伊士曼化學 (EMN) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the Eastman Chemical Company fourth quarter 2007 earnings conference call. Today's conference is being recorded. This call is being broadcast live on 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.

Thanks, Matt 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 Bogni, Manager of Investor Relations.

Before we begin I'll cover two items. First, during this call you will hear certain forward-looking statements concerning our plans and expectations for first quarter and full year 2008, and for 2008 through 2012. 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 fourth quarter and full year 2007 financial results news release and news release being issued this morning and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2007 and the Form 10-K to be filed for full year 2007.

Second, unless otherwise mentioned, references to historical sales revenue and earnings are non-GAAP financial measures, which exclude restructuring-related items identified in the financial results news release. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring-related items are available on our 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 everyone and welcome. Thank you for joining us today. As usual, I'll give you some highlights for 2007, and then I'll talk a bit about 2008 and I'll wrap up with conversation about corporate strategy. Last night we announced fourth quarter 2007 earnings per share from Continuing Operations of $1.25. And excluding restructuring items, the earnings per share were $1.27. Our solid fourth quarter was the conclusion of what was another very strong year for Eastman. Full year earnings per share on a continuing basis were $5.06, and when combined with 2005 and 2006, this is the best three year stretch of earnings in our history.

We did a number of things right in 2007. On this same continuing basis, our sales revenue increased by 11% and our operating margin was 11%. And the strong operating margin was despite an increase of approximately $250 million in raw material and energy costs. There's been a lot of hard work that has enabled us to sustain a high level of earnings. It starts with Eastman employees around the world who have done really a fantastic job of operating our facilities faithfully and reliably so that we can provide our customers with world-class, innovative products..

It also reflects the fact that we have kept our commitments made to you over several years. For example, we told you we would divest the underperforming businesses in the CASPI segment and we did, and CASPI has been stronger ever since. We told you we would improve our financial position and continue to be disciplined as we put cash to work. Today our balance sheet is the strongest it's ever been. We continue to pay a strong dividend as we have every quarter since we became a public company in '94. We purchased almost $400 million of our shares in 2007 and we're continuing to buy back shares. When we're finished with the current authorization, we will have bought back $1 billion of our shares since 2007. Our return on invested capital in 2007 was 13%.

We told you we'd divest our polyethylene business, which we completed in the fourth quarter of 2006, and related to that, we're shutting down older, non competitive crackers at our Texas site. One was shut down during the third quarter of last year and another will be shut down in 2008. The result of that is that we're reducing our cyclicality as a smaller percentage of our products are ethylene derivatives. And we told you we'd divest our PET manufacturing facilities outside the U.S. Three of them were divested in 2007 and we expect to complete the divestiture of our remaining European facilities by the end of the first quarter. The bottom line is that we've had a history of following through on our commitments and the results have been the historically high earnings we are now enjoying. I actually have a reason for emphasizing this track record. That's going to become apparent to you in a few minutes.

Transitioning to the segment highlights, starting with Fibers, Fibers' operating earnings were $238 million in 2007, which by the way, is the highest in their history. Of course this means they were a bit higher than 2006, which is consistent with the guidance we gave you. Revenue increased by 10% due to a combination of selling -- higher selling prices, needed to offset the higher raws and energy and some increased sales volume. The volume increase was 3% which was in line with the guidance we gave you. A quick comment about their fourth quarter, earnings were up solidly based on strong volumes which were due to some chunkiness in customer buying patterns, particularly in China. Looking at 2008, we expect another solid year from Fibers, really not much different from 2007.

Next is CASPI which had another great year despite the difficult climate for autos and housing in the U.S. throughout the year. Operating earnings of $234 million were just slightly lower than the record year they had in 2006, with the decline concentrated in the fourth quarter. In the fourth quarter, operating earnings were lower year-over-year, as selling prices could not keep up with rapidly rising raw material costs, particularly propane, during a seasonally slow quarter for volumes. I would add that although earnings were lower in North America during the year, they were up in all other regions for CASPI, particularly Europe, as they benefited from robust demand and the strong Euro. Looking at 2008, we expect CASPI to maintain solid earnings at the low end of their 15 to 20% operating margin range that we attribute to them as continued weakness in North America is offset by strength in Europe and Asia.

Moving to Specialty Plastics, during both the fourth quarter and full year 2007, operating earnings improved over 2006 despite higher paraxylene costs. Co-polyester volumes increased by 10% as our market development efforts continue to pay off. Partially offsetting they growth in co-polyester volumes was the decline in demand for polyester products going into photographic and optical films, and the impact of this decline ran its course in 2007 so we don't expect it to be a factor in 2008. As I've said before, we are reinvesting our gross profits in the Specialty Plastics segment and we're in the early stages of seeing a return on that investment. We expect 2008 operating earnings will be a bit higher than 2007, despite higher paraxylene costs and we're on track to approach $100 million in operating earnings in 2009, which would represent about a 50% improvement over 2007. So I'll talk a bit more about that later on.

Performance chemicals and intermediates is next, and they had simply a fantastic fourth quarter and full year 2007. Operating earnings for the fourth quarter were $62 million and for the full year were $238 million. The full year earnings are their best in a decade and on a continuing basis, their revenues were up 17% with strong demand for olefins and acetyls in Asia and North America as the biggest factors. The segment also benefited from earnings from the licensing of acetyl technology for the production of acetic acid to the Chungchun Petrochemical Company in Taiwan.

Operating earnings from the license were $22 million in the fourth quarter. And as additional milestones are met, there will be more earnings from the license but at a lower level than what we received in the fourth quarter. As a reminder to you, this is the second licensee of our acetyl technology. Back in 2005, we licensed to Sipchem in Saudi Arabia. Looking forward, obviously it's challenging for PCI to sustain this level of earnings. In 2007 their operating margin was well over 10% and we normally think of them as a 5 to 10% operating margin range. However, we don't see significant increments of additional capacity that would impact their business coming on line in 2008. So we therefore expect them to be at the top end of their 5 to 10% range that we normally attribute to them.

Turning now to performance polymers, we made a lot of progress in 2007 towards transforming our PET business, including our new IntegRex PET facility in South Carolina to fully operational status. We run at above name plate capacity and confirm that the conversion cost savings are greater than 50% compared with conventional assets. Our ParaStar PET resin is now widely accepted in the marketplace, and we are on track to debottleneck our facility by 50% by the end of 2008. In addition, as I mentioned earlier, we completed the divestiture of our PET sites in Spain, Mexico and Argentina and we are on track to close the divestiture of our sites in the Netherlands and the U.K. by the end of the first quarter.

On a continuing basis, performance polymers' revenue will consist of sales from U.S. PET manufacturing sites, which were $1 billion in 2007. And that is less than 40% of what the performance polymers' segment revenue was in 2006. Of course when you take significant actions like this to transform a business, there are costs involved. During the fourth quarter, and throughout the year, we incurred costs related to the ramp-up of our IntegRex facility and the many actions we're taking at the South Carolina site. Combined with difficult market conditions in North America for PET, this led to a significant operating loss. There is no doubt, however, that we will improve on these results in 2008.

In addition to expanding the capacity of our IntegRex facility by the end of the year, the transformation of our South Carolina facility will be completed by mid-year 2008. This includes shutting down 300,000 metric tons of our conventional capacity, which is on top of 100,000 metric tons we shut down in 2007. We will also complete the shutdown of our DMT intermediate assets and increase our PTA capacity by the middle of the year. And we will remove approximately $30 million in annual costs from our South Carolina site, also by the middle of the year. We now expect that we will have low single digit positive margins for the full year 2008, and that we will approach 10% operating margins for full year 2009. We have a clear path to get to this significant improvement in results.

One last comment on PET and IntegRex. On this call in October, I said that we were not happy with the typical PET business model, which is build a big facility and then try to sell out the plant. I also said IntegRex has secured its place in the market as the best technology for manufacturing PET, period, and that the PETA part of the technology is every bit as impressive. After considering all our options for creating value from the IntegRex technology, we have evolved our PET strategy and we are now pursuing licensing opportunities for IntegRex. We have already had discussions with a number of interested parties and their response has been very good. We are actively pursuing this strategy and expect to make good progress in 2008. As we generate licensing revenue from IntegRex of course it will bolster our results in the performance polymers segment.

Now, turning to the regions and looking at regional performance, I'll make a few overall comments before talking about each of them individually. In 2007, on a continuing basis, our sales revenue was about 60% North America and about 40% outside North America. Looking at operating earnings on the same basis, the split is closer to 50/50. The growth we achieved outside the U.S. allowed us to offset the impact of the slowing U.S. economy, and we see this as one of the strengths of our company and it is something we will continue to build on.

With that said, I'll start with North America. Full year North American revenues declined by 4%, mainly due to divestitures. On a continuing basis, North American revenue actually increased 6%. Operating earnings declined by about $65 million, mostly in performance polymers and CASPI. Asia-Pacific revenue increased by 20% for the year and went over $1 billion for the first time. Asia-Pacific is now our second largest region by revenue. Higher revenues were realized in almost all the segments but were strongest for Fibers and PCI. Asia-Pacific operating earnings for 2007 increased substantially, to approximately $190 million, up about 70% over 2006. The biggest increase was in PCI as they benefited from strong acetyl and olefin demand in that region, and of course, the licensing revenue showed up in that region as well. Fibers, CASPI and Specialty Plastics also increased operating earnings in the Asia-Pacific region. In Europe, our revenue increased by 17%. The largest increases were in CASPI, specialty plastics and Fibers. Operating earnings also improved, up about $40 million with particular strength in CASPI and PCI. Lastly, Latin American revenue and operating earnings, excluding PET sales, were about flat compared with 2006.

Now, looking at our first quarter and full year 2008, there are two key uncertainties. Prospects for economic growth in the U.S., Europe and Asia appear to be dimming, although we have yet to see evidence of this in our volumes. And volatility in our key raw material and energy costs remains an issue. At the same time, we're continuing to work on transforming the PET business while we also make progress on growth initiatives and industrial gasification, Fibers and Specialty Plastics. Even with all those moving parts, we expect strong results in 2008. During the first quarter, we expect earnings per share to be above first quarter 2007 earnings per share of $1.19. And for the full year, 2008, we expect earnings per share to be similar to our 2007 earnings per share of $5.06. For all periods, gains and charges related to strategic decisions are excluded in these numbers. With the major economic uncertainties along with all of the work that we're doing internally, we think that would be a very, very good result.

As I usually do in these calls, I'd like to conclude with some remarks on corporate strategy. Over the last couple of years at our investor days and at conferences and on these calls we've spoken with you about our corporate strategy. What we have not said as much about is the value we expect to create when we have completed the strategy. So this morning, I'm going to begin a dialogue with you about the value we expect to create over the next five years and beyond and this is really why I stress in my opening comments our historical track record of doing what we say we will do.

Today, we are once again painting a picture of the future for Eastman and we're going -- we're doing this because we strongly believe we can achieve this vision. When we look across the company at the many transformational initiatives we are currently pursuing, we expect them to result in a doubling of our earnings per share by 2012. So roughly, we expect to go from around $5 per share now, to $10 per share in 2012, and between 2008 and 2012, we expect our earnings each year to increase over the previous year. So for example, in 2009, we would expect our earnings per share to be 10 to 15% higher than 2008.

So I'll anticipate your first question, how do we get from $5 per share to $10 per share? Let's look at it in two buckets. In the first bucket we have our two announced industrial gasification initiatives which we expect will contribute about $2 per share by 2012. This includes the Texas and Faustina gasification projects that we have discussed with you before. Milestones for these projects include completing the front end engineering and design process in the second half of 2008, obtaining project financing by the end of 2008, breaking ground in early 2009 and then starting up in 2011. And by the way, the economics for these projects just keep getting better after 2012 as they reach their peak operating rates. In the second bucket are the growth initiatives for our core businesses. We expect these to contribute about $3 per share by 2012. These initiatives include PET improvements that I discussed previously.

Increasing profitability in Specialty Plastics is another. We expect to increase operating earning to about $100 million in 2009 and continuing to grow further thereafter. Milestones to get there include converting PET capacity to co-polyester. We will complete the conversion of 50,000 metric tons by mid-year 2008 and will convert another 50,000 metric tons by 2010. Another milestone is increasing our revenue from cellulose esters used in LCD screens to $100 million in 2009 from approximately $50 million in 2007.

The third milestone is making continued progress with the commercialization of our new co-polyester, Triton, which was launched in November of last year to much positive customer fanfare. Growth in the Fibers segment is another initiative in this bucket. It includes the expansion of our acetato capacity in the U.K. which will be completed by tend of this year and another milestone is making an announcement regarding our Asian growth strategy for acetato and we expect to give you more details this year. Of course, the $1 billion in authorized share repurchases of which we have already completed about $400 million is another step we're taking which will increase earnings per share.

We have a clear strategy for creating significant value. We're leveraging the biggest strength we have as a company which is the ability of our people to innovate and execute and that gives us a lot of confidence that we'll be successful. Getting to $10 per share is not the end, by the way. There are additional initiatives in familiar areas like gasification and in other areas that we have not yet discussed with you that will add to the story, and we continue to work on those, as well. I'm sure you're going to have a lot of questions about our expectations and we'll start to answer those this morning. Rich and I will also be at a number of conferences throughout the year to give you more details and to update you as we achieve the milestones we laid out for ourselves. I hope can you tell that we're pretty excited about the value that we have created as a company and about the additional value that we expect to create as we execute this strategy. I'm looking forward to talking with you more as we continue to make progress.

With that I'll turn it over to Rich.

Thank you, Brian and good morning everybody. That was a pretty tough act to follow. But here I go. Before I begin with my remarks, I do want to second Brian's comments that we're very confident and excited about the value we're going to create over the next five years and beyond that. Taken a lot of hard work to strengthen ourselves and get to where we are and it will take a lot of hard work to go where we want to go but I'm very confident that we as a a company have what it takes to get there. With that said, I'll get started with my comments.

This morning I'll cover our restructuring-related items, provide a little more color around our cash flow and net debt, touch on our effective tax rate and finish up with some overall financial metrics. First, as Brian mentioned, we have taken a number of significant strategic actions in our performance polymer's segment during 2007. During the second quarter, we divested our PET facility in Spain and in the fourth quarter we entered into definitive agreements to divest our Netherlands PET and PTA facilities, as well as our PET facility in the U.K. and those are our last two PET facilities outside the U.S. The Netherlands and U.K. closing is scheduled later this quarter and we'll be recognizing a gain on the transaction.

As a result of these actions, we now have a GAAP measure in our results for Discontinued Operations. For reporting purposes, the European PET assets were considered an asset group and because we're exiting the PET business in the European region, results from the Spain, Netherlands and U.K. facilities will be reported as discontinued operations in our results. Looking at the fourth quarter of 2007, that will be reflected as a loss of $0.04 per share. We also closed the sale of our Latin American PET facilities in Mexico and Argentina during the fourth quarter. Unlike the European business, the Latin American business did not meet the accounting criteria for Discontinued Operations. We will continue to have involvement in the region, selling PTA to the Argentina plant from South Carolina under the terms of a supply agreement, and we will also have some sales of PET into the region from our U.S. side. To help you size the revenue and operating earnings impact of the Latin American divestitures there's some additional information provided in the conference call tables we sent along with our earnings news release.

In addition to the strategic actions for our PET facilities outside the U.S., we're continuing to take actions to transform our South Carolina PET site. As you heard from Brian, we're moving along as scheduled. While in the process of shutting down our highest cost PET lines in South Carolina during 2007, we incurred $30 million of accelerated depreciation costs related to these actions. $9 million of that total was incurred in the fourth quarter. During 2008, we'll record another $4 million of the accelerated depreciation costs as we finish up these actions. Obviously, significantly reduced compared to 2007. We've also incurred accelerated depreciation costs for our scheduled shutdown of of our smaller cracking facilities at our Longview, Texas site and that's reported in the PCI segment. During the fourth quarter of 2007, we incurred $3 million of accelerated depreciation costs and a total of $19 million for the full year.

Looking ahead in the full year '08 we expect to incur an additional $6 million of accelerated depreciation costs associated with these facilities, again, significantly reduced compared to 2007. We do have some flexibility as to the exact timing of the cracker shutdowns and we have the ability to keep them running as long as it's economically sound to do so. One additional item in the other income area, we recorded other income of $10 million in the fourth quarter of 2007, compared to $14 million in the same period last year. The other income in this year's fourth quarter included net gains on foreign exchange transactions and income from some of our venture investments.

Moving on to cash flow, our cash flow from operations for the full year 2007 was $732 million. $321 million of that was generated during the fourth quarter. Key driver, continued strong earnings from almost all of our segments through the year. Our depreciation and amortization increased slightly year-over-year to $327 million in 2007, that's about in line with what we expected. Looking ahead, we expect depreciation and amortization to decline in 2008, to about $270 million. That decrease primarily due to the divestiture of the PET facilities outside the U.S. and significantly reduced accelerated depreciation costs relating to the restructuring actions.

In the first quarter of 2007, we contributed $100 million to the U.S. defined benefit pension plan, which is now fully funded. This compares to a contribution of $75 million in 2006, and these are included in the liabilities for employee benefits line on the cash flow statement. We don't expect to make additional contributions to the U.S. pension plan in 2008. In addition to the strong cash flows from operating activities, we also had other items that helped us in cash from investing and financing activities. During the year, we received approximately $200 million in proceeds from the divestitures of the PET facilities in Argentina, Mexico and Spain. We also received proceeds from stock option exercises of about $100 million, as our employees were able to share in the success of the company.

On the uses of cash, our capital expenditures totaled $518 million in 2007, compared to $389 million in 2006. The increase in capital spending in 2007 was primarily due to investing in our strategic initiatives. The transformation of our PET site in South Carolina, the conversion of the older, higher cost PET assets over to co-polyester capacity, it includes the expansion of the Workington, U.K.. acetato facility, which is on schedule to be completed in second half, we continue the revamping at the Longview, Texas site which included costs to shut down older, higher cost cracking units, one of which was shut down during the year with the second plant to be completed by mid- '08, and of course we had a number of capital projects as we continue to improved efficiencies and invest in reliability.

Looking forward at 2008, we have a number of projects and initiatives that we're funding. First, we have the expenditures related to the debottleneck of our IntegRex facility which will increase capacity by about 50%. We also will increase expenditures on our efforts in gasification. We're increasing our capacity of CTA which goes into LCD screens and will support our efforts to achieve $100 million in revenue by '09. We're increasing capacity of new high temp co-polyester Triton. We'll complete the work on our acetato expansion in Workington, England in the second half of the year, and of course, again, continue to fund improvements in efficiencies and invest in reliability.

As a result, our current forecast is for 2008 CapEx to be above $600 million. Putting this all together, our total debt less cash and cash equivalents or net debt at the end of the year was $719 million. That's an increase of about $70 million over 2006, and it obviously driven by the share repurchases, $328 million, and the increased capital spending on our strategic initiatives. Our net interest expense declined in 2007 to $62 million, a $15 million reduction compared to 2006. The decline was primarily due to higher interest income on our invested cash balances. Looking ahead, we expect net interest expense to increase somewhat in '08, primarily due to lower interest rates on invested cash.

Our effective tax rate in the fourth quarter for Continuing Operations excluding items was 30%, and that's about flat compared to fourth quarter of last year, or 2006. The tax rate for the full year '07 for Continuing Operations excluding items was 33%. That's flat compared to the full year 2006 and slightly lower than our previous guidance of 34%. The lower tax rate was primarily due to the change in reporting for Discontinued Operations. On an overall basis, our tax rate was pretty close to guidance. For 2008, on a Continuing Operations basis, our effective tax rate should be around that 34% level, given the ins and outs of earnings in different tax jurisdictions.

Finally, I'll wrap up with a few comments on overall financial metrics. We ended 2007 with a net debt-to-capital ratio of 26% and an ROIC of 13%, well above our cost of capital. Given our expectations for improved financial performance, we expect to have very strong operating cash flow over the next five years and beyond. We continue to be rated a strong BBB, BAA2 by the credit rating agencies. We see this as our sweet spot and are happy with that rating. As Brian said, we've got aggressive plans for growing our profitability over the next five years and as we pursue those opportunities, we do so with a strong balance sheet and a very firm financial foundation.

With that, I'll turn it back over to Greg. Sorry, to Jennifer.

Thank you, Rich. This concludes our prepared remarks, and Matt, I believe with that, we're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS). We'll go first to PJ Juvekar with Citi.

Good morning, Brian.

Good morning, PJ.

Let me play devil's advocate with you. Let's say U.S. goes into recession and oil is down to $60 in 2008. If that occurs, would you still go ahead with your coal gasification project and do you believe you'll get financing?

Absolutely yes in both cases. The basic math we have done for the coal gas economics basically assumes $60 oil and something in the neighborhood of $8 gas. Also, remember that recessions are things that play out in months and this vision we have described to you plays out over many years. A recession is a bump in the road. If I think about Eastman having to face a recession, I cannot think of a time in our history when we are better positioned, or were better positioned than we are now. We've got a very strong balance sheet. We have a very strong credit rating. We have lots of cash generation. I don't anticipate anything slowing that down. As far as the financing is concerned, I'll let Rich comment on that.

PJ, I think the projects will stand on their own two feet. We're confident that the financing will be there for us.

The second broader question is, your licensure of technology to the company to Sipchem, now you're going to license IntegRex, as these new players come in, use your technology and add capacity, have you thought through what is the real impact on your existing businesses when the new capacity gets added.

Absolutely. Whenever you get into the licensing world, you have to imagine what the world is going to be like if the world is swimming in that particular commodity and how much do you like it. We've absolutely thought through that. We're very comfortable, especially in IntegRex case. We're going to create an awful lot of value here. That is a great technology. It is going to result in multiple licenses across the world. And we think that's going to create better value equation for us than some of the alternative choices.

And just lastly, in terms of cost, how does your acetic technology compare with [Celluvision's] technology. Thank you.

I can't really comment on that. The fact that we're getting licensees, the fact that we've been going head to head with these other guys in the world for a very long time tells you we're very competitive and that's about as far as I can go on that.

Thank you.

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

Good morning, Brian.

Good morning.

With regard to your $2 contribution from the coal gasification initiatives, can you talk a little bit about the assumptions that are going into that and the confidence interval you have around that number, given the way you've structured the contracts and potential fluctuation in energy prices, that sort of thing?

Sure. First of all, when we talk about $2, it's a combination of the IRR from the equity investment and the value that's created by the offtake. So the offtake is not a trivial part of the value creation. It's a significant contributor. Of course we're going for non recourse debt financing on these projects and to secure that, there has to be some kind of an equation in the contracts that indexes selling prices to raw material costs. So that generally locks in some kind of a margin. We have a contracting strategy to protect that financing covenant but also provide for upside so you mix it up in the way that you do the contracting, that's something the guys are working on but we feel very confident about taking out the market risk through that process.

The assumptions on CapEx, we still have about $1.2 billion per project -- $1.6 billion per project. We're going through the feed process to confirm that. The gas price that is sort of the key commodity that you want to look at to see if you have a good spread between coal and pet coke versus other hydrocarbons, we're assuming that price this the neighborhood of $8, that's $8 and change roughly, that yields a $6 spread between the solid and the other hydrocarbons that you're trading off against. We feel good about that. The combination of geopolitics, scarcity, and potentially, global climate change policies looks like it's going to support that spread at the very least, may even get a bit wider. So we feel -- I guess we looked at this every way we know how. We feel pretty good about them.

Just to follow up, if the energy complex were to inflate 20%, let's say, versus your assumptions, how much would the $2 number fluctuate, do you think?

When you say the energy complex, talking about the CapEx.

Sorry, crude oil.

Actually, that's -- the key issue is the spread. It's the spread between solid hydrocarbons and oil and natural gas. I would expect, based on what's going on in the world, that the inflation happens more quickly to the oil, natural gas community than it does to the coal pet coke community.

Right.

And that broadens spread, which actually improves our margins.

Right I'm wondering how much would it improve in that scenario, do you think? Possible to quantify that?

No, we're all speculating about the spread.

Okay. To follow-up on PET licensing, how would you characterize the financial opportunity from that new initiative over the next three to five years, how big could that be?

We're going to do that for you, Kevin. I think the main announcement we made today is essentially we are not pursuing a new plant of our own. We're not pursuing a JV of our own. We had chosen this licensing route because it creates the best combination of value versus risk. I will tell you that it doesn't take many licenses to create a whole lot of value and compete very well with the other choices that we had. So we feel -- I'm not going to -- you don't want me to size the price of the license on a telephone line before we negotiate it.

Fair enough. Last question, as you shut down crackers, what should we expect in terms of impact to your contract ethylene sales and PCI profitability?

Those were never all that profitable, that was mostly about volume, which is why we called them out separately, so you don't get so excited about the volumes we sell there. Those were always part of the accommodation for the sale process. As they go away, some volume and sales dollars will go away. But there's not a lot of earnings. It's pretty much a wash most of the time.

Thank you, Brian.

We'll go next to Jeff Zekauskas with JPMorgan.

Good morning.

Good morning, Jeff.

A few questions. What was the tax rate on the acetyl licensing?

That was our ordinary tax rate, our effective tax rate.

Why is it so high?

Our effective tax rate is high because our primary tax jurisdiction is the United States.

What were the EPS effects from currency translation and hedging gains in the quarter?

Jeff, I'm not going to say much about hedging gains, other than that we have a very active risk mitigation program and it's -- the risk we take, and it's not something I want to call out and have our customers think that it should be theirs.

How about currency translation? Do you comment on that?

Well, we have a very strong Euro. As Brian noted, and as you can see in the results of several of our product areas that do export aggressively, such as CASPI and Specialty Plastics, our earnings have held up very well and that's partially driven by the opportunities to sell in Europe. We did say in our other income area, we have some currency gains, primarily that's across the receivables that we hold and the fact that they actually got more valuable as they stayed on our books until we collected them. But again, it's -- you can make a judgment on the value of the improvement in the Euro by the size of our exports to Europe.

Brian, why have you lowered your expectations about PET margins in '08? What was the factor that led you to move them down?

Well, remember, we're still holding to the 10% expectation.

You moved it back.

Moved it back a bit. There's some very good news, actually, related to that. As we went through the evolution of the engineering, looking at how to debottleneck, gathering all the data, we actually identified a much larger debottleneck that we can accomplish than we had originally anticipated when we first made the comments to you. The consequence of accomplishing that bigger debottleneck is that it moves it out about five or six months. So a very good outcome, lots of value to be created but it takes a few more months to get it done.

Two more brief questions, if you don't mind. When you talk about growth in 2009, what's your PCI expectation? Do you have that business going back to a 5% margin or staying at about 10%? How do you frame that in your '09 forecast?

It's coming down. I'm not going to give you the exact number in there. It's part of that cycle that's going on. We're much less cyclical in PCI than we were before because of the many things we have done there.

Lastly, in your five year forecast where you have your $10 estimate, are there any earnings from commodity PET in that number?

Sure. We have the South Carolina facility humming along at this expanded rate with a very good cost position, creating value above 10%. So absolutely there will be some in there. Remember, that South Carolina site is evolving over time too. Over time we keep on encroaching on PET capacity and converting it to Specialty Plastics, so it will be a moving number over time.

Okay. Thank you very much.

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

Good morning, gentlemen.

Good morning, Frank.

Hey, Brian, in terms of your volumes, you're saying that you have not seen a slowdown in your businesses and I saw that Caterpillar said on the tape today they believe we're in a recessionary environment. Looking at past recessions, when would Eastman see a slowdown in its volumes. Would it see it concurrently with a recession? Would it see it in advance of the recession? Can you shed a little light on that?

I can make a guess, but then it would be -- it would probably be wrong, Frank, because it all depends on how much stuff there is in the supply chain. Our sense is there is less stuff in the supply chain today than there has been in past years, so I would expect to see it sooner rather than later. We did indicate to you that North America was a lower volume year, well I guess on a continuing basis, a little bit better, but we've seen some falloff in the fourth quarter. But it's the overall rise across the globe that has shored that up. So, some of that rise, we saw some pretty dramatic rises in Asia-Pacific and Europe. It's because we were able to move to profitable markets there when things got softer here.

So in your view, if you suggest that you would see it sooner than you have in past recessions, that's fairly bullish for '08 or at least the start of '08.

It's bullish for the first half of the first quarter, Frank. That's all I can tell you. Because the visibility on those books doesn't go out for a long period of time, as you know.

Which brings me to my second question. When you announced third quarter results you said the fourth quarter would be above $1 and here you are coming in 27% higher. You're saying that for the first quarter you're going to be above $1.19. So should we be looking at a number 27% higher like $1.50 for the first quarter?

You should be looking for a number that's above $1.19, Frank.

And lastly, you explained why you're expecting to see the PET margin improve a little bit later and some of the milestones that we'll be seeing along the way in terms of the debottleneck. Can you give us some of the near term milestones in terms of the coal gasification project, in terms of financing, so we can monitor how you're keeping on track to ultimately get to a doubling of earnings.

Yes, you can. We're actually going to be printing a press release here this morning that should have some of those milestones down. The next milestone is the feed process concluding. That stands for Front-End Engineering and Design. That's later this summer. That's where we lock up the CapEx and have all the data, have the contracts in hand so we can go seek the financing. The financial close is the next milestone you should look for. Financial close means we've gone to secure the financing, contracts are in place. We let the contracts to the contractors, et cetera. The next milestone after that is breaking ground in 2009. If you break ground in 2009, it means you accomplished your permits also. Those are the three major milestones that would be external to you, and there may be a few other intermediate ones we can refer to.

This will be spelled out in the Press Release.

Yes.

We'll go next to Gregg Goodnight with UBS.

Good morning.

Good morning.

Couple questions. In terms of your share buyback, you've repurchased $380 million. If I'm not correct, a lot of that was with the former $300 million authorization and now you have a $700 million authorization. How do you see the timing going forward? When are you going to take a big bite out of that $700 million?

Greg, yeah, we've continued to buy here in January, of course. I would say we're going to continue to be thoughtful about it. But at the same time, we're going to be opportunistic about it. So I take this and we look at it on a day by day basis.

You don't have a target, a rough target for completing this? Is it 12 months? 18 months? Anything we can look at and model?

Again, it much depends on where the share price goes. If it's down, we'll be opportunistic. If it's up, we'll be more measured.

Okay. Well, it seems like it's been down recently. But anyway, the other question I had is it seems like you have some very aggressive plans for growth and share buyback and you yourselves had said that you're assuming good cash flow in the immediate future. I have really two questions. Number one is, what is your base case economic assumptions going forward? Is it a U.S. recession case? Is it continued global strength? And number two, if the economy does get worse, would you be willing to sacrifice either, say, your share repurchase or let debt go up in order to maintain your aggressive growth plans?

Gregg, let me answer it this way. We've -- our base case does not include a severe recession, but we've got alternative scenarios which we've built internally to try to get arms around what might the impact be to the company in the face of a significant recession. It's a question that we ask ourselves, can we continue to invest in our strategic initiatives in the way we've planned them and the timing we planned them if we do hit that kind of a bump in the road. And my short answer is, we believe very strongly that we will be able to stay the course, invest in our strategic initiatives, as we go forward.

Will you be able to maintain your current debt level in that scenario, where you do have a major recession?

Gregg, the short answer is yes. We model quite extensively our ability to retain our strong investment grade credit rating and that's where we want to stay. And we believe that we can withstand a recession, invest in our strategic initiatives and retain that rating.

Remember, Gregg, we've got very little net debt right now. We're low. So a little more debt wouldn't actually be the end of the world, would it? So --

And our bond maturities are such that we don't have a major call on cash in the coming years.

Would you rank your priorities on use of cash for me?

Number one, strategic initiatives. We are -- maintain the dividend, clearly, and obviously the pension plan as well for our employees and of course share repurchase.

Pension plan is fully funded.

Yes, it's fully funded. As time goes on, if we need to fund it, we will.

Okay. Thank you, gentlemen.

We'll go next to Bob Goldberg with Scopus Asset Management.

Good morning, guys.

Good morning.

Had a bunch of questions but I do have to make a comment on the share buyback. I assume you have confidence in this forecast of doubling earnings that you get the $10 by 2012. Sounds like it's been very well thought out. If you believe in those numbers, the stock is trading at six times earnings and about three and-a-half times enterprise value to EBITDA. So given that context, does it really matter, Rich if the stock is trading at 60, or 58 or 64 in terms of the level of enthusiasm for the stock buyback. It just seems like if you believe in the forecast, any of these prices in this range are just very compelling opportunities for the company to take advantage of.

Bob, I guess I would just say absolutely yes. We bought shares, at a lot of different prices over the last month. Our initial authorization ended up at about $64. We bought some at just about every price level and I agree with you that it's a compelling buy. Again, we're being opportunistic, the same way you would be when you want to increase your position in Eastman and you look for the opportunity to get in at a price you feel is a good one and we're doing the same thing. But the short answer is yes, we feel like the range of share prices we've seen over recent months is -- it's a strong buy and that's what we're doing.

Couple of detailed questions. Rich, while I have you, what are the net proceeds expected from the sale of the European PTA and PT assets.

That's about 300 --

330.

$330 million that includes working capital.

That's after tax, though? Is there a tax associated?

We don't have a major tax to pay on that.

Okay. And one more detail question, maybe I'm not sure who is going to answer this, but PET, the loss of $15 million on the U.S. business on an operating basis, how much is in there for expenses associated with this transformation process? And how much of the $53 million loss for the year is cost that would be associated with that process?

Bob, it was more than half. That's about as far as I want to go. It was more than half of the $53 million loss.

And when does that start to -- does this wind down by the end of the second quarter or when do these transitional costs, when are they fully absorbed?

The vast majority of them are absorbed by the end of the second quarter. You can't fully appreciate how much we are tearing up that facility and how much work is going on. And then it's all in good shape there. The last shoe to drop of course is the debottlenecking and it requires a couple of shutdowns in the second half of the year for us to do 50% the debottleneck of the IntegRex facility. There's a little bit of cost that hangs over to the latter part of the year, but when you go into 2009, then you're hitting on all all cylinders.

Should we expect to see any sequential improvement from the PET business from the fourth quarter?

Absolutely. Absolutely.

Okay. And lastly, Brian, on the guidance for the year, last year you gave guidance of something below -- something less than 10% relative to the $4.53 consensus estimate for 2007 at that time. And you ended up doing $5.06. So it was about $0.75 better than the midpoint of the guidance. I'm not going to ask you if you're going to beat your guidance by $0.75 but it's very difficult given the segment guidance that you gave to get to $5.06. Are you just baking in a much -- a much less robust macroeconomic outlook or I'm just wondering what's baked into that guidance to get to the 506? Because it seems like, given the outlook for each segment, that the earnings could be perhaps somewhat better than that.

Oh, well the world was very kind to us. Okay. The world was very kind to us last year. We had some great things that happened when some people were in force majeure in certain businesses. And we benefited from that because we could operate when they couldn't. That had something to do with the outperformance of this past year. You can't expect that to happen again this year. So we didn't cook that into the numbers. Our expenditures are going up, of course, for some of the transformational work we're doing in South Carolina. We're also spending more money in the gasification world as we start to crank up these big projects.

In the press release you're going to see a whole lot of growth initiatives, in the Specialty Plastics, transforming PET, expanding Fibers. There's a lot of stuff going on in 2008, a very pivotal year and all of those eat into the expense line. If we had not had those things going on, yes, it could very well have been a better year. But the net of all the activity we're going on with the internal activity plus, frankly, give me a little bit of leeway here with a very uncertain world in front of us. We feel like the guidance we gave is appropriate.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). We'll go to Charles Neivert with the Morgan Stanley company.

Good morning.

Good morning, Charlie.

Couple of quick questions. Have you guys gotten, as you get closer I guess to locking down some of the numbers on the coal gasification stuff, have you noticed any sort of deescalation in some of the prices, maybe they're coming back a little bit because you've been seeing some project work, some freeing up of recourses, things like that that have begun to pull down these earlier estimates on construction costs. Is that showing up at all in the projects?

It's hard for me to tell right now, Charlie. That is actually one of the windfalls. We talked about the down sides of a recession. This is one of the up sides of a recession. The biggest thing everyone is worried about right now is CapEx. One of the best things that can happen to us on a very capital-intensive program for us is for a recession to slow that down. Yes, there is a lot of close watching of that and we're trying to account for whatever is happening there as we do our CapEx estimates. And that would give us some hope that it's not going to hit in the wrong direction in any kind of meaningful way. This work is still -- it's only about halfway through so it's just too early to call.

Another quick one. There is obviously some questions about next year's guidance and it being a little bit on the low side. But I guess this year, the fourth quarter, there was some benefit in particularly I guess for the year on the acetyl side. I assume you're bringing the acetyl numbers down a bit, to something more, what other companies would call sustainable levels.

Yes, that's correct.

And then does '08 include any PET licensing?

We have not built anything like that in there yet and that would be the answer.

Okay. Thank you.

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

We'll go to Andy Feinman with Iridian Asset Management.

Thanks. Do you think that the Fibers operating profit will get back to 25% in 2008?

I guess, Andy, the guidance we gave is that this is always a chunky business but we think that the best color we can make for Fibers is it's going to look next year like it did this year.

That's different than what you said last quarter about Fibers operating margin.

Yeah, we're going to be a little later on the Fibers expansion. It's taking a little more time in the U.K. So maybe 2008, 2009, a bit better. But we've had construction delay in Fibers and this bigger expansion of PET that pushed two projects back in 2008.

Okay. In CapEx, you talked about -- you included some coal gasification CapEx but the project -- you hadn't broken ground yet,and you don't have the financing yet, so I was wondering what that was and how much of the $620 million or how much of the capital spending was -- $625 million, how much was going to that?

I'll give you a piece of that and let Rich do the rest. Because of long schedules and very full shops, we are doing some early ordering of equipment in the gasification project to make sure that things will be on time. So what you risk there, of course, is cancellation fees. We'll be doing some early ordering even before we get other things done like permitting and some of the feed process, et cetera, and you invest the money to get those things done. As far as its percentage in the CapEx budget, I'm not sure the --

Yeah, I'm not prepared here to break all of that out. But the other piece of the gasification is paying for the feed process, and -- so, and there's some land purchases in there too around getting the site ready. So it's a part of that build-up, Andy, and -- but the major ramp-up of construction cost of course comes in in 2009 and beyond.

So paying for the feed process, that's capitalized?

Yes, we pay for the feed process and capitalize it. We buy the land and we talked about the plant that we purchased before and as Brian said, we've got some long lead items that we'll be putting some money down. So --

Okay. You said that the PET revenue in North America was $1 billion after the stuff you're selling. Can you say how much it would be on a whole year basis, after you closed the 300,000 tons of legacy capacity?

I'm going to let Greg work you through the pluses and minuses math on all of that maybe offline.

That's fine.

That's probably the best way to do that. If I did it right now I'm bound to do it wrong. Remember, we shut down 100 last year, shutting down 300 more this year. That's a total of 400 coming down. The math of the last IntegRex facility is 550,000. But that's not the only PET. We have other lines running. So that's where I get messed up in trying to help you with that.

That's fine. I'll talk to Greg. I just have two more quick things. First of all, your net debt is $719 million. So you're going to get $333 million from the sale of the European PET, you're going to pay $150 million dividend and if you have your earnings estimate of $5.05, and you -- that will give you free cash flow for the full year of around $100 million. So -- from operations, even though you're spending $625 million. So that assumes that your net debt in 2008, without doing any more buybacks, would drop from $719 million to something like $435 million, if you didn't buy back any more stock. And I wanted to know if I got that right.

Yes, you're pretty close, Andy. Your math is pretty close. We've given you all those numbers and that works.

Okay. So the last comment that I would like to make is to echo Bob Goldberg and to say that the more shares you get now, when the price is cheap, because I mean if all your numbers are right, you know the days of $59 stock are numbered or even $62 stock are numbered and you got to make hay while the sun shines. If you're going to spend $700 millions, you're going to get more shares now at this price which is going to be better for all the rest of us that don't sell the stock because the residual earnings per share will go up more for us, so I would encourage you to -- I mean, you could sign up with the brokerage firm and get the whole thing done tomorrow and let them take the risk and something like that I think would make sense.

Your basic logic is not lost on us, of course. And you saw how we have behaved over the last several months. So that's all I can say and all I will say but thank you for that advice, I appreciate that. You're also showing again the reason why we're not really expecting a recessionary situation to cause us any kind of a slowdown in our activity because we do have the cash and the debt capacity to work with here.

I'm sorry that I -- there's one last thing I wanted to say. The PET margin that you estimated was low single digits for this year. And I was only -- even though I thought you would get to 10% in the second half, I was only assuming 1% for the full year because of the first half. So really, you're going to do better than I thought because I assume low single digits doesn't necessarily mean 1%.

I'm glad to hear that. That's good.

Am I correct?

I stand with low single digits and digits is plural, so yes.

Okay. Thanks.

Thanks again for joining us this morning, everybody. On audio replay of this conference call will be available this afternoon through Friday, February 1st and have a great day.

Once again that does conclude today's call. Thank you for your participation. Have a good day.