伊士曼化學 (EMN) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the Eastman Chemical Company second quarter earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Mr. Riddell, please go ahead, sir.

Okay. Thank you, Rufus and good morning everyone and thank you for joining us. On the call with me today are Jim Rogers, President and CEO, Curt Espeland, Senior Vice President and Chief Financial Officer and Anita [Detesche], who is new to our Investor Relations team. 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 third 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 second 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 second 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 items. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring related items are available in our second quarter 2009 financial results news release and the tables accompanying the news release. Lastly, I want to remind you that we posted slides that accompany our remarks for this morning's call on our website at www.eastman.com in the investor section.

With that, I'll turn it over to Jim.

Thanks, Greg, and good morning everyone. I'll begin on slide three. I'm going to start out this morning looking back at some of the outlook statements we gave you during our first quarter earnings call in April. I'd like to do this kind of look back on each quarterly call. Good or bad, so that we hold ourselves accountable for the statements we make. I've listed a few of the corporate statements here, and we'll look at the segment statements when we get to their results.

On second quarter EPS we said we would be near $0.71 a share. And we came in at $0.86. Yes, we were a little above our own expectations, and I'll talk more about that in a minute. Next, we told you full year 2009 EPS would be between $2 and $3 through the first half of 2009. We've earned $1.11 per share and with our EPS outlook for the second half, we remain on track to meet this expectation. We told you that $200 million of cost reduction actions we have taken since December would be evident to you in our results through the first half of 2009. Our SG&A and R&D are down $38 million, and we're seeing the impact of the cost reduction actions in our costs of goods sold as well. I don't want to steal Curt's thunder, but we told you we would have positive free cash flow for the year and through the first half of 2009 our free cash flow was $69 million and we are set up for a very strong second half of cash generation.

Moving next to our corporate numbers, first on sales volume, while we were down 13% year-over-year, excluding contract ethylene and polymer intermediates volume, we were up a solid 11% sequentially on the same basis. The biggest increases sequentially were in CASPI and specialty plastics, but volumes were up in all but our fiber segments. This reflects a couple of factors I mentioned in April. Namely, we are at the end of customer destocking and there's some seasonality to our volumes. But with capacity utilization averaging about 71% in the second quarter, and 74% if you back out the impact of the reconfiguration of our Longview, Texas site, customer demand is still not back to where it was last year.

Moving next to earnings, sequentially our operating earnings increased by $77 million and we're down $50 million year-over-year. Margins improved both sequentially and year-over-year with our gross margin above 20% and our operating margin above 10% in the second quarter, admittedly on a lower revenue base. The improved earnings and margins sequentially are really due to three factors. The improved volumes that I mentioned, the flow-through of lower cost raw materials and energy during the quarter, and the impact of the cost reduction actions we have taken. The year-over-year revenue and earnings comparisons continue to be difficult as they are for most companies due primarily to the global recession.

I'll turn next to the segments and begin with Fibers on slide five. Volume for this segment declined both year-over-year and sequentially, but this was not due to acetate tow, but rather due to acetyl chemical volumes being down due to customer buying patterns and acetate yarn volumes being down due to global recession. Earnings and margins remain strong. Year-over-year, earnings improved due to higher selling prices and cost reduction actions. Sequentially, we were able to stay at the very high level we set in the first quarter. Looking forward, we expect third quarter earnings to be slightly below second quarter as volumes decreased slightly, and then fourth quarter earnings to be similarly impacted due to customer destocking and the global recession's impact on disposable income.

Moving next to slide six and CASPI, year-over-year, volume was down due to the recession but despite the volume decline, operating earnings were only down slightly as we were able to restore historic gross profit margins due a decline in raw material and energy cost. Sequentially, operating earnings increased substantially as volume was up 22% and mix improved as the volumes for the specialities came back with a decline of customer destocking. This is consistent with my comments on CASPI during the call in April. As a reminder, we think of this business as about two-thirds specialty and one-third commodity on a normalized basis and one thing we have seen in this recession is a structural improvement in the market for our commodities, such as solvents which is allowing them to hold up better than in past recessions.

Looking forward on CASPI, we see the third quarter a lot like the second, as volumes stay about the same as we don't anticipate much movement in their raw material cost. On slide seven is PCI. Their year-over-year story is really about lower volumes due to the recession and lower selling prices due to lower raw material and energy cost. Sequentially, volumes picked up some as destocking is mostly behind them, and they were able to restore some margin with raw material and energy cost declining.

During the quarter, they also had about $15 million in costs related to the reconfiguration of our Longview, Texas site. This included the turnaround of our largest cracker which we normally do every five years. We also completed capital projects in preparation for shutting down our two remaining smaller crackers. Overall, the results were excellent. This was the biggest project in the history of our Longview, Texas site and we completed it on time and on budget. Looking forward, we expect our third quarter operating earnings to be up compared with second quarter, excluding the cost related to the Longview reconfiguration but below last year's third quarter as we continue to make progress on restoring our margins.

Moving next to Specialty Plastics on slide eight. The Specialty Plastics story is very straightforward. It's all about volumes. Year-over-year sales revenue and operating earnings declined, as volumes were down, due to the global recession. Sequentially, sales revenue and operating results improved as volumes increased 19%, particularly in Asia and the US. In April, I said our focus for this business was to get it back to the black and we achieved that. Looking forward, we expect them to stay in the black in the second half of the year with third quarter earnings similar to or slightly higher than second quarter.

Turning next to slide nine. In April, I said performance polymers results would improve significantly in the second quarter due to higher selling prices, improved volumes and improved operating factors with our Integrex debottleneck. I also said our priority, as with Specialty Plastics, was to get this business back to the black as soon as possible. Sequentially, pricing and volume were up, leading to operating earnings of $3 million compared with the operating loss in Q1.

So we are happy with the improvement we achieved in the quarter. Looking forward, performance polymers faces a number of headwinds. First, the seasonality of demand which is likely to lead to lower industry volumes in the second half of the year, and next, a competitor adding about 10% of industry capacity to the North American market will be there before year end. And the IntegRex site is still not running the way we would like it to. We are confident we can get the performance to a higher level but we expect to incur some cost in the second half of the year as we work on this. As a result, we expect to have negative operating results in the third and fourth quarters. In short, we're not out of the woods yet.

I'm on slide 10 now. And here I'm going to give you a quick update on our Beaumont, Texas industrial gasification project. We're making good progress on feed, the front end engineering and design and continue to be on track to be finished by the end of the summer. From what we can see at this point, although costs have come down from where they were last summer, they remain higher than what we would like. We continue to look at this as an attractive option for all the reasons we talked about before. But given the current environment, it's an option that is still out of the money. As a result, we are reducing the burn rate to a minimal amount while we continue to work the capital number, the incentives, the financings, et cetera.

I'll end on slide 11 by taking you through our outlook for the second half of the year. As I'm sure you have heard from other companies by now, the global economy is a little bit better but we can't see a recovery yet. Starting back in December of last year, we took cost reduction actions, necessitated by the current economic environment and these helped to position us to continue to deliver solid results. When we look at the second half of the year, what we can see today indicates that demand should stay near current levels, and raw material and energy costs should increase slightly.

Looking at the third quarter, we think EPS will be approximately $1.10. And really this isn't much different from second quarter EPS of $0.86, without the approximately $20 million or about $0.20 a share related to the Longview reconfiguration and the higher tax rate which deducted about $0.10 per share in the quarter, and Curt will give more details on that in a minute. Given the solid earnings performance in the second quarter and our expectations for continued solid performance in the third, for the full year we now expect EPS to be toward the high end of the $2 to $3 range we previously gave you. And I think this is pretty good performance in what is a very difficult business climate.

Now, before I turn it over to Curt, I want to institute a new part of our conference call, where I talk no more than 60 seconds to identify one of our executives who has had an exceptional quarter. I want to do this to reinforce the depth we have in this management team. Normally, present Company will be excluded but for this past quarter, the executive I would have to pick is our CFO, Curt Espeland. I'm sure when Curt took over the job a few months ago, none of us were expecting to be in the current economic environment we find ourselves in. But Curt has adapted extremely well. He came into an oversized capital expenditure budget, some difficult hedge positions and a sliding economy. But Curt quickly realized we had to change the current focus of our organization to managing for cash and he has be the leader in that charge.

You can see the results of his actions in our numbers. The win on our tax line is a specific example of what I'm talking about. Of course, he has a luxury of working with some real pros such as Mary Hall, our Treasurer, and Terry Bagley, the Head of our Supply Chain. But Curt has rolled up his sleeves and been personally involved in these efforts. He has helped us transition to the point where our performance is very solid even in the depths of this current recession. As I look across the table, I know this is a surprise to Curt so I'll give him a second to pick his jaw up off the table. And now I'll go ahead and turn it over to Curt.

Thanks, Jim. Appreciate those kind words, and quite honestly, I and everyone focused on cash appreciate the comments and good morning to everyone. While most of Jim's comments were focused on earnings performance and outlook, I'm going to focus on cash generation. We have a great story to tell as Jim already mentioned. In March, we committed to generate positive free cash flow for full year 2009. This commitment is possible because of the strong focus on cash that is occurring throughout the Company. To a greater extent, the increase focused on cash represents an important cultural shift for Eastman, and I am very pleased with how everyone at Eastman has stepped up and responded to the challenge, particularly in this tough economic environment. And as you can see from the results we're making good progress.

In the second quarter our $255 million in cash from operations was the best second quarter cash generation we've had in over five years. Bringing our year-to-date operating cash flows to $337 million. Solid net earnings was a contributor, as was cash from working capital, which I'll speak to in a minute. Our capital expenditures decreased to $94 million in second quarter and we expect to continue to reduce our capital spending in the second half of the year. And we continue to pay our dividend which is currently still at a healthy 4% yield. On free cash flow, we generated $129 million in the second quarter, and with $69 million through the first half of the year, we are on track to meet our expectation for positive free cash flow in 2009.

Turning to slide 14. As part of our free cash flow objective, in March, we committed to generate $100 million in cash from working capital. As part of this commitment, our businesses are now being measured on both earnings and operating cash flows. This helps the business and sales teams understand the cash implications of choices being made. This is on top of a multi disciplinary team dedicated to managing our working capital targets and taking necessary actions to achieve them. Our collective efforts have resulted in good progress both during the second quarter and for the first half of the year.

Year-to-date we have generated $84 million of cash from working capital. One of the key drivers has been our reduction in inventories, which are down $191 million through the first half of the year. This is a pretty low level for us, and in part is due to the timing of the Longview reconfiguration. As a result, we expect to see some increase in inventories in third quarter. However, we remain committed to our working capital objective. We expect with demand in second half of the year, similar to current levels and with a slight increase in raw material and energy cost, to sustain the progress we've made through the first half of the year and generate $100 million in cash from working capital for the full year.

Another example of our focus on cash is the change we made to accounting methodologies used for federal tax purposes to accelerate the timing of deductions for manufacturing repairs. In 2008, the IRS reproposed regulations indicating a willingness to accept prior case law on the matter of expense versus capitalization of repair type expenditures. As a result, we filed for a change of methodology late last year and we received approval from the IRS during the second quarter. Essentially for tax purposes only, we are recognizing the deductions related to previously capitalized manufacturing repairs expenditures on an accelerated schedule so that we can obtain the tax benefit sooner. This will be done with the filing of our 2008 return.

The change is expected to result in over $100 million of positive operating cash flow impact in the second half of the year, including a refund of previous tax payments in 2008. One consequence of this change from an accounting perspective was the impact on our effective tax rate. Since the additional deductions will significantly lower taxable income for federal purposes, in previous years, it eliminated the $7 million of domestic manufacturing deduction recorded in 2008. This adjustment is reflected in our tax expense for second quarter, negatively impacted EPS by $0.10 per share. This resulted in a higher effective tax rate for the quarter and will likely result in an effective tax rate for the year around 33%. This is a terrific outcome and I congratulate our fine engineering professionals that made it happen.

Given our performance for the first half of 2009, and our expectations for second half of the year, we're strengthening the financial objectives we have made for the year. I've already taken you through why we expect to maintain the progress we're making on working capital in the second half of the year. On capital expenditures, our spending has been weighted to the first half of the year as we continue construction on our Triton polyester facilities, complete our feed efforts associated with our industrial gasification project, and recently completed the Longview site reconfiguration. Given our continued discipline with capital, I expect our capital expenditures will be in the $300 million to $325 million range as we approach more maintenance capital levels in the second half of the year.

With these factors in mind and our earnings outlook for the year, we expect increased free cash flow for the year. We have already generated $69 million of free cash flow in the first half of the year. I believe we can generate a similar amount of free cash flow in the second half of the year. Add to that the $100 million of expected cash benefit from our tax change and I expect we'll generate over $200 million of free cash flow for full year 2009.

Slide 17 brings me to our financial position. We have a little less than $1.5 billion of total debt on our books. We have a terrific debt ladder with nothing due until 2012 and even that is a modest $153 million. Our cash on the balance sheet as of the end of the quarter was $450 million, and I expect that to increase by the end of the year. And we have a committed and undrawn $700 million revolver substantially available to us well into 2013. We are in a very strong position from a liquidity standpoint, even stronger than we started the year.

With our strong balance sheet and potential cash generation, we're well positioned for growth going forward. We continue to believe that deploying our cash in a value-creating way will differentiate us and we're continuing to evaluate all options. These include organic and inorganic options. There is still a premium on cash in the current environment, thus we will remain disciplined as we pursue growth initiatives. And as we grow, we remain committed to maintaining our current investment grade credit rating.

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

Thanks, Curt. That concludes our prepared remarks. We're ready for questions.

Thank you, gentlemen. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (Operator Instructions). And we will pause for just a moment to assemble the question roster. For our first question we go to Frank Mitsch with BB&T Capital Markets.

Good morning, gentlemen. And nice result, obviously. Curt, in your free cash flow expectations for the full year, did you factor in the bonus that the fellow who got the 60 second shoutout will be receiving on these conference calls into that projection.

Cut it out, Frank. Cut it out.

But I did want to ask a pay related question. Obviously, the aggressive stance that Eastman took in this unprecedented period in terms of cost reductions is paying dividends here in terms of your performance. Any thoughts on when we're past the crisis, and you go back to the old pay methodology?

That's a good question. There's probably 10,000 people who care a lot about how I answer this, Frank. I used the phrase not out of the woods yet when I talked about performance polymers, but it's certainly true for our whole economy and the company itself. You have to have been here and enjoyed this culture to appreciate the ability for management to be able to adjust ton fly and make significant changes like that. And for the people to just keep doing their job and the professionalism we see even though we did take a 5% pay cut from the Board all the way down.

What I would like to do, Frank, is I would like for Eastman to always remain competitive in terms of its comp and benefits and salary structure. This was an extraordinary case. Frankly, I think that with the amount of uncertainty we have, we're not going to look at any changes until we get closer to year end. So I would expect to run at this level for a while. But eventually, yeah, the economy comes back, the earnings come back, and we will go back to the -- I would envision us going back to the levels we were before we made the pay reduction.

All right. Terrific. And Jim, thank you for the update on Beaumont. Given the uncertainties on cap and trade and the CO2 legislation you highlighted, we really can't expect Eastman to make a cogent decision on this any time soon until we get clarity. So I guess my expectation would be that whatever time frame had been in place gets pushed back as every day goes by that we have this uncertainty. Am I thinking about that the right way?

I think so, Frank. In my comments I talk about how we're reducing the burn rate. Do have some legislation you would like to see fall in place. Remember, for Beaumont, since we sequester most of that CO2, like 90%-plus of the CO2, could actually be an upside. But the dust hasn't settled on that. The capital number like I said, we're going to think it's too high so we're going to be working everything from incentives to what's the best we can do on financing. But I'm not expecting to talk a lot about Beaumont until we actually have something we think we can pull the trigger on.

Lastly, Curt, you talked about possibility of inorganic options in terms of use of cash. Which areas do you believe offer attractive possibilities for you as you look out over the next six to 12 months?

Well, what we've been looking at, Frank, we've seen -- have been looking at options with mergers and acquisitions in the past, let alone going in the future. Those areas that are really of particular interest to us are those that might leverage our acetyl stream or areas of our acetyl streams or derivatives that we have in our CASPI or Specialty Plastics businesses and so you look at both businesses that are core to those businesses or potentially even adjacent to those businesses. That's probably some of the areas that we're looking for.

Frank, if I could add, we've been somewhat surprised, we haven't seen the attractive opportunities that I might have thought we would see at this point in the cycle. So I just want to let everyone know, we are going to be very patient. If we do anything, it will probably be on the smaller size. We like the kind of thing we did with SK where we got the tow capacity in Korea and like I say, I just tell people we're going to be smart about this and we're going to be patient.

Thank you.

We go next to PJ Juvekar with Citi.

Yes, hi, good morning.

Good morning.

CASPI performance held up quite well but PCI hasn't performed that well. I think the end markets are kind of similar with paints and coatings and all that. So is there a supply demand issue in PCI and could that last into 2010?

Yeah, I'm not sure I caught every word but you're comparing CASPI and PCI and the supply demand issue, I mean, yes, definitely that's affected PCI, in particular in the oxo stream. That's kind of what's held it down. That's why we talk about it being cyclical and why it gets impacted in a recession. On the other hand, look at what the performance they turned in even though they carry that load of a turnaround of a major site there in Texas and as we look forward, this is where we're seeing some improvement come, as I think we will get a little more demand back here. I guess the way I think about it, let me just jump to something for you, PJ, because you're talking about CASPI, PCI, we led you to a $1.10 for the next quarter. We kind of showed you how we got there. We took the $0.86 and we added back the two kind of exceptional things we knew about this quarter. One of the things we're counting on is for PCI to be up from second to third quarter, and because we're going to have Performance Polymers back down, maybe Fibers is going to come off a little bit, CASPI flat but up a little. SPBO flat to up a little. PCI's the one that's got to do some nice improvement second quarter over third quarter and a lot of that has to do with supply demand cost position, et cetera.

My second question is about coal gasification. There has been a fundamental change in natural gas supply in the US. There is a lot of new supply that has been found. Gas is down to $3.50. Is coal gasification justifiable at these natural gas prices given that gas is cheap and it's more environmentally friendly?

We've said that we would like higher natural gas prices in order to go forward with the project but remember we're looking out over 20 years and what the prospects are for natural gas. The other thing that I'll say is that as the winds blow out of Washington, there's other factors in the project that have economic importance, let's put it that way. So your CO2 stream and whether or not you get paid for sequestering it and how that gets treated if it gets used for enhanced oil recovery can be fairly significant, plus I'd say all the products that would come out of the gasification project would not necessarily be tied to natural gas. But you're right, I mean, I believe the arbitrage spread between the solid and liquid hydrocarbons is going to be there over the long run but right now gas is way down so it's just one more reason why we're taking a pause here. Thank you.

And we go next to Kevin McCarthy with Banc of America.

Yes, good morning. What is the level of raw material inflation in the back half that you're baking into your $1.10 guidance, Jim?

I would say roughly -- I'm actually going to give you a direct answer on this. I would say roughly $20 million from second quarter to third quarter. Give or take. So I'm trying to ballpark it for you, that's not an exact number. We'll see on the fourth quarter what happens.

Great. So that's similar in magnitude to the cost related to the reconfiguration at Longview rolling off?

Yeah. I hadn't tied the two together in my mind. I mean, better way to think about it is what's going on with pricing. We are going to get a little pricing from second to third as well. And one of the things I take this opportunity to say is I am really impressed with the job the folks have done in terms of managing the margins because you've had the raws move all over the place. We haven't always responded well when you have fast moves in raw material cost. But I feel like our margins are pretty much there in almost all our businesses and so it's really a volume issue right now and that's the upside. We're just waiting for the volume.

Okay. Next question on CASPI. I thought profit hung in remarkably well there. You mentioned in your prepared remarks that the solvent portion of CASPI has benefited from some structural improvements relative to the last recession. Wonder if you could elaborate a little bit on that explain why that might be the case.

It's a matter of capacity. Some capacity that has exited the market. But we talked about it ahead of time. We didn't really think we would say more than that other than to let you know the solvents do look a little better. I'd say the Company as a whole if you look at such a deep recession and if you look at where we're guiding people for the full year, I don't think anyone would have believed for our five years ago that in a deep recession we'd be talking about approaching $3 a share. There's been a little improvement there but I guess I don't want to go name by name.

Finally, what's the magnitude of the savings associated with lower burn rate on coal gasification.

I'm not sure how noticeable it's going to be to you guys. We have another line that picks up this cost. But it has other costs in there too. So I think we came down from like 12 to nine on that line from first to second quarter. But there's some other good stuff in there besides gasification we're working on that I personally want to see us work on that's very front end on some different platforms, et cetera. So I think a Company our size, to have that kind of spend on some up front R&D on some stuff that could be meaningful for the Company down the road is what we should do. So don't start modeling in a zero there. We're going to keep spending on that line.

And Jim, I might add, besides the other line item in our P&L, you're also seeing some of effect of that Kevin as we tighten up some of our capital spending outlook for this year as another example of how we reduced the burn rate on gasification.

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

Thank you, good morning. I just want to return to the guidance again. If we originally I think we spoken about 75 to 80% utilization could drive us in this 2 to $3 range. We're looking at sort of mid-70s now it sounds like. But still now perhaps headed toward the high end. So I wonder if some of the cost reductions have helped or performed I guess I should say better than you expected and if now 80% could drive us above, how should we think about that?

I would say that the cost reductions came in pretty much as expected. Maybe the discipline we've shown and how quickly people turned the knobs down I was personally impressed with. Again, it goes back to our culture. On utilization rates, first, let me say I'm hoping to wean you guys off of those because I think at one point it was very valuable. At another point is starts to become more valuable to our competitors than it does to our investors so we have to think about how we talk about utilization rates. But I mentioned we hit 74% without the reconfiguration of Longview in the second quarter. The guidance we're giving is not in anticipation of us reaching 80%. It's anticipation of things staying in that range of 75 to 80 but we're not pegging it to the top of the range. So again, yes, I guess if volume comes back for the whole economy, hopefully there is some upside.

Okay. Fair enough. Just on prices, it did look like there was some downward acceleration, not sure how much of that to read as competitive pressures versus raw materials pass-through in some of the segment but could you just comment on what you -- how you think about pricing playing out through the rest of the year?

Yeah, I'd say we've -- I'm pleased that we're kind of getting back to the margins you would expect for the value that our products yield to customers. So I would say most of the move in pricing has been due to the raws coming down and you can kind of see that in our margins, right? So if pricing was coming off a lot more than the raws were moving you would have seen a contraction in our margins. When I just look forward, that's probably one of the unknowns, is what's going to happen in the marketplace as volume comes back and it's up for grabs, how aggressive are competitors going to be on pricing.

We have some price increases in place right now for PCI for example. There were some price increases that went forward in PET I think. So we'll just have to see. But that's probably a place I feel the least comfortable talking about, is predicting the pricing. Through this deep a recession, price has been able to track with raw materials in a way that we could protect our margins.

Yes, fair enough. And lastly, on CASPI, I wonder if you could in any way break apart what end markets or regions you're a little more specific in Specialty Plastics perhaps, if you could take a similar treatment to CASPI and sort of help us understand. And just if I could append a question to my question, sorry, how much I guess the concern there might be with such an impressive sequential improvement plus the comment that destocking is coming to an end, is there any restocking going on there that kind of is there any restocking going on there that kind of pulls demand forward? Thanks very much.

That's a good question on the restocking. That's hard for us to see right away. We told you last time that we could see what was happening to our specialty, that we knew the volumes were down well below what the end demand was so we knew guys were destocking. That really hurts your mix. This is good stuff in CASPI. We talked about two-thirds specialty, and there's some stuff that's truly special, let's put it that way, that was way down and that has come back.

I don't think it was restocking. I'm not sure you can possibly know. I can tell you Asia, for just about all the business, was kind of leading the drive upward, if I think of it regionally. If I thing by markets, honestly, I don't think we can point to the transportation or autos and building and construction as anything exceptional. I think at best we just got the destocking behind us but still noticeably lower levels so no particular market I would point you to.

I would point you to Asia and I would just also say the power of our specialties in CASPI, it's been there all along but when you don't have the volume to sell it, you can't see it. Well, the destocking was pretty much behind us and now you see what that business really looks like and as we look forward we're saying it ought to do the same or even a little better next quarter. Remember seasonally for CASPI they typically do better in the second and third and they usually come off some in the fourth.

Thanks a lot.

We go next to Mike Judd with Greenwich Consultants.

Yes. Looking at your balance sheet I didn't see an inventory number. Do you have that?

That will be in the Q. We'll file that next week.

Could you maybe just help us understand whether inventories were lower or higher sequentially from the March quarter?

Well, you can see that in the tables, Mike. I think that will give you some sense that inventories decreased.

You can see that in the cash flow statement.

Right.

Perfect. Okay. Great. That's what I wanted to know. And then I guess there's been sort of a recurring theme across the chemical industry in terms of the earnings reports. And you guys certainly fit into some of these categories. A lot of the earnings beats have been due to cost savings, leads and lags with raw materials, and also some -- there's one other item. I'm trying to remember what it is.

But as you guys think about the December quarter and the issues around potentially higher oil prices and things like that, what is really driving your customer's desire to restock? Yeah, I guess that was actually the third issue is the restocking issue. So I mean, is this something that looks like it's really just sort of a mid-year restocking type of scenario that's seasonally driven? Or do you think that it really has sustainability from here? Because I think this is something that most people are struggling with, trying to understand whether this is just a typical seasonal bump and then things slow back down sort of in the December quarter.

Any thoughts along those lines would be very helpful. Thank you.

Yeah, I can -- it's a good question. I don't have a good answer for you. I can tell you specific to to Eastman, there is seasonality and we see it in a number of our businesses. Second and third stronger and we always come off in the fourth quarter. You used the word restocking and I haven't heard our customers telling us that.

Maybe they wouldn't, even if they were. So I can't point to restocking. I'm pretty sure the destocking is over, just about everywhere, but I'm not so sure that customers are doing any restocking and so as we look forward and obviously by giving you annual guidance and third quarter guidance we're kind of saying -- we're pegging a range for the fourth quarter and that will be down from the third quarter so we're looking at more traditional seasonal pattern for our business and we're not counting on any big move in restocking and I really don't know that we've seen much of restocking yet.

Okay. Just as a follow-on to that, maybe this is just a nuance here and what you're saying here makes a lot of sense but in terms of the end of destocking, is the issue here really just that inventory levels were just too low, they were drawn down too much or what is sort of driving the end of destocking? Is it being driven by higher energy prices or what's really driving that, in your opinion?

Again, I think you see it -- let me use the idea of specialties because that's where we really felt it the most, when the destocking of specialties ended. Perhaps there's an additive or something where we're really the only reliable supplier in the world someone can get it from, they do not just keep six or eight weeks worth of inventory, they keep three or four months worth of inventory. When their end demand goes down noticeably that three or four months worth of inventory turns into eight months of inventory. It wasn't so much they had to take a different view on the market. It's just that as demand went down, they have a lot more inventory of specialties. As they finally work that down to where they get back to that comfort range of three to four months at a lower level, from then on out they've got to go back to ordering again. So I don't think of it as a restocking back up to the eight months.

They never liked the eight months in the first place but they would be trying to hold the three months. So that's -- I'm trying to give you -- I have a specific product in mind that I know about and that would accurately reflect what we saw happening with a particular specialty. The commodities, they don't carry three or four months worth. It's much smaller. That's why we saw the destocking in there sooner.

But this whole issue, you're hitting the right issues. I mean, the whole issue of restocking versus destocking, I never talked so much about it in my life and it's a real hard one to read.

That's very helpful. Thank you and congratulations on a good quarter.

You're welcome.

Our next question we go to Brian DeRubio with Yield Capital Appreciation Partners.

Good morning, gentlemen.

Good morning.

My question is on Performance Polymers. At one point you guys were talking about possibly licensing out the IntegRex technology. Are those discussions that you're still having at this point in time? A. And B, has some of the delays you have experienced with IntegRex, has that put off some of those discussions?

I wouldn't tie the two together. We are still in discussions. I would tie it much more to the economy and just how tough things are out there for people and for people who would perhaps like to license. So discussions are ongoing. I hate to commit to a time when we could sign one up. I know there's real value in our technology. I can see it when I look at the numbers and I compare legacy pounds to our ParaStar or IntegRex pounds so I know that there's value in the technology, it's just the worst of all possible times to be out there talking to someone out building something new and using our technology.

The troubles with the plants is not so much technology-driven. I mean, it's just a place where we need to get back to operational excellence and for someone like me who's worn the Eastman label now for 10 years, it hurts to talk about a plant that doesn't run well. That's unusual for us. I don't -- that's something we are addressing. I would expect that will change and we will achieve operational excellence there. But the technology I know works, adds value. We've demonstrated the higher capacity run rates and so I would expect that we will be able to monetize some value of that technology through licensing but I can't tell you when.

Okay. Thank you.

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

Okay. Thanks again for joining us this morning. An audio replay of this conference call will be available on our website this afternoon, through Monday, August 3rd. Have a great day, everybody.

And ladies and gentlemen, this does conclude today's conference. We do appreciate your participation.