伊士曼化學 (EMN) 2009 Q1 法說會逐字稿

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

Okay, thank you, and good morning everyone. Thank you for joining us. On the call with me today are Jim Rogers, who will be CEO after our annual meeting on May 7; Curt Espeland, Senior Vice President and Chief Financial Officer; and Marie Wilson, Manager of Investor Relations.

Before we begin I'll cover three items--First, during this call you will hear certain forward-looking statements concerning our plans and expectations for second quarter and full year 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 first quarter 2009 financial results news release on our website and in our filings with the Securities and Exchange Commission including the Form 10-K filed for 2008 and the Form 10-Q to be filed for first quarter 2009. Second, except when otherwise indicated all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures such as sales revenue, operating earnings and earnings per share that exclude restructuring related and other items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures including a description of the restructuring related and other items are available in our first quarter 2009 financial results news release and the tables accompanying that news release. Lastly, we've posted slides that accompany remarks for this morning's call on our website at www.investors.Eastman.com. With that, I'll turn the call over to Jim.

Thanks, Greg, and good morning, everybody. Thanks for joining us. Should be able to see the slides. I'll begin on slide three. Last night, we announced first quarter 2009 earnings of $0.25 a share and this is an improvement over the $0.05 per share we reported in the fourth quarter but obviously well below our first quarter '08 earnings. Sales revenue declined by 30% due to lower sales volume and lower selling prices. The lower volume was throughout the Company and reflects customer destocking as well as the weak end market demand and guys that's really the story for the first quarter and don't you bet it will probably be the story throughout the year. The price declines were more pronounced in our commodity businesses, Performance Polymers and PCI, and reflect lower raw materials and energy cost and we continue to work through higher cost inventory through the quarter and we think this is largely behind us.

With a continued weakness in the global economy we took a number of cost reduction actions that will positively impact results throughout the year. In December we announced actions to reduce costs by $100 million and these have been implemented. In the first part of March we announced a second set of actions to reduce cost by an additional $100 million and for the most part these have been implemented. One of these actions was a reduction in force of approximately 300 people and that was completed in the first half of April. Wanted to point out that the highest percentage reduction of people was at the Vice President level, and the next highest was at the Director level and we know this is a little different than how many companies choose to reduce their headcount but we felt it made sense for us, and the result is that we have flattened our management structure at the higher levels, bringing it in line with the overall size of the Company. This new structure we hope will empower our plow sees to drive increased speed, focus, and flexibility. It increases accountability for delivering results and it supports Eastman's long term growth strategy reflecting who we are today as a Company and where we are going in the future. Now let me move on to the segment highlights, and I guess I've got to begin with fibers.

Fibers operating earnings of $73 million were a quarterly record eclipsing a record that was set in first quarter '08. Revenue increased slightly year-over-year as higher selling prices and a favorable shift in product mix were mostly offset by lower sales volume. The higher prices were in response to higher wood pulp and energy cost which increased during the fourth quarter and remained at elevated levels. The lower volumes were in acetate yarn and acetyl chemicals. Acetate tow volumes were up year-over-year due to strong tow demand and a capacity addition at our facility in Workington, England completed in October. We expect second quarter operating earnings for Fibers to be similar to the first quarter. And for full year 2009, we expect Fibers earnings to be above full year 2008, weighted more towards the first half as we benefit from continued strong demand for acetate tow and our capacity addition in England.

One other comment while I'm talking about Fibers, a few weeks back we issued a news release announcing a number of senior management change. One of those was the appointment of Rick Johnson as an Executive Officer of the Company. Rick has done an outstanding job as leader of the Fibers since 1996 positioning Eastman for the profitable growth we are reporting in Fibers today. As a Senior Vice President Rick wise also be responsible for the supply chain, our acetyl stream operations and for the regions outside the United States. His addition to our executive team increases the direct profit and loss responsibility on that team and I look forward to the contribution that Rick will make on our executive team.

Now let me move to CASPi. first quarter 2009 operating earnings declined to $21 million. Year-over-year the decline largely reflected lower sales volume which lead to lower capacity utilization and higher unit colts. The lower volume was due to the global recession particularly for the automotive, building and construction and packaging markets. We also had an unfavorable shift in product mix and these were partially offset by the lower raw material and energy costs. Sequentially, operating earnings declined due to continued low volume and an unfavorable shift in product mix as destocking continued particularly for specialty product lines. Looking forward in the second quarter we expect CASPi's earnings to increase sequentially as volumes improve due to reduced destocking and some seasonality.

Looking at the year, we think of CASPi's earnings on a normalized basis is about two-third specialty and one-third commodity. In this environment, margins for the specialty product lines although challenged by the weak demand should hold up reasonably well; however, commodities margins will continue to be under pressure and as a result we expect segment operating margins to be low double digits on a lower revenue base.

Performance, Chemicals and Intermediates is next. Operating earnings were $3 million for the quarter and year-over-year, the earnings decline was due to lower sales volume, primarily in the olefin based product lines, higher unit cost due to lower capacity utilization and lower selling prices reflecting lower raw materials and energy cost. Sequentially, operating results improved due to lower raw material costs and higher capacity utilization partially offset by lower selling prices and an unfavorable shift in product mix.

Looking forward during the second quarter we will be completing the reconfiguration of our Longview, Texas site. We will be shutting down our largest Cracker for maintenance and completion of capital projects in preparation for permanently shutting down our two remaining smaller Crackers. This capital project will improve the efficiency, reliability and safety of what will be the only Cracker at our Longview facility supplying our propylene derivatives in the PCI and CASPi segment. The cost related to these actions in the second quarter expected to be approximately $20 million of which two-thirds will go to PCI and the rest will be for CASPi and despite these costs we expect results for PCI in the second quarter to be similar to the first quarter because of slightly improved volumes as destocking declines leading to higher capacity utilization and lower unit cost. For the year we expect a run rate in the third and fourth quarters to be slightly better than that second quarter rate without the cost I've just described, as volume improved slightly leading to higher utilization and lower per unit cost.

Next, is Specialty Plastics. Operating results declined to a loss of $13 million in the first quarter. Year-over-year the decline is primarily due to lower volume, similar to volume declines for many plastics in this recession and you'll remember in the middle of last year we converted legacy PET capacity to co-polyester and when you combine that with the volume decline we faced our capacity utilization was down between 50 and 60% for the quarter. In addition, we also had an unfavorable shift in product mix as we sold less cellulose Esthers to the LCD market and this was all partially offset by lower raw material and energy cost. Sequentially operating results declined as prices decline as we continue to work through higher cost inventories and volume decline due to customer destocking, the lower volume and the resulting lower capacity utilization led to higher unit cost. In the second quarter we expect results to improve as volume improved slightly leading to lower unit cost and our priority for this business as we get it back to the black as soon as possible.

Turning now to the Performance Polymers segment, operating results were a loss of $21 million in the first quarter. Year-over-year that's a decline and it was due to lower selling prices, partially offset by lower raw material and energy cost, lower polyester stream utilization which led to higher unit cost, sequentially operating results improved at a higher PET volume which led to higher capacity utilization and lower unit cost. first quarter results were also impacted by the slower than expected ramp up of our IntegRex facility after the major debottleneck in the fourth quarter. Looking forward we expect results to improve significantly in the second quarter due to higher selling prices, improved volume, and improved operating factors with our IntegRex debottleneck. As with Specialty Plastics, our first priority for this business is to get it back to the black as soon as possible.

Looking at our second quarter and full year outlook, capacity utilization improved somewhat from the fourth quarter to the first quarter but the global economic environment remains challenging and visibility is limited. The cost reduction actions we have taken will positively impact our financial results throughout the year. We expect margins to recover as we work through high cost inventories. For the second quarter, assuming a modest improvement in demand, we expect our EPS to be similar to the First Call mean estimate, currently $0.71. For full year 2009, assuming our capacity utilization increases back up to between 75 and 80% for the remainder of the year, we continue to expect EPS to be between $2 and $3, which I think will be very solid performance in the current difficult environment. And with that I'll turn it over to Curt.

Good morning everyone and thank you Jim. We all agree that the challenges of the financial crisis and the global recession that developed in fourth quarter 2008 have continued into 2009. As it became clear during the quarter, that economic conditions were not substantially improving, we stayed the course. Closely managing our cash flows and reducing operating costs, including implementation of an additional $100 million of cost reductions announced in March. These actions are improving an already solid financial foundation that will sustain us through even an extended period of weak demand. Eastman is well funded, continues to weather the storm, and remains well positioned to take advantage of economic recovery.

Turning to our financial highlights. One of the financial highlights for the quarter is our strong operating cash flow performance. Even with continued weak demand we remain focused on working capital and achieved a $70 million reduction in inventory. As a result, we reduced working capital by $58 million, the best first quarter performance in our Company history. We are on track to reduce working capital by $100 million in 2009 under admittedly difficult circumstances. This combined with our other operating activities enabled us to generate strong cash from operations of $82 million in the quarter, reflecting a significant cash focus on all fronts by the men and women of Eastman. This is a strong start to the year and we are pleased with our progress toward the objective of being free cash flow positive for the year. Net debt to total capital remains at a good place at 52%. We finished the first quarter with net debt of approximately $1.1 billion up slightly from year-end underscoring our cash focus. Our balance sheet is solid and holding up in these difficult economic conditions.

Since the last recession, we have taken many actions to restore our financial condition and shore up our underlying business strategies. We were hopeful that these actions, coupled with the cost reductions implemented in December, would be enough to manage through the current economic environment; however as first quarter unfolded it became clear that this recession is more severe and having a deeper and potentially more lasting impact than originally anticipated.

In response we implemented additional actions to reduce cost by an additional $100 million. This included a 5% pay reduction in the U.S. effective March 30, and equivalent cost reductions being implemented globally. Completion of a reduction in force of approximately 300 employees that Jim mentioned, this did result in a $26 million charge in first quarter for severance and related costs. And lastly the $100 million includes a reduction of non-critical maintenance costs, logistics costs and further reductions in discretionary spending. The impact of these additional actions will be evident in our second quarter financial results and throughout 2009. These were difficult but necessary actions to improve the financial performance of the Company and to maintain our strong financial profile.

We have been disciplined in our financial approach and that extends to our priorities for uses of cash. As highlighted on slide 13. First, we continue to pay our dividend as we have for every quarter we have been a public Company and our current yield is over 5%. In 2009, we expect our contributions to our pension plans to be at the 25 million to $50 million range I gave you last quarter. We have further prioritized our capital spending for 2009 and expect capital expenditures to be in the range of 300 million $350 million. It is worthwhile to note that our capital spending is weighted to the first half of the year.

As we have just discussed before, there are good business and economic reasons to complete some growth initiatives in 2009 that were well under way in late 2008. This includes the construction of our Tritan, co-polyester facilities, finalizing feed efforts associated with our industrial gasification project in Beaumont, Texas and completing the Longview reconfiguration. The majority of these costs for these projects will be in the first half of the year. We spent $110 million in first quarter and expect the growth spending to continue somewhat in second quarter. By the second half of the year, we expect spending to be at the low end of our baseline capital spend rate of 200 million to $250 million annually. Our manufacturing, engineering and construction and other personnel are doing a great job in managing our capital program given the current environment. In addition in first quarter we started making progress payments for our alliance with SK in Korea, to expand our acetate tow capacity that's included in other investment activities in our statement of cash flows. Those progress payments will continue for 2009 although at lower levels.

With all these factors in mind, again, we are committed to generating positive free cash flow in 2009. Financial discipline underscores Eastman's results and supports our strategy for the future. I have reviewed this last quarter, slide 14, but as CFO, I can't resist the opportunity to highlight Eastman's strong balance sheet, attractive debt profile, and liquidity position. As a reminder, we don't have any significant debt coming due until 2012. We have a committed and undrawn $700 million revolver with substantially all of it available well into 2013 and our cash and cash equivalents at the end of March were $340 million. We are in a very strong position from a liquidity standpoint.

Putting it all together, Eastman has a strong balance sheet, sufficient liquidity, and a history of financial discipline, plus the actions we have taken recently to reduce costs and strategically over the last several years provides us with a portfolio of businesses that are well positioned to recover with improved economic conditions. We are actively evaluating all options to create shareholder value from our balance sheet both looking into and beyond this recession. This includes continued work on our industrial gasification initiative, developing additional organic growth opportunities, exploring merger and acquisition opportunities, and if appropriate, we will consider the repurchase of shares. Our approach to growth initiatives and creating shareholder value will remain disciplined. Eastman is well funded, continues to weather the storm, and remains well positioned to take advantage of economic recovery. Now I'll turn it back over to Greg.

Okay, thanks, Curt, and that concludes our prepared remarks this morning. We're ready for questions.

Thank you, sir. (Operator Instructions). For our first question, we go to Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning, Jeff.

I'd just like to start off with just a few questions about Fibers. Can you remind me about the end markets of Fibers by geography, that is how much is U.S. and how much is Europe and how much is Asia?

Yes, I don't know if we say the actual percentages.

Or roughly?

Yes, but roughly domestic market is obviously much less important to us than it was years and years ago, so less than a fourth of our business I'd say noticeably less than a fourth of our business would be in North America. Asia is kind of the market, Jeff, and it's probably not just for us but for most everybody and then of course Eastern Europe is also important, but so I'd probably line it up Asia, Europe, North America, and then Latin America.

In the statistics you gave, you had the volumes down 10, prices up 10, with a positive mix effect of two, so under that dynamic, why wouldn't the operating earnings really be much much higher if prices are up just as much as volumes with a positive mix and wouldn't a percentage point of price be worth about 2 percentage points of volume?

Yes. And I haven't done the math that way, number one, the earnings are up fairly significantly of course sequentially. The one piece you left out was the cost. Remember the reason we got those price increases was because of what wood pulp and energy did late last year and we didn't get it all back in the fourth quarter. We're just now getting that back. Tow volumes up but the other volumes off, so I think the math works that we had a great quarter but it is pretty much the way it is.

Okay, thank you very much.

Yes.

And for our next question we go to P.J. Juvekar with Citigroup.

Good morning, Jim.

Hi, P.J..

I'm looking at CASPi and it was down like most of the coatings companies. Can you give us a little bit granularity on different parts of CASPi, you talk about coatings, specialties?

Yes, it's an interesting story and it's actually a similar story for Specialty Plastics as well and you look inside commodities versus specialties whether you're talking coatings or adhesives, one of the things I'm learning is just how the destocking is winding its way down, so the commodity stuff, you never have that much destocking going on. I mean I guess initially but it's big, bulky stuff, people know they can get it from a bunch of different players and they didn't necessarily carry a lot of inventory. The specialties are different, especially that we're the sole supplier of there they would carry a lot of inventory so specialties had that longer value chain, more inventory all along the chain, and then if you think not only specialty based but then if you think regionally the longest Supply Chain is Asia, so you are really seeing destocking having an impact on specialties and in particular on some of the international sales. So as I look inside CASPi it's not an issue of margins and again similar for Specialty Plastics.

Pricing is pretty much tracking with raw material and energy cost. It's really all about volumes, volumes being affected on the commodity side very much by just what's going on in the overall economy. You've seen that by building and construction, by autos. On the specialty side you got the lower end demand to a certain extent, nowhere near as much as commodities but you really got this destocking thing going on. So that's what gives me some encouragement when we say CASPi is going to be better next quarter. As you see a lot of that destocking product line by product line region by region slowly coming to an end the fundamental business in terms of the demand for the specialties, it's still there. If you want to paint cars, and do the other coatings, our coalescence, our additives, I mean all that business still looks pretty good. We're just going through this inventory destocking issue.

And I guess the longest I've heard is a customer say it's going to take until September to work through inventories but we're seeing the end of destocking, we saw the end of destocking for some of the distribution channels in the first quarter. So maybe that gives you a little more color. The other thing we'll get in CASPi is we're going to get a little seasonal pick up, we're starting to see a little seasonal pick up to second quarter and that's something we were waiting to see whether or not we were going to get.

How much do you call the commodity bucket and the specialty bucket, how much of CASPi do you put into the specialty bucket?

And I think I had it in the comments, it's like a two-thirds, one-third, and the commodity piece being more some of the commodity adhesives and the commodity solvents, the additives and the coalescents are fairly special.

And one quick question for Curt, Curt, in the previous downturn, you guys have put CapEx well below D&A. This time you're guiding to 300 to 350 and I know you got investments in Tritan and coal and all that but beyond that do you see capital spending coming down meaningfully below D&A, especially if you're running at 70% why do you need to spend capital now?

I think what you'll see as we enter the second half of the year and look at even the fourth quarter you'll find that our capital spend is more in line with that 200 million to $250 million spend we say is what we would spend in just a maintenance mode and so yes, when we're in the second half of the year and going into the fourth quarter we will have capital expenditure that is lower than depreciation and amortization.

Thank you.

For our next question we go to Mike Judd with Greenwich Consultants.

Yes, a couple of quick ones. The tax rate for the rest of the year, what should we be using?

We're still looking at a 30 to 33% rate for the year.

Okay, and with what's going on with Chrysler and General Motors, can you help us understand, obviously that's a relatively small part of your business but what sort of exposure do you have there? And lastly, just there's been a lot of information coming out recently indicating that the destocking is coming to an end and you guys have actually talked about that on this call.

I'm just curious as you look ahead to the Summer we've heard I guess yesterday, General Motors announced that they were going to shut down a number of their plants for an extended period this Summer. How do you see this destocking issue playing out as we look into the Summer? Thank you.

Yes, so, first on the autos and you're really pointing to domestic autos, obviously we're a global supplier to a whole bunch of customers. We're a little up the food chain from the OEMs and the auto industry so whether or not we could actually trace anything to a nine week shut down versus a two week shut down, I would really doubt it. Just as a curiosity I mentioned to a customer the customer that said their destocking would probably go as long as September which is the longest I've heard just happens to be selling into the auto industry. The way I look at that, I think the car builds are around 9 million, we're tearing up 13 million cars a year, that's not going to last. I don't know whether it will be GM, Chrysler or who but I know we're going to be driving cars and I know the coatings suppliers we supply to will be painting those cars, so I have trouble breaking out these kind of news stories from day-to-day in terms of having an impact on us. I know this is part of our end markets that have been hurt the most. CASPi has about 20% exposure to transportation and autos but remember it's not just the original builds, it's also all of the repaints, and that almost has a utility function if you don't build any cars you're more likely to take care of the old car, so again, I think the fundamental value proposition in the CASPi business to coatings business is sound.

Just on destocking in general, again, I want to point out it doesn't mean that there's absolutely no more destocking, we're done across the Board. It really is product line by product line, region by region but we are getting to the end of destocking for a number of our customers, a number of our areas that we sell into.

That's very helpful, thank you.

For our next question we go to Jason Miner with Deutsche Bank.

Thanks, good morning.

Good morning.

Sorry, I know it's a bit apples and oranges to ask this at a summary level but given that 75 to 80% utilization is probably a tough outlook in the environment for pricing, could you guys sort of talk about what your overall pricing expectations for the rest of the year for the total Company are sort of driving the 2 to $3 expectations in EPS?

Yes, I'd be glad to because it's something we're watching very carefully. I said earlier that pricing has kind of moved with the raws and energy and frankly, that's true. It appears that most everyone realizes that there's not additional volume to be gained by being overly aggressive on price, so we're keeping our pricing in line with cost, the variable cost. The part you can't take care of is the unabsorbed overhead and that's the fixed burden, that's what's affecting results right now but on pricing in most markets it's been fairly disciplined.

Now, will that change as people start to sense that there is volume to be gained and I just don't know. I think most players have such skinny margins right now and their profitability is so low that they will probably have to stay disciplined for some period of time. We're I think in the quarter we ran around 71% capacity utilization to bump up the 75, 80%, I'm not sure would be that dramatically different in terms of the market dynamics pricing wise. It would be dramatically different in terms of us and our underabsorbed burden or the fixed cost that you can't put into all your products and you just got to eat into your pricing, so as I look at it, 75 to 80% would still be well below where you want to run but it just points up the powerful leverage we have in this Company. We're quite an integrated Company and I've been impressed, one of the things I've learned is that this is the trough, we're down at the bottom and we're still talking about 2 to $3 a share running at the lower levels that we're running at, and you look at the operating leverage in this Company and just how much fixed cost we can, the cost is fixed and as you grind out more pounds you get to spread that across and really boost your margins back up historically.

I get very encouraged and I look at this and I think to myself 2 to $3 in the trough and then you get back up to any kind of rates like we were at before, you can set record earnings in this Company just on the existing businesses we have today and then the upside is what can you do with your cash on top of that. So that was a long answer. You started me thinking about just where this could go when we start looking to the future and I can get fairly bullish in a hurry.

That's fine. All good information, I like to look to the future. I'll just have one short follow-up then. Given the improvement in gross margin sequentially, that there's a lot of moving parts, could you help us to think about how much might have been eating up high cost raw materials versus all the cost that you put in place and I guess what I'm really getting at is how much more room to run on some of those cost actions we might see come through in the back half of the year?

Yes, I mean, Curt may want to chime in on this too. I agree. I have trouble when I go from fourth quarter to first quarter because we did have so many moving parts. I know that in a number of places like in the PET business and SPBO and even CASPi, I guess most of the businesses, we were still eating some high cost inventory as we went through the first quarter. It seems like most of that will be ending. That's partly what gives us the encouragement for the second quarter. We won't be having to jump that hurdle. We've only had the impact of some of our cost actions. We haven't seen all of that yet. The pay reduction doesn't kick in until the second quarter.

I would think the second quarter on our cost reductions would be a good indicator of just how successful we are and then when you get to the back half of the year, we're just looking for a little uptick in capacity utilization to get in that 2 to $3 range, and I don't know, right now, I hate to be too optimistic. I hate to get carried away looking at short-term trends, but things have been picking up ever so slightly most recently and so I think that's where some of our optimism comes from. Do you have anymore comments, Curt on the second half of the year?

No, I think it's well said. It's partly capacity utilization, it's a greater extent behind us on the inventory cost flow through and then the second half of the year we also don't have that cost that we have in the second quarter with that Texas reconfiguration so that impacts the second half of the year.

Fair enough. Thank you very much.

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

Good morning, gentlemen.

Good morning.

Jim, could you do me a favor? I know Brian is not on the call. If you could let him know that I appreciated his thoughtful opinion piece in the paper and that Washington could use a fellow like him?

Frank, people don't think we set you up for that, I was hoping we would get a chance to mention that op ed, so in case people are on the call and they don't know what Frank is talking about, Brian wrote a very good piece that got picked up in several publications I guess it was a couple weekends ago and it's just about, not just about Eastman but our whole industry and frankly, the whole manufacturing industry in North America and some of the proposals that are being suggested in Washington and the impact, obviously negative, that it will have on manufacturing in the industry et cetera. So if anybody wants that and wants to see what Frank is talking about, I highly recommend it and our Investor Relations guys here would love to send it to you so yes, Frank, thanks for bringing that up.

Anything I could do to help, Jim.

And in return I'd love to give you a weather forecast but they got me in a room without windows so I guess I could make a joke about how I don't have any visibility but it seems like everyone else has used that on their conference call so we thought we were trying to avoid it.

I appreciate that. Jim, a few years ago you did a pretty good job of cleaning up CASPi and getting it into the black although obviously the results have ticked down here a little bit and I'm wondering especially plastics has been disappointing for several years now. You mentioned that you want to try and get it back into the black as soon as you can. Can you elaborate on that? What can you do? Is this just a damaged business whose time has passed? Can you give me some update on that?

Yes, and I'd rather say it's a damaged industry. I think our business is actually a decent, it has a decent position in the marketplace, in a really doggy marketplace, so I'm pretty sure we're over on the left end of the cost curve for the PET business. They're one of the outfits that was eating these higher inventory flow throughs. We built inventory for the major shut down and debottleneck and, of course, you built inventory right at the time when costs were very high so they had to eat that, some in the third, some in the first quarter. We're going to be doing everything we can to take advantage of the IntegRex technology, reduce our legacy exposure. We started moving last year, we started moving the line line over to Specialty Plastics. On the PET business then you price, we're going to see weaker players fall out, and I think we're going to get it to the black but I'm going to stop from saying how soon that's going to happen. I'm going to predict a direction.

On Specialty Plastics, I got to tell you I really like that business. There is value in that business, and it's where you see most of the internal growth opportunities, it's where we've been spending R&D and SG&A dollars, it's hard for you guys to see it, but it has been, over a longer period of time now it has been a business that's been increasing its gross margin, we've just been reinvesting it.

One of the things that impresses me, I started to get on a rant earlier about the powerful leverage in this Company. This is a place that has powerful leverage in Specialty Plastics. If you think about it, it's getting hammered right now because we just, for example, moved it on to a bigger line that used to make PET so the capacity utilization is down around 50 to 60%. It's hard to look pretty when you're running that low but it has the kind of growth and we've got the kind of products with Tritan and Embrace and (inaudible), you just some classy names and so again you think about as the volumes come back and you start using these bigger lines of the lower cost, this is another business that can get back to that 15 million to $18 million a quarter kind of run rate and then go North from there. Right now unfortunately, it's on the other end of that, the leverage works in reverse too and that's what we're seeing but no, this is a good one.

Well, I guess that accounts the change over in lines is part of the issue as to why this is one of the few businesses that we've seen in the chemical industry where the first quarter was worse than the fourth quarter but you're of the opinion that we should see black ink if not the second quarter then the third quarter?

Yes, again, I'm trying to be on the polyester side just because plastics is so bad we were talking to Brian earlier and he was looking at me and said the plastics industry is just lost this year. It's just a lost year for plastics and so you hate to get out ahead of yourself and get too optimistic. I can pretty much call the direction that it's going North, we're heading towards black but I'm shying away from actually calling timing like the economist who says where the market is going to go but just not when.

So I've been unsuccessful in pinning you down. Let me try Curt. There's been a lot of discussion Q2, we should see evidence of the cost savings flowing through. What sort of a ballpark are you guys looking for in terms of cost savings in Q2 and to actually realize during 2009?

Well, let me speak to the cost actions in December have pretty much been implemented, we saw some of those in fourth quarter and saw those in the first quarter. As it relates to the additional actions, the way I look at it is think of the three items we mentioned as a third and a third and a third. So the first action about the pay reduction, that was effective March 30, so you can get a sense of when we would expect to start seeing effects of that. The restructuring is the other piece, Jim mentioned was completed in the first half of April and you'll start seeing those as completed and the other areas are being actively worked and will be seen throughout the year so that's how I put my head around that $100 million.

Okay, great. Thank you.

Our next question we go to Chris Willis with Impala.

Good morning. Just had a quick question about the PET. Can you give us an idea of how much the less than successful ramp of the debottleneck effected it? If you were to try to normalize that business and talk about the elevated cost at inventories, what would be a normalized run rate if this thing had been running properly and you didn't have the type of massive cost escalation in late last year with the inventory build and all that? Can you just give us a sense of how well this business is doing ex all that?

Yes, I can qualitatively. That's what's giving us the, it's the fact that these things have ended that we are running well now, the IntegRex technology does work. We are getting the conversion cost savings we thought, but it was a difficult start up and also with the high cost inventory those are the two things that really hurt us in the first quarter. If it hadn't been for that it would look like we think the second quarter is going to look like where we said it would be significantly better. So we're driving towards breakeven in that business, I guess that's as close as I can get whether or not it's the second quarter or soon thereafter, and from then, it's just a matter of how do we do on price over raws, what's the rest of the industry structure, how many more weak players can dropout, and can we slowly be converting, now talking longer term, can be slowly be converting some of those lines to more specialty lines, send them over Specialty Plastics way but I don't have an exact dollar number. I just know that's why I'm more confident second quarter will be better because I don't have the start up issues and I won't have the high cost inventory in the second quarter.

But what you're saying is you wouldn't have been in the black even if you didn't have the issues?

I think that would have been tough to have been in the black, yes.

Okay, great. And same thing on the Specialty Plastics, I mean can you give us a rough idea how much the sort of incremental fixed costs are affecting that?

It's just, I mean, we were surprised that it was as negative as it was in the first quarter. When you're running at 50% something utilization none of your rules of thumb work anymore. Again I like to think a little bit longer term and say that this is a business that you get back into the kind of volumes we had it's easily going to be back in the 17 million to $18 million kind of quarter kind of range but it's just a matter of when is that going to come back. The operating leverage in that business is very powerful, Chris.

Great, thanks.

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

Yes, good morning, how are you?

Good morning, doing fine.

In the Fibers business you had the best operating margins in three years notwithstanding the higher raw material costs and some of the volume pressure but I suspect it will be even better were it not for acetate yarn. So Jim I was wondering if you could talk a little bit about the yarn business and what the profitability is there or lack thereof.

Yes, lack, there of. It's not in the black. It's red ink. It's interesting, I mean people look at it and say so why are you in the yarn business? Well, it's actually a very nice positive contribution. Yarn sells more per ton than tow does. We like making yarn in terms of how it allows us to run our plant but it is a negative that brings us down. You can watch fashion trends, et cetera and see what's happening. It's a more expensive fiber as compared to polyester. On the other hand there aren't a lot of guys out there making it, and we had a competitor exit North America a few years ago and we got a little bump up in the business and it looked good and then slowly people keep migrating away from it and you get to where you're losing money again. The one thing I feel good about is we've taken quite a few actions internally to address cost there and I think we're doing about as good as we can. This is a business that's run do you as low as 30% something capacity utilization, so we'll see.

We have our SK venture going where they had some yarn capacity we're going to convert to tow so that will be coming out of the market but there's not high hopes for yarn ever making a lot of money. We would just like to get it back to say breakeven so it's not a drag and can continue to be a positive contributor.

Are there issues around integration or overhead absorption that you feel would preclude a strategic reevaluation of that business?

No. It just comes down to running at a certain volumes that you get positive contribution. If the world changed enough that there wasn't volume, which is a volume less than we're at today, by the way, so volume would have to drop off from where we are today that the contribution was no longer positive, well, then you could take action, you could switch over and just be tow but right now we are still getting positive contribution out of it and we don't need that capacity right now.

And finally, if we focus on the other businesses outside of Fibers, I was wondering if you could comment on how sales and volumes trended in the month of March and what you're seeing in the early days of April.

Yes, but I don't want to get your hopes up. I mean if I go all the way back to December, December as everyone knows was really doggy, so that way was down there. January, February, kind of both months look similar and but noticeably better than December of course, and then March was even just a little bit better and the last three or four weeks has ticked up above that so I said our capacity utilization was 71% in the first quarter and you know that we worked inventories down so maybe demand was running a little ahead of that so when we look at our second quarter guidance we basically just need demand to stay kind of where it is in order to run at the utilization rates we want. So yes, it's been, there's been some positive upticks. I can tell you I've been fooled before where we've seen two or three weeks go up and then we came right back down the next week so I don't want to get everyone's hopes up that somehow Eastman's calling an end to the whole thing, but yes, it's been a better trend than just flat or down.

That's helpful. Thank you very much.

For our next question we go to Bill Young with (inaudible).

Hi, good morning gentlemen. Jim, could you give us where you are on the timeline? You said you're doing some investment now in the coal gasification PET coke gasification project. Could you give us an idea about the timeline and where you stand with customers and partners ahead?

Yes, thanks for asking because this is another one that I just think that it's a little nugget, not a little, it's actually a big nugget of value within Eastman, but man, we need some building blocks to fall into place. So right now, we're on the front end engineering design like we've talked about so you are doing that study trying to nail down a capital number plus or minus 10%. We think the wind is blowing our way on that one. We think capital costs coming back in, and we've told the world we'll have an update towards the end of the Summer on that.

I've got a few other blocks there that have to fall into place, one of which is just the hydrocarbon spread between liquids and solids and you know natural gas is down around $ something right now, forward curve higher obviously, but still not at the level that you would want to try and lock in pricing on contracts or hedging whatever to kind of guarantee that arbitrage that we're pretty sure is going to be there for the long time and just can't see it in the market today. You've got a financing building block that those markets aren't exactly ideal, the one [benny] we have there is we're in the federal loan guarantee queue to try and get that benefit for this project.

Let me see, what building block am I missing? Well, I said capital cost is coming back our way. Bill, you got all of the legislative issues and how is the government and the world going to treat CO2, is it going to be a benny, because we're going to sequester it and use is it for enhanced oil recovery or is it going to be a negative? So those are my building blocks that have to come together but late Summer is the next time we'll talk about it.

How about customers and your downstream technology?

Well, the customers are kind of, they understand what's going on in the world too. I think we're in pretty good shape. We continue to chat with them and you kind of say well what in the world could you be chatting about this long and working on but as the world changes then you got to keep looking at are you keeping pace with the changes you see in the world in terms of energy and legislation, et cetera. The downstream technology, that is where some of the spend has been, but I don't really have an update on that. I can just tell you we're going to try and be highly selective in what we spend money to work on. We've talked about gasification as an option for us and we think one of our mandates is that we need to keep the premium we pay for that option as low as possible in times like these. So we're trying to be very selective what we work on and you'll probably see us reducing our spend what shows up in the other line on our income statement you'll see us taking that down throughout the year.

Okay, great. Thanks a lot, Jim.

Yes.

We go next to Bob Goldberg with Scopus Asset Management.

Good morning guys.

Good morning Bob.

I just wanted to follow-up on Kevin's question on utilization rates. I was just wondering are you at the low end of that 75 to 80% range?

No, we're not. We're 71 in the first quarter and obviously we're down looking at it week by week guys, trying to figure out a trend so again you can fool yourself so we're a point or two above 71 today but that could be right back down the next week. We need a little pick up in demand to get to that 75 to 80%.

Okay, got you. And could you give us some indication by business as to where you're operating? More for that level of granularity?

Yes, well within the businesses, you can get, even within the businesses you can get different pieces just like I was talking about, yarn has run as low as below 40% whereas tow would be high 90%. I guess I won't give you that granularity all through the whole business. We typically talk in terms of stream and so if the Company's average was 71%, you can pretty much count on the acetyl stream being the highest operating rates, the highest utilization, probably polyester and olefins next and then parts of the adhesives chain has been the lowest. I've given you quite a few pieces now that I look back on it so Specialty Plastics as you know is running low and PET runs higher. But it's at, you can kind of fool yourself just going just by utilization rates because mix is pretty important too and so we're trying to find rules of thumb that we can give you something to help you but I hate for anyone to put too much weight on any one measure because there's so many moving parts.

Sure, and just one question on raw material costs. Do you see much movement going into the second quarter and I know your consumer coal obviously in a decent part of the business, coal prices have come down it seems like quite a bit from last year. Is there any, is that a benefit for you or you've locked up with contracts, I'm just wondering what the status there is?

No, we benefit as the prices move. We try and do contracts and you ladder them so that you get some smoothing effect and that's not just true for coal, that's anything. So we're benefiting from lower energy cost to a large extent. I guess a number of our raws are down or flattened out, I think our paraxylene is maybe the exception where you see that one going up, which of course affects our polyester side of the house. In times in the past, the story has been raw material movement, does pricing keep up with it. As we ran through all the numbers and what's going through our business that's not so much the story right now. Right now the story is all about volume.

Right, and one more follow-up on that, in the SPBO business, you had a big squeeze there from paraxylene. Have you recovered the impact from the higher raw material cost late last year? Is it simply a function of the lack of volume or I'm just wondering where unit margins are relative to where they've been historically?

And here is what I'm told because all of the questions you guys are asking are the same things we're trying to make sure we understand about our business. The margins are there. If you didn't have the unabsorbed overhead in that business because of running at such a low utilization rate you would like this business still, so the products still have the same value to our customers. The margins are there. Yes, you do get squeezed on paraxylene and again I'm speaking generalities but Specialty Plastics in our opinion really is a volume story and it's a destocking story and it's an end market demand story and it's the amount of capacity we got versus the volume we're seeing.

Okay, I appreciate it. Thank you.

Yes.

(Operator Instructions). We go next to Sergey Vasnetsov with Barclays.

Good morning. A follow-up on your gasification comments. This project is by now more than three years old, at least publicly and so when I look at the transcripts of your conference calls last year the decision was supposed to be reached in Summer of '08 and then December of '08 so I realize it's complex project truly, but my question is on your end of the Summer update as the next milestone, will you complete the feat at the time and be able to make a decision of go or not go or should I take it at the end of the Summer you'll give us yet another date for update?

Sergey, I'm shocked, shocked I tell you that something we said over a year ago may still not be appropriate today. Yes, the world has changed a little bit in the last few months. What hasn't changed is I still think there's quite a bit of value for Eastman doing another gasification project. So at the end of the Summer we will have completed our feed process but I don't think you ought to think that this is the kind of thing where you just make a final decision and you're done and you either have to did it or it goes away. That's the exact reason why we've referred to it as an option. I think there ought to be kudos to Brian and the rest of the team for the patience we've shown for not just plowing ahead. I don't know how I'd feel. In fact I do know how I'd feel. I'd feel pretty lousy if I was halfway through building a major plant right now just like I'd feel pretty lousy if we were just trying to digest a major acquisition right now so yes, it's been going on for a while but I don't see that as a bad thing, guys. We're trying to be very prudent with our money and when we pull the trigger you can be pretty sure that it's the right thing to do and we're going to get a good return. Until then we're going to just hold our spend down and so it doesn't cause us much pain while we wait for the world to come back our way so we can make some money on this thing.

So by the end of the Summer you'll give us another data point as far as making a decision you feel is driven by some other factors that maybe later, maybe next year, whatever, right?

Well, take a look at natural gas, if it's still $3.50 it may be hard to get contracts in place that give us the kind of spread we want between PET coke and our products we're going to be selling, so that's what we talk about. We say that there's building blocks that have to fall into place but when they do fall into place, this thing can be very significant and it's a matter, if you think energy is never going to go back up again, well, then you'd say that building block is not going to get there. We actually think that energy is going to be more expensive in the future and the window is going to open again.

Well, just think of the options cost to maintain this option alive per year?

The option cost?

Yes.

You've been seeing it on the other line is where the bulk of it is, which I think has been over $10 million a quarter, now all of that can't go away but we are going to be reducing that number. In fact, I think on the quarter it was 13 million or something on the other line. We are going to be bringing that down but we're willing to spend some money each quarter to keep this one alive and remember it's not just, we're also working on derivative products, other things we can do, we're trying to look down the road a little bit so we think it's a good use of money but we can bring the burn rate down a little bit.

Okay, thank you.

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

And that question will be a follow-up from Kevin McCarthy with Banc of America Securities.

Yes, just a quick follow-up, I was wondering if you could comment on the trends that you're seeing in acetyls and Intermediates within PCI?

Yes, acetyls, intermediates and PCI is probably the bright spot. Obviously not all the way up to the level in the hay day when PCI was making moe than $200 million a year but still solidly in the black. We're not the big acid supplier like maybe some of the other names you follow so we're more in derivatives and high dry and other things in the acetyl stream, but I'd say that one is the acetyl piece as you might expect it's holding up noticeably better than the other streams.

Thank you very much.

Yes.

And with that, Mr. Riddle, I'll turn the conference back over to you for any closing remarks.

Thanks, and thank you everyone for joining us this morning. An audio replay of this conference call along with the slides that accompanied our remarks will be available on our website this afternoon through next Friday, May 1. Have a great day.

And ladies and gentlemen, this does conclude the conference call. We appreciate your participation.