伊士曼化學 (EMN) 2008 Q3 法說會逐字稿

Good day, everyone and welcome to the Eastman Chemical Company third quarter earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website at www.eastmanChemical.com. I apologize, that was 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.

Okay. Thank you and good morning everyone and thank you very much for joining us. On the call with me today are Brian Ferguson, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; 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 fourth 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 third quarter 2008 financial results news release, on our website and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for the second quarter 2008 and the Form 10-Q to be filed for third quarter 2008.

Second, except when otherwise indicated, all financial measures referenced in the call will be non-GAAP financial measures such as earnings per share, and operating earnings that exclude restructuring related items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures including a description of the restructuring related items are available in our third quarter 2008 financial results news release and the tables accompanying the news release. With that I'll turn the call over to Brian.

Good morning and thanks for being with us on a pretty busy day in the marketplace. Last night we announced earnings of $1.35 per share for third quarter 2008 which was above the $1.27 we reported in third quarter 2007. The GAAP earnings were a few pennies lower due to restructuring related costs that Curt will cover in his comments. Through nine months, our EPS at $4.38 is up 15% versus a year ago. We are continuing to benefit from our unique and diverse portfolio of products and all the actions we've taken over the last five years to improve our profitability. Sales revenue for the quarter increased by 8%. And excluding divestitures it was up 12%. The increase is largely due to higher selling prices. Gross profit dollars excluding accelerated depreciation improved slightly in the third quarter and through nine months compared with the year ago. This improvement was despite an increase in our raw material and energy costs of approximately $225 million in the third quarter, and $575 million nine months.

Operating earnings for the continuing businesses in the third quarter and through nine months are up 6% over last year. And on the same basis, the operating margin was 11% in both the third quarter and the year-to-date, similar to the year-ago period, this is in line with our goal of keeping our operating margins at or above 10%. We have been able to achieve the improvement in our gross margin, operating earnings and EPS, despite a 6 to 7% decline in North American volumes, despite high commodity prices, hurricanes, financial meltdowns and a host of other financial plagues. We are well positioned to continue delivering solid results despite the many headwinds we face.

Moving on to the segment highlights beginning with Fibers, our Fibers business continued its string of very strong quarters with operating earnings of $65 million. Through the first nine months, operating margins are at 25% which is where we normally expect them to be. For the full year, they are on track to report operating earnings above full year 2007. One other comment on Fibers, the 9,000 metric ton capacity addition in the UK which adds about 5% to our global capacity, is up and running and this is a very good thing because we need the material to supply our growing customer demand in Europe.

Next is CASPI. CASPI came through again with a very solid third quarter of $55 million operating earnings despite a very difficult economic and cost environment. Revenue was up 11%, mostly due to higher prices needed to offset much higher raw materials and energy. Volumes were down 10% due to divestitures of some adhesive products in the first quarter and lower volumes in the US and Europe. Looking at four quarter, CASPI will see seasonally lower volumes and continued weakness in North America and Europe, but they should be able to hold up pretty well given their diverse mix of businesses.

Performance Chemicals and Intermediates is next and they reported another solid quarter. Operating earnings were $65 million. Sales revenue excluding contract ethylene sales increased by 19% primarily due to higher selling prices needed to offset higher energy and raws. Looking at the fourth quarter it's normal for their operating earnings to decline sequentially and we expect that will occur this year due to seasonality in their volume and continued volatility.

Turning next to Specialty Plastics, sales revenue in the third quarter increase's by 17% year-over-year. Volume was up 8% as we benefited from continued co-polyester growth and growth for cellulose esters used in LCD screens. Operating earnings for Specialty Plastics were down year over year, primarily due to higher raw material and energy costs, particularly paraxylene which peaked at an all time record high in July. Looking to the fourth quarter we expect the results to carry the overhang of high raw material costs in their inventories and we will see some softer volumes as well.

Turning now to the performance polymers segment, in the third quarter we remained profitable even in a very difficult business climate. Volumes declined 12% as a result of consumers buying fewer soft drinks and water bottles using less resin. Aggressive customer destocking of inventory has also occurred. However, we continue to benefit from the numerous actions we've taken over the last two years to improve the profitability of this business. The one remaining key milestone for improving profitability in PET is the debottleneck of the IntegRex facility which is under way now. The cost of this will have an impact on fourth quarter results for this segment in addition to continued challenging market conditions.

Now, looking at regional performance, we continued in the third quarter to have about 60% of our revenue in North America and about 40% outside of North America. Despite a decline in volume during the quarter, the percent of our earnings in North America increased to 55% from the previous 50%. Looking at each of the regions beginning with North America, sales revenue increased 10%, as higher selling prices more than offset a decline on volume of 6%. Operating earnings improved year-over-year, particularly in the PCI segment. Asia Pacific revenue increased by 19% due to higher selling prices. Sales volume was flat as increases in Fibers, Specialty Plastics and CASPI were offset by a decline in PCI.

PCI experienced a down time at our Singapore facility in this quarter due to the inability of get raw material from a major supplier. Operating earnings in Asia increased, particularly in Fibers and Specialty Plastics, partially offset by a decline in PCI. In Europe revenue increased by 7%, due to the continued strong euro versus the dollar and higher selling prices. Operating earnings declined slightly in all segments, except Performance Polymers. And lastly, excluding divested PET product lines in Latin America, Latin America revenue increased by 14% primarily due to higher selling prices.

Now, looking at our fourth quarter, we continue to benefit from our global geographic profile, and solid financial position but we're also confronting like many others continued economic weakness in North America and Europe and slowing growth in Asia. As we expect -- and we expect volatility in our raw material and energy costs to continue. Given these conditions, we expect fourth quarter 2008 earnings per share from continuing operations excluding items related to strategic actions to be near the low end of the current range of analyst estimates on FirstCall, which is $0.90 per share.

I'll conclude with a few remarks about Corporate Strategy and the economic environment we see. Starting with an update on our industrial gasification project in Beaumont, Texas. It may be counter intuitive to say this, but we think that the overall attractiveness of this project is actually set to improve as world events play out. We believe the long-term spread between solid and liquid hydrocarbons that we are exploiting remains solid. We've made very good progress on contracts for inputs and outputs and now we see for the first time the capital cost environment is starting to move in our favor.

I'd like to think that we were smart or maybe we were just lucky in how things have progressed. We took an early peek at the capital estimate midway through the front end engineering and design or feed process. Not surprising to anyone, the costs were high. But we could also see that the edges of the capital and materials bubble were starting to fray a bit. So we chose to slow down our activities and do some more homework on process simplification and optimization. As a result, two good things are now happening. One, we have a better design. And two, we firmly believe that capital costs will come down and improve the financial outlook for this project further.

The changes we've made have caused of course some rework in our feed process which we now expect to complete in the middle of 2009. This also provides some time for the banks to get settled down again before we seek financing for the projects. So bottom line, we still believe we have a unique opportunity to create value in this project, very similar to the value that coal has brought to the rest of our portfolio historically. We just have to keep plowing ahead and continue to make smart decisions. The next update we'll give you on this project will be at our Investor Day in February 2009.

Lastly, given that everyone believes that we are in a recession or soon will be, I'm going to take a minute to describe why we are better positioned today to withstand challenging economic conditions compared with earlier this decade. First, we have a very much improved product portfolio than the last recession after we have sold polyethylene, fine chemicals, several PET plants and a host of other actions. We have a significantly upgraded product mix. Going into this recession, we have about 10,000 employees. Compared to more than 15,000 last time and today we are closely managing all discretionary costs across the Company. What makes this cycle different from some cycles for Eastman is that we are not seeing major capacity being added in most of our product lines. For our propylene derivatives, acetyl derivatives, and other major product lines the recession issue for us is lower volume demand due to economic conditions, not large capacity additions as we had in prescribe l prior recessions. We don't have significant ethylene exposure now that we have divested polyethylene and are shutting down crackers. We don't have significant acetic exposure. We are mostly taking our acetyls to higher value derivatives like acetato.

We are also unique because of the durability of the earnings we derive from coal. Although the spread between coal and natural gas has recently contracted, we generated solid earnings in this third quarter with that condition. We have generated solid earnings in periods when the spread is similar to what it is now and we expect that the spread will get wider going forward. Acetato in our fiber segment is a product that benefits from using coal as a raw material. Remember, this business usually contributes about 35 to 40% of our operating earnings in a typical year. Global operating rates for acetato are expected to remain at very high levels and there will be 2 to 3% global growth next year. We remain confident that the Fibers segment will deliver 20 to 25% operating margins as we have said many times.

Looking next at our Performance Chemicals and Intermediates segment, remember about 25% of the volume and roughly 50% of the earnings in this segment are from products derived from coal which again we expect to remain solid. For propylene derivatives that we make in PCI we are a relatively small user compared to derivatives like polypropylene and as I mentioned earlier we aren't seeing significant capacity additions in our propylene derivatives. We've also taken a number of actions to improve this business including shutting down one Cracker and we have the option to shut down others in the future. Implementing long-term contracts with key customers, and divesting our fine chemicals business. As a result, we remain confident that this segment will continue to deliver 5 to 10% operating margins.

Next is CASPI where we have also taken a number of actions to improve results compared to the prior recession. Remember in 2004, we completed the divestiture of underperforming businesses that in the previous year had revenue of approximately $700 million but operating losses of $80 million. And since then we've also taken a number of actions to improve our adhesives businesses such as the expansion of resins in Europe. And despite a challenging economic climate our coating specialties product lines have continued to deliver solid results. We therefore expect this business to deliver operating margins in the 15 to 20% range.

Turning next to the improvement we expect in our Performance Polymers and Specialty Plastics. The PET turnaround is based on actions we've taken to reduce costs. We've shut down 400,000 metric tons of our higher cost conventional capacity. We rebalanced our Intermediates to achieve lower costs. We removed $30 million in annual costs from our South Carolina site and as I mentioned earlier we have one key milestone left, debottlenecking our low cost IntegRex facility which we began a few weeks ago. Certainly a recession will impact our results but we expect PET volume in North America to grow in the low single digits next year and in that kind of environment, given all the actions we've taken, we expect to improve operating results by 100 million to $125 million in this segment next year, compared with our 2007 operating loss of $53 million.

In Specialty Plastics, the improvement is driven by a combination of actions we've taken to reduce costs and add higher volumes from differentiated products. We've talked to you before about our new Triton product co-polyester which is bisphenol A3 and has a high temperature resistance among many differentiating product qualities. We're on track to have a new facility online in early 2010. We've also talked to you about our cellulose esters going into LCD screens. We continue to feel very good about the long-term prospects for this business. In the near term growth rates will be low to flat and certainly a severe recession will make it more difficult to achieve the volume goals we have for our co-polyester product lines. As a result, we see Specialty Plastics operating earnings closer to 2007 levels, in the mid-$60 million range next year, with the growth in volume and earnings coming when the secondary economy rebounds later. When I sum up all of this, the bottom line is that we are well positioned to weather an economic downturn and deliver very solid results next year. With that, I'll turn it over to Curt.

Good morning, everyone and thank you, Brian. I have been in this seat coming on two months now and given the continued turmoil in the marketplace it is truly an interesting time but I feel good about the prospects for Eastman Chemical and as CFO I still sleep very well at night. Let me share a couple reasons why.

First, Eastman has a strong balance sheet. As our underlying business and financial strategies have served us well. Our balance sheet fundamentals are indicative of a strong BBB credit rating that we have held quite some time now and that feels pretty good. Second, Eastman has sufficient liquidity to meet foreseeable cash flow requirements. At the end of third quarter, we had $337 million of cash and equivalents. We have available to us an undrawn committed $700 million revolving credit facility with substantially all of it available well into 2013. And we have no material debt maturities until 2012.

Third, our portfolio of businesses provides a healthy plat form to generate sustainable cash flows. Over the past three years, we have generated on average over $700 million of cash from operations and we are on a path to repeat this performance in 2008. Lastly, Eastman has and will continue to be well disciplined with the use of cash. All these factors combined put Eastman in a good place to manage through the current credit and economic environment. This is further evidenced by our performance in third quarter so let me cover some more of the specifics for the quarter.

Regarding cash flows, our cash generated from operations in the third quarter increased to $214 million, totaling $293 million for the first nine months. This compares to $411 million generated in the first nine months of 2007. As the primary source of cash flow, operating earnings remained solid in the third quarter. The relative change year-over-year can be attributed to an increase in inventory due to higher underlying raw material costs, and certain inventory builds in preparation for planned shutdowns in fourth quarter as well as a decrease in some payables. In fourth quarter we expect to generate strong cash flows from operations including a reduction in working capital. This is a normal seasonal pattern for us and we are taking actions such that this pattern will hold in the current economic environment.

Our priorities for uses of cash, first, we continue to pay a regular dividend as we have for the last 59 quarters since we've been a public Company. And our current dividend is yielding nearly 5%. Next, we maintain a disciplined approach to funding targeted growth initiatives. Our capital expenditures were $153 million in third quarter 2008, totaling $431 million for the first nine months. This compares to $346 million in the first nine months of 2007. We will selectively fund our growth initiatives, recognizing we need to balance the expected benefits of such initiatives relative to the timing of the underlying market opportunity. In addition, as Brian discussed, we have slowed capital investment in line with the adjusted time line for our Beaumont gasification initiative. While capital spending will be lower than previous expectations, capital spending are expected to be between 625 million and $650 million for the year.

We continue construction on the Eastman Triton co-polyester facility. We look forward to this additional commercial capacity coming online in early 2010. The low cost bottleneck of our IntegRex facility is under way. This debottleneck will add an additional 50% of IntegRex capacity. We have converted 50,000 metric tons of PET capacity to co-polyesters at our South Carolina facility and we have just completed the expansion of our UK acetato facility. Lastly, we were active with our share repurchase program under the $700 million authorization of September 2007.

During the third quarter, we bought back an additional $231 million of outstanding shares. Through the first nine months we have purchased $501 million of outstanding shares, leaving $117 million remaining on the authorization.

That brings me to net debt which is defined as total borrowings less cash and equivalents. We have been reducing our net debt significantly over the past several years and we ended the quarter with net debt of $1.1 billion. The year-over-year increase in net debt is primarily due to a lower cash balance driven by share repurchases and increased capital spending as I just reviewed. Even with the increase, our net debt to total capital remains at a good place at 35%.

Moving to interest expense, our net interest expense was $19 million for the third quarter of 2008, and $53 million in the first nine months. Slightly higher than the same periods in 2007, as lower interest income on our lower invested cash balances was partially offset by lower interest costs. We continue to expect net interest expense to increase slightly for full year 2008 compared with 2007 for the same reasons. Other expense during the quarter of 2008 was negatively impacted by earnings by $7 million, primarily related to foreign exchange losses as the dollar strengthened. Similarly, the year-over-year change is primarily related to the impact of those losses, compared with gains in 2007 when the dollar weakened.

Moving to taxes. Our third quarter 2008 effective tax rate for continuing operations was 33%. As the reduced capital spending on the Texas gasification project mentioned earlier resulted in lower expected investment tax credits for the year. In the fourth quarter, we do expect to benefit from the R&D tax credit that was recently passed into law and that should reduce the rate to a bit below 30% in the fourth quarter. Putting this all together, our tax rate for full year 2008 on a continuing operations basis should still be around 30% for the year.

Wrapping up, let me mention a few minor restructuring events in the third quarter of 20001 that totaled approximately $0.02 per share. We recognized asset impairments and restructuring charges of $2 million related to previous divestitures and the transformation of the PET assets in South Carolina. And we recognized $3 million in accelerated depreciation costs related to previously announced actions including Cracker shutdowns at Long View and the transformation of our PET assets in South Carolina. Lastly, we expect to recognize the last of these accelerated depreciation costs, $2 million, in the fourth quarter. With that I'll turn it back over to Greg.

Thanks, Curt. We are now ready for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And for our first question we will go to PJ Juvekar with Citi.

Good morning, guys.

Good morning.

I have a question on performance plastics and PET. Your guidance would imply that in '09 you will make over $50 million in operating earnings. Somewhere in that ballpark. You made $1 million this quarter. I understand the guidance was put forward a year ago but the world has changed in the last one year. How do you go from making $1 million this quarter to more than $50 million next year?

PJ, we've anguished over this many times. I spent hours on the water fall charts that take us from this year to next year. It's a combination of volume and lower costs that kick in. This year we ate a lot of costs relative to off class material early in the year because of the IntegRex plant was starting up and had issues. We had expenses related to the expansion that we are doing that are not all capitalized. We have the shutdown cost this quarter and we have all the issues that come along with taking out 400,000 tons of old capacity, putting in new, all those things weighed on the P&L for this business. Next year, all of that is off the deck. And so you can bet that when I choose to walk the plank on a statement like this, I've given it some thought. And we have chewed on this quite a bit. We stand by the statement.

I know you're a thoughtful guy but can you give us some idea of how much was that expense this year?

Probably more than $20 million, more than -- probably 20 million to $30 million of expense related items and then throw in shutdown stuff and other things that are going on, there's a bunch of expense.

Additional IntegRex.

Don't forget the additional of the IntegRex capacity as well-being a piece of this. You're switching lower cost pounds for expensive pounds that you were selling this year and you get more of the lower cost pounds. We've been saying for sometime, this is a perennially oversupplied market. It's not like this there is some kind of capacity cycle going on. This is a market that is 50% oversupplied, pretty much every day of your life so it's not like the margins are going to move a whole lot compared to this year.

And then one quick question about PCI. You've done a good job of restructuring CASPI, shutting down ethylene plants. The one thing that has not changed in your portfolio is PCI. This is your most cyclical business.

Well, I would say -- I would say that it has changed. PCI, of course we sold the fine chemicals business which was a big weight on that. We changed the contracting. We are less dependent on manufactured olefins. And what's not so apparent to you is the upgrading of product mix. Just a general comment, PJ. for the whole Company. If you look at our volume right now and you compare this volume to something several years ago, the Company's volume really hasn't changed and yet we've gone from $1 per share EPS to $5 plus per share EPS. How is that possible? All across the Company we have upgraded mix. We've sold things like polyethylene and PET and low value added CASPI lines and we have added higher value adding things. That has gone on in PCI as well and that's part of the story.

So the acetyl prices declining in China, it's not much of a worry for you?

No, we're very different from a Solinese or a BP. The vast majority of our acetyls are heading into things like filter toe and CAVs that go into coating specialties and a number of other -- all the products that have As in them, CTA going into LCD screens, CABs going into coating specialties, acetato, we have a little, a marginal amount of acetic acid we make to keep the balance working so that we have a little bit of a fly wheel. We are a very different animal than either a BP or a Solinese in that respect.

Thank you.

Our next question we go to Frank Mitsch with BB&T Capital Markets.

Good morning, folks. Hey, Brian, you briefly touched on some down time in Singapore in the third quarter and obviously the PET conversion in the fourth quarter. Can you size the various down times for the third quarter in aggregate and what your expectation is in terms of the cost for the fourth quarter?

The Singapore outage had very little impact from an earnings standpoint. We did point out the volume issue to you and it did have a little bit of impact on their volume but not so much on the earnings side.

And we've been asked to size the fourth quarter, some people ask the question, will the fourth quarter for PET be worse than it was last year? No, it's going to be a lot better than it was last year. But we contemplated the impact of PET in the fourth quarter guidance we gave you. That's part of the reason for $0.90 instead of a better number. But I really don't want to cite it for you beyond that, that's one of the other things that's going to go away next year that's not going to be in the numbers.

Okay. Fine. You also commented with respect to the fourth quarter, volatile raws and obviously you've been dealing with high raw materials throughout the year. But it looks like it's heading in your favor now. Is that not correct?

Absolutely. We have this ability to whine in both directions. We can whine when it goes up and whine when it goes down. The whining when it goes up is because you're costs are going up. Whining when it goes down is that customers, especially in the fourth quarter, the end of the year people order less because they're destocking. If you also have prices falling, they're waiting for that bottom to happen in the pricing so that they don't buy more expensive materials so they hold their breath twice to order, waiting for prices to fall further. Then if you go into an economic recession on top of that, they don't know what their volumes are going to be so they have a third reason not to order. The volume risk is what you worry about on down volatility because people just go to the last minute. That's what we mean when we say volatility in the fourth quarter. This is all going to play to our favor when we get to the first, obviously, part of our optimism about next year. It's something to whine about now.

I appreciate your candor on whining. That's rare in this industry. Lastly, you obviously took advantage of the falling stock price during the third quarter in terms of the share buyback. Curt mentioned you have $117 million left on the current authorization. Obviously the credit markets, economic concerns, et cetera have taken the stock down further. What's your expectation in terms of when you want to finish that program and potentially reauthorize another one.

Frank, this is Curt. I'll go ahead and answer that. As I mentioned, we do generate good, strong cash flows and we have sufficient liquidity. We've been looking at that program as it relates to our overall priorities for our cash. Just recognize that in the current marketplace there is a premium on cash as it stands today. But our three priorities that we've had, continue to be to pay our dividend, to fund these growth initiatives that I think are going to create good value for our shareholders and we'll continue to look at share repurchase programs. And as these things unfold, we'll continue to decide how active we'll be in this quarter and we'll continue to follow that path.

That's terrific. I feel like I'm a moderator at a debate, asking a question, not getting a clear answer. I understand where you're coming from.

We've never given a straight answer to that question. You know why. What you heard in the answer is we didn't change our posture. We're going to do what makes sense and we'll tell you later.

Terrific. Thank you very much.

Our next question we go to Kevin McCarthy with Banc of America Securities.

Yes, good morning.

Hey, Kevin.

Brian, with regard to the industrial gasification project, can you update us on what you're seeing there in terms of capital costs relative to your old forecast, which I believe was $1.6 billion? And also, the new time line there.

Yes. The $1.6 billion is a really old number. If we had the $1.6 billion we'd be ecstatic. There were some significant accelerations that happened between the 1.6 and the time we peeked at it this summer. We're moving back down into numbers that are more reasonable. I really hesitate to say because we're still midway through. These are the kinds of numbers that generate very healthy unlevered returns. So we are optimistic about how that's going to turn out.

Time line.

The time line question, what we've indicated to you is we thought we would get done with the fee process this month and I'd be reporting to you on how did it turn out. Because we decided, I think wisely to pause, we probably don't get done with that process until the middle of next year. So that kicks everything out a good six to nine months at least. It kicks the feed out a good nine months. What we are seeing in the construction environment is that we may get faster lead times when we do pull the trigger. We may be able to go a little quicker just because it looks like everything is going to start to slow down. We're encouraged by the very rapidly falling prices of commodities like steel and stainless steel, and we hear a lot of anecdotal data about projects starting to slow down. So that could not only reduce our costs but speed our time to construction.

Just to follow-up on that. Energy, at least crude oil and net gas are roughly half of where they were in early July. As I recall, you were very comfortable with the economics at $45 oil, 5 to $6 gas. Is that still the case?

When we look at the spreads that we see today or the spreads we see going -- especially spreads we see going into the future when we're not in the middle of a worldwide recession, we feel very good about the structural durability. We debated whether we should give you a chart showing you the long-term history of this and decided that it was more trouble than it was worth to try to show you that right now. The history says that there is a structural widening of the relationship between coal and natural gas. And we remain confident that it's there. Every external data we can accumulate tells us that, that that's going to happen so we do feel good about that.

I want to ask you about Specialty Plastics as well. Obviously there's been margin compression there. You alluded to the paraxylene cost pressure issue. Was wondering, are you seeing any creeping commoditization in the co-polyester business and what are you seeing on the other side as it relates to cellulose for LCDs.

Every plastic goes through a period of being very, very special and then it commoditizes. I can remember a time when we, the first day as a PET people dared to use the word specialty when they were describing PET. It didn't take very long for that role to change. We've always had a continuum in this business and in every plastics business you have this continuum. You face the challenge of constantly reinventing your business and that's what you see us doing with Triton and LCDs. Those continue, Triton and LCDs continue to be excellent leading edge, high margin kinds of businesses. You continue to reposition all the time. You have to change your game plan. You have to remember how you have to play in that kind of a world as opposed to a super special world. You see some of that going on right now. I remind you that we're not the only guys going through this. If you look at the polycarbonate guys, you look at the acrylic guys, they are getting hit in the face with the same exact issues and that's the world where we're competing. It's a rough playing field that we're playing in. We still have good confidence that we have enough differentiation to play well.

Finally, for Curt, any thoughts on pension expense for next year?

Pension expense, we are evaluating this for the overall pensions. We'll look at the tend of the year. As you know, pension funds across the US are being affected by the market conditions. We did start the year fully funded. So that's a good place to start with. And we're continuing to look at this, how it projects. The last time I looked at pension funding status at the end of third quarter, we were in pretty good shape. In a sense that we didn't see a picture of where we would be required to significantly fund next year. So that's kind of some of the dynamics we're looking at and as we get towards the end of January we'll have more ability to be more specific on that.

Thank you very much.

For our next question we go to Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning.

I want to start by asking about the investment tax credit for the quarter. Was there any benefit from it?

Yes, if you look at the tax rate, you'll see the tax rate went from a normal expected full year rate of 30% to 33%. You could tell that was not a benefit.

In other words, it went the other way.

Went the other way. And that was a result of the true-up of our full year outlook for the capital spending related to the gasification project.

When we slowed down, we had to give some back.

How much did you give -- what would your tax rate have been, your tax dollars, excluding the credit in the quarter?

I'd say it would have been more close to the 30% we had guided for the year.

Maybe I can follow-up on that. Brian, so many things have happened in terms of the volatility of raw materials and the cost of construction for the plant that you may put up in Beaumont. What would be the data point that would lead you to not put up that plant?

The principal value proposition is a spread, an arbitrage between two raw materials. If we believed that that was going to evaporate or erode sufficiently that would be the most dramatic thing. Pretty much everything else we can find our way through, but that is the fundamental thing that everybody has to watch. Since nobody can really forecast energy prices, you end up signing up for a belief system on that one at the end of the day. So we test our beliefs very, very carefully. That's the direct answer to your question.

So the idea is that you have some ideas about natural gas being sustainably, I don't know above $6 in the US.

It goes back to the marginal costs of generating. We don't try to do the same thing on a market basis. We don't know where markets are going to be. We've been trying to look at the marginal costs of production. And you have two choices of providing the marginal volume for natural gas in North America. You can either drill it out or you can bring it in as LNG. We know that LNG is landing all across the world at much higher numbers than domestic gas. It's 10 or $12, I don't know where it is today, but it's been a lot higher than what we're seeing domestically. Then we turn to what is the marginal cost of producing in North America for the next increment of gas. That gives us a number. We also look at the long-term of -- long-term situation of the kinds of coal and pet coke that we use and that gives us a number and we work off of that kind of analysis.

Okay. In terms of the PET business in the fourth quarter, I take it that raw materials are falling at a very rapid rate but prices are also falling. Can you give us a sense for the fourth quarter of whether things are accruing to your benefit or to your detriment, as there is so much raw material change.

Actually, what is sometimes hard for you to see with all the moving parts is the PET guys have done a super job of matching those two together. They have modified their pricing behavior and they've worked well enough with our customers that throughout this year, they've done a great job of matching those two. So they didn't get much ahead or much behind and we expect them to continue that in the fourth quarter. So they're not going to -- they're not going to get some kind of a giant wind fall from raws falling faster than prices nor are they going to get hurt the other way.

There's seasonal volumes and then there's other trends in volumes as well.

Volumes are always off in the fourth quarter. You're asking a spread question. The spread is not necessarily being helped our hurt.

Order of magnitude, how much do you expect to spend for capital expenditures next year?

This is Curt. We are still formulating our overall plans for next year and we'll have a good answer for the end of July -- end of January.

We haven't talked to our Board about this. The answer is obviously going to be less than this year, I think.

Less than this year.

Yes.

Did you earlier in the call give an outlook for PCI for next year?

Say that again.

Did you give an outlook for the PCI business next year for 2009?

Not -- what we've done in all of the businesses is we've reaffirmed the five point ranges on operating margins that we have had out there forever. For PCI we said they're going to stay inside their 5 to 10. They're sitting at the top right now at the 10 right now. This is October. My traditional time and probably my more sensible time for giving the outlook is at the end of January, not the end of October. What we've done this time is we're telling you that we have seen recessions before. We've seen bad ones. We've seen mild ones. We see a bad one coming. We've looked at the operating ranges we gave you for all the businesses in the past. And we still believe that those brackets, those book ends that we gave you for the businesses still hold up. That's as specific as I'm willing to go until we have another look three months from now.

And then lastly, when you think about the merger of Dow and Roman Hoss, of course Dow is in some of the businesses that you're in and CASPI and Roman Hoss is not. Does this merger in any way accrue to your benefit or detriment or are you indifferent to it?

Actually, we're somewhere between indifference and positive, actually. There's probably more positives than negatives at the end of the day. I can't go into it.

Why can't you go into it. How are we going to know if it's positive or negative?

You'll have to watch. There are some -- actually, no, I'm not going to go into it. It's more positive than negative.

Are you interested in the acrylic assets?

Jeff, can we make that your last question?

Yes, that's my last one.

The acrylic assets, there's -- let me summarize by saying we have looked at a number of acquisition targets and frankly, all of the deals that we see being done or the deals that would come to us look expensive and don't fit well strategically and that's a general statement across the board right now.

Okay. Thank you very much for your patience.

Our next question we go to Mike Judd with Greenwich Consultants.

Good morning.

Good morning.

Couple of questions. Do you have any off balance sheet financing right now, any debt?

We do not have any off balance sheet debt. We do have normal leases that you would expect a Company like Eastman to have.

What's the nominal amount of that? Is it a couple hundred million or so or?

We haven't put that information out there. We'll have to come back to you on that.

Just secondly, in the other category you mentioned in the September quarter there was a foreign exchange impact and I'm just wondering if you could provide any sort of update as to -- let's just say you -- I realize that foreign exchange markets are extremely volatile, even this morning, but if you were to, say, look at the euro or yen type of exchange rates versus the dollar today, what would you expect the magnitude of the impact to be in the fourth quarter?

Well, I think a couple things to respond. First, our primary exposure as we look at our export business, it's primarily with the euro. So that's the thing we pay the most attention to. As it relates to the recent volatility and the strengthening of the dollar, that is what you saw in the third quarter and that is -- we have looked at that and have built that into the fourth quarter expectations. We do have an active hedging program that helps us mitigate some of that volatility so as I look at the next -- the remaining quarter, it to me is not a key determinant of our profitability into the fourth quarter.

Is it reasonable to say you take that minus 7 and multiply it by 2 or 3 or?

No, I would not say that. I would say kind of the volatility you saw in the third quarter and the impact that you saw in the third quarter would probably similar to what you're going to see into the fourth quarter.

Then just lastly, on the -- in the M&A front here, given that your net debt to total capital is relatively high here, is it fair to say that even though you guys have been buying back your shares, would you think that share buybacks would be more attractive than acquisitions at this point?

As I said, we haven't seen an acquisition that looks attractive and you've seen us buying back shares instead. So that has been the bias so far. The world's changing. We'll take a look and see what the world tells us here as time unfolds. That's where we've been in the past.

Thanks for the help.

And for our next question we go to Gregg Goodnight with UBS.

Good morning, gentlemen.

Good morning, Gregg.

Air Products this week announced a hydrogen plant as you may know that is expected to come on-stream March of 2010 and their press release says this is the third plant since 2006. What I'm trying to understand is what is -- how does hydrogen capacity demand, what is the projection and how does your project fit in terms of, say, satisfying demand growth. Is your project half a year demand growth? Two years? Three years? I'm just trying to size the market up and how your project fits into that?

First, I want to remind you that there continues to be an incredible demand for hydrogen in the Gulf Coast and that will be going on for some time with the crew that they have to deal with down there. With that said, that Baton Rouge project that Air Products announced will see their Louisiana network and our Beaumont project feeds their West Gulf Coast network. The two networks are not connected, so there is really no impact on our project if that's where you were going. In terms of the size of our project, I know it's a significant fraction of air products capacity. I'm not sure I know the number of what it would be relative to the growth demand for the entire hydrogen market. We'd have to come back to you on that. It's a big one, it's not some kind of modest expansion, it's a pretty big one.

The numbers I gave, $650 million standard cubic foot per day, seemed to be considerably larger than your project. So it would seem to me your project is not such a large piece of the demand growth as it wouldn't be adjustable by the market.

I fully support your comment. We do not have any angst about being able to place hydrogen in the marketplace. if that's where you're going with the question?

Yes. The second thing is I know you're still working through your contracts with your customers. I was wondering why can't you structure your contract to, say, lock in this arbitrage, have your pricing indexed to your basic cost structure. I mean, isn't this something that the gas companies typically do?

Gregg, you're right on the money and what you're describing is sort of what Air Products does to everybody else, right?

Yes.

That's exactly the design. I mean, if you think about our approach to using secured financing for this project for project financing, that's exactly the kind of contract you need to bring to seek the financing so that is the plan.

What is your thinking in terms of the probability of you executing this project, just in rough terms? Is it more than likely? Is it almost certain? Is it?

I'm feeling -- I'm way in the more likely category. If you just look around at what's happening in the world right now, you see growing interest in methanol to olefins as an example, you see methanol -- people, talking, CONSOL was on the television yesterday talking about how they wish they could go after a coal to diesel program but I guess their limitation may be more in the financing area for the time being. Everybody's discovering that this is a great resource. They don't know exactly how to deal with some of the greenhouse gas issues and that's stopping some people. We have an answer for that with this project which means we get to go ahead. I'm feeling bullish on it.

I like the -- I very much like the idea that we have acted smartly here to slow our pace so that the world can move toward us a little bit here and that gives me more encouragement that over time the overall value creation that's going to come along with this project is actually rising as we pause a little bit. What a lousy time. There's economic chaos all around us and I'm sounding like I'm enthusiastic about a big project. We're going to take our time, pace this well and when the time is right, we think we're going to have a very good project.

Okay. Lastly, your February 10, Investor Day I assume is still on. Will you be able to give us significantly more details about this project at that point?

That's the plan. We don't want to ruin the surprise there.

Thank you very much, gentlemen.

(OPERATOR INSTRUCTIONS) For our next question, we go to Andrew Feinman with Iridian Asset Management.

Thanks. You said you don't have any off balance sheet debt but you had ask securitized receivables in June, I think it was $200 million. Are you saying you paid those off?

Actually, I took a note after that question. You are correct, we do have a $200 million AR securitization program on top of our leasing.

But it's not drawn.

It's drawn at the end of the quarter. It's included in the cash equivalents number that I gave you.

So it's $200 million at the end of September?

Yes.

And the cash flow that you gave, you said $700 million operating cash flow for the last few years and you expect to do that again in 2008. But the first nine months was $293 million. So that means in the fourth quarter, you're going to have $400 million plus of operating cash flow? Is that correct?

That is our expectation and we're working hard towards that goal.

It's not that unusual either, Andy.

You said that the capital spending was slowed, so it would be 625 to 650. But I only had it at 620 in the first place so I don't know how much slower that is.

Well, just keep in mind, Andy, as we talk about looking in the quarter as well as next year, a lot of capital projects were already under way so as you start making some of those decisions to slow projects and match some of the things we talked about, you can't see that effect immediately in the fourth quarter. Some of that spend is seeing some slow in our gasification project work as well but we've said in the past, over $600 million. I wanted to give you more specifics now given the outlook that we have.

Andy, you're right. We just pulled the trigger on this. What we're talking about more is upcoming CapEx. We were on a spend to spend about where we're spending this year so there was only so much we could do to pull it down this year.

Okay. Thanks. I think it's great that you're buying back all this stock and I have been a proponent of the Beaumont project for a long time. But I mean, in the world we're in right now, it seems like relative to Beaumont, not necessarily compared to buying your own stock, but it seems like everything's trading at 4 times EBITDA and, so, I guess if I was in your shoes today, I'd be thinking about making a takeover bid for somebody, doesn't necessarily have to be friendly, either, because today that might be a lot lower risk, lower risk than doing Beaumont. And then you could create as much if not more value, just by paying the debt down over the next few years. If you were to buy, sell in these, I think that would be a great deal. You probably got other companies in mind. It doesn't have to be friendly. Look what happened with Budweiser.

Andy, what you're saying is that the world's changing and we ought to keep our eyes open to all the choices and I would say yes, we should keep our eyes open to all the choices. Some of the things that you're describing, just as an example, the one you just described I think would have so many antitrust problems it wouldn't be possible. The idea that you're saying is exactly right. Keep your eyes open and go for the highest value creation and don't fall in love with a project. That's exactly right. We're not going to do that.

Okay. Thank you.

Can we make the next question the last one, please.

And ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Riddle, I'll turn the conference back over to you for any closing remarks.

Great. That worked out perfectly. Thanks again for joining us this morning. An audio replay of this conference call will be available this afternoon through Friday, October 31. I hope we all have a terrific day. And again,

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