for the year.

Turning to our effective tax rate, our rate on normalized earnings for the second quarter and first six months was approximately 34% which was slightly lower than our previous expectations and guidance. The decrease was due primarily to higher foreign earnings and favorable tax jurisdictions. As a result we expect our full year effective tax rate to be at about that level, 34%, and the change from last quarter really, it's a tweek and it's really a complex thing and my hats off to the tax guys and our accounting guys for getting something this complicated this close.

On net debt, again, that's defined as total borrowings less cash and cash equivalents. At the end of the second quarter, we were at 688 million and our financial profile continues to remain very strong with a net debt-to-capital ratio of 24%. So what are we doing with this cash?

Well, our priorities for uses of cash remain supporting our $1.76 per share dividend and we've paid a dividend to stockholders for every quarter we've been a public company. As both Brian and I have discussed we're continuing to fund our strategic growth initiatives, making good progress with IntegRex in South Carolina, with our new high temperature co-polyester in our Specialty Plastics business and our filter tow expansion in Europe. Also our coal gasification initiatives as you've heard have begun to pick up steam, as Brian discussed. Also under the heading of Strategic Investments it's fair to continue to say we're open to M&A although recent multiples for trades in our industry have been very high, staying disciplined continues to be key. Lastly, we'll pick up the pace of our share repurchase program in the coming quarter to return additional value to shareholders. With that, I'll turn it back over to you, Greg.

Okay, great. Thanks. This concludes our prepared remarks. We're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Mike Judd with Greenwich. Please go ahead.

Good morning and congratulations on a good quarter.

Thanks, Mike.

The new projects that you announced today, I think that you've been fairly clear in the past about not wanting to perhaps go overboard in investing capital. I'm just wondering if you could comment a little bit about CapEx because CapEx, I think you raised your guidance on what you think CapEx is going to be this year to 500 million. What do you think CapEx could look like next year and maybe even over the next couple of years?

Well, let me try to take that on. It's going to be in the same kind of the neighborhood that we're running at now, and as the gasification projects ramp up, we'll be making equity investments in those projects, so without being very specific sitting here today, I'd look for continued higher CapEx going forward.

5 to 6.

Yes. In that range.

5 to 6, okay. And in terms of your Performance Chemicals business, how much of a benefit was there in the quarter from the acetic acid outage in Texas?

As I said, this is really forestalling some softness that we might be seeing about this time of year. It's positive but it's not a huge effect, and we expect that they are going to be up pretty soon and that will loosen things back up again.

We'll now take our next question from Jeff Zekauskas from JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Jeff.

So we're trying to remember exactly what Terras capacities are. So we're guessing.

I could help you with that if you'd like.

Well, we can give you our guess, well, go ahead. It's like 280 million gallons of methanol and 450,000 tons of ammonia? Something like that?

I think it would be better if I spoke about the kinds of assets that we'll have in place that we'll be using in the project.

Okay, go ahead.

So we're thinking about, I think it's 900,000 tons of methanol approximately. It's about 2 million? I need to have a note in front of me here that I don't have. Let me describe it in another way. The hydrogen is probably two times a world scale SMR, so it's a very very large hydrogen facility that would be there. The methanol plant is a large world scale methanol plant. The ammonia is somewhat smaller at the Terra facility as I understand it. Now, the sum total of the capacity of these assets for making hydrogen, for making methanol, and for making ammonia actually will exceed the capacity of the three gassifiers we'll be running and this is a good thing because this allows us to wheel the capacity of the syn gas to the places where the markets as you do the best job.

So forgive me, so when will you begin to turn these into products, I guess turn some of it into propylene that will eventually go into the CASPI business or that's much much further out?

Yes. The value of the projects just on the base commodities we described is really outstanding, so we don't feel like we have a need to wait on doing these projects while we sort out the methanol derivative portfolio. The value of these projects is very high, just on the basis of methanol, hydrogen and ammonia if that was the only thing that we did. In the meantime, we're really encouraged by the discoveries that are being made by our scientists and ways to take methanol to a number of derivatives. We're working through a slate that's going to create the highest value and when we get done with that, we'll be much more transparent with you, Jeff, but it's still a work in progress and I wouldn't want to say what that slate looks liked today and then change my mind and tell you something different a year from now, so the deal is we can go ahead with this project. It takes a little bit of less time to build the derivatives than it does to build the big gasification facility so if we make a decision on the derivatives a year from now they can probably catch up and be there shortly after the start up of the big facility.

Okay. In terms of -- Eastman has always aspired to be a specialty chemical company and it's always this funny kind of interest , you make a set of Intermediates and so what you're going to do is you're going to vertically integrate all the way back into all of these different commodities. Does it also mean that over time, you may consider a different corporate structure where the commodities, you build these plants, you separate them off, you have your specialty assets with long term supply contracts or do you want to stay an integrated entity as you continue to build all this

Let's remember why people say they want to go to specialty chemical companies, they want to do that because they want to take some of the volatility out and they would like to have secure margins that are attractive and that's what the allure is for being a specialty versus a commodity where you're volatile and some days chicken and some days feathers.

The business approach that we are using in these investments is very different from anything we have ever done in the past. As we said we're seeking non-recourse debt and in order to get non-recourse debt from a bank, the bank has to look at the product slate and the market in the contracts and conclude that there is sufficient debt coverage to lend money on a non-recourse basis. That means that the design of these contracts has a much less volatile earnings structure. We do have a situation where the prices are indexed to the raw materials and that essentially establishes a margin zone in which the margins will be generated, and it's a much less volatile generation of cash flows and earnings than you would traditionally have for just building a plant and hoping that somebody buys it through the cycle.

Because we're using leverage, the returns are in the attractive zone where private equity typically makes their investments, so this actually has many of the features that people seek when they go to those specialty chemical kinds of business approaches. Now this is a foundation for transforming the Company, Jeff. This is the beginning of a journey, not the end of a journey. I can remember the days when we built the Texas facility and made some simple molecules and today we make hundreds of things at the Texas facility, specialty, and commodity alike. We're laying track for a very exciting future where we change and we add a whole new platform of low raw material products, starting with these basics, and then taking it forward to a whole new set of chemistries that make everything from specialties to commodities, so, and, we've taken much of the volatility in earnings and market uncertainty out of it by the business approach we've taken, so it's not the same as just saying hey, I want to go build a methanol plant and I hope I can sell it at a market price.

Thank you very much.

We'll now go to Frank Mitsch with BB&T Capital Markets.

Some day chicken, some day feathers.

That was for you, Frank.

Thank you, thank you. Just to clarify, with your expected expenditures on coal gasification, are you saying that your spending is going to range between 500 million and $600 million for each year for the next four years? Is that what we should be thinking about?

Well, Frank, I don't want to go out too far, but the 1.6 billion, let's be sure there's no confusion here. The 1.6 billion that's listed as the cost of building this plant is going to be 60, 70% leverage financed, and will be a 50% partner--.

On equity.

On the equity side so that the overall outlay for Eastman Chemical Company over the next four to five years on the gasification project is not going to approach those high billions. The primary CapEx is related to other areas that we're investing in as I said, the Fibers growth, the Specialty Plastics growth, the debottlenecking of our facility, IntegRex facility in Carolina, and some of the cost improvements that we've got going in Texas around the Cracker shut downs, and of course we always have our baseline or maintenance CapEx in at around $250 million.

Okay, I'm sorry. And there was a press report that Eastman has committed to spending $1.3 billion in Tennessee over the next five years. Can you talk about that a little bit?

Yes. That's a variety of things we need to do to keep up with all of the big ideas we're going to be chasing over the next five years. It's a combination of infrastructure, information technology , R&D, various debottlenecks of various kinds of capacities that we need to keep up with our growth. The governor was kind enough to help us with some incentives so that package was pulled together and submitted to the state and the event that you referred to was where the state was kind of making reference to

I'd just remind you on an annual basis that's a little over 250 a year, Frank.

Okay, great. And you talked about your volume growth by region on Table 2-D. Can you clean that up for us with the changes in the PCI business?

I'll clean it up with the exclusion of the ethylene contract sales.

That's correct.

I'm going to ask Greg to do that for us.

If you look at Europe, certainly -- well, first of all, in Latin America there was some polyethylene sales and so that is a part of that and there's also an issue with a strike that is occurring in the chemical industry in Argentina so that impacts PET. For Europe, the volume is down I think a portion of that is polyethylene, and the divestiture of our Spain facility.

I think the biggest impact there, Frank, is if you netted out the ethylene, the North American number would be bigger than what you see there.

The North America would be the 3% but it looks like you're looking at negative growth so I was just trying to get a sense as to the health of your business globally. It sounded from your commentary that it was very positive and then obviously I couldn't reconcile that with Table 2-D.

You're seeing a lot of PET effects first of all in there that are mostly about volume effects in PET but in the base businesses we're doing quite well. The earnings are actually outstanding in the ex U.S. regions. They're up a good bit from last year.

It's a combination of the PET divestiture and the polyethylene divestiture, Frank, is what is skewing some of those numbers for you.

I see your problem. What we don't show you is our operating earnings in the regions, just a qualitative comment. Operating earnings in the regions are up relative to last year. They're doing quite well.

So the year-over-year decline in earnings is more related to North America rather than the rest of the world? The rest of the world is doing fine for Eastman. Lastly, on any update in terms of your ethylene plant operations in Texas and when may you be closing those?

We're just watching the world unfold here, to decide what we need to do. We do the math on whether it's better to make or buy, and we have some contractual limitations. One plant has to come down, Rich, this year, and the other two, I think one of the other two is on a schedule next year some time, but we're just going to look at the financial math and run them as long as it makes sense and the limits of the contracts.

Great. Thank you.

Our next question comes from P.J. Juvekar with Citi. Go ahead.

Good morning, Brian.

Good morning, P. J.

So, so many coal gasification projects are being canceled due to concern about carbon regulation or maybe some kind of (inaudible) for carbon. So, two questions for you. One, why do you think so many projects are getting canceled? What are are they worried about? And two, do you have a contract to sell carbon for enhanced oil recovery?

Yes, two very excellent questions. The people that we are allied with and also ourselves, we view this as something where we have to be relatively innoculated against any kind of public policy impact that might happen from global greenhouse gas policy which we expect to happen in 2009 or 2010. Going back to some of the comments I made earlier, nearly all of the CO2 from both of these projects, when I say nearly all we're talking about more than 85, maybe less than 90, nearly all of the CO2 will be sold and sequestered in the form of enhanced oil recovery injections. So this is the poster child of environmental responsibility that the NGOs have been looking for in the industry. One of the great things about being a first mover is that over time, there may be limited opportunities to stick CO2 into holes for long periods of time for enhanced oil recovery by being a first mover on two or three projects we can work with the people that buy the CO2 so that they can use it for sequestering CO2 and we sort of get in line first for long term contracts while others work on their projects.

Now many of the projects you're talking about being canceled are power projects. A power project has a hard time capturing the CO2 because it's dilute, there's a lot of excess air in the combustion process. The beauty of the gasification process is that CO2 is in high concentrations so when people talk about carbon capture and sequestering, the carbon capture part for us is relatively easy. It's a natural part of the process for us to capture the CO2. The sequestration has always been the trick because of the location of these projects near the Gulf Coast, because of the need for enhanced oil recovery and CO2 and its role to do that, we feel very confident we can sell nearly all of the CO2 and as a result, we have played out the scenarios of likely public policy outcomes where we're in great shape actually in any of the outcomes we can imagine.

Okay. And the second question is making ammonia from natural gas was a great business 20 years ago, and then gas prices spiked and that business went away. What happens if coal prices spike?

Well, remember we're looking at -- again the expectation of global climate policy, especially in North America, and we're also looking at the availability of PET Coke. Let's go at this in two ways. If we think about the likelihood of greenhouse gas policy, we expect it's going to make solid hydrocarbons look less attractive, it's going to penalize them for being used. It's going to encourage the use of gas and other light hydrocarbons that have less of a greenhouse gas impact. We think that dampens the price of solid hydrocarbons, PET Coke and coal alike. Two days or three days ago you saw a Wall Street Journal article where all of these projects are being canceled for that very reason and that's depressing some of the coal equities right now.

Second is the fact that we're using PET Coke. PET Coke always sells at a discount and at worst it sells at parity to coal. There's a bunch of it in the Gulf Coast, there's going to be a bunch more with the developments that are happening in the refineries. We feel very good about the price environment that we'll be going into to secure PET Coke, so you're right, P. J., that if you think about what kind of an assumption or what kind of risk are we signing up for, we're signing up for a spread between solid hydrocarbons and other hydrocarbons. That's what we're signing up for in this business. As we look at all of the things that are moving in the world , geopolitics, scarcity, public policy, all of those things seem to be pushing us towards at least the spread we have today if not a broader spread between those and that's why we feel good placing the

Okay. And then one quick question on IntegRex. Now that the plant is running on an operating cash cost basis, how much more did IntegRex profit as compared to the plant next door?

It's a bunch, and you're going to get qualitative answers from me. This is actually going to become clearer to you as time goes on, but we still feel very very good about the investment in IntegRex. We're convinced this is the best technology in the world. This is the technology that others need to use. We are going to generate the kinds of profitability we said we were going to generate in this segment as we get through all the stuff that we are doing. So there's a meaningful improvement. You can do some of the math yourself by we said 50% of the conversion costs and 50% of the CapEx so you have half the depreciation, you have half the conversion cost. That's if you know what the other conversion costs are that kind of tells you the story. So that's about as far as I'm willing to go on that one, P. J.

Okay. Thank you.

And next we'll move on to Kevin McCarthy with Banc of America.

Yes, good morning, Brian.

Good morning.

Just wanted to follow-up on the Louisiana project. What is the total cost of that project and can you comment on your co-investors there?

The size of that one is also very similar. It's $1.6 billion. I should comment that both of these projects have common features. They both have four gassifiers, three operating, one spare. They both take advantage of the fact that over a number of years, plants have been built in the Gulf Coast that were depending on cheap natural gas to be successful and when natural gas was no longer cheap they were basically shut down and they were stranded. So in both cases, you have great derivative plants that are at a discount that you can use that you wouldn't have to build in a Greenfield. So the size of the project varies very similar at 1.6 billion. Our equity stake is at least, when I say at least 25, we have 25 and we're trying to work it North from there, so if you have the same debt structure you're talking about maybe $500 million of equity, 25% of 500 million means that we're in for $125 million of CapEx. Now I've given you maybe more than you wanted to know, Kevin. Take me where you want to go now.

That's helpful so if I add that 125 equity committment on Louisiana and run the math on the Texas facility, it looks like your total equity committment could be 400 million to 450 million based on the current economics; is that about right?

Yes, 400 is probably a good estimate and then the way I'd really like for you to think about this over time is we think we can handle about three of these things especially if they look alike, about three of these things at the same time so you add a little bit more for that and we think over time that these derivatives over the next six or seven years that take methanol to a more valuable commodity than methanol could be about as much capital as we spend on the gasification stuff. So all in the program is in the neighborhood of a billion, or a little north of 1 billion, but you have five or six years for that investment to play out.

Okay, great. And shifting gears to PET. We're hearing that M&G is planning to build a very large facility in the U.S. for start up in 2009. I think the Trade Press has reported 800,000 tons plus another 200,000 tons of debottlenecking. Very large numbers there. You have a goal to get your margins up to 10%, Brian. Can you achieve that level irrespective of competitive capacity actions?

Yes. Actually, we've been waiting for this announcement for some time, Kevin. As we've said before, the market in North America grows about 250,000 tons a year. Somebody had to build a plant, and we've been speculating internally about which one, two, or three of our competitors was going to do something so this shoe was just bound to drop and it is not unanticipated in our model to begin with, first part of the comment here. Some of it depends a little bit on timing. 2009 would be a very very aggressive schedule. I wish them luck on that timing but at 250,000 tons a year it only takes three years for that capacity to be basically taken up by the growth. Remember that in South Carolina, after we get done by debottlenecking what we have and shutting down some of the facilities, we're either a wash or a reduction depending on which math you use. We're not really adding any net capacity into the marketplace through all of the stuff that we have done because we've taken down about as much as we've put in.

So I guess this doesn't change our view in any meaningful way. We still believe in that environment that the imports are the dominant factor that set the pricing. We built this plant on the basis of cost savings. We assumed when we built the plant that we would have imports at our border at their cash costs for the rest of our lives. That was the basis for the investment. It's also the basis for the projection that we gave you, so we're not overly concerned by that and as we said somebody had to do it. It was just a matter of who it was going to be.

Great and then final question for Rich. Your dividend has been constant for many years. I understand you have elevated capital commitments here through the balance of the decade but you're starting off with net debt-to-cap at 24% today. Could you comment on the dividend policy, any room to resume growth there?

Kevin, the only thing I can add this morning is that we actively discuss and debate all measures to improve shareholder value and I'm certainly not going to speculate and get ahead of Board level discussions about dividends but I just want to reassure everybody that we are actively discussing all means to return value to shareholders.

Kevin, we know there are are a lot of ways you can use money to create value for shareholders. You can build things, you can buy things, or you can use the cash flow of your balance sheet or the position of your balance sheet to create value also in a variety of ways. All of those are on our mind and have been discussed just as recently as the last couple of weeks in our retreat together, so we're intent on making sure you guys are taken care of.

Thank you very much.

And next we'll go to Chris Willis with Impala Funds.

Good morning. Actually Kevin just asked the first half of my question. The question I have is the pending Star PET announcement in your thinking as well, hearing another 400,000 metric coming behind the M&G?

Is that announced, or is that a rumor, Chris?

It's chatter. It's out there. I don't think I've seen anything formal in print.

Yes, again, we debate with ourselves does it matter much how much new capacity there is in there. It's really a matter of looking at the cost curve and did the overall cost curve get pushed down meaningfully by some of these actions. Again, the squishy part of that cost curve is how much of the imports you shove out. Are the imports still there, are they the price setter or do you get so much capacity in the marketplace that the imports are not the price setter anymore, and there's somebody domestically that's doing that. I just don't have a comment for you without having more analysis on that, but I think -- it's usually the routine that people say they are going to do more quicker than they actually do so that's why we would like some time to analyze it and make our own judgments about what will people actually do and how quickly will they do it before I give an answer to that.

Okay, thanks. Appreciate it.

We'll now go to Sergey Vasnetsov with Lehman Brothers. Please go ahead.

Good morning.

Good morning.

Brian, you clearly are excited about your new unique project and for us to get excited I would like to estimate the commercial success of this project. So maybe if you can talk about the expected rate of return for your total capital including debt, number one? Number two, projected earnings reduced volatility in methanol inside the projects compared to the typical standalone projects? And thirdly, maintenance CapEx so we can estimate the free cash flow from it.

Okay. I fully intend to answer your question, but not today. I want to get through a few more conversations. We need to get through some more conversations with our partners with our customers before -- what you'd like for me to say is how many dollars per share will this add to the EPS number.

Sure.

We actually know that number, but I'm not willing to share it until we have some more confirmation and conversations with others. I can say that it is large. It is meaningful. It is transformational. And I'd leave you with a couple of adjectives today which will leave you hungry for more. We'll tell you more later this year. You won't have to wait long. Three, four months, five months, something like that, before the end of this year we'll have an answer back on your specific question there.

In terms of the volatility question, again, the nature of this business model if I can call it a model is that nearly -- the nature of the volatility is you start out good if you have low energy costs and it goes to excellent if you have high energy costs. So while it still may be volatile, it's volatile between good and wow. That's the kind of volatility we see as opposed to your typical barely getting reinvestment costs when you integrate under a curve for a typical commodity business model. So and this is because of a couple of things. One, the inputs including the capital cost are still lower than stranded, than the materials that are made from stranded gas made in other parts of the world. We can beat and prosper against the people who are using stranded gas to make these same commodities, and I guess that's about as much as I can say about that. Is there another part of your question I didn't get to?

Maintenance CapEx?

I'm sorry?

Maintenance CapEx.

Maintenance CapEx. Oh, gosh, I don't have a good answer on that one. I think typically new plants are always less than old plants so you're probably talking about a 2% kind of a number early on and it grows to some slightly bigger number later on but it's not a meaningful number I think. When you say maintenance CapEx the first couple years there is none so I don't know how to gauge that for you right now.

My last question is about the maintenance CapEx announced for your (inaudible - highly accented language). The (inaudible) number seems to be pretty large given the maintenance CapEx with the (inaudible) for the entire Company was around (inaudible). I realize it's a very large site accounting for more than 50% of your total assets but I just wanted to ask you is it your view that maybe because of age and the need to invest in infrastructure the maintenance CapEx at Kingsport goes up?

You should not confuse the $1.3 billion with the term -- with maintenance CapEx if that's what's happening here. There's much more going on in maintenance CapEx that that $1.3 billion package. This is adding things and changing things so we're prepared to grow. This isn't about taking care of infrastructure. This isn't maintenance. This isn't keeping -- this isn't carrying forward the status quo. The $1.3 billion creates the platform in many ways for us to grow into something much bigger and different.

Okay, thank you.

And next we'll go to Gregg Goodnight with UBS. Please go ahead.

Good morning, all.

Good morning.

Say, the new announcements for PET capacity, do you view that as precluding your full scale IntegRex concept that you had or is it still full steam ahead on that concept?

What we've discovered about the the IntegRex facility in South Carolina is first of all it's everything we hoped it would be. It makes a great product. And the other thing we discovered is that it's got a whole lot more capacity than we ever dreamed when we built it. We're still exploring how much it is but it's significantly more than the 350 and it's actually significantly more than the 450 that we're debottlenecking too. So we have figured out that we have a few years to consider that question that you just asked. Because of the extra capacity we got, which improves the quality of that project even more, we have more than a year to think about your question before we come to a conclusion.

Okay.

So there's no urgency in answering that question and moving on. One comment I will make though, the nature of the way we have been doing business in PET is something that's on our minds and we are looking for some different way to make investments in this business or to a different way to conduct the business so that it doesn't have some of the problems we have had historically and I give you the example of the gasification investments where we have very traditional commodities where we are mitigating much of the volatility and improving the earnings through a different approach to doing business.

In the gasification example, we will have executable contracts that sell the entire output of the plant before we turn the first shovel of dirt on those gasification projects. There will be guaranteed volumes with formulaic prices in contracts before we turn the first shovel of dirt in those gasification projects. Now that's, I don't know if you can get something like that at PET but there needs to be some different kind of approach because the way we have been doing it is just too darn painful, so one of the criteria for this future choice I'm talking about is what would that different way be of investing? We actually see prospects of achieving something like that outside the United States, probably a higher likelihood than in the States at this particular moment but we'll continue to work on your question and we feel like there's, we have time.

Okay, great. Second question. You mentioned the Louisiana plant starting up in 2010, the Texas in 2011. When is your expectations for this program to be, to start being accretive to earnings?

After the first one starts in 2010 actually. We hit our full stride probably about 2012. Full stride means you got at least a couple of projects and other things running but I think you start gaining from this thing with the start up of the Faustina project. The Texas project, middle -- well, whenever it comes on in 2011 is of course the bigger one for us so probably the safest answer I should give you is five years from now, 2012.

It sounds like you're going to have methanol from both projects. Is that correct?

Correct.

Now, how does your total methanol balance look with respect to your consumption of methanol for DME propylene? Are you going to become a net seller of methanol on the market?

Yes. That's very possible. We're going to use some. We'll figure out what else we do with the other. I was trying to be coy in my comments by saying we have a number of avenues for creating value and that was my way of saying I really don't want to tell you the answer to that question, that's a secret. I'm still working on it.

Okay.

I did tell you though that we feel very good about mitigating the volatility and having these contracts sold out before we turn over a shovel of dirt, so we're in the middle of discussions around this, but it's fair to say that not all of this methanol is going to some kind of a strategic derivative for Eastman. You got to sell some. May have to sell a bunch. We'll see.

Now that some of the details are coming out on these projects, will you be providing more details to help us quantify and evaluate this thing?

Yes. What I need to give you and what you all want is how many dollars per share and what year, and I'm dying to give you that number. I'm some months away from feeling good about giving you that number. It's going to be a fun day when I get to tell you that. It's a meaningful number.

Material balance sort of rough material balance would also be very helpful.

We can do that too. Yes.

Okay, thanks for answers all of these questions.

Sure.

Let's make the next question the last one, please.

Thank you. Our last question comes from Bob Goldberg with Scopus Asset Management. Please go ahead.

Just made it under the wire.

Good morning, Bob.

Hi, Bob.

A couple of questions. First, did you make money in North America PET in the second quarter?

No. We lost a bit, but just a bit.

Do you anticipate getting back into the black any time soon?

In North America?

Yes.

Again, we said that the time for fixing this business is when you get done overhauling South Carolina which is in the middle of '08. We really haven't tried to represent any kind of outcome. This is a mismatch of all kinds of things that are going on between now and then where we're tearing things up and fixing them and you get charges for all of that. It's a messy time right now, Bob. I'd rather look to the second half of '08 and tell you that it's going to get good then.

Any further update on the potential divestitures or other initiatives you're trying to employ with the non-integrated assets?

We're real close on a couple. I was hoping I can say something definitive this morning. We didn't quite get done. The others are moving along nicely. I'm feeling confident.

Okay. And lastly, another balance sheet question for Rich. How much cash do you really need to carry on the balance sheet? Are you going to have, even if you do some stock buyback in the second half you are going to have close to $1 billion in cash come year-end I would imagine. What's the appropriate level of cash that you need to hold on the balance sheet do you think?

Bob, when we build our internal models, we always think about keeping a couple $100 million as a buffer, but that's going to be after we see what the total investment pattern is going to be and the other uses of cash, so we certainly do not intend to carry $800 million to $1 billion in cash. That's really what the point of your question is, and I can assure you that that's not what we're thinking.

Okay, so you said you've been discussing these issues recently. What kind of time frame do you think about when you look at how to deploy the excess cash on the balance sheet?

Well, starting now.

Yes, we're starting now, but this is going to unfold over the next year or so, and there's a lot of conversations to be had on where best to deploy.

First thing, Bob, the first way as we look at the choices for how you create value from the money we have, building some of these projects and maybe even acquisitions if you can find a good one trump buying back stock, and so what Rich is telling you is we're scrambling around trying to find ways to put it to work that way as opposed to buying back stock because buying back stock is traditionally the least attractive of those choices so we're giving ourselves some time to scramble around on the others before we have to pull a bigger trigger on something else.

It sounds like the M&A environment is attractive.

It's fluffy, yes.

Okay. Appreciate it.

Okay, thanks, again, for joining us this morning. An audio replay of this conference call will be available this afternoon through Friday, August 3. Have a great day.

That does conclude today's teleconference. Thank you for your participation. Have a lovely day. You may now disconnect.