伊士曼化學 (EMN) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company third quarter 2010 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. Please go ahead, sir.

Okay. Thanks, [Artavia], and good morning, everyone, and thank you for joining us. On the call with me today are Jim Rogers, President and CEO, and Curt Espeland, Senior Vice President and Chief Financial Officer.

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 fourth quarter and full year 2010. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are, or will be detailed in the Company's third quarter 2010 financial results news release on our website, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2010, and the Form 10-Q to be filed for third quarter 2010.

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 operating earnings, earnings per share and cash flows from operations that exclude restructuring charges. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including the description of restructure related items are available in our third quarter 2010 financial results news release and the tables accompanying the news release.

Lastly, we have posted slides that accompany our remarks for this morning's call on our website at www.investors.eastman.com in the presentations and events section. With that, I'll turn the call over to Jim.

Thank you, Greg, and good morning everyone. We know it's a busy week for you, so thanks for choosing to join us. As is our normal practice, I will begin on slide three and I will begin with a review of the outlook statements we made on the call in July. Back in July we told you we expected third-quarter EPS would between $1.65 and $1.75, but then at an investor conference in September I updated this guidance to a range of $2.20 to $2.30. There were a few reasons for the increase. First, prices remained solid, mainly due to higher industry capacity utilization rates for some of our key products. Second, the seasonal decline in volume occurred later in the quarter than we expected, really not beginning until September. And we received partial settlement of an insurance claim worth $0.19 per share in the quarter related to the outage at our Longview, Texas facility earlier in the year.

Next, for full year 2010 EPS, we told you we expected to be between $6.20 and $6.40. I updated this guidance as well in September saying we would approach $7 of EPS and now we are expect to be above $7 for the year. On free cash flow, we told you we'd be $200 million and $300 million for the year and now we expect to be over $300 million, even after a $135 million pension contribution. Back in April we told you we would review our strategic actions for the performance polymers business and now you have seen our announcement earlier this week of a definitive agreement with DAK Americas to divest the PET business.

Moving next to slide four. Review of our third-quarter results which were simply outstanding if I can say that. Revenue was up 29%, volume was up 18% year-over-year, largely due to improved end use demand and packaging durable goods in other markets. While volume was up 2% sequentially, we did see a seasonal decline but later in the quarter than we expected. And pricing was solid. Operating earnings of $280 million were a quarterly record. The result is our second consecutive quarterly record for earnings-per-share. Of course this includes $0.19 a share from a partial insurance recovery. However, even without the partial insurance recovery in the third quarter, our EPS would still be a record. While we are very pleased with our strong results, both in the quarter and through nine months, we continue to be focused on increasing our EPS in 2011 compared to 2010 even with the very high bar we continue to set for ourselves here in 2010.

Turning now to the segments, starting with fibers on slide five. Fibers continues to demonstrate the strength of this business and the result of solid operational performance and reliability, a very competitive cost position through coal gasification, and long standing deep customer relationships. Both sales revenue and operating earnings were quarterly records and they set a record for acetate tow volume in the quarter as well. Acetate yarn demand is strong and we are operating a very high capacity utilization rates there. Operating margins for the quarter and first nine months were 30% and looking at the full year, we now expect fibers to report operating earnings of approximately $325 million which would establish a record above their $300 million they reported in 2009 and would be the sixth record year out of the last seven years.

Moving onto CASPI, they also delivered another very strong quarter. Sales revenue increased by 20%, reflecting both price increases and volume growth. Volume increase, particularly in packaging and transportation markets in Europe and the US. We also continue to benefit from our growth initiatives, including the 30% expansion of our Regalite hydrocarbon resin capacity in 2009. Operating earnings increased year over year in the quarter when you include $9 million from the partial insurance settlement. Otherwise, the higher raw material and energy costs were mostly offset by higher selling prices and strong volumes. For the year we expect CASPI to report earnings of approximately $310 million. To give you some perspective, their previous record year was $242 million back in 2006. So, you can say they are on track to deliver a fantastic year.

Next up is PCI on slide seven. Keeping up with the theme, they had another outstanding quarter. Sales revenue increased 42% due to higher volumes and pricing. Higher volumes were due to a number of factors, including the growth in plasticizer product lines, which includes the Genovique Specialty Plasticizer acquisition and strong demand in end use markets such as industrial chemicals, agriculture, and health and wellness. Selling prices were up due to higher raw material and energy costs, including propane. Operating earnings increased due to higher selling prices and volumes, higher capacity utilization and $12 million from the partial insurance settlement. For the year, we expect PCI to report operating earnings of approximately $230 million, this compares with $54 million, just $54 million for last year 2009 and the record $247 million back in 2007.

Specialty plastics is next. With their strong third quarter earnings you can clearly see the progress we've made on their growth initiatives. Sales revenue grew by 33%, driven primarily by increased volume. The higher volume is due to improved end use demands and specialty packaging consumer and durable goods markets. They are also benefiting from growth in the shrink film market with our Embrace copolyester and from growth in the clear handleware market. And the first 30,000 metric ton Tritan resin line is expected to be sold out before the end of the fourth quarter. Operating earnings increased to $31 million and their operating margin increased about 500 basis points year-over-year to approximately 12%, 12%, which is in the 10% to 15% range we have targeted for that. For the year we now expect them to approach $100 million of operating earnings on sales revenue of over $1 billion.

Moving next to PET and the transaction we announced earlier this week. Back in April we indicated we were going to review strategic options for our PET business. The definitive agreement with announced at DAK America's to divest the PET, related assets and the IntegRex technology begins the final phase of that process and we expect to close the transaction by the end of the fourth quarter. Over the last few years we've taken a number of no regrets actions to improve this business and you can see the results of that effort in the revenue and volume growth, and in the earnings they reported in the third quarter. In fact the third quarter was a record volume quarter on these assets. We firmly believe that the South Carolina PET site is the best in the world. And this transaction reflects the progress that has been made improving the performance of the Carolina assets. I personally want to thank the employees in Carolina that have shown tireless dedication in improving the performance of this business. I am very confident that DAK is well-positioned to build on the progress that has been made. In a few minutes Kurt will speak more to the financial implications for Eastman of the transaction.

Moving next to the regional performance on slide 11. The take away from the slide is probably obvious. It is the balance that we have in our revenue growth around the world. Although North America continues to be our largest region on revenue and earnings basis, we are seeing strong growth in all regions. This balance is also reflected on regional operating earnings growth year-over-year. We view this balance as the strength of our portfolio that results in more consistent earnings.

That brings me to our fourth-quarter guidance on slide 11. While we expected our sales volume will increase year-over-year, we also expected to decline sequentially following the normal seasonal pattern. As I said before, we are already starting to see that. We also expect that raw material and energy costs, in particular paraxylene, will increase which would put pressure on operating margins. As a result, we expect fourth quarter 2010 earnings-per-share will be between $1.40 and $1.50, excluding the $20 million to $25 million of restructuring charges for the cost of the severance programs that we announced this week. Combining our fourth quarter guidance with EPS from the first nine months leads to an expectation for a record year, our first year ever above $7 a share. While we are on track to close a very strong year with a solid fourth quarter, we don't feel like we are done. Which leads me to the work we have been doing since January to grow our earnings per share in 2011 versus 2010.

We are not giving 2011 guidance today, but I did want to share some of the headwinds and tailwinds we see for next year. We have a number of tailwinds that will be helping us. Such as the Genovique acquisition, which we completed in April of this year, will have the benefit of a full year results from Genovique and we are on track to achieve all the synergies we expected from that. We'll also have the benefit of a full year of operation of our Korean facility in the fibers business. As we have said previously, the Korean facility came online in the first half of this year and we expect to have qualified this material with all of our target customers by the end of the year. And our first 30,000 ton Tritan copolyester resin facility should be sold out at the end of the year, about a year ahead of the schedule, and this enables Tritan to approach breakeven in the fourth quarter, where at the beginning of the year they had about $7 million a quarter of fixed costs that they had to cover and fell short and are in the red.

Of course there is also headwinds. Sustainable global economic recovery is by no means guaranteed to any of us. There is going to be volatility in our main raw material and energy costs for propane, paraxylene, wood pulp, coal and other raw materials. That is always a risk. And increases to our corporate cost structure, in particular things like the pension expense due to low interest rates and costs related to the capacity additions we are making are also a headwind. So, recognizing these and other tailwinds and headwinds, our objective is to make 2011 EPS greater than 2010. And we take this very seriously.

Now one of the parts I like, I get to turn to what I call the executive spotlight. I am going to continue to practice shining the spotlight on an area of the Company that I believe had stellar performance during the quarter. Given the announcement of signing a definitive agreement to sell our performance polymers business, it should come as no surprise that I want to give credit to our corporate development team. I mentioned earlier the employees in the performance polymers business and their contribution to this outcome. But specific to the transaction was Curt Espeland's team led by Damon Warmack and Mohit Bhalla who did an exceptional job. Many of you know Damon from his time leading our CASPI business and our PCI business and he continues to excel in his current role as strategy and corporate development. Mohit Bhalla had investment banking experience before he came to Eastman and we are now benefiting from in his deal savvy, as shown by this transaction. Of course they are supported by a strong team in corporate development, finance and legal. When I put this outcome together, the sale of our performance polymers business with the successful acquisition of Genovique, I have a high degree of confidence that we can execute our inorganic growth strategy to grow the Company. Thanks again to Curt's team and corporate development, and now I will turn it over to Curt.

Thanks, Jim and good morning everyone. I am going to start with our 2010 free cash flow expectations on slide 14. In the third quarter we generated $316 million in operating cash flows and $228 million in fee cash flow. This continues to demonstrate our strong earnings performance is translating into significant cash generation.

From a working capital standpoint, we are seeing good discipline across the Company. The majority of the increase in working capital to date has been in receivables, reflecting the improved sales revenue and the change in accounts receivable securitization program that I mentioned earlier in the year. In fourth-quarter we expect to generate cash from working capital, which is our normal seasonal pattern. Given our strong cash flow generation, this year we have decided to contribute an additional $100 million to our US defined benefit pension plan beyond the $35 million already made. We are in essence accelerating a contribution that might otherwise need to be made next year due to the anticipated low-level and discount rate at the year end. This is also a tax efficient use of cash and will help offset some of the expected pension headwinds in 2011.

Our capital expenditures did ramp-up in the third quarter, but not to the degree anticipated. Again, this reflects good stewardship of capital dollars in the halls of Eastman. We expect our capital expenditures will be approaching $100 million in the fourth quarter. This reflects our plans to expand capacity in a number of areas that I'll speak to in a minute. Putting this together, our estimated capital expenditures will be approximately $225 million in 2010. Even with the increase in pension contribution, we continue to set expect our free cash flow will be over $300 million for the year. And as a reminder, our free cash flow expectation is net of our strong dividend.

A question we often get and I expect some of you may have this morning is how we are going to put this cash to work. In answering that question, it is helpful to see how we have allocated cash through the first nine months of 2010 across the four buckets we have talked previously here on slide 15. In the build bucket we have be spent $133 million of capital expenditures. As I just mentioned, we expect that ramp-up will occur in fourth-quarter and into 2011. I will talk more about the capacity additions shortly.

In the joint ventures and acquisition bucket, we completed the acquisition of Genovique back in May and in March we started up the acetate tow facility in Korea that we had acquired from SK. Back in January we acquired a small specialty polymers manufacturing facility in China to support CASPI segment and our specialty plastics business recently into a small cellulose diacetate compounding joint venture with a manufacturer who is also in China. We are looking at several small to medium-size opportunities that would be a good strategic fit for Eastman. We need bid ask spreads to tighten some to ensure such transactions provide good value for our shareholders. In addition, we anticipate better quality assets should come in the market as companies become more confident with 2011's economic environment. Until then, we will continue to be active but also patient and disciplined.

In the equity bucket we have repurchased year to date $68 million in shares, outstanding primarily to offset dilution. I would anticipate the level of share repurchase to increase in fourth quarter 2010 and going into 2011, in part to offset the additional dilutive effect of stock options in the money resulting from our share price increase, or the actual issuance of shares upon exercise of such options.

In one other matter, related to comp related programs, for tax planning reasons we are aware that participants in our deferred comp plan are considering early withdrawal of a portion of their deferred pay as allowed under the plan. This could result in a cash payment in the fourth quarter of up to $35 million to participants, including executive officers. Any executive officers who receive early pay out of the amounts in the phantom stock account of the deferred comp plan would complete a Form 4 filing, even though it would not involve shares of Eastman stock.

Lastly, in the debt and long-term liabilities bucket, we will continue to be opportunistic as market conditions evolve. Going forward you would expect us to continue to be disciplined in allocating across the best opportunities in each of these buckets, just as we demonstrated in the first nine months.

Turning next to the announced capacity additions on slide 16. The common characteristic of each of these capacity additions is that they are driven by strong demand growth in very attractive markets where Eastman has a competitive advantage. They all have attractive returns well above our cost of capital.

Starting with the CHDM capacity addition. CHDM is the monomer used in the manufacture of copolyester for the specialty plastics segment. As a reminder, specialty plastics volume has increased 37% through the first nine months and was at a record level in the second quarter after increasing sequentially for six straight quarters. We expect that 25% increase in CHDM capacity to be online in two phases with the first in mid-2011 and the second in 2012 to support continued strong growth expectations with copolyesters.

Next is the Tritan copolyester capacity addition. At the end of 2009 we started up a Tritan monomer facility to support two 30,000 metric ton Tritan resin facilities. And then started up the first of those resin facilities. Each resin facility supports new revenue in excess of $100 million. We had expected to sell out the first resin facility by the end of 2011, but demand has been stronger than we expected, thus we expect it will now sold out by the end of fourth quarter. As a result, we are adding a second Tritan resin facility and expect that will be online around the end of 2011.

Also in the specialty plastics is cellulose triacetate, or CTA, which is used in the LCD industry for the manufacture of polarizer films. We had plans back in 2009 to expand CTA capacity that was put on hold due to the recession. In 2010 we have seen a nice return of demand for CTA. And it is expected to be very strong over the next several years with a compound annual growth rate of better than 10%. As a result, we are expanding our CTA capacity by approximately 70% with the new capacity expected to be online in the first quarter of 2012. We are also expanding our 2EH capacity at a Longview, Texas site. This expansion supports our growth efforts in the plasticizers market, particularly with our non-phthalate plasticizers, which are expected to have about a 7% compounded annual growth rate for North America and Europe over the next five years. 2EH is also used as an additive for fuels and lube oils. We have a small de-bottleneck that will be completed in the fourth quarter of this year and an additional expansion expected to be online in mid-2012.

Lastly we are once again expanding our Regalite hydrocarbon resin capacity. Regalite is used as a raw material for hot melt and pressure sensitive adhesives and is also used in non-woven products such as disposable diapers. We expanded our Middleburg facility three times since 2006. This expansion will add approximately 20% to current capacity and is expected to be aligned the second half of 2011. Again, these are good uses of cash and will benefit earnings going into 2012.

Next I will briefly cover the expected financial impact of the PET transaction. First, just to piggyback off of Jim, I would like to add my thanks to the corporate development team and the others who have been working on this transaction over the last several months. As I've said in the past, who ever wants to be the market leader in PET North America would want our IntegRex technology and the South Carolina facility. This has proven to be the case and should provide, or be a win-win transaction for both parties. We expect total proceeds will be $600 million before transaction costs, with the final price subject to working capital adjustments at closing. The transaction will also result in approximately $100 million of payment of taxes to be made shortly after closing. The timing of the payment will depend on the date of the closing. It could be the fourth quarter, it could be in the first quarter of 2011. We still expect overall transaction to close before the end of this year. As you know, all tax payments are reflected as cash flows from operations and therefore will impact our free cash flow where made.

In addition we have approved our restructuring plan to address the indirect costs associated with the performance polymers business segment. We expect to recognize a charge between $20 million and $25 million in fourth quarter for severance costs associated with this plan. Regarding the potential EPS impact of the transaction on our fourth quarter results, our forecast for performance polymer segment results, excluding corporate costs that have been previously allocated to the business, is near break even. We, therefore, expect that reporting the performance polymer results as discontinued operations will have a minimal impact on earnings from continuing operations for the Company in the fourth quarter.

Lastly, I am very pleased to invite you to join us for our 2011 investor day in New York City on March 1. We are holding it at the Century Center, which is conveniently located in mid-town on Third Avenue between 45th and 46th streets. Like our last investor day, there will be a presentation from our senior management and we will update you on our growth strategies. I look forward to seeing you there and with that I will turn back over to Greg.

Okay, great. Thanks, Curt, and this concludes our prepared remarks. Artavia, we are ready for questions.

(Operator Instructions)

Our first question is from David Begleiter with Deutsche Bank.

Thank you and good morning.

Good morning.

Jim, just on Q4 and CASPI, it looks like the year over year decline was a little bit worse than I expected. Is that because of raw or other issues beyond the seasonality?

Don't forget that in the third quarter they are benefiting from some of the insurance. I think it was $8 million? $9 million for CASPI. When you back that out, it is a smaller decline I guess is the way to think of it. Yes there is always a little squeeze on the margins at the same time we have the volume come off. I don't think it is anything out of the ordinary for what I would expect seasonally.

Understood. Curt, on the indirect costs in performance polymers, does this restructuring cover -- will it cover all the excess costs of it being stranded here or is there still some left over to be absorbed by the rest of the organization?

I would say going into 2011, we will probably have some cost that still stick to our ribs as we go into 2011. Part of that, as you can anticipate, we are focusing on growth and we're going to need some of those costs to support our growth efforts. But that would be a small headwind for us, but manageable.

I would just add that, that is part of the challenge. Part of the challenge is putting that cash to work to keep growing the Company. We want to replace that business. Because we do have that corporate structure in place.

And just lastly Jim, what was your capacity utilization in Q3 and what is your expectation for Q4?

Sooner or later I am going to wean you off of those numbers, but we went into the quarter in the mid-90s. We exited in the high 80s. You would expect the fourth quarter to kind of continue their in the mid-80s or something like that. Which by the way, I'll just jump to it, when I look at do we have juice left, we did run really hard during the middle of the year, but on the shoulders capacity utilization still wasn't at peak. There's still some more room to go.

Thank you very much.

Our next question is from Kevin McCarthy with Banc of America Merrill Lynch.

Yes, good morning. Jim now that you've got some visibility into timing and magnitude of the proceeds from the PET divestiture, what are your latest thoughts with regard to potential acceleration of share repurchases and/or initiating a dividend increase?

How did I know to expect this question? I know it's on everybody's minds. What we have said before, I won't drag you through all the buckets again, but you know we want to use all of them. In the owners bucket with equity, we talked about keeping up with the share creep in terms of dilution that comes from options et cetera. We actually were a little bit ahead of it, and of course when you set a record price basically all your options go in the money. And so we need to pick up the pace there on this share buyback just to offset dilution. Beyond that, we do have the flexibility to buyback beyond just offsetting dilutions, if that looks like our best alternative. But remember, I am always comparing it to what we see in the other buckets. So, we're trying to play that a bit by the year and see if we have got better growth opportunities. But, you can expect our share buybacks will tick up, first of all just to keep up with the new dilution numbers and then if we want, we can go a little beyond that.

On the dividend, of course I always beg off because that is a board decision. We play a healthy dividend and that discussion really isn't ripe at this time, but I guess the next time the board looks at it is in December. And, we obviously think that returning cash to shareholders is a very valid use of cash. We look at the dividend and we look at share buybacks as our ways to do that. But we'll just have to wait and see what comes on that score.

Okay, fair enough. And then, Jim, with regard to the 4Q comments, it would seem that your sequential guidance is arguably somewhat conservative relative to the sequential patterns that you would have, you would have had 3Q into 4Q in years like 2006 and 2007 kind of pre credit crisis. In that context, are you seeing a more pronounced seasonal decline in any of your businesses is that you feel would create that kind of pressure or is there an element of conservatism in setting the bar here?

Actually, we're trying to call it pretty close. We are getting better by the way. I know we missed on the bottom side. In terms of expectations, we always seem to do noticeably better than we say. This last time when you come in at $233 million and we told you $222 million to $230 million during the quarter, I feel like we are getting better on that. I don't see anything all that unusual. There is some inventory destocking in some specialty plastics markets, like in displays. But when I went back and looked at the typical seasonal drop, I looked at 2005 and a couple other years, and to get this kind of drop, especially when you remember to back out in the insurance from the third quarter when you're just comparing third to fourth. It doesn't feel that out of whack to me from a seasonal point of view.

Kevin, I might add, Jim highlighted in the third quarter, the seasonality didn't -- we didn't see the drop in seasonality until later in the quarter, so that makes the fourth quarter drop a little more pronounced, but the seasonality is not out of the ordinary, and as Jim mentioned, the insurance settlement third quarter won't materially repeat in the fourth quarter.

It's still going to roll up to a great year and I think if we $140 million to $150 million, that's got to be close to a record fourth quarter as well.

Okay and then finally, if I may. With regards to specialty plastics. I think about the $10 million sequential increase in operating profit. Obviously, I would imagine you've got a diminished drag from Tritan, but are there some other factors at work there and explaining the very strong results in the quarter in SPBO?

Yes, probably a couple things. I don't want to take anything away from the specialty plastics. The copolyester did very well, the cellulose esters did extremely well.

We also had a case where, in a more specialty business you are trying to make your pricing raws -- you are always trying to cover your raws with price, but you can be real smooth about it. So, one of the things we see is I don't think paraxylene moved up as much as perhaps we got in price, and now as you go into the fourth quarter with paraxylene moving up, you'll probably give a little of that back.

I wouldn't read any huge trends into it, it's probably more the timing of pricing versus raws. I can just tell you within specialty plastics, everything seems to be performing very well.

Thank you very much.

Your next question is from Edlain Rodriguez with Gleacher & Company.

Good morning, guys. Jim, quick question. You mentioned raw materials as a tailwind going into next year. Can you talk steps you can take to offset that volatility there? Do you see opportunities to raise prices and how proactive are you going to be with prices?

Yes. Well, hopefully, we're going to be just as active with pricing as we have been in the past. I think that's one of the things that, that explains part of our out performance is just how much we focus on passing through the raw material cost et cetera. I don't expect that to change. I do know that the margins have been good. We all know that. They've been good. Some of our businesses, maybe it's not so noticeable to you, but in CASPI, the solvents for example, their margins were actually noticeably higher in solvents a year ago. They've already started down in the margins. The reason I say that is because we think there is other ways to offset that.

Yes, you always go with pricing, but we also think there is additional volume to be had. And, as I think about it, we've got volume on the assets we've already got in place plus we've told you that we've got a number of expansions underway. So, we are going to use every tool we can to make sure that what I want is each and every business to either hold their own or gain ground in 2011 over 2010.

Okay. Another question. When you look into the landscape into 2011, where do you see the most challenges? In terms of where in the portfolio, what segments will provide the most challenges.

That's a good question because we are still trying to nail down our targets with the business leaders for what their plan is for next year. I've been hearing about all their challenges that they are facing. Seriously, I like all our core businesses, what we are down to. Let's make the assumption that performance polymers is closed by year-end. We're left with a nice portfolio of businesses. The challenges are pretty much the way I described. Some of the things are lower interest rates, higher pension expense. There's just no way around that. You can just see that it's coming.

Within the businesses themselves we like the demand we're seeing. The biggest challenge we had this year was just trying to eke enough stuff out of our pipes to meet that demand, and I expect that to continue. We're going to need almost flawless operational performance to make sure we deliver the volumes of products that the market wants from us. Let's see what competitors do. Let's see if they bring on much more capacity or how quickly they can get that on, how disciplined they are in recovering their costs. But overall, I can't say enough about the portfolio of businesses that we have right now.

Okay, thank you.

Your next question is from Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning

A few questions. In your, in your Korean fibers business that you bought, did you benefit from that in the third quarter and do you expect to benefit from it in the fourth quarter on an operating profit, or an EBITDA basis?

I try not to look plant by plant, even if I do, I try not to talk plant by plant. I don't think it's been a -- it's not going to be a big add. Probably more like a break even for this year, I would guess. We did get some volume out of it, we're qualifying with customers as we said. The real benefit will come in next year.

In theory, should the profitability of that plant be more or less the same, or the profitability of that output be more of less the same as the profitability of any other fibers output that you have over time?

No. That would be an incorrect theory. We have, we have quite a bit of integration and scale here in Kingsport. So, as you might expect, we consider our operations here to be just the tops. Then you have working ten in Korea and a lot depends on where the customers want you to shift from et cetera. You could kind of imagine the difference in cost between a US mega plant, a Korean plant, and a UK plant, but what we do is we try and optimize the three sites for serving our customers, such as you ship from the one they want it from. And try to maximize profit across the three.

Are prices in CASPI and PCI going up a lot sequentially to offset all the inflation in propane? Are you ahead of the curve, or behind the curve, or equal to the curve?

I would say if you look at our over year basis, CASPI piece being key, our raw materials increased probably about $100 million and our pricing would be ahead of that curve.

I'm not looking at it year over year, I am looking at it sequentially.

Sequentially the raw materials that come off slightly and prices were sticky in that environment. We are still ahead of it a little bit.

Are you thinking in the fourth quarter, Jeff? Is that your questions?

Yes I am. Exactly right because propane has come up from under $1 to whatever it is --

I think we will get a little bit of a squeeze on that, Jeff.

You talked about the drag from Tritan. If you compared the drag on the first quarter to the drag on the fourth quarter, what would that look like?

Is probably a difference of roughly, roughly now, roughly, $7 million in the hole at the beginning of the year, to a break even at the end of the year. Which by the way, when you have a monomer plant, which is a sizable capital investment running at 50%, you can break even, that's not too bad.

If I could just ask sort of I guess, probably too elementary a question. So, you brought up Tritan, it has been a very successful product. You were losing $7 million a quarter in the beginning of the year and we're now at break even. Why is this good? Shouldn't we be making a lot of money in Tritan?

Maybe you're already thinking your next questions when I answered your last, I said the -- I mentioned that the monomer -- that is my kind way of saying I think I just answered that. The monomer plant is running at 50%, Jeff. I said anytime you have a big capital expenditure that is running at 50% and you are break even that's probably going to bode well for when that thing runs flat out.

Okay, thanks very much Jim.

Your next question is from Robert Koort with Goldman Sachs.

Thank you. This is actually Luisa Herman in for Bob.

Good morning.

Good morning. And I guess you have answered most my questions already. But I am wondering, you touched on capacity utilizations earlier and can you just give us a little bit of color on what you see in terms of capacity utilization across the businesses versus the industry in the fourth quarter? And then also what you are saying or what your expectations are for 2011?

Probably not going to do that. If I get into utilization rates for 2011, then I start giving guidance for 2011. Other than we said we are going to be trying to drive EPS in 2011 higher than 2010. Rather than go business by business, just what we typically might talk about externally is our streams. As you can imagine, in the third quarter, actually second quarter and most of the third quarter, first two months of the third quarter, we were running high pretty much everywhere. The acetyl stream typically runs quite strong for us.

I gave examples of the whole company. Walked into the third quarter in the 90s. Mid to low 90s and so that would be true for most of our streams probably, and there has been times in the past where acetyls ran noticeably harder than the other streams. This year, as well as we have been doing all most all the streams, have been running up there. So, when I give numbers for the overall company it is not probably not all that much different by business.

Great, thank you very much.

Your next question is from PJ Juvekar with Citi.

Good morning, Jim.

Good morning, PJ.

You talked higher propane prices. Can you talk about propylene prices, clearly higher propylene benefits you, so what is your confidence that propylene will stay high, especially as some new capacity is added in US and in Asia?

I first think about the capacity near home here in the states and as we looked at that, I think that's around 2% or 3% of the market. With the guys who run that business and lady who runs that business, tell me that that's pretty much just offsetting the loss you've had, the loss of propylene you've had with the world cracking lighter feedstocks et cetera. Refineries running less. I don't see that trend going away. My guess is you can probably count on that spread between propane and propylene. Of course, it's only a gas. I think that as people have to go to make more propylene on demand versus just getting it the way we have been getting it out of the heavier feedstocks, I think you can count on that spread being there. Will it temporarily move around as capacity goes on? Yes, it probably will.

The other thing I'd like to add. I still feel pretty good about our position. You know we are bringing a cracker back on it's because -- we think that cracker by the way has moved from fourth quarter to first quartile cost position just given the low shale gas prices. So, I look at our position with where we thought we were going to be shutting crackers down and here we are turning around and opening one up. I know our crackers have a higher percentage propylene, comes not only from the fact of feed stock that we buy, propane, ethane we buy a higher propane mix, but it's also just the crackers themselves produce more propylene than say what might be normal in the industry.

All that stuff bodes well for us and the final thing I would like to say when people ask me about that spread is I think we can count on it, but it doesn't really explain the bulk of PCI's profit. PCI has an acetyl stream that's very steady. It has the olefins and oxide derivatives piece, which of course is where a lot of the spread you are talking about gets picked up, but even there we have strong derivatives. You think about the plasticizers that are growing. We're making part of the profit on that spread, but we are making probably just as much profit on the derivatives and on top of that, you have acetyls and some other things from PCI. I think I can count on the spread, but PCI is doing a lot better than just what that spread would say.

That's very helpful. Secondly, if I look at your geographic regions, you had the strongest growth in Europe and a few other companies are showing similar trends. Do you think Europe is now building inventory maybe a few quarters behind US?

On the inventory builds I don't know. I don't hear people talking that much differently across regions. It's more across markets. I think the one place where I think people are actually destocking, which was displays. I can tell you that they are still having trouble building inventory in a lot of the adhesives markets, which you would see in our resins business in CASPI.

I think, frankly, Europe just had their act together, certain parts of it. I think about how Germany has handled themselves through this recession. I think about how Eastern Europe has come back. So, I don't think it's just us. I think we are benefiting from some stuff. I know that our plasticizers, non-phthalate plasticizers are doing very well over there. A few other key products, the hydrogenated hydrocarbon resin is doing really well over there. Overall, I think Europe is maybe stronger than people gave them credit for.

Great. Thank you very much.

Your next question is from Andy Cash with UBS.

Jim, I just wanted to clarify myself. One of the things you mentioned about the specialty plastics business, you indicated that it was up 27% on end use demand. Part of that business, as I understand it, probably goes to some converters, is that what you mean by end use demand or do you mean that it's consumer demand as you and I would go into a store and buy something?

I think a lot of it's consumer demand. Remember, I don't mean to portray that we have a perfect visibility looking down our supply-chain. So, in general what we talk about demand, we are talking about the end use demand and when we can see inventory in the chains we try to point that out, so that's where I mentioned displays. That's one place where it is going and the other way where you've probably got some destocking going on right now in this quarter. But overall, yes, end demand has been pretty good.

So, I would assume that part of that is displacement of traditional products, is that sort of your comment?

Yes, absolutely, and just take an example. I even pointed a couple out like the clear handle plastic bottles. Next time you go into a grocery store and you look at orange juice, I was pointing it out to my wife the difference between our product, which where you can have that integrated clear handle and then the opaque bottle where you can't even see the juice. I think we're taking share. I think our product is taking share.

Along the same lines, in terms of overall growth. It would appear to me and maybe you don't agree with this, please tell me, but shipments in the third quarter away from, if you take away specialty plastics, it would appear to me they're above normal market demand. So, I'm just wondering, how many more months or quarters do you think that Eastman could experience the stellar growth rates on a year-over-year basis? You said that your plans are kind of full out here. You may be kind of limited in how much growth and volume you can have next year. What are your thoughts about that?

Well I do think about that. In fact, I was just telling the guys here I was in the hot tub last night looking up at the stars expecting a question on have we peaked and is this it and is there anything left. I ought to have a good answer for this question because it has been asked for quite awhile. I remember back when we were going through the recession and we had cut the bottom off of the trough and we only got down to about $3.60. That surprised people and they said we must have given up the upside. Then we had investors day and we said we think we can do $6 in recovery just on the core businesses alone and people were asking then, you must mean that's the peak. And then we came out and said it looks like we are going to go over $7 and then we said 2012 we are looking like $8.

I sit back and I say what are we missing here and I think one of the things is, I think maybe it's not as relevant anymore to talk trough and peak when you talk Eastman. I am not saying it is irrelevant, but maybe it is just not as relevant because of all the changes we have made in our portfolio. Specifically, getting to do we have any juice left, I was trying to get to that earlier when I said it's not like we ran flat out the whole year. You can go back and look at our first quarter and say that we were lower. We're telling you now we are coming up again in the third quarter, we've been running hard but it hasn't been perfect. We had some outages et cetera. We typically expect capacity creep each year. We've announced the capacity expansions we had on. I start by thinking I got growth opportunities just in the core businesses in the existing markets. Just getting more capacity online.

Then, if I try and take an even longer view than that, I think we will -- we can also create new businesses. As we exit PET and we kind of change the nature of the portfolio to where we are staring to look more special, soon when we close by end of the year, we're going to be sitting on something between $15 and $17 a share of cash. Depending on what else we do with our cash between now and then. That's the way it would look today if we did nothing else. As long as you can generate cash in a business and you're smart about how you put it to work, you can continue to grow. So, I hate it when people try and put us in a box and say the existing businesses is running high utilization rates, I guess you don't have any more juice. As long as we can generate cash we can grow.

Part of my question, I'm not denying that; I totally agree what you're saying as far as the cash. I am kind of curious as to are your customers, do you think they are satiated in terms of their inventory levels or do you think they have to continue to run full out for another half-year or another year before they sort of get back to kind of normal inventory levels? It seems like your shipments have been above normal market demand in most products, there are some exceptions obviously, but just generally speaking.

But I don't think we are, just have GDP growth, I do think that we have products that are gaining share and I think we are taking share. I don't think that this has all just been inventory build. I know in some areas they have been trying to build, but I have given you other examples where they already hit their inventory levels and now they're starting to try and trim down again for year end. I think, I think it sounds somewhat conceited, but I think we are winning in the market place in a number of areas and you are seeing some very good demand. We'll find out as we get into the next year and of course if the whole economy turns down so be it. I fully expect it a number of our markets. A number of our positions in the market will grow faster than GDP.

One final question. Cigarette filter tow shipments in the fourth quarter, should it be higher, lower than fourth quarter a year ago or perhaps you can compare it to the third quarter?

It's definitely going to be down from the third quarter. We set a record in the third quarter. We've talked about this in the past, used phrases like chunky and whatever. What it is, is you have a few big customers who really try to manage their inventories very well and try to think about it. I very much expect that shipments will be down in fourth quarter.

Thanks.

Your next question is from Frank Mitsch with BB&T Capital Markets.

Good morning, gentlemen. You've obviously been very productive over the past couple of months, so congratulations on that. Just a follow-up on the last question with respect to the demand out there.

When I hear you say things like one of your biggest concerns as you need flawless operations next year to meet demand and then I look at one of your key headwinds is global economic uncertainty, it's hard for me to imagine that you really are concerned about the pace of business activity next year based on what you're seeing right now. So based on what you are seeing right now, is that, is this something that you are very concerned about or is it really just you never can be really certain about what's going to happen next year and so, therefore, you view that as a potential headwind?

Yes, Frank it is more the latter. And by the way we've been productive all three months, not just -- It is really just the latter.

Actually I feel more confident that we are going to avoid any kind of double dip. I don't know that you want to take that to the bank, I am not an economist, but just from what we see, I don't see any signals that says that the economy is in trouble here or around the world. And -- but it's a kind of caveat you have to throw out there because who saw the last one coming.

That's fair enough. It's like one of our research reports where every company we have a risk, global economic uncertainty and it's really just a boiler plate. As I looked at the tailwinds, one of the things I didn't see, and you mentioned it during the Q&A, was the restart of your propylene unit. Would you not anticipate that as we look at 2011 versus 2010, that restarting that facility would be additive to your results?

Absolutely. It's going to be sweet because of course we were spending the money this year and next year we get the income.

Great. And then, lastly as I look at your slide of growth by geography, it almost appears to me that Greg Riddle had some fat fingers because we've a bunch of numbers repeated here, all with all around the 30% range. Is that an accident of nature or is that planning on your part in terms of devoting the resources?

I wish, I wish, I wish we had that kind of control. I am laughing too because if you could see the earnings growth, they're all within about three or four points of each other, just as well in the high 40%'s kind of by the region. Would I expect that trend to continue? No. I would think, sooner or later, Asia is going to pull away, the parts of Europe where strong is going to pull away and Latin America does well. Right now I'll take it across the board.

All right, terrific. Thank you.

And our last question is from Gregg Goodnight with UBS.

Good morning. Snuck in there.

That's right. Good morning.

The Tritan of expansion that you have going on, is there any chance to accelerate the timing on that? And the follow-up question is, any chance when both of these wines get on that you will have some pretty cheap debottlenecking options?

You should be running that business because you sound just like Mark Costa. The first day he had was a little later than that. So, he has been leaning on them and of course he doesn't have to lean that much because everybody involved wants to do it faster. We see the need, but right now we're saying the end of 2011. That will actually be young men's work if we can get it on that fast. And yes, I would say our track record and reputation is that whenever we get something up and running, then you start right away on debottlenecking, how do you get more pounds out of it. But good question.

This is primarily reused equipment?

Yes, typically it is a PET line that you would then convert over.

I heard what you said on margins. My question here is once you get both lines up are your margin expectations above or below your say typical specialty plastics margins?

Right now we're thinking it's probably going to be in line. It's probably going to be low double-digit margins. One of the things we are doing right now, obviously, when you start out with something new you are filling up the lines and so you're pursuing a lot of markets. As you get the, let's say more experienced with a different market places and you start to differentiate your markets and you can start working on your mix and start making sure that your products go into the highest and best use that people want to pay the most for it. I see some improvement there over time, but right now I'm looking for kind of low double digit margins to fill it out.

It seems if this is -- you're positioning it as a premium product vis-a-vis competitive options that you might be able to get better margins.

Frankly, there is always a trade-off between how quickly you fill something up and then how much do you segment your market and just stay in the higher end uses that they'll pay the most for. I think we have chosen that we are going to do that over time.

Okay, got it. The second question if I could. How much working capital is included in your $600 million headline number for your PET sale?

The working capital in that $600 million is roughly $150 million.

Okay. Excellent. Okay. That's all I had guys. Thank you.

Thank you. Operator?

And there are no further questions at this time. I'd like to turn the conference back over to you, Mr. Riddle, for any additional closing remarks.

Thanks everyone for joining us this morning. An audio replay of this conference call will be available on our website this afternoon through November 8. Have a great day.

That concludes today's conference call. Thank you for your participation.