伊士曼化學 (EMN) 2007 Q3 法說會逐字稿

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

We'll now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Thank you, Vicky. Good morning, everyone, and thanks 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 Bogni, 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 fourth 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 third quarter 2007 financial results news release on our Web site and in our filings with the Securities and Exchange Commission, including the form 10-Q filed for second quarter 2007, and the form 10-Q to be filed for third quarter 2007.

Secondly, 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 third quarter financial results news release and the conference call tables accompanying the news release. With that, I'll turn it over to Brian.

Hi. Good morning, everybody. Thanks for joining us. This morning I will follow the usual pattern of talking about quarterly highlights at the corporate level, the segment level, the regional level, and the fourth quarter outlook. I'll wrap up with some gasification comments.

But before I get started on all of that, I would like to make a special announcement to everyone. The first item today is to announce that our Board of Directors has authorized the repurchase of up to $700 million of Eastman common stock. When combined with the $300 million repurchase program that was authorized earlier this year and which we have completed this quarter, the total share repurchase authorization in 2007 is $1 billion. I would like to give you some thoughts on how we came to think about this.

If we look at a time frame between 2003 and what will be by the end of this year, we will have accumulated approximately $1.5 billion in divestiture proceeds over that time. And over that time, we've used about a third of that to pay down debt. So the remainder we are returning to stockholders through the $1 billion in share repurchases authorized this year. The authorization will also allow us to manage our share count down to a level much closer to where it was about five years ago and it also means that we believe we can fund our very aggressive growth initiatives with a combination of existing cash and the ongoing cash flows, which we think is a very, very good story. So wanted to you give you that news first before we moved on to the regular conversation.

Now I will go on to the corporate highlights. I think it's clear that we remain very focused, as a company, on delivering strong performance. Last night we reported GAAP earnings of $0.24 per share, but this includes asset impairments and restructuring charges related to the pending divestiture of our Latin America PET facilities and accelerated depreciation costs related to restructuring actions. Rich is going to give you all the details about that in his comments, but excluding all of those, our third quarter EPS was $1.26. This is very consistent with the guidance we gave you in July that we would be slightly above the $1.24, excluding items that we reported in last year's third quarter. Our sales revenue, at $1.8 billion, was down 8% year over year, as has been the case, pretty much, throughout the year, the lower sales revenue comparisons primarily reflect divestitures and other strategic actions we've taken. Excluding all the transitional ethylene sales and divestitures, our revenue was about flat.

The operating margin for the quarter, after excluding all of the traditional items I mentioned, was about 10% and this reflects strong results in four out of five of our segments and as I'll talk about in a minute, we continue to make progress in the fifth segment, which is our PET business. So turning to the segment highlights, our strong base of businesses, consisting of Fibers, CASPI, and Specialty plastics segments is maintaining a very high level of performance. Combined, they had an operating margin of 16% in the third quarter with operating earnings increasing by $11 million year over year. And the strong base of businesses is also being joined by continued strong results from our performance chemicals and intermediate segments.

Looking at it by segment starting with Fibers. Fibers' operating earnings were a record $66 million in the third quarter of 2007 with an operating margin of 26%. Operating earnings for Fibers improved both sequentially and year over year. Prices increased to offset higher raw materials and energy costs and competitor outages in the U.S. and Asia contributed to favorable market conditions for acetato- and acetal chemicals. with a strong quarter and a strong quarter to come in the fourth, we expect Fibers' full-year 2007 results will be a bit above full-year 2006 results.

Next is CASPI. Where our third quarter operating earnings were $58 million, and through nine months, their operating earnings are higher than a year ago. Their operating margin for the third quarter was 16%. Through nine months, it's 17%, and all that's in about the middle of the 15 to 20% range that we have described for them. Sales revenue increased by 5%, excluding the divestiture of the Epolene product line, mostly due to increased prices needed to offset higher raws and energy, particularly propane, which is very high right now.

Volumes were down, mainly due to the divestiture of Epolene product lines in the fourth quarter of last year. Excluding the impact of the Epolene divestiture, volumes were down 1%. Higher volumes in Europe and Asia were more than offset by lower volumes in North America. So CASPI has seen lower demand in North America due to the downturn in housing and autos, but they have been able to mostly offset this with higher volumes in Europe and Asia and because they sell into a wide variety of diverse markets. And we expect this trend to continue, although they will be impacted by record high propane costs in the fourth quarter.

Turning to Specialty Plastics, their revenue increased 5% as higher selling prices and improved product mix offset slightly lower volumes. The slightly lower volumes were the result of the decline for polyester products used in photographic optical films and this time line will last through about the end of the fourth quarter that. Decline was mostly offset by copolyester volume growth of 8% as we continue to benefit from our market development efforts. Operating earnings for Specialty Plastics declined year over year, mainly due to an increase in research and development spending for our tritan copolyester. Tritan is the new high temperature copolyester that we launched yesterday at a trade show in Germany very successfully. We already have a number of customers signed up, including Camelback, Vita-Mix, Carlyle and others. The early response for Triton has been very, very positive.

Specialty Plastics currently has a gross margin of about 25%, with revenue growth of about 7 to 8% annually, and we expect that to continue. Their operating margin has been in the 7 to 8% range as we have increased expenses and there are indeed investments for growth initiatives that they're working on. We're starting to see the benefits of the R&D spend and we remain confident that Specialty Plastics will be approaching $100 million in operating earnings with a 10 to 15% operating margin by 2009.

Next is Performance Chemicals and intermediates. They continue their string of quarters with operating earnings of $51 million. Revenue was $509 million, including $84 million of contract ethylene sales. Excluding the contract ethylene sales, revenues were up 7% and sales volumes declined by 1% from very strong levels a year ago. The great results reflect continued strength across the board for the segment oxos, resins, plasticizers and acetals and they've also benefited from competitor outages in acetals. Looking forward, record propane prices will put pressure on them in the fourth quarter, but they should remain strong in 2008.

Next turning to PET. Given that we recently announced we are divesting our PET facilities in Mexico and Argentina, the tables accompanying our news release have broken out results from PET sales in Latin America. Excluding accelerated appreciation costs and asset impairments and restructuring charges, PET sales from North America and European sites had a loss of $3 million in the third quarter of 2007. The $3 million loss was in Europe and that means that North America was approximately break-even. There are a number of factors leading to the results in North America. We had high and volatile raw material costs, significant supply additions and announcements for additional capacity. We had lackluster demand and costs from the actions we're taking to improve results will be with us through about the second quarter of 2008. So we have made progress in difficult market conditions. We also recognize there's much more work to do, and that's why we're taking so many actions to improve the North American business.

So let's discuss those, starting with the PET facility in South Carolina. We've been able to run our IntegRex facility at very high rates and we will increase capacity to 150% of nameplate to over 525,000 metric tons of ParaStar PET resin by the end of 2008. We originally estimated that the conversion costs would be 50% below conventional technology. Now we have validated that those costs are even lower. And ParaStar resin is widely accepted in the market. Previously, we've mentioned Constar as a ParaStar customer, supplying the Pepsi system. Nestle Waters is also a very large customer, using ParaStar water resin. Nestle selected ParaStar for its product performance and favorable environmental footprint and they use it in combination with their lightweighting efforts to significantly reduce the environmental impact of their water bottles. So I think you can understand on why just about every level we're very, very pleased with the progress we're making with the IntegRex program.

In addition to the IntegRex capacity, we're transforming our South Carolina site with a number of other actions. We're balancing out our intermediates, meaning that we are increasing PTA capacity, we are shutting down DMT capacity, and we are shutting down some conventional PET capacity and this will all be completed in the second quarter of 2008. Also, by the end of the second quarter in 2008, we will reduce our cost structure by more than $30 million at the site to reflect the changes we made to the asset base. At the end of 2008, we will have reduced our total PET capacity by almost half to approximately 800,000 metric tons, all of it based in North America with over 60% based on IntegRex technology. As a result, we anticipate the performance polymers segment, which is PET, will go from being our largest segment to our smallest and we will go from being the largest PET producer to the third largest in the Americas. So this certainly changes the way that we all think about the business.

When I talk with investors, I often get questions about our strategy beyond these actions, so I would like to make three points. First, IntegRex now has secured its place in the market as the best technology for manufacturing PET, period. and while we have demonstrated the PET part of the technology in South Carolina, we know that the PTA part of the technology is every bit as impressive and we're looking for opportunities to capture the value of that technology. Second, we're not happy with the typical PET business model, the model of building a big facility and then trying to sell out the plant. Third, we're pursuing the idea that a different business model based on IntegRex could work, but the typical business model is just not an option. Given the current state of the PET industry in North America, it looks to us like it's ready for structural changes, including consolidation and rationalizations. As a results, we're keeping our options open, looking for ways to create value from our excellent technology and for our excellent business.

Now turning to the regions. Looking at our regional performance, I'll begin with North America. Third quarter North American revenues declined by 8%, mainly due to the divestiture of the polyethylene business. Excluding transitional ethylene sales and sales from divested businesses, North American revenue increased by 1%. Profitability in North America declined, primarily due to lower results in performance polymers, CASPI, and Specialty Plastics.

In Europe, our revenue declined by 6%, driven by lower PET volumes due to the divestiture of the Spain site, which was partially offset by volumes in all other segments. Excluding the Spain divestiture, revenue increased by 11%, driven by strong volumes, particularly for Specialty Plastics, Fibers, and CASPI. An important point here. Profitability in Europe increased with improvements in CASPI, Fibers, and PCI. Year-to-date, our operating earnings in Europe have increased by 35% compared with the year-ago period. The favorable U.S. dollar versus euro exchange rate was a contributor to this improvement.

Asia-Pacific revenue increased by 7% due to higher selling prices. Operating earnings in Asia increased 60% year over year and 56% year-to-date, primarily due to cyclical strength in the Oxos for the PCI segment. In addition, results were strong for CASPI and Fibers. Lastly, Latin American revenue declined by a whopping 24% year over year, primarily due to lower volumes for the Performance Polymers segment and due to operational disruption at the Argentina PET facility. As you may guess, next year, after the divestitures of the Latin American PET assets, the revenue from this region will be much lower. Now for the outlook for the fourth quarter. As usual, we expect demand to decline for most businesses and product lines sequentially due to normal seasonality. We also expect raw material and energy costs to remain volatile in the quarter. As a result, we expect fourth quarter 2007 earnings per share to be similar to fourth quarter 2006 earnings per share of $1, excluding gains and charges related to strategic decisions in both periods.

Let me wrap up with some comments on gasification. This morning we released a news item announcing that Green Rock is the financial partner in our Beaumont gasification project. Greenrock is a company formed by D.E. Shaw and Goldman Sachs, two very respected names in this space, and you may also know they are also our partners in the Faustina, Louisiana project as well. Eastman and Green Rock will each have 50% equity stake in this project. This is another important milestone for the Beaumont project, where we continue to make excellent progress.

Going forward, we have a number of additional milestones we're working on. The front end engineering and design process or the feed process, which is being provided by Fluor, will be completed in the middle of 2008. That gives us more precise estimates of costs. After the feed has been completed, we combine that with the contracts for inputs and outputs that we have negotiated, and we expect to obtain non-recourse project financing for the project by the end of '08. So that will allow us to break ground in early 2009 and hopefully start the project online in 2011. So as a reminder, the base load products for this facility will be hydrogen, methanol, and ammonia. Air Products will purchase the hydrogen, Eastman will purchase the methanol produced by the facility under a long term supply contract, and Eastman will also serve as the operations and maintenance provider for this facility. And we expect to sell over 90% of the carbon dioxide produced into the enhanced oil recovery markets in the Gulf Coast.

Another project, the Faustina project in which we are also involved is going very well. We continue to make good progress with the research and development of converting methanol to other chemicals of interest to us. And we're developing a third gasification project that we'll tell you more about when it's appropriate. Sometime in the first half of next year, we will give you a much better idea of what these projects will contribute financially, but I will say they are significant. As you can see, we're making great progress towards getting these projects up and running. So with that I'll turn it over to Rich.

Thank you, Brian. Good morning, everybody. This morning I'll discuss our normal agenda of cash flow, interest expense. I'll touch on other income, talk about our tax rate and our overall financial position or net debt.

First, like I normally do, let me add some color around the restructuring-related items. As Brian mentioned, we announced last month that we've entered into definitive agreements to divest our Argentina and Mexico PET facilities. We expect that these transactions will close during the fourth quarter. The cash proceeds for these assets will be $138 million, which includes working capital, which as in many transactions is subject to some minor adjustment at closing. As a result of these agreements, we incurred asset impairment and restructuring charges in the amount of $117 million, or $75 million net of tax in the third quarter. Also, as Brian mentioned, to help you size the revenue and operating earnings impact of the pending divestitures of these sites, we've provided additional information in the conference call tables that accompanied our earnings news release.

Looking at Europe, we continue to make good progress on the divestiture of the facilities there and we do not expect to incur material asset impairment and restructuring charges related to this action, if any. Brian also described the series of actions we're taking to transform our South Carolina PET site. One of these actions is shutting down our highest-cost PET lines and 100,000 metric tons of that shutdown has already been completed. We've incurred $21 million of accelerated depreciation costs at our South Carolina facility through the first nine months related to these actions, with $7 million of that being recorded in the third quarter. Looking forward into the fourth quarter, we expect accelerated depreciation costs should be at about that same $7 million level as we work through this transformation.

In addition to the actions we're taking in the PET business, as previously announced, we're also shutting down the older, higher-cost crackers at our Longview, Texas, facility. We shut down the first of these crackers just this week and we expect to shut down another in the middle of 2008. As a result of these planned actions, we've incurred accelerated depreciation costs of $16 million through the end of the third quarter. In the fourth quarter, we expect to incur additional accelerated depreciation costs at our Texas site, but only about $2 million. And that's below the run rate of previous quarters now that that first cracker is down.

Next, looking at cash flow, our cash flow from operations for the third quarter was $312 million. That was driven by our continued strong net earnings and a seasonal reduction in our working capital of about $100 million. Looking into the fourth quarter, we expect continued strong earnings as Brian discussed, and again we'll pull cash out of working capital in the normal seasonal pattern. So net/net for the year, we expect cash from operations to be approximately $700 million. On uses of cash, our capital expenditures totaled $148 million for the third quarter and that totals $346 million through nine months. I expect capital expenditures to be approximately $500 million for the year, and that's about $100 million higher than last year.

The key drivers of that increase, first of all, we've got a number of capital projects as we continue to improve efficiencies and invest in reliability throughout the company. Next, the transformation of our PET facility in South Carolina, the commercialization of our new, high-temperature copolyester Tritan that as Brian said, was launched just this week, and also the expansion of the Workington U.K. acetato facility which is on schedule to be completed in the middle of next year.

In addition, as part of our gasification initiatives, we've exercised an option to purchase methanol and ammonia assets along with storage and terminal facilities located in Beaumont, Texas, from Terra Industries. We expect to close that transaction at the end of 2008. The purchase price for these assets will be around $50 million. This fits very well with our Beaumont, Texas, gasification project and gives us a much reduced capital cost as compared to building greenfield facilities.

Looking at our net interest expense, it was about-- it was $17 million for the quarter and that adds up to $50 million through mine months. This is just a bit lower than last year, primarily due to the higher interest income derived from our higher invested cash balances. Looking forward to the full year, we expect our net interest expense to be below $70 million. In other income for the quarter, we recorded a $9 million compared to an other expense of $1 million in the same period last year. Primary drivers for the higher other income in the third quarter 2007 were net gains on foreign exchange transactions, mainly euro denominated accounts receivable, and we had some income from certain venture investments. Our effective tax rate on our normalized earnings for the third quarter and through nine months was approximately 34%, which is consistent with our guidance through the year. Again, on the full year, we continue to expect the full-year effective tax rate to be approximately 34%.

Lastly, on net debt, again, defined as total borrowings less cash and cash equivalents, at the end of the third quarter, we were at $813 million. This is higher than the second quarter by about $125 million and that increase was driven entirely by the $214 million of share repurchases during the quarter. Our financial profile remains strong, and we're at a net debt to total cap ratio of just under 30%. Our priorities for uses of cash continue to be supporting the dividend, and as I say every quarter, we've paid a dividend to the shareholders every quarter since we've been a public company. We'll continue to fund our profitable growth initiatives. We've seen our capital spending increase as we continue to make good progress on our growth initiatives with efforts in coal gasification, our new high-temperature copolyester Tritan and our Fibers in Europe and also our IntegRex. Lastly, we will repurchase shares opportunistically with the recent board authorization to return additional value to stockholders. With that I'll turn it back over to Greg.

Okay, thanks, Rich. That concludes our prepared remarks. Vicky, we are ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from P.J. Juvekar with Citi.

Good morning, Brian.

Good morning, sir. How are you?

Good. First question on PCI. With oil and propylene moving up, how are Oxos doing in Asia? I would imagine that a lot of smaller plants would be unprofitable right now?

I'll make a comment. Remember, PCI, first of all, is about 50% coal-based and 50% olefin derived. So the coal-based stuff is doing great. Your question speaks to the olefin side of the house. The thing we have to remember, is that the raw materials are going up like crazy, you're exactly right, whether it's propane for crackers or whether it's propylene, but the derivatives themselves have been fairly tight. The Oxo derivatives are not oversupplied and we don't see any big scenario oversupply coming in the near future or even in 2008. That has allowed us to prop up our derivative margins. Asia's a little more sensitive. It fluctuates more than the others, but worldwide, Oxo has held up pretty well.

Do you believe Asian plants are going to be unprofitable now?

We have been doing well in the Asian plant this year, it has a history of not doing so well in the past, and we're in the cyclical peak right now. So down the road, it doesn't do as well as it's doing now, we're going to enjoy it while it lasts.

Not your, but your competitors, the smaller players in Asia, maybe in China?

I don't have a -- I don't have a good comment for you on the competitive position of those folks. If they're buying raws outside of a formula -- if they're buying it spot, they're hurting. We have formula that affords us some protection, but even that formula has a lot of volatility in it because it tracks some of the major underlying components that move around.

The second question on Specialty Plastics, you have this goal of 10 to 15% operating margins?

Yes.

Well current year closed at about half of that.

Yeah.

So the question is how much of the existing PET capacity is now converted into copolyesters? Outline steps for us. How do you get there?

It's really an easy answer. That's why I gave you the gross margin information. The gross margin for Specialty plastics is 25%. All we've got to do is get their SG&A and R&D down to something below 15% and we're making the margin that we said. The appropriate overhead load for this business probably is between 10 and 15% over time, which would make it about twice what the load is for the whole company. Right now it's running above that just because we've been investing in the growth of all the other products. This is under our control, P.J., We ratchet back some of the spending that we've been using on launching and commercializing and we just let the gross margin carry the day. The gross margin's strong.

Okay. And how much of that existing PET capacity is now converted into copolyester?

15% --

50,000 metric tons.

Greg was trying to whisper to me. 50,000 metric tons is on the way here.

Okay, thank you.

Our next question will come from Mike Judd with Greenwich Consultants.

Yes. A question about your methanol business. I guess it's coal-based. Obviously methanol prices are way up here. Is there an arbitrage opportunities here? Maybe selling a little bit more methanol into the market and how do you manage your mixed products here given sort of that unusual dynamic? Evidently according to Methenex the issues around methanol supply are going to continue well into next year. And secondly, I had a question about that other income line again with the foreign exchange. Should we expect a similar or maybe even a little bit larger figure for the December quarter?

Okay, Mike, I need to make sure I clarify and get the answer you want? Are you talking about methanol today or methanol in the future?

Well, methanol prices are obviously up significantly today.

You're talking about today. Mike, we make methanol primarily for internal use. It's the intermediate that we pass through on the way to acetic acid and acetic anhydride and other products. We're not in the methanol market out there, and the answer is no, we're not going to try to play some kind of an arbitrage or move intermediates out into that world. We need the material internally and we add a lot of value to the material internally. In the future now, of course, we'll be watching that carefully, because we'll have a whole lot more methanol than we have now. On the other income, Rich needs to answer that.

Yeah. The gain we reported was primarily driven by the strengthening of the Euro against our accounts receivable. The only way we could duplicate that is if the Euro strengthened further during the quarter against our receivables and then we'd have another gain. I'm certainly not in a position to know what the Euro would be by the end of the year. But if it continues to strengthen, we'll have an additional gain.

Just secondly, on PET, thank you for providing the detail to us so that we can kind of back out the Latin American plants. But is the implication there, though, that the business looks like it would continue operating at a loss, even with the sale of those particular assets? Is that sort of the right inference, at least in the near-term?

It is. First of all, we have not dealt with the European side of this equation yet, that's still in there. We have all of the expense that we're going through that is tearing up South Carolina to make it leaner and switching materials. So all of that friction is using up some money. It will be a modest number, but it will still be Rocky between now and the middle of '08. That's why we keep on putting on the benchmark out there in the middle of '08. All of this heat and friction to fix it is going on between now and then and after that is when you get to see the improvements.

Thanks for the help.

Next we'll hear from Frank Mitsch with BB&T Capital Markets.

Good morning, gentleman.

Hi, Frank.

Good thing when I got in when I did, you started out the call with a bang. Can you talk about the timing of that? You ripped through the first $300 million fairly quickly. Is $700 million going to be equally as fast?

I'm looking at my CFO. I think we're going to be opportunistic on this as we were. The timing of the first 300 had something to do what was going in the markets. We saw some great buying opportunities and Rich being a shrewd guy with money jumped in there and took his opportunities. It's going to be the same thing in the future. In higher numbers, we're going to be less interested, lower numbers we're going to be more interested. We'll just see what the markets do.

All right. Obviously, at 64, if you bought a whole bunch back at 65, obviously your buyers, as soon as this call is completed. Can you talk a little bit more about the PET business? Brian, you talked a little bit about consolidation and rationalization in North America. Can you talk a little bit about that? And also, Wellman announced an lawsuit on IntegRex. Can you talk a little bit about that as well?

Sure. Let let me start with the lawsuit. We usually don't comment on pending litigation, but as you know, we're the market leader in PET. We have introduced this IntegRex process, which is a game-changing technology that could be viewed as being threatening to a lot of people. I have to tell you, this is supported as by a very broad portfolio of R&D, extensive research and development. We understand and know everything about the patent world as it exists out there and it doesn't surprise us that some people would want to challenge it, but we consider the pending claim to be without merit and we will defend it vigorously.

Going back to the PET structure comment, starting with our situation, I have to point out that we started this year with about 1.5 million tons of PET. By the time we get to the end of 2008, we will have removed from our portfolio 80% of that conventional PET. We will have taken out over 1.2 million tons of conventional PET and we will have added IntegRex capacity, but even with adding the IntegRex capacity, will be about half the size with about 60% IntegRex. So we are feeling good about the position we will have in that changing marketplace.

We look around and we see all the announcements, we see a somewhat slowing demand picture in North America. We used to think of North American demand growth being about 250,000 tons. We think it's more like 200,000 tons these days. We look at the cost pressures, the global cost pressures, the new entrance that bring their materials to North America. This just looks -- and if I also throw in the supplier power for the raw materials guys and the buying power of the big brand owners, this is an industry that's ripe for structure change. We have a great technology. We're watching as this structure change is swirling around us and we're looking for ways to capture value as it goes on.

All right, fair enough. Then lastly, you referenced propane costs rather high. Can you talk about the calculation between higher raw materials and the price increases that you're putting in place to offset that? How should we think about that?

We're going to be a little bit stressed, but we gave you our guidance for the quarter, which would tell you it's not an undue stress. We're fairly fortunate that the derivatives that we sell are fairly tight. So that gives you some ability to pass on prices. But there's always a lag there, Frank. The raw material guys can go up fast. It takes our inertia, and pricing is always a little slower than that, but I think our fourth quarter guidance gives you a sense of how we're feeling about that. It's stress, but not undue stress.

Terrific. Thank you.

Our next question will come from Banc of America's Kevin McCarthy.

Yes, good morning.

Good morning.

Good morning.

Brian, you mentioned the elevated R&D spend in SPBO for the Tritan project. Is there an inflection point coming where that spend will diminish and we can expect margin advancement toward your double digit goal?

Yes, and it's somewhere between the end of this year and about the middle of next year. I keep on doing this to you. I keep on pushing you toward the middle of next year, but that's really where a lot of these things start to trail off and come to a head, but somewhere between the end of this year and the middle of next year it starts to trail off and we start yanking back on some of those expenditures. Plus, they have some margin expansion. I need to point out that the sale assessors that go into LCDs are growing like gang busters. They're doubling every year or two in terms of their volumes. The copolyesters are growing at over 8% a year and this new material looks like a winner. So all of that starts to come into play somewhere next year, basically.

Okay. Sounds like maybe a year or two from now you might be getting far fewer Wall Street analyst questions on your PET business, but as long as you're still in it, I have a couple for you.

Okay.

As you exit these international assets, should we anticipate anything meaningful in the way of stranded costs in that business?

We've given -- all the big lead balloons around write-offs and things like that are basically done with this announcement in this quarter. I think the next time, we don't expect any significant restructuring or write-offs or anything. Rich, do you want to make another --

No, I would just say that what you're thinking, we're going to reduce and eliminate the vast majority of the costs -- the out of pockets surrounding those plants. So going forward I think you'll see more -- you'll see that stability.

And then on the lackluster demand that you referenced, Brian, can you comment a little bit on what's causing that? Is that just simple maturing of the market? And given that circumstance, do you think it's still reasonable to expect your double digit margin goal in that business? I would presume not.

Well, first of all, as far as our business expectations, as we mentioned, we're taking this plant that we invested in and we're going to be increasing it by 50%. We are taking out 80% of the old capacity, we're switching to lower-cost materials. We're doing a lot of things to improve the existing business, but demand has been a little bit soft this year. The customers have reduced some inventories, water growth has slowed a little bit. And that's why we think that the demand growth is closer to 200,000 tons than 250. Don't know if that's a long-term trend or not. That's just what we have seen.

Okay. Finally, in table 2-D of your release, I think you have some volume numbers in there by region. However, they do include the divestitures as far as I understand. Not sure if you have any handy or maybe we can follow up on it, but I would be curious to know with a the underlying unit volume numbers might be for these parts of the world?

Yeah, Kevin, I think Brian mentioned a few of those numbers in his prepared comments so I'll be happy to after this call -- sales

Sales but not volume.

Yeah, I was interested at getting at the demand numbers. I'll circle back. Thanks.

Yep.

Our next question will come from Ted with Bear Stearns.

Good morning. Congratulations on your earnings.

Thank you.

I had a question on the share repurchase -- we, really the question is on your balance sheet. Would you use new debt to fund this $700 million if you do it this year?

No, we have more than enough cash on hand and coming proceeds from divestitures to hand it completely out of cash.

Okay, so there's no expectation of any debt bond market offerings or anything?

No, there's not.

Okay. Thank you.

Moving on, we'll hear from JPMorgan's Jeff Zekauskas.

Hi, good morning.

Good morning, Jeff.

A few things. Fibers' earnings were up very significantly versus the second quarter. In fact, they were up so much they almost equaled the sequential sales gain and in the -- you said for the year that you expected the business to be a little bit better than last year, so I guess that means we're going to go down into the low 50s in terms of operating income if the fourth quarter. So can you explain this volatility? How do you go from 50 to 66 back to 50 again?

It has to do with order -- let me clarify. We're saying this year going to be a bit above last year and we're quantifying exactly what a bit is, of course. The order patterns, these are large customers that especially in other parts of the world, where they place large orders, load up on inventory, run it down and then wait to look for opportunity to place other large orders. That's why I coined the phrase, chunky some years ago, and some days it's chunky good and some days it's chunky bad. It all goes along in a pattern on an annual basis that looks about the way we have describe it. We're used to it and we try to get you guys used to it so you don't either panic or become overjoyed alternatively.

Second, I would imagine that the squeeze in CASPI from higher propylene costs or propane costs is a little bit more difficult to handle. I would think that the prices for the CASPI product line would be a little stickier in the market. So is that an area where you're a little bit more worried about raw material squeeze?

Sure. Any of the specialty, whether it's paraxylene in the specialty plastic business or whether it's the raw materials in CASPI, those are exactly as you described, the prices are given more by functionality than they are by cost plus. So you have to figure out ways to deal with that. Again, without breaking it down in any kind of detail for you, we've given you our outlook and we think there is some squeeze there, but we think we're okay.

Lastly about the opportunistic share repurchases, as far as can I see, Eastman's prices have been relatively stable this year.

Yep.

And so I don't know why last quarter was anymore opportunistic than any other quarter. So can you give us a better idea of the timing of the execution of the $700 million that you intend to spend for share repurchase, because Eastman's price has been around here for the last three years. So does that mean you're going to execute it really quickly or is there some other factor?

Jeff, we saw some prices bounce around in the months previous. We got some shares in in the 63s, for example. But looking forward, I don't foresee a big rush into the market. I think we'll pace ourselves and keep dry powder and be opportunistic depending on the ups and downs in the marketplace. So I guess the only clear message I could send is that we're not in a huge hurry to go out and spend the $700 million and that we're just going to be very measured.

Well, if the price, say, fluctuated between 60 and 64 over the next 12 months, how many shares would you buy?

I can't answer that very specifically, but if the price fluctuated down to 60, I'm in the market.

Okay, good. Thank you very much.

Moving on, we'll hear from Scopus Asset Management's, Bob Goldberg.

Good morning.

Good morning.

Good morning, Bob.

Can you update us on where you stand in terms of divesting the European PET assets?

Yeah. I'll be very brief, just to let you know that we've been very active and we feel like we're getting close to the final announcements and I can just say stay tuned. We're working very hard on it.

And a follow-up question to that, Brian, if you look at the analyst's earnings models, which I'm sure you spend a lot of your time on, they all have a PET business Performance Polymers, either being around break-even or losing money in 2008. Despite the fact that if you go through your earnings release, it looks like you're relatively flat in North America now, losing $3 million, I believe, in Europe, and $4 million in Latin America, which is going away, so you're almost back to break-even on a run rate basis, not quite, but almost, especially if you divest the European assets in a timely fashion. So what's a reasonable expectation given all the measures you're taking into next year for the Performance Polymers business in 2008?

We're about three months early in giving you outlooks for 2008, but my first answer would be, it's not zero. We're taking these actions to move these things back into the black. That's why we do these things. We expect when we get done, it's going to be well into the black, we've given you some parameters on where we think it's going to go and we still believe that. So I guess I would judge that those numbers that look at us as being zero going forward are light. I'm not going to give you anything more than that right now, Bob. I'm three months away from giving you views of 2008.

Okay, appreciate it. Thanks.

Your next question will come from Gregg Goodnight with UBS.

Good morning, all.

Good morning.

Say, you mentioned several times about the high cost of propylene. Would this justify an acceleration of your initiative to the MTT process to make propylene from methanol?

Not going to comment on what we're going -- on the derivatives from coal gasification. We're still working on our derivative portfolio for coal gasification. There's a lot of reasons why we don't want to talk about that. But just to answer your general question, this is -- this is an energy-related play that we are doing. These low-cost hydrocarbons are all about trying to play the arbitrage against other hydrocarbons that have higher cost. That's true of all of them, whether it's a propylene or propylene derivative or whether it's a coal-related derivative, you've got the right idea, that these high-cost things can be attacked. But we're not going to comment on any of those choices right now.

Conceptionally, I guess I should be thinking of 2012 to 14 in that range or later?

Yes. We would like to get them up as quick as possible. We have hopes of timing at least one of these close to the start-up of the Texas project, but it's an R&D project. You can't birth those things any faster than they have their natural way to go. So yeah, that's probably a good guess for you.

All right. I look forward to your additional information on coal gasification projects which you mentioned is coming. Just one question. Would you characterize the CO2 market at the tertiary well process. In a former call, you mentioned that there's value in being first in. Is that an undersupplied market, oversupplied market, what is the value and use of the CO2 that you would supply?

Good question. Down there on the Gulf Coast, as we all know for as many years as anyone can remember, they've been drilling holes to pull out oil. There's not much of a man-made CO2 supply down there actually. The C02 supplies come up from Texas and Oklahoma, they have some natural supplies there, but that's not easily transported.

I guess my point is there are a whole lot of holes that are ripe for secondary recovery and enhanced oil recovery and this is a rapidly growing market in the Gulf Coast. So as an early entrant, we think there's a lot of opportunity to move this product. And that's -- that allows us to move to sequester the C02, which is already fairly easily captured by us. When you kind of talk about the world of CO2, there's two problems. The carbon capture is usually a big problem for a lot of people. We make capitals instead of power, we get to capture it more easily. The next problem people have to face by being on the Gulf Coast with all those depleted oil wells down there, there's lots of places to put the CO2, but I think we estimated the two projects we were in would generate something like 10 million barrels a year of oil just because of the ability of the CO2 to enhance the oil recovery.

Okay. Fantastic. I appreciate the comment.

Our next question will come from Morgan Stanley's Charles Neivert.

Hi guys, how are you?

Well. How are you?

Good. In getting the additional PET capacity that you got out of the IntegRex operation, you had talked about an initial spend, something over $100 million, pretty indefinite, but how much more was spent to get the additional piece -- sort of at the margin, how did you add that 50 odd percent?

We haven't revealed that, but it's a modest number relative to the first number. Charlie, you've been in the business a long time. You know debottlenecks are a fraction of the initial cost. This is not different, the same thing. This is really in many ways not fully appreciating the size of what we had built. When you're building a brand new technology, you put in all these extra -- in case this happens, in case this happens kinds of allowances and as it turns out this critter was able to generate a lot of pounds that we hadn't anticipated and there are certain bottlenecks that you move out of the way so that you can feed it, so that you can process things and it's a modest amount of money.

Could you classify at least some proportion of this more like an accelerated capacity creep as opposed to a debottleneck, or was it more --

It's more of a debottleneck. It's certainly less than 50%. Let's put it that way.

Okay, thank you.

Next we'll hear from Andrew Feinman with Iridian Asset Management.

Thanks. First, I would just like to commend your board for making the decision on buying back stock. I think it demonstrates their conviction and belief in the investments that you're making and it's not just they should not think of it as returning cash to shareholders, but they should think of it as investing in the future growth of the company because it will make each share worth more.

I'll pass them on to them, Andy. Thanks for the comment.

Can you tell me -- first, I assume the receivables, the offbalance sheet debt is still about $200 million?

That's correct.

Okay. And the Greenrock announcement, is that different than who you might have thought it was going to be a few weeks ago, or is that kind of what a you were expecting all along?

No, this is not different. We've been working with these folks for quite some time. They are the partner we have become comfortable with in the Faustina project, which we have been working on quite for some time and the only reason we were delaying the announcement is because we wanted to ink the agreement between us and agreements take a while to hammer out. But they are a very capable, knowledgeable group. They understand what they're investing in, they have a history of investing in basic assets like this. They are motivated similarly to us. I think they're going to be a very good partner. Now we have one partner for two projects, so we don't have to try to understand two partners, we can understand one two times.

Okay. And wonder if you would be willing to tell me what the net book value of the European PET business is?

Andy, it's Rich. When we get to the end of that process, we'll certainly inform you and everyone else what the net results are. I'd like to leave it at that.

Okay. And then the last thing, just because I sleep better at night when I hear it and I haven't heard it yet on this call was 10% in the second half of '08. Are we still thinking along those lines, if we're still in the business?

Yeah, Andy. This is going to be a much, much better business. We're going to be if not on that number, in the neighborhood of that number. I think this is one of those things that we're doing different things at different times. We're doing part of the transformation in the middle of '08. At the end of '08, remember, we're picking up this IntegRex facility 50%. So I feel better about '09 than I feel about the end of '08. I'm not trying to crawfish on the number.

Let's take our last question from Paul Christopherson with New Vernon Associates.

I know it might be a fight, but there is a possibility in the fourth quarter there are going to be some pretty big sequential cost increases, not just in propylene, but in paraxylene and ethylene glycol. This could be a big cost quarter. Do you include that in your fourth quarter outlook?

Yeah, absolutely.

Thank you.

At this time, I'll turn the conference back over for any additional or closing remarks.

Okay. Thanks again, everyone, for joining us this morning. An audio replay of this conference call will be available this afternoon through Friday, November 2. Have a great day!

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.