伊士曼化學 (EMN) 2008 Q2 法說會逐字稿

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

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

Thanks, Rufus, and good morning, everyone. 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, Curt Espeland, Vice President of Finance and Marie Wilson, Manager 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 third quarter and full year 2008 and for 2009. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed in the company's second quarter 2008 financial results news release, on our website, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2007 and the Form 10-Q to be filed for second quarter 2008. Second, our comments today will reference non-GAAP financial measures such as earnings per share and operating earnings that exclude restructuring related items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring related items are available in our second quarter 2008 financial results news release and the tables accompanying the news release. With that, I'll turn the call over to Brian.

Good morning everyone. Thanks for being with us. Last night we announced earnings of $1.53 per share for the second quarter of 2008. The GAAP earnings were a few pennies lower due to restructuring related charges that Rich will cover in his comments. Both for Second quarter and through six months, our EPS is up over last year 16 and 20% respectively, and given the current economic and raw material and energy environment the increase is a testament to our global geographic profile and diverse portfolio of products. Sales revenue increased by 4% as we continue to work hard to offset sharp increases in raw material and energy costs with higher selling prices.

If you disregard the contract ethylene and polymer intermediate sales related to recent divestitures, our corporate revenue increased by 8%, as higher selling prices more than offset a 4% decline in sales volume. The volume decline was most significant in our Performance Polymer and PCI segments, both of which were impacted by restructuring actions we have taken. Gross profit dollars, excluding accelerated depreciation, improved slightly in the second quarter compared with a year ago period, and this is despite an approximately $200 million year-over-year increase in raw material and energy costs.

Year-to-date, raw material and energy costs were up about $350 million. This is a clear indication that we're a different Company today than we were a few years ago and that means we have experienced raw material increases that were more than what we experienced with Katrina and still had very good results. The ongoing operating margin for the continuing business was about 10% in the quarter and this is in line with our goal of maintaining our operating margin at 10%. We also had a tax benefit during the quarter which I'll talk more about in a few minutes. Looking at the second quarter and our first half, we are clearly benefiting from all of the actions we have taken over the last several years to improve our product portfolio and our profitability, and these changes have positioned us to weather the challenging business environment that we currently face.

Moving on to the segment highlights beginning with Fibers, Fibers had another terrific quarter, with operating earnings of $62 million. Year over year, revenue was up 9% primarily due to higher selling prices. Looking at our volumes, we had an increase in acetate tow volume while acetyl chemical volume was down and that's a major reason why our profitability is up year-over-year. After a great first half with 25% operating margins, Fibers is on track for full year 2008 earnings to be slightly better than 2007, even though raw material and energy costs are expected to continue to increase in the second half of this year.

Next is CASPI. Despite a very difficult economic and raw material environment, CASPI came through with a solid second quarter of $51 million in operating earnings. Revenue was up 10%, mostly due to higher prices needed to offset much higher raw material and energy costs. In particular, propane, propylene, and adhesive raw materials like crude tall oil, piperylene, and pygas were up. Margins have been challenged, particularly in specialty product lines, as raw materials have continued their rapid increase. For all products, we remain focused on raising prices needed to offset the higher raw material and energy prices. As we look at the second half of of this year, we expect CASPI will continue to benefit from geographic and market diversity, and they're going to have to work hard to catch up to continued increases in raw material and energy costs.

Performance Chemicals and Intermediates is next and they once again delivered a very solid quarter. Operating earnings were $58 million, slightly below the year ago period. Sales revenue increased, excuse me, sales revenue, excluding contract ethylene sales, increased by 8% as higher selling prices more than offset lower sales volume. Sales volume was down 8% as the Cracker we shut down in the fourth quarter limits the amount of bulk olefins we can produce and sell. Looking forward, given the continued pressures from raw material and energy costs, we expect earnings to decline sequentially but remain strong.

Turning next to Specialty Plastics, sales revenue increased by 17%. Volume was up 8%, as we benefited from continued polyester growth and growth for sale of esters used in LCD screens. We also had higher selling prices and we benefited from a strong Euro. Operating earnings for Specialty Plastics were down year-over-year. This is primarily due to higher raw materials and energy costs, particularly for paraxylene. As oil and gas gasoline prices have gone up to historic levels, they have brought paraxylene prices with them. In the second quarter, paraxylene prices increased by 20% compared with the first quarter. This is very difficult for any business to recover quickly and particularly difficult for a specialty business. As a result, margins were squeezed in the second quarter. Given expectations for oil prices in the second half of this year, we expect paraxylene prices will continue to pose a challenge.

Turning now to Performance Polymers, in the second quarter, we once again made solid progress improving the profitability of our PET business, with $6 million of operating earnings in the second quarter, our Performance Polymers segment was profitable for the first half of the year, which is consistent with the guidance we gave you in April. We have now completed many of the cost improvement actions we said we would take to improve profitability in this business, including building a new PET manufacturing facility based on our IntegRex technology and that continues to exceed our expectations. Shutting down 400,000 metric tons of older, higher cost conventional PET capacity, shutting down our higher cost DMT Intermediates capacity, and expanding our lower cost PTA Intermediates, removing approximately $30 million in annual costs from our South Carolina site and divesting all of our PET and PTA capacity outside the US. The one remaining key milestone for improving the profitability of our PET business is the 50% debottleneck of the IntegRex facility, which we will begin early in the fourth quarter. I also remind you that the current environment for PET in the US is difficult, primarily related to the high price of paraxylene. However, we continue to do everything we can to offset raw material costs, including raising prices to preserve margin while maintaining volume.

Looking at our regional performance, our revenue in the second quarter and for the first half of 2008 was about 60% North America and about 40% outside of North America, and once again our earnings were closer to 50% in North America and 50% outside North America. This is consistent with how our earnings were distributed in 2007, and it's an indication that we continue to benefit from the relatively higher profitability of our sales outside of North America. Looking at North America, the second quarter revenues increased by 4%, and excluding contract sales revenue I mentioned earlier, North American revenues increased by 2%. Sales volume was down 10%, with a decline in all segments except Specialty Plastics. Operating earnings declined year-over-year, primarily in the CASPI and Specialty Plastics segments.

In Asia Pacific, revenue increased by 23%, due to higher selling prices and increased sales volume. The higher sales volume was primarily in Fibers, CASPI and Specialty Plastics. Operating earnings increased, particularly in Fibers and Specialty Plastics. Asia Pacific remained our second largest region at just under 20% of our overall revenue. Looking forward, we are currently experiencing an outage at our Singapore facility due to an inability to receive a key raw material from a major supplier. We expect this will have a modest impact on results for PCI and CASPI in the third quarter.

In Europe, revenue increased by 11% driven by the continued strong Euro versus the dollar and increased sales volume. The higher sales volume was primarily in PCI. Profitability in Europe increased slightly with improvements in PCI and Fibers. Lastly, excluding divested PET product lines in Latin America , Latin American revenue increased by 23% for the quarter as volumes increased throughout the rest of the Company.

Now, going to the outlook for the third quarter. The current business conditions are characterized by volatility and uncertainty. We're expecting costs for raw materials and energy to continue to rise in this quarter. Also, we will continue to work to implement price increases needed to maintain our margins. Economic conditions in the US are soft. Globally they seem to be holding up so far. As we have for the past several months and years, we expect to continue to benefit from our global geographic profile and our diverse product portfolio. I'm putting all of this together. We expect third quarter 2008 earnings per share from continuing operations to be similar to third quarter 2007 EPS from continuing operations excluding items related to ongoing strategic actions.

Lastly let me conclude with a few remarks about our Corporate Strategy. Starting with our industrial gasification initiative, I'm sure you all noticed that the effective corporate tax rate for the Company was 25% in the second quarter. This is well below the 34% rate we had previously estimated for the quarter and for the year. The primary reason is the tax rate, excuse me, the initial benefit we expect from a $130 million investment tax credit for our Beaumont, Texas industrial gasification project. You may recall, we first announced that we had been awarded a federal investment tax credit in late 2006, when the gasification project was to be located at our Long View site.

With the change in the project's location to Beaumont, we have in been working with Congress, the Department of Energy, and the IRS to have this credit apply to the Beaumont project, and we are very appreciative of the significant the cooperation we have received from all of those agencies. On the basis of that cooperation, new federal legislation enacted during the second quarter gives us belief and confidence that we can transfer that tax credit to our Beaumont project, so therefore, we are projecting our 2008 effective tax rate to be approximately 30%. Now this credit is based on our ongoing capital spending for the Beaumont project, so the second quarter benefit catches us up through the first half of 2008 and we expect to continue to benefit from this credit on a quarterly basis for the next couple of years as we go forward with this project, and the benefit actually increases beyond 2008 consistent with our capital spending on this project.

So we are on track on our other project milestones including completing the front end engineering and design effort in the second half of this year. We are finalizing input and output contracts. We're progressing on obtaining the project financing. So the gasification project is moving ahead. Next, we continue to make progress on our Asia Pacific growth option for Fibers, and we expect we will give you more detail on this before the end of the year. We have broken ground on our new 30,000 metric ton Triton copolyester facility and expect that will come on line in early 2010. We continue to expect we will add additional capacity in that product, given the very strong response from customers.

Now, a broad perspective. Just last week, I, with the entire executive team, reviewed plans for next year and for many years going forward. We looked at very different energy and economic scenarios, both high and low, and after that review, we remained very confident in the guidance I gave you in January that our earnings per share will be 10 to 15% higher in 2009 compared with 2008. Lastly, as you may have seen a few weeks ago, we announced some significant Management changes and I'd like to add a few comments to what was included in the news release. Now, rather than relist all of the changes, I'll say that we are very fortunate to have the caliber of people that we do have to take these critical roles. I have total confidence in their ability to lead in their respective areas and to deliver on the aggressive growth initiatives that we have for this Company. On the call with me this morning is someone many of you will get a chance to meet shortly and get to know a lot better, Mr. Curt Espeland, who will take over as Chief Financial Officer in September. Say hello,

Good morning.

Curt has been with Eastman for over 10 years in a number of different roles and I'm confident he will do a fantastic job. Finally, I'd like to also acknowledge my friend, Rich Lorraine. This will be the last investor conference call for Rich. Rich has been with me in a lot of foxholes and we've fought a lot of wars together over the last 5 years. He's made a tremendous contribution to Eastman's success over the last five years. He's a quality guy and he's really going to be missed and we wish him nothing but happiness and success in his future. With that I'll turn the call over to him.

Good morning, everyone. Thank you, Brian, for those kind words. My time here at Eastman has certainly been challenging, but always exciting. I'm really proud of what we've accomplished as a Company, and where we are as compared to five years ago. I'm looking forward to listening in on these calls from the other side of the table, the investor side of the table, hearing about the growth in the businesses and the strategic initiatives delivering results but for today now, let me come back around to the Management side.

This was a good quarter with solid operating results in the face of those strong headwinds. We benefited from the tax item going our way, and let me just hit a couple of highlights in our results for the second quarter. From just the first to the second quarter of this year, raw materials and energy were up about $100 million and since the end of 2007, the increase is about $125 million. As Brian said, our business people have done a great job working through what you can only assume were very tough negotiations on a customer by customer basis, and ended up covering about 70% of that second quarter 2008 raw material increase through pricing actions. Given this cost environment, there's additional work still going on.

Switching gears from pricing, Brian described the investment tax credit in support of TXE, our Beaumont project. We recorded $12 million of this credit in the second quarter, which improved earnings by $0.15 per share. Going forward we project the benefit from this tax credit will continue with our investment in the Beaumont project. I'll get into a bit more detail on the tax credit in a couple of minutes. I'd like to return now to my usual agenda, cover the restructuring related items, cash flows, net debt, interest expense, and finally circle back to the tax rate.

On the restructuring area, there weren't any major restructuring events in the second quarter, just a couple of minor items that totaled about $0.05 per share. A bit of color around those. We recorded asset impairment and restructuring items of $3 million and also we recognized $3 million in accelerated depreciation. As we've discussed in the past, both of these are related to the Cracker shut downs at our Long View facility and work being done around the transformation of the PET assets in South Carolina. With the $4 million charge we project for the second half of this year, we'll complete the accelerated depreciation adjustments for both of those sites.

Moving over to cash flow, we generated $132 million of cash from operations during the second quarter, bringing us into the black or positive cash of $79 million for the first half. That compares to $165 million and $99 million generated in the same periods of 2007. The lower level of cash generated through the first half is primarily driven by the increased inventory value and the accounts receivable value related to the higher raw material costs and the pricing we pushed through to recover them. We do expect our second half operating cash flow to strengthen. That's typical of our seasonal pattern. We normally release cash from working capital as we go through the second half.

On uses of cash, our capital expenditures totaled $146 million in the second quarter and $278 million for the first half. That's compared to $112 million in the same quarter last year, and $198 million in the first half of last year. That pretty much leaves us on track for Capital Expenditures to be above $600 million for the year as we continue going forward with our key initiatives. Just to kick them off again just to remind everybody, we're going to start that debottleneck of the IntegRex facility in the fourth quarter, to add 50% additional capacity there. We're going to see increased expenditures in our gasification project now that we're the 100% owner of TXE, we've got the capacity additions going on for cellulose triacetate for LCD screens, acetate tow in the UK which we'll be finishing up soon, and we've started the Eastman Triton copolyester plant construction. Finally we'll be continuing to fund improvements to increase efficiencies and invest in reliability throughout the Company.

As I highlighted on the April call, we also paid down some debt in the quarter. We repaid $72 million in notes that matured during the quarter, and we also paid down a portion of our Euro credit facility with part of the cash proceeds from the European asset sales, and that was approximately $100 million US. On net debt, total borrowings less cash, we ended the quarter with net debt of $878 million, about $160 million higher than the year-end '07. The increase in net debt is directly attributable to lower cash balance and that's driven by the share repurchases of about $270 million through the first half of the year and we did see that $80 million of increased capital spending this year. With that increase, we still have net debt to total cap in a pretty good place at 30%.

Looking at interest expense, our net interest expense was $18 million for the second quarter of 2008 and $34 million in the first half and that's slightly higher than the second quarter and first half of last year and that's as a result of the lower interest income on invested cash balances. We do expect net interest expense to track slightly higher through the full year compared with last year, and that again driven by lower interest income on, we've got slightly lower interest rates as well as the lower average invested cash balances. Back to the tax situation, our second quarter effective tax rate for continuing operations was 25%, which includes that impact of the investment tax credit on our gasification investment. As I look at the tax rate for the full year on a continuing operations basis, including the investment tax credit, we're projecting it should be around 30% for the full year.

Brian discussed the gasification investment tax credit in his comments a couple of minutes ago but let me again just emphasize a few points. First, this is great for our shareholders and we're very pleased with this effective tax rate reduction. The second quarter impact does include some catch up credit for investments made on the Beaumont project before the second quarter, prior to the second quarter, which is why I'm guiding to a 30% rate going forward rather than something lower than that. And ongoing, we obviously plan to use this investment tax credit to the fullest extent possible, as we continue to invest in the gasification initiative in Beaumont. So we'll look forward to seeing lower effective tax rates over the next few years.

Okay, back over to you, Greg.

All right, thanks, Rich. This concludes our prepared remarks. Rufus, we're ready for questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS). For our first question we go to Mike Judd with Greenwich Consultants.

Good morning.

Good morning.

A question about the tax rate in the second half of the year. Because the tax rate was around 25% or so in the June quarter, in other words should we be using a 30% tax rate for each of the quarters or should the September quarter tax rate be slightly higher or lower? How do we balance that out ?

Mike? I wish I could give you an exact number on those but that depends on the pace of capital spending on the Beaumont project, so we're going to have to help you out kind of quarter by quarter as we go forward and give you some advice on that.

Is it reasonable to expect it would be higher though than the 30% rate in the September quarter?

That's a reasonable expectation.

Okay. And then just lastly, on the IntegRex capacity expansion, or debottlenecking that you guys are doing in the fourth quarter, could you provide a little bit more color? In other words, should we expect that on an operating profit basis that that should be potentially negative, because that the whole plant is shut down in the December quarter or how does that work out from a logistical as well as financial perspective?

Yeah, Mike, good question. The typical PET pattern is that their best half of the year is usually the first half of the year, we're done with that. The second half is seasonally slower. We have really high paraxylene costs, and we're going to be down for weeks working on that facility, and we absorb a lot of the costs to go along with that into the quarterly earnings, so yeah, all that hits the PET guys on the second half.

Okay and just as a follow-up to that question, it's difficult looking on a year-over-year basis for comparison because there's been so much restructuring in that business and by the way you guys have done a good job, but could you help us understand sort of what the magnitude of the operating profit loss could be in the December quarter?

I'm not going to, you're talking about in the Fourth Quarter?

Yes, when you're doing the --

I'm not going to call that one for you. We have lots of shut downs we come and go with constantly in the business and we never call what the individual shut downs do in terms of the earnings, but what we've done, Mike, is give you the longer view of what kind of turnaround. That's why I went out of my way to describe 2009 in this call.

Okay.

We talked about in our January time frame the kind of turnaround we expected and we said this is a messy year and this messy year, we're tearing things up and it just got messier with historic high raw material and energy costs, but after looking at all of this, we look, we gave you an outlook in January of how much of a turnaround we were going to see. Nearly all of that was driven by the plastics business group , both Specialty Plastics and the PET business, so by making my comments on 2009 I'm telling you what I think that is going to look like and it was a recognition of your question that it's a messy year, kind of hard to estimate what's going

And that's fine. I just wanted to understand, in other words can you reserve for that turnaround, in other words, when there's plant turnarounds you can basically build that in over the year. Is there something unique or different about this one?

We don't do that. Rich do you want to comment on that?

No, we'll record that as it's incurred.

Okay, thanks for the help.

We go next to Jess Zekauskas with JPMorgan.

Hi, good morning.

Good morning, Jeff.

Can you give us an idea of what's going on in the domestic and global PET market in terms of volumes? It's a little difficult to read the volume effects you've got because I guess there are some divestitures in there.

Oh, yeah. I think what we would characterize it as a slower growth period, where it was growing over 200, maybe 250,000 tons a year is probably growing less than 200 these days. As far as new capacity additions we have a little bit from Indorama. We don't know anything, maybe more than you know about any kind of a future M&G expansion because as far as we know, they haven't, we're not aware of a site they've chosen to build that, so lacking that, it's hard to estimate when and how they would come on. The market, the operating factors are generally pretty high for the PET industry but you always have the ability of the agent to come in over the top, so it's the biggest issue right now is more about paraxylene prices and the ability to move those downstream. We're able to keep the plants running basically full.

So the overall PET market, has it, why does it seem to be slower this year? Is it the thinner walls of the bottles? Is it the competition of the Asians versus the US?

Yes and yes. I mean, yes, it's also reduced basic demand and in many cases PET is something of a discretion airy luxury when you're stopping in a gas station and if you just put $100 in your gas tank to keep your SUV running, you buy fewer soft drinks at the store, so it's a combination of reduced demand, the thin walling you're describing especially by the water guys and whenever there's an arbitrage between Asian raws and US raws, the Asians come in over the top.

As far as your European business overall, it seemed that there was growth, as a whole, there was growth in the first quarter and contraction in the second. Can you describe what's going on in Europe and what your outlook is for the European business for the remainder of the year?

Europe has been, it's not going gangbusters but it has been fairly steady for us and one of the factors that helps us in Europe is that we have been focusing our growth efforts on some of the central and Eastern Europe countries that has and that growth has maybe offset some of the softness that could be in some of the other parts of Western Europe but it has been a pretty steady performer for us. The Euro/dollar exchange certainly helps and we're not feeling nervous about it to any degree, Jeff.

I have a couple of questions for Rich. In terms of the tax credit, does the tax credit apply to moneys that you spent in 2007 as well as 2008?

There was a very modest spend in 2007 and yes, the current, the second quarter ITC you included the benefit of that.

So philosophically, why isn't that called out as a non- recurring item? I don't mean to be adversarial about it, but --

Jeff, it's just that the 2007 piece is very small.

Very small.

Yeah. It's really not of any significance.

Okay, and if you choose not to go ahead with the project, do these credits reverse or do you keep them because this has to do with moneys you've already spent?

Well, that's kind of a, it's a pretty hypothetical question, but if we choose not to go forward with the project, sitting here I'd assume we would have reverse those credits.

And what's the relationship between the amount you spend and the credit you get?

It's a percentage of what we spend and I'm certainly not sure I can project spending by quarter going forward and I'm not going to attempt it, but it's 20%.

It's 20%.

It's 20% until you reach the full amount of the ITC.

Okay. What's the full amount of the ITC?

$130 million.

Thank you very much.

You're welcome.

By the way, Jeff, it will take a couple of years to work through that, we estimate, so you're going to see this every quarter for a couple of years or so.

We go next to Frank Mitsch with BB & T Capital Markets.

Good morning and congratulations on your tenure at Eastman and best wishes for the future Rich.

Well thank you, Frank, I appreciate it.

And more importantly Rich, now that you are going to be on the investor side and any key difficult questions you'd like me to pose to Brian by all means shoot me an e-mail and I'll be happy to tag that long.

I've got a direct line to Brian though.

I hope so. Rich, you dialed back share buyback fairly significantly here in the second quarter. Can you talk about the factors behind that and what should we expect going forward?

I'm going to be a little bit coy on that, Frank. We're opportunistic and we're measured in that and you put a little table out that described it and I'd just say that we're well aware of the remaining authorization and we'll just remain prudent on that going forward.

Is it any sort of reaction to the fact that you're now solo on the coal gasification and your spending is a bit higher than you targeted originally?

There's a lot of factors, Frank, and wrapping them all together, I'm just going to say we'll continue to be prudent and opportunistic going forward.

Yeah, but Frank, that's a yes. Obviously when you take down 100% of that project, now, yes. That's a piece of it as well.

All right, and then with respect to the taxes, you suggested that '09 would be, I believe what you suggested and I just want to make sure that I heard it correctly that the 09 rate would be lower than the 30% rate and if that's in fact the case, bigger than a bread basket?

Frank, as I said to Mike, I think you're going to have to be patient with us a little bit as we see what the CapEx schedule, how that's going to fall out and Curt is going to have to provide you with some guidance on taxes, more specifically as we go forward.

The context of the question pertains to Brian's assertion that '09 would be 10 to 15% higher than '08. I was just curious --

That wasn't a tax credit comment, Frank. I was really talking about the basic earning power of the business.

Terrific.

Yeah, I knew that was going to come up. This wasn't some kind of a tax credit where 10 to 15% are better, yeah, but it's all coming from tax, no. That's not the thought that's behind that. This is the basic earnings power of the business up 10 to 15% driven by a much stronger performance in the polymers business group.

All right, terrific. And lastly, Brian, obviously volumes in the US were down, some of that was portfolio restructuring and some of it was the softening of the economy. Can you talk a little bit about which areas appear to be slower than other areas and which areas you're noticing have started to take a turn downward? Any insights in providing some granularity on that?

Sure. And I'm not going to tell you anything you haven't heard 10 times already this quarter. The interesting thing for us, probably has been, it's not new news for anybody else, but since we have moved our portfolio to more specialty items, the products that got hit both in CASPI and Specialty Plastics were more specialty oriented and not surprising, you don't get to drive prices up as quickly in specialty items as you do in commodity items because everybody understands and lives with putting margins on top of raw materials and commodities. In specialty, if you drive the price up too fast, the alternative for the customer is usually some different chemical or some different plastic and once you drive that behavior, it's very hard to recover so you're always a little cautious with the way you increase prices in the specialty so you don't drive the customer away to a competing material and that tension right now on the specialty that caused most of the dip in both CASPI and Specialty Plastics. We're working our way through it and the customers understand the need for the price increases because they are , they fully understand the environment that we're living with, and so if the energy and raw material environment starts to stabilize, which it looks like it might be trying to do, then we have an opportunity to catch up

Okay. Thank you.

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

Yes, good morning.

Good morning.

Brian, I think you mentioned that the raw material and energy inflation was about $350 million year-to-date. Can you give us a sense of how much of that you would consider as unrecovered at this point?

I think a rough number is that we're about 30% behind the eight ball just because of the inertia, the speed and the magnitude, and we've got 30% on the table that we're probably trying to recover. That's a rough number and that presumes that everything stay s stable from this day forward for the next several months and if it doesn't, then that number will change.

So $105 million?

Oh, I'm not going to put it down to millions of dollars, but I'm pulling a rough number out. We've gotten maybe two-third or 70% of what's happened and we're working with our customers to see if we can get more.

Okay. And then I notice you cited propylene as one of the culprits in terms of inflation, cost inflation in CASPI and PCI. I know you have some propylene coming out of your Crackers but you shut one down. Can you give us a sense of what your position in propylene looks like in terms of make versus buy?

Sure. We've become a bigger net buyer because as we shut down these Crackers that used to make our propylene, we were always a purchaser, just so you know, and I'm not sure we've given you the ratios but we were always net short propylene, we were a buyer. We become a bigger buyer as we shut down these Crackers so now we are more exposed to propylene prices and how they move. The good news in that story is that by and large, the derivatives that we sell that are made from propylene track propylene prices better than they track the propane prices we had in the Crackers, so we had the dilemma when we were making Cracker propylene, if there's a divergence between what's happening with propane and propylene, we either enjoy or suffer from it. There's really more alignment as we become more exposed to propylene in the margin story. So we're going to continue to grow in that and it's a healthy percentage. Greg, I'm not sure we've given anybody a percent of how much of our raw materials come from propylene.

Not at this point. I don't have a number in front of me.

Yeah, but it's a healthy percentage of getting healthy over time. We still make, I'm playing with words now, Kevin. I'm not going to tell you.

Okay. Finally, Brian, any change in the milestones that you've laid out previously for the industrial gasification project or update there?

We're on track to hit the milestones and then decisions will be made when the milestones are achieved. Next milestone is completion of the feed process. I'll go through the brief list of the input output contracts, making good progress on those, those are not going to be the right determining step in any kind of a progress. Good progress on the permits, very positive progress there. Working through the feed process and of course the biggest deal in the feed process is the CapEx. We all know CapEx is going nutty in any kind of estimate that you're making whether it's big or small, and we're, every part of our Company working through those kinds of issues. I'm trying to think of what other milestones on gasification I should have discussed.

Just financing.

Financing that was it.

And we're making great progress with that.

Yes. So, on track with all of the milestones and when we get through those milestones that's when we advise you of decisions and actions that we're going to take.

Okay, thank you very much.

We go next to PJ Juvekar with Citi.

Good morning.

Good morning.

It's good to see that you're going to pay less taxes. But do these tax credits come with any conditions like carbon capture or any other pollution related conditions?

Really not. They were part of the energy policy act that was I believe 2002 or may have been 2004, but it was essentially for clean coal technologies and there was a competition among many companies and their projects for who would be able to use the allotted moneys that they had. We wanted $130 million of the allotted moneys. It's a straight investment tax credit against investments that you make in the project and it didn't really have much else in the way of strings attached so no, we don't have to sign up for an operating burden of some kind that goes along with it

Now, clean core, does that mean carbon capture?

The clean coal technology started for us with the isolation of mercury and sulfur and that was the nature of the qualification. The capability of the capture and sequester was certainly a piece of it. Now, capability is different than actual doing. The fact that you isolated CO2 as a separate stream and had the ability to sequester it was a piece of the ore but it was'nt a requirement that we sequester it.

It wasn't?

Yes..

Then, another question on oxos and acetyls. Oxos must be feeling pressure from housing, can you talk about that and then in acetyl, your other acetyl competitor in the US sounded very positive so can you give your outlook on acetyl results?

Yeah, the acetyl business continues to be a solid business and we feel good about it. We especially feel good about our position in using coal as a raw material for that and you can see what it does for the Fibers business as an example. Yes, the oxo businesses are stressed by both building construction and autos, and that shows up in both CASPI and PCI. There is a little bit of a supply effect in Asia as a result of a new expansion there, but again, PJ, these are things that don't wreck these businesses.

As you see the kind of softness that we have right now but there's still pretty solid quarters and that's again another reason why I gave you a view for 2009 to give you some confidence that we still believe that we're on track for some good growth and we don't think this is bad enough to derail those businesses. And for 2009 outlook, you said you stress tested your models with high energy prices, low energy prices, what's your assumption on the economy?

We're assuming right now that it's going to rock along with the same kind of softness that we have right now. We're saying it's not necessarily a lot worse, when I say right now like right this minute. We did a spot look at where we are right now, with very soft auto and housing and we said if this rocks alongside ways and doesn't get a lot worse nor does it get a lot better, how do we think about that and then we stress tested the economy gets a lot worse what happens to our volumes, what happens to our margins, if it gets a lot better what happens ? We stress tested both sides of those. The way our Company is wired these days, there are some counter cyclical pieces that kick in and when one gets worse another one gets better, and that was a factor in coming to this

And finally do you care to give us a delta in the stress test, high versus low?

No.

Okay.

Well, I'll go this far to say we talk about $60 oil and $200 oil. So there's a range for you. We talk about GDP, we talked about negative, successive negative quarters, a significant recession, as one end of it and of course you don't need to stress test the high end. You don't have to talk about a great economy. So that would give you some sense.

Okay. Thank you.

We go next to Andrew Feinman with Iridian Asset Management .

Thanks. Are you still, this investment tax credit has nothing to do with the carbon credits that you're still working on; is that correct?

That's correct. This is an investment tax credit only.

So you may get additional incentives for the Beaumont project if you're awarded those carbon tax, carbon credits?

The policy story has to unfold there, Andy and what the US government is going to do relative to capturing carbon and how they charge and credit, and we expect that to unfold in the future. You're kind of assuming they're embracing a European structure when you say what you said but as that policy unfolds we have the ability to potentially take advantage of it, yeah, and none of that, the credit we're talking about today has nothing to do with that.

So where do we stand on the possibility of another gasification project?

We continue to develop projects pleural, domestic and otherwise, and are still very optimistic on being able to do one of those. There are no milestones to report and when we have progress I'll tell you more, Andy.

And how about on licensing? Talked a lot about that in the last two calls. I was wondering how that's going and whether that's still --

PET specifically or licensing in general?

Well I'm thinking about PET, but I think you also do a little bit in what is it? PCI, I don't remember.

Yeah, we have an acetic acid license a couple of them, and we've had a lot of interest and we continue to be engaged in several negotiations relative to the PET and IntegRex technologies both for PTA and PET so we're very encouraged by those discussions. As far as any other licensing I don't have anything else to report but we are still, we stand by the statements we made before about there being a lot of interest and we expect that that's going to be a source of revenue in the future for PET.

So PET licensing is probably not going to hit your numbers this year?

Hard to say. If you're building a model I probably would not put it in there and it will be a happy surprise if it happens but I wouldn't put it into your model.

And then finally, the last thing that you said about the full year was that it would be similar to $5.05 from the previous year, and the problem now is I need to get rid of that statement because having it hang out there along with $1.27 versus $1.27 in the third quarter would mean that your fourth quarter comes in at $0.76 versus $1.27. So I'd like you to give us some indication that your Fourth Quarter could at least be close or flat with last year.

Andy you're trying to get me to say more than I'm willing to say right now. This is a hard economy to call anything in for a week much less a couple of quarters. What I've done is given you a forward view for the third quarter. We've given you a general outlook for how we feel about 2009 and that's as much information I'm willing to give because you're asking for things that are just unknowable, Andy.

Well I hear what you're saying and I appreciate that and I apologize for trying to pin you down but can I at least get you away from $0.76 versus $1.27? You know what I mean?

Well the time we give the Fourth Quarter outlook is when we get done with the third quarter and I'm going to stay with that pattern, but look, we're not going to, we're going to work really hard to make this as good a year as we possibly can, Andy. There's, I think when I was talking to you guys in the first quarter i don't think any of us were talking about $140 oil as the thesis for the rest of the year. I don't even know what the thesis for the rest of this year should be. I think I'm taking risks even talking about third quarter to be honest with you because there's so much uncertainty, so i would feel awkward trying to give you more thoughts on the fourth quarter. I think I just got to wait.

All right thank you.

We go next to Gregg Goodnight with UBS.

Good morning all and congratulations, Rich.

Thank you, Gregg.

Brian great questions, great answers. I've learned a lot on this. One question I still have is did you mention, did you give an update for your Asian Acetate tow?

It was very quick. What I said was we were on track to do what we were going to do before the end of the year. It's a good story to tell. I'm looking forward to telling it. I've got to tell you but it's just not time yet.

Okay, great. Second one, do you believe the economics will work out on your Beaumont project where it's a readily bankable deal and you'll have no problem financing that?

The great news here, the really terrific news is that the basic value proposition that we started investing into here is holding up and in fact maybe improving some. The basic spread, everybody worries about coal going up and pet coal going up and all of those things are true but the basic spread between solid hydrocarbons and natural gas has even expanded a little bit. The potential in all this, Greg, is the CapEx cost which in my career I've lived through two capital cycles so I've lived through booms and busts and capital cycles over my 30 years two times and when they boom, they get really nutty, and when they bust, they get really attractive. We're in one of those booms right now where you don't exactly know what to do to make some of the numbers in many cases, we have worked through those numbers already in our Company and found our way. And we're only about half way through that process in the gasification so it's too early to call, but the really great news is the value proposition holds up and if I read the tea leaves of the future of this country and the future of the world, this proposition holds up for a very long time so we're still very optimistic about this strategy and whole platform of projects. There's no question we have to work through a CapEx burden and the point is we're not going to do something stupid here. We have a strong belief and a great feel for this initiative and we don't want something that we judge maybe transient to cause us to do something stupid, so I've got to playoff of those and when we get done with the process we'll tell you how we started it out.

Outstanding. Last question I had was with the recent run up of propylene pricing and the like, is it changed your outlook or your thinking on potential methanol to propylene process? Has it given it extra incentive to maybe take a good hard look at that potential?

Yeah, we're looking at all of the derivatives that we can make from the coal gasification process and of course that will be included in the mix. We're learning a lot of really interesting things about how to take basic Chemicals on to more value-added products using some chemistries and sometimes those chemistries are cropping up from old past chemistries that people practiced a long time ago, and that one would be a new one, the methanol propylene is a brand new one, there's other chemistries that have long proven histories that we compete against that so we're looking at all of those and we'll let you know when it's time.

You're going to have an Investor Day meeting later this year?

Later this year, is less likely, probably push it off into the first couple of months of next year, maybe January or February of next year will be a more logical time.

Thanks for all of these great responses.

Thank you.

Our next question we go to Brian Geiger with Merrill Lynch.

How you doing, guys?

Hi.

I was just curious if you guys had any kind of target debt structure or target debt to EBITDA leverage, and when you plan to get to that level?

Let me take that one, Brian. What we adhere in terms of targets and capital structure is more around bond credit rating and we focus on being triple B, and really keep track of all of the ratios and all of the factors that go into that and that's where we would want to stay.

Okay it's triple B flat or is it plus or minus, some wiggle room there?

Triple B Flat would be the right target.

Great. Thank you very much.

For our next question, we go to Jess Zekauskas with JP Morgan.

Thanks for taking my follow-up. So in order to recognize the tax credit for the Beaumont project and because you expect to recognize I guess 120, that means that you'll spend 600, that is 20% of 120, and I guess that would be the equity portion and so if the project is financed at 30%, it's a $2 billion project. Has the Board approved all of this yet?

Well your math is presenting a lot of different things but the general thrust of your question is we have stepwise approvals with our Board each step of the way and right now the expenditures that we're making are in the feed process and at some point, we get to early delivery of equipment and that would be a capital expenditure and when you start breaking ground and each of those steps along the way we discussed with our Board, we do not have a blanket. We have not asked for, and any kind of a blanket approval to go ahead with this project, it's just not time. It wouldn't be appropriate and again, the nature of these projects are that you do these front end engineering and design initiatives and those define the big expenditures and then you ask for the blanket expenditure. We're not there yet.

And then lastly again for Rich and this is a question of clarification, with the tax credit, this was a tax credit if I understand it that was originally for Fastina and it's now being used for Beaumont.

No, no, it was originally our Long View.

Long View, and so is this already, is there a regulatory step that needs to take place for you to use this with certainty? Or can you use this tax credit with certainty?

We feel real good about the tax credit right now. It's been through legislation and so we feel very confident. And I'd like to clarify one other point.

Sure.

On the, yes, about the equity portion of the project, it doesn't matter how we finance the project. The tax credit comes as we spend capital money and it's blind to the source of that money whether it's the money that's sitting in our bank today or money that might come from any other financing source for the Company.

So when you said, thank you, that's helpful. When you said that you were confident, what are you confident about?

We have the regulatory authority to claim the tax credit.

Okay, good. All right, thank you very much.

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

And with that we have no further questions on our roster. Ladies and gentlemen, so, Mr. Riddle, I'll turn the conference back over to you for any closing remarks.

Thanks again for joining us this morning. An audio replay of this conference call will be available this afternoon through Friday, August 1. Have a great day.

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