伊士曼化學 (EMN) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company's second-quarter 2011 earnings conference call. Today's conference is being recorded. This call is being broadcast live on Eastman's website, www.Eastman.com.

I'll now turn the conference over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Okay, thank you, Trisha, and good morning, everyone. Thank you for joining us. On the call with me today are Jim Rogers, Chairman and CEO, and Curt Espeland, Senior Vice President and Chief Financial Officer. Before we begin I'll cover 3 items.

First, during this call you will hear certain forward-looking statements concerning our plans and expectations for third quarter and full year 2011. 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 2011 financial results news release on our website. And in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2011 and the Form 10-Q to be filed for second quarter 2011.

Second, except where otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures including earnings per share and operating earnings that exclude restructuring related charges. 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 2011 financial results news release and the tables accompanying the news release.

Lastly, we've posted the slides that accompany our remarks for this morning's call on our website at www.investors.eastman.com (sic) and you'll find those in the presentations and events section.

With that, I'll turn the call over to Jim.

Thanks, Greg, and good morning, everyone. If I sound a little funny I just have a little head cold. I tell you what, I wanted to start out first by saying that even though we're only 5.5 hours from Washington, DC, we want to assure all our friends and family that we're still healthy. We're fine. We're not in any personal danger. The plume of radioactive ridiculousness is not blowing our way. The tsunami of surrealism has not seemed to have breached the levy called the Beltway at this time. We only have one plan here. I've never failed in getting the votes I need to implement that plan of growth.

Now, I can't vouch for the levy on the New York side of DC, because as we announce record earnings not only for the Company as a whole and for each of the businesses as we raise our guidance for the year, as we put a foundation in place for double-digit earnings growth year-over-year, I see we're indicated lower, while United States government, which is indicating bankruptcy in failure to meet its obligations, people are piling into their short-term notes. So I can't vouch for the levy on the north side. And since all that was unscripted and my lawyers are probably squirming in their seats, I'll stop there and pick it up on page 3.

Beginning with a review of our performance against some of our recent outlook statements, our second-quarter guidance was that our EPS would be slightly above first quarter EPS of $2.52, and we delivered on that. Guidance for full year 2011 was that we would report EPS slightly above $9. We're off to a great start with 2 consecutive record EPS quarters. In the second half we expect to continue to deliver year-over-year earnings growth. And as a result, we are raising our outlook by $0.25.

As expected, our very strong earnings performance is translating into cash flow. We're on track to generate approximately $200 million of free cash flow this year. And I hope you'll agree we've been disciplined in how we allocate our cash. We've put cash to work this quarter in a number of areas and we'll talk about that throughout our remarks this morning. Bottom line is that we have had a fantastic first half of the year. We're on track for a great full year 2011. And I remain confident that we are well positioned to deliver earnings growth in 2012 and beyond.

Moving next to slide 4 and our corporate results for second quarter, second-quarter EPS was a record. And this is the second consecutive quarter that we've set an EPS record. In fact, we've set a quarterly EPS record for 3 of the last 4 quarters. In addition this is the 8th quarter in a row of year-over-year earnings growth, and we expect to continue this performance in the second half of this year.

Sales revenue in the quarter was also a record, driven by higher selling prices and strong volume growth. Prices increased in response to higher raw material and energy cost and also because of tight industry supply. Volume increased throughout the Company and in most regions. This level of earnings reflects the contributions of 10,000 employees around the world, the improvements we've made in our portfolio of businesses and products. And it reflects the benefits of our geographic and end market diversity. Many of you have heard me say we know who we are and we like who we are. With these results you see why I'm comfortable saying that.

Moving next to the segments starting with CASPI on slide 5. CASPI had another outstanding quarter with record revenue and operating earnings. Year-over-year revenue increased due to the higher prices and higher volume. The prices were due to higher raw material and energy costs and also attributed to strong demand and a high capacity utilization rate in the industry. Volume increased primarily in the US in the packaging, transportation and durable goods markets. Sequentially, revenue was up 5% primarily due to higher selling prices in response to higher raw material and energy costs. Volume was flat as seasonally higher volume was offset by some softening in the Asia Pacific region, which began in June and has continued into July. But I want to stress that we are seeing signs that these areas are now stabilizing.

Operating earnings increased to a record $99 million and the operating margin was a solid 20%. Earnings increased over a strong second quarter 2010 due to the higher selling prices and higher sales volume. CASPI also benefits primarily in their solvents product lines from cracking propane to produce propylene at low cost. Sequentially, operating earnings increased slightly primarily due to higher prices. So looking at the full year, we continue to expect that CASPI will have operating earnings above $350 million, which indicates we expect a strong second half of the year, higher than their second half of 2010.

One other item of note in the quarter for CASPI. Earlier this month we acquired Dynaloy, a small electronic chemicals business that manufactures and sells formulated solvents with a particular focus on semiconductors. Dynaloy brings a strong market connect and material science capability that are complementary to our own. And they will be a great enabler to growing our CASPI electronics materials product lines.

Fibers is next on slide 6. And they once again delivered a great quarter with record earnings and revenue. Revenue was up 21% due primarily to higher acetate tow sales volume as the Korea facility is now running at capacity. Pricing was up 5% as the full impact of the annual sales price increase for acetate tow was reflected in the quarter. For the year, Fibers remains on track for operating earnings of approximately $340 million, which would be the 8th consecutive year of operating earnings growth.

Next up is PCI, on slide 7. And you probably recognize the theme at this point. PCI had record operating earnings, in line with our first quarter. Year-over-year, sales revenue increased due to higher selling prices and higher sales volume. Selling prices increased in response to higher raw material and energy costs and also because of tight industry supply. Volume was up due to growth in plasticizers, customer buying patterns for acetyl chemicals, and the restart of a previously idled cracker. Sequentially, sales revenue was up 5% due to higher selling prices in response to higher raw material and energy cost. Operating earnings increased year-over-year due to higher prices in volume plus the benefit of cracking propane to produce propylene at low cost.

Sequentially, operating earnings were flat as the benefit in North America from the improved olefins cracking spread and customer buying patterns for acetyl chemicals was offset by softening in Asia-Pac for our oxo chemicals and other olefin derivatives. In Asia we saw the softening begin in June and into July. And as with CASPI, we've recently seen signs that it is stabilizing. For the year, even with additional costs related to planned and unplanned shut downs that I'll talk more about in a minute, we continue to expect PCI to have operating earnings above $300 million.

Specialty Plastics is on slide 8 and they are on pace for a new level of earnings in 2011. Second-quarter sales revenue and operating earnings were both records. Revenue increased due to higher selling prices which more than offset higher raw material and energy cost. Operating earnings increased primarily in Asia Pacific and in Europe due to the higher selling prices. Earnings were higher than we expected in the quarter primarily because the results of our growth initiatives in Asia Pacific were above expectation, and because paraxylene costs didn't go up as much in the quarter as we expected.

Looking at the full year, Specialty Plastics assets are currently running at a high utilization rate. And as you know, we have a number of capacity additions coming online in 2012 that we will grow into. In 2011, we are focusing on valuing up our mix of products. And I've talked about this before, not just for Specialty Plastics but also for PCI and for CASPI. Valuing up the mix helped Specialty Plastics in the first half of the year and we expect it to continue in the second half, as well. With the outperformance in the first half of the year and an expected strong second half of the year we are increasing our outlook for Specialty Plastics to approaching $120 million of earnings compared with our previous guidance of approaching $100 million.

That brings me to our regional performance on slide 9. And you can see from the chart how our geographic diversity is a source of strength for us. Our highest revenue growth in the quarter was in Europe due primarily to both higher volume and price. The higher volume was particularly for plasticizers and PCI. North America had the next highest revenue growth due to higher prices in volume. And PCI had the highest volume growth in North America, in part due to the cracker restart.

Asia Pacific revenue increased 23% primarily due to higher prices, higher volumes, and a favorable mix shift in Fibers, basically more tow. For the last several quarters we've said that although sales revenue was split about 50% in North America, 50% outside of North America, operating earnings were split closer to 40% North America and 60% outside. In this quarter, it was closer to a 50/50 earnings split due to the benefit of the increased cracker spread in North America.

On slide 10 is our outlook for third quarter and full year 2011. In the first half of the year we grew earnings year-over-year by over 50%. We expect continued year-over-year earnings growth in both third and fourth quarters and for the second half as a whole.

We also expect a normal seasonal decline in our sales volume in the second half and for raw material and energy costs to remain volatile. In addition, we will have costs related to planned and unplanned shutdowns in the second half of the year that we expect to be approximately $25 million higher than they were in the first half. These are costs for an issue we are currently having with one of our Texas olefin cracking units, and that problem then impacts the shutdown we have planned for the largest of our 3 crackers. We also are bringing down our Kingsport coal gasification facility in the second half of the year for a planned shutdown. And we have shutdowns in Specialty Plastics in order to bring their new capacity expansions online.

Even with these higher costs, we expect third quarter EPS to be slightly higher than last year's third quarter EPS of $2.22. And I want to remind you that third quarter last year included $0.19 per share related to the partial settlement of an insurance claim related to a power outage at our Longview, Texas facility. And for the full year we had previously said we expected EPS to be slightly higher than $9, and we are increasing that to slightly higher than $9.25 for the year.

Now for the minute I call the CEO Spotlight. And I typically highlight an Eastman executive, just to remind people that we have a deep bench here at Eastman. This time, though, I thought I'd do something different and provide some info on Eastman's operators, some of the most experienced, dedicated professional chemical workers in the world. So just some fun facts here. Our average operator is 46 years old, has education beyond the high school level, has nearly 20 years of experience, with the longest-tenured having over 47 years at Eastman. Their job is highly respected in their community and highly sought after.

As an example, an opening in Kingsport that we posted on May 2 of this year, received 908 applications in 24 hours. And I can remind you, Kingsport is not a huge town. Roughly, 15% of our operators are female, and our folks tend to retire in the same community as they worked. Because of this, it's not unusual to have more than 1 employee from the same family, including across generations. In fact I personally know 2 people, Senior Team Manager Lori Garrett, and Government Relations Director Charley Poe who are 4th generation employees. And after this segment, I'm sure I'll hear about others.

So the Eastman Operator is an important reason for our success and I just wanted to give them some air time. And with that, I'll turn it over to Curt.

Thanks, Jim, and good morning, everyone. I know it's been a long earnings season for many of you, so let me just focus on a few slides this morning.

I'll start on slide 12 and you'll see here the financial highlights for the quarter. You can see that the record earnings we are delivering are translating into strong cash flows. Cash from operations of $207 million included a $55 million estimated cash tax payment for the gain on the sale of the PET business which we completed in the first quarter. For the year we expect total tax payments for the gain on the PET business sale will total approximately $110 million. Our tax rate at the second quarter of 2011 did benefit roughly $0.07 per share from the recognition of additional sate tax credits we expect due to the increased level of capital spend at our Kingsport site. For the remainder of the year we expect our effective tax rate will be approximately 33%.

Working capital was up slightly for the quarter, consistent with our expectations. And we continue to expect it will be a source of cash in the second half of the year. Our free cash flow for the quarter, which excludes the cash tax payment related to the sale of the PET business, was $120 million. I continue to expect our free cash flow for the year will be approximately $200 million, meaning that we expect to generate over $350 million of free cash flow in the second half of the year. At the end of the quarter we had $834 million in cash and short-term time deposits. And our net debt-to-capital ratio at the end of the quarter was at a conservative 29% level, particularly relative to our credit rating.

Next on slide 13 is how we're putting our cash to work. We continue to take a balanced, disciplined approach that is creating value for stockholders. In billed, we spent $109 million on capital expenditures in the quarter. We continue to expect capital expenditures for the year to be over $450 million. We are on track with the 5 major capacity additions that I spoke about on the last call. These are, in turn, a component of our earnings growth expectations in 2012 and 2013.

Over in joint ventures and acquisitions we've been busy. I'll speak more about the Sterling acquisition in a minute. And as Jim mentioned earlier, we closed on Dynaloy earlier this month. And while they are small they will be a great addition for us as we continue to grow our electronic materials business in CASPI. We have a number of other projects in our pipeline and I expect there will be more activity in the second half of the year.

Next, in equity, our share repurchases totaled $103 million in the quarter. And we're at $177 million in the first half of the year. We have $239 million remaining on our existing Board authorization and we are well on our way to more than offset dilution for the year. I will also add that we continue to pay a healthy dividend, and that while a quarterly dividend is a Board decision it is reasonable for investors to expect the dividend to increase as our earnings increase.

Lastly on debt, we are in good shape. You may recall we restructured some of our debt in the fourth quarter 2010 at very attractive interest rates. We have $150 million of public debt coming due in 2012 and nothing materially to deal with until 2015.

An example of what we're doing in the joint ventures and acquisitions is the Sterling acquisition, summarized here on slide 14 that we announced about a month ago. You recall that in May 2010, we completed the acquisition of Genovique Specialties, a leading producer of non-phthalate plasticizers. With that acquisition and our own Eastman 168 non-phthalate plasticizer, we became the largest manufacturer of non-phthalate plasticizers in the world. Our acquisition of Sterling will further support our strategy. Sterling has plasticizers assets that will convert to Eastman 168 non-phthalate plasticizers.

We expect the facility will be fully converted in 2012 and ready to meet demand growth in 2013. Sterling also has an acetic acid business which has a long-term contract with relatively stable revenue and earnings. The purchase price is approximately $100 million in cash and we expect the transaction will close in the third quarter. Excluding costs and charges related to the acquisition, we expect the transaction will be slightly accretive to 2011 earnings per share.

In 2012, we expect it to be accretive above our cost of capital. And what I mean by that is that we expect earnings from the acquired businesses to be above the cost if we had gone to the capital markets to fund the transaction rather than using our cash, which in the current environment is earning a very low interest rate. We expect the acquisition to be accretive well above the cost of capital as the plasticizers assets start materially contributing in 2013, as expected. Given the demand growth for non-phthalate plasticizers, our leading position in the non-phthalate plasticizer market, and the steady revenue and earnings streams from the acetic acid business, this acquisition makes a lot of sense for Eastman as we are the logical highest and best owner of the business.

As I close, let me also reiterate a comment Jim made earlier. With the strength of our portfolio of businesses, the earnings of potential various growth initiatives underway, and the expected benefits of disciplined capital allocation, I am also confident we are well positioned to deliver earnings growth in 2012 and beyond.

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

Okay, thanks, Curt. And this concludes our prepared remarks. Trisha, we are ready for questions.

(Operator Instructions) Kevin McCarthy with Bank of America.

Yes, good morning. Jim, over time, the profitability in your PCI segment has tracked fairly well with the spread between the cost of propane and propylene linked selling prices there. That spread improved in the second quarter and yet your profit trended flat sequentially. I was just wondering if you could elaborate on that. Was it attributable to the softness that you mentioned in Asia in the back of the quarter or were there other factors at work there? And what would your outlook be entering 3Q?

Yes, thanks for the question, Kevin. PCI did have another great quarter, even though it didn't get all the bump you would have expected from the spread. And it gives me a chance to make 1 comment. I think probably those outside the Company underestimate just how much work we've done in developing our downstream products and our derivatives. And these are more stable. They don't bounce around the same. And I tried to talk about how you don't capture the spread every day when you're dealing with derivatives. So it's not like we're just pushing propylene out the door. So that's part of it. I expect a more stable business where you give up some of the upside when the spread widens but you don't move down 100% when the spread tightens either.

Asia was a part of it. We actually had our Singapore site down for a few days. Planned, but still down in Asia. We talked about the softening in the oxos and butanol 2-EH NPG. That was more in June. I said it stabilized here in July. Frankly, you never know if it was just the inventories that the customers are moving around, or if there was really in demand. We really just don't have that kind of visibility. I can just tell you it's not continuing to decline.

And we did have an unplanned outage with 1 of our crackers in Texas. And that nipped us a little bit in the second quarter, as well. And that happened in June. And just for a little update on that, we're obviously checking that several times a day. We have brought it back up. It's running about 85%. This was a vibration issue, by the way, so it's one of those things where it takes a little time, you want to do it safely. But it's back up to 85%, which is a good thing because at that level we can go ahead and do the turnaround we wanted to on our cracker 4. And we'll be doing that one shortly here in a week or 2. And when cracker 4 comes back up out of turnaround, it will have full capacity. And it's been running at probably about 85%, as well.

So a little hiccup there on the crackers that nipped us a little bit in the second quarter. We're going to feel it again in the third quarter, like we talked about. A little will dribble into the fourth quarter, even, potentially. But overall, I don't have a lot to complain about. That business has just been going great guns.

Just a final word on that. You try and tie it to the spread PCI's performance, some of that has just been coincidence. There's a lot to PCI when you think about their plasticizer business. Good margins, good growth, you think about their acetyl business, et cetera. So as I look at PCI, even though it's the most cyclical part of Eastman, we're trying to continually take that out and move more product downstream. So I'm sorry, it's a long answer to your question but I wanted to get all that color in about the cracker.

That's helpful, Jim. I appreciate it. And the cracker you're referring to is the HCC-3 cracker that started up earlier this week?

Yes.

Great. And then just to follow-up on plasticizers, you mentioned you'll be converting some of the Sterling capacity. At what point in 2012 can you get that up and running? And maybe you could size the increment for us relative to your existing base.

Let me let Curt help me out here so I can save my voice. Go ahead.

If you look at the Sterling acquisition, there's a few components of the startup of the plasticizer assets we still have to work out. And we have got to close the transaction first before we can work out those final details. So right now I would just say it is going to be some time in 2012. From the sizing of the asset, 2 components. One, it does have an acetic acid business, I'd call that roughly $100 million of revenue. And I think when the PGS that comes up in the sum, it could add over $200 million of revenue.

So let me add this, too, because we haven't closed on the deal yet. So we can talk more when we actually own it. But I'm glad we found this one. Eastman, in my mind, is clearly highest and best owner of this business. We could pay a very good price to their current shareholders. And yet, because we can have a particular way of using the assets that they were not running, I think we can create quite a bit of value for the Eastman shareholder, as well.

PJ Juvekar with Citi.

Jim, you talked about the slowdown in China. Can you tell us what particular end markets or what products slowed down for you?

Let me hop in there. So I mentioned the oxos just a minute ago. They were offset -- I'd say the solvents in CASPI were the other area. By the way, don't let me portray this like Asia had a bad month in June. They actually overall had a very good month. A bright spot for example, would be Specialty Plastics which has taken this opportunity to really upgrade their mix in Asia. So they got volume pretty much around the globe but in Asia they were also able to get price and really value up from the products they were selling. And that's just what you would expect us to do in a tight market. But the places where things were slowing down was really solvents and then on the oxo side. And like I say, we've seen that stabilize in July, which may lead you to think maybe it was just, forgive me, inventory maneuvering. But I can't say that for sure, because it could have had some final demand influencing that as well.

Okay. And then a couple years ago you tried to build a coal gasification unit in the US. But I was wondering if you can take that expertise to China, given that some of your competitors are already there or getting there in coal gasification.

Yes, and I think that would be, as you look down the road for Eastman, I think that would be a higher probability scenario, certainly than trying to come back to the States. China does have huge coal supplies. More than likely there's the kind of coal that would work well for the way we do gasification. You have to always solve the water issues. It requires a lot of water and that's something that's a bit of a constraint.

But yes, I would expect that that is the kind of gasification project we should do, would be a place more like China. But you know us. We're not just going to make some big announcement and jump into something. We're going to think everything through because there's advantaged raw materials in other parts of the world, as well.

Lastly, I think you answered this partially about the seasonality. Both CASPI and PCI earnings were flat. Shouldn't you see some improvement in 2Q over 1Q?

Yes, as you might imagine, we talked about that internally, as well. Again, a couple things go through my mind. We had a really strong first quarter. I know that there were price increases April 1 that probably pulled some Q2 sales into March. At least we know that now. March was incredibly strong. So typically you're right. I would have looked for a little more but again, we had that softness in Asia. We had the strong first quarter. Fantastic results, still, in all the businesses. When guys are setting a record, it's hard to beat them up. So I'm not concerned by that at all. I can see the business model for each of these 4 businesses is intact. I have a high degree of confidence in our ability to perform the way we're predicting.

Duffy Fischer with Barclays Capital.

Yes, good morning. Jim, just to follow on, the dip you saw in a couple businesses in June and July, then you said you're starting to see some signs of uptick. Can you walk through what are those, what are the guys telling you out in the field that gives you confidence that things are coming back in Asia?

Again, it was only in a couple areas. When we say stabilizing, we're just saying it's not the -- in other words, your orders are coming back in. The reason I use the word stabilize is because it's not back to the level it was before we saw the down tick, but it's not continuing down. So that's really all I mean and I hope people don't read too much into this. I know everyone is looking for indications of how China's doing across broad markets.

I can just tell you that our China, our earnings in China in June were very strong. But we had these 2 areas we wanted to point out because I know everyone is looking for the canary in the coal mine when it comes to China. But that's really all it was. I don't want you to read too much into it. We just wanted to share with you that oxo market was loose but seems to be stabilizing. And the solvents market, which of course would affect coatings, was also weaker and weaker demand, but we've seen that stabilize.

Okay. And then in PCI, you talked a little bit, the volume there was up 10 percentage points more than the other segments. And you talked a little bit about the olefins cracker coming back. But you also had 1 that was down for a while. Can you dig a little deeper into why the volume was so strong in PCI in the quarter?

Let me ask Curt to comment on that.

When you think about the volumes for PCI, if there's a cracker issue it doesn't mean we don't sell the same volume. We just end up having to buy some of our raw materials rather than making the raw materials.

I'd just add one thing, that you got Genovique, get a full quarter of Genovique in the second quarter of 2011, and you only had it partially in second quarter 2010.

We didn't have the cracker running at all in the second quarter 2010. We brought that up at the end of the year.

Just the last one, on the Sterling acquisition, will you get access to the technology that Sterling was running so you can mix that with your own acetic acid technology and maybe make both better?

No, we should be clear on that. The technology that runs there is owned by BP. We will simply be tolling that asset for them. And, in fact, I'll just make a joke, that's part of the reason BP is comfortable with us running those assets because they trust us. They know that we'll respect that law.

Edlain Rodriguez with Gleacher & Company.

Good morning, thank you, guys. A quick question. In terms of the improvement you saw in CASPI and PCI, can you talk about the benefits of the spread? Can you quantify that?

If you look at, if you're talking specifically second quarter, I'd say second quarter over first quarter we saw roughly a $15 million benefit from the improvement of spreads. And that gets split roughly 60/40 or 50/50 depending on propylene or ethylene. But that's how you'd split it between PCI and CASPI. As Jim mentioned, in PCI that benefit was offset by some other factors, including CASPI had some offsets, as well.

Just to jump in on that, and to speak about spreads more broadly, it gives me a chance to brag on, once again, the businesses. When we started the second quarter, we were guessing that we would have maybe $35 million to $40 million increase in raw material costs across the whole Company. Remember, first quarter over fourth, we had $75 million increase in raw material cost. We had close to $100 million increase in raw material costs, second quarter over first quarter and yet we still managed to hold on to our spread through all that.

Another quick question on propylene. Propylene prices have been coming down. Does that mean you're going to have to give up some of the pricing that you had obtained in the first half of the year?

It's really market by market but if I'm going to stay true to my words, there's several places where we're really not pricing off that propylene. As the derivatives get further downstream you refer to it less and less. But obviously the same way we can move price when the raws go up, we may have to move price when it goes down. I continue to re-emphasize, and what we focus on, is spread.

Okay, and one last question. On that $25 million of cost for unplanned outages, what's the split there between the segments? Is it going to be all in PCI and CASPI? What's the split there, the impact?

To be clear, the $25 million we specifically called out was additional shut down costs from the planned and unplanned second half versus first half. But having said that, you're not far off on the cost of the unplanned when you pick up the little bit in second quarter and what came in the second half. I'll let Curt give you as best we can.

It gets across the various businesses. As you know, a chemical company like Eastman does have planned shutdowns. If I look at first half of the year, we had probably less than $20 million of costs associated with shutdowns. That would have been the Singapore plant Jim talked about, et cetera. If we look at the second half of the year, we knew there would be some plant shutdown costs greater than what we saw in the first half just because we have shutdowns in the fourth quarter tied with how capacity works, and the like. And that's an example of the island.

But the unplanned typically gets split between PCI getting the biggest piece of that cost. Because what you're doing is you're buying propylene instead of making it. And CASPI would be next. And Specialty Plastics even picks up just $0.01 or $0.02, of that. So it would mainly be felt in PCI, but CASPI would also get a pretty good share of the unplanned.

David Begleiter with Deutsche Bank.

Thank you. Jim, very strong earnings in Specialty Plastics but why are they down in the second half of the year versus the first half?

They've always had a bit of seasonality, I think. I can go back and check the numbers. Part of that, too, is when you have just such a strong first half. As I look at it, I understand some of the things that are going on. That, again, is harder for you to see. So we know we're going to be shutting down some of our assets to tie in these capacity expansions. I know in many of the markets they are pretty much sold out, and so it's all a matter of improving mix and they did a lot of that in the first half. But third quarter is not going to be off by much from second quarter. And then the fourth quarter for this Company, everything seems to always come off some, which is just what we've learned to deal with. And Specialty Plastics -- no exception.

And Jim, any update on the plans for the 4th cracker down in Texas?

Ye, I'm glad you asked because I know I mentioned it last time. You might think what in the devil have you guys been doing. So there's a couple of smaller things we can do. Let me back up. We did put a team in place to look at this because while it's not huge for Eastman, it's still a nice goodie we have, that we have these crackers down in Texas. So we put a team in place to look at how we optimize that. You know that I think we got out ahead of the crowd in restarting the cracker we did, since it was online in the end of last year.

There's a couple of smaller things we can do, smaller projects. Smaller, meaning it may add $10 million to $20 million of earnings, 30%-plus kind of returns. Those are the kind of things we're going to get started on right away and they will start to kick in towards the end of next year, I guess you would say. We'll see how we do but probably towards the end of next year.

On the bigger issues about just restarting the 1 cracker that's down, our view of the markets and such is that it's going to make sense for us to do something of size. Let me put it that way. And whenever I say, of size, meaning I've got to go to my Board to get them to approve it, starting the cracker would be of size. But there's more than 1 option on what that bigger thing would do. So we're doing some of that preliminary work to pick which of the bigger things we would like to do.

And of course I always throw the caveat out there it depends also what else you're doing with your cash in terms of what you go ahead with. But my instinct says, yes, we're going to do these small ones, they'll be good for us, and there'll probably be something bigger we'll do, as well. And we'll try and update you on that before year-end.

Jim, just lastly on the M&A pipeline, can you give us any update, either color or such?

Yes, and Curt may want to chime in although we usually are pretty well aligned on this. We continue to think we can put money to work. You heard how much cash Curt said he had. I like to remind people, all these earnings forecasts and stuff we do, there's always upside in terms of how else we can put this cash to work. So I'd say the pipeline is looking pretty good to me in terms of having options. We can actually start to choose between what we go after as compared to maybe a year-and-a-half, 2 years ago, it was hard to find something that someone wanted to shake loose.

You see the size of ones we've done. We could do bigger than the $100 million, $150 million, but the truth is, the sweet spot in the pipeline for where you get the most ideas and can drive the value you want, is probably those small to mid-size bolt-ons that fit with 1 of our businesses. But I always say I reserve all my rights. If we were to do something bigger, it would have to be exceptionally good, and it would have to be kind of a no-brainer for the Street. But the odds are that what we're getting done are the small to medium-sized bolt-ons. We got Sterling that we're trying to get closed and I would expect we'll have more announcements before year-end.

Robert Koort with Goldman Sachs.

Hi, guys, this is Manav Suri. Just a quick question. You are still net buyers of propylene, right?

Yes.

So as the propane, propylene spread actually comes down because the propylene prices are declining, do you actually tend to benefit from it or does it go the other way around?

It's usually the other way around. And it has to do with the more dominant impact as the pricing on products driven by the higher propylene versus the amount that we actually buy.

And how much are you actually buying right now?

It's about 2/3 and 1/3. So I don't have a number for you. We make 2/3 and we buy 1/3. We hesitate a little bit because we've had some cracker issues so we've been buying a little more propylene than we like to have to buy lately. But we're typically in that 60% to 70% make and 30% to 33% buy.

And the next cracker which you are taking down for plant outage, what's going to be the duration for that one?

It's a typical turnaround and those are usually 10 days to 2 weeks if you do it well, and I would expect we'll do it well.

And on the pricing side of the acetyl, what kind of prices are you looking at? Are they holding up pretty well or they're slightly coming down at this point?

Again, I'm not sure how familiar you are with this, but when you think acetyls, if you're thinking acid that's really not all that important to us. So we're more of the anhydride and derivative kind of player and those prices have been good. Obviously, I just said how much cost went up quarter-over-quarter, $100 million, and we held our spread across the Company. So I'd say the pricing we've been able to get is in line with what we've seen the raws do.

Jeffrey Zekauskas with JPMorgan.

Hi, good morning. How are you doing in general in offsetting your higher raw materials with higher prices in Fibers? Are you making progress in that area?

Judging by the results, I'd say we're doing okay. They just had a record quarter. So I know, Jeff, you know how we do it, that it's an annual pricing, typically annual pricing. But the pulp is also set annually. So if you're reading the month to month gyrations in viscous pulp, which isn't exactly ours, but in the pulp market, our pricing and our costs are pretty much locked in. The one thing that can move around a little bit is coal because we do start with coal. But you look at what percent of our cost, that is small. So overall I'd say yes, we did okay when it came to covering our cost with price.

That's what I thought in that you've earned a little bit more than $170 million in the first half and you expect to earn about $340 million for the year. I would think you would earn more than that given that you seem to be pricing pretty well versus raw materials and your volume is growing. No?

Obviously, we told you what we think. We think we're going to do about $340 million. We're looking at what we can see that you can't see is volume by quarter where it comes out of. I can tell you, for example, when we run Korea full, that Korea, as good as it is, is a little higher costs than, say, a Kingsport would be. So the mix can move around too a little bit that you can't see so well. But overall we feel good about the business, Jeff. We're selling all of the tow we can make and I think those are pretty good results, $340 million.

Are you worried about propane and propylene spreads in the third quarter?

Not really. Maybe I should be given all the conversation people are having around it. But again, I look at PCI, they've got a nice acetyl stream, they have a great plasticizer business. Whatever the spreads, even if they come in some, and remember that was our indication, that was our expectation second half, they would come in some. We factored that into when we gave our guidance. So obviously if it does a lot more, we'll feel it. But again, I don't think you should see us move around quite the same as someone who is just stopping at that point in the value chain and selling out the propylene or the ethylene.

So what you said in your guidance, if I understand it, is that you'd earn about a little bit more than $2.22 in the third quarter and you earned $2.76 in the second quarter. And I think Curt said you had a $0.07 tax credit. So that's about, your earnings should drop about $0.47 sequentially which is about $50 million pre-tax. So where does the $50 million drop if you had to allocate it around the segments, where are the big differences?

Yes, I'm going to let Curt help you as best he can. But I would say first half to second half to come off as not unusual. Remember that we're going to eat most of the pain on the unplanned shutdown in this quarter. But Curt, what color do you want to give?

Yes, Jeff if I had to predict the waterfall we'll see how the third quarter plays out. But, again, one of the factors is just some of the unplanned maintenance costs associated with the shut downs Jim mentioned. In addition, as we talk about, we expect the propylene/propane spreads to come back in relative to the peaks of the second quarter. So those are 2 key factors, and then some of the seasonal volume declines Jim mentioned.

Yes, so you would see PCI and CASPI probably come off the most, I'm guessing. You'd see Fibers and Specialty Plastics just come off a little bit.

Lastly, is there any positive price momentum that you've got from the second to the third quarter? Because it looks, judging from your CASPI results, maybe you didn't get as much, you didn't move prices up as quickly as you might have. And maybe some of that momentum will flip over to the third quarter. Is there something to that?

I'm not looking at it that way. We'll see what the guys can do, but I think they actually did a good job of price versus the raws. So it's not like I think they're lagging on their raw materials. They had the 20% margin or so I believe and that's, I think they are pretty much there. The place where there's probably the most pricing power is one of the tightest markets, is in the adhesives, the resins part of CASPI, extremely tight right now. And not necessarily any relief coming any time soon in terms of capacity other than we're expanding our Middleburg site.

Frank Mitsch with Wells Fargo Securities.

Good morning. Jim, regarding your introduction, I still believe you should use your bully pulpit to start a Draft Ferguson for Senate movement and help troubleshoot the situation down there.

He would have shot somebody by now so it's probably a good idea he is not in DC.

Well it would shake things up. On CASPI -- actually I think you were talking about your prices being up nicely and driven in large part to high capacity utilization. And so I was wondering where you stood in the quarter on your capacity utilization for that segment, and where you were relative to the industry. And any color you can give on the third quarter to date would be great.

Yes, CASPI is running at fairly high utilization. Again, the resins piece, for example, is way up there. Basically if we can make it we can sell it, so we're trying to make all we can. Let me use your question, Frank, to talk about utilization across the whole Company. Because this is one of the things sometimes people don't understand. They think -- Well, gee, aren't you running out of capacity.

I went back and looked at the numbers and first quarter we ran around 90%. We ran a little higher this quarter. But what's interesting is, even though we had 9% more volume year-over-year, our utilization was a point less than it was a year ago. So between adding the cracker, the capacity creep we get, the acquisition we did, we find some way to get fairly high single-digit volume growth. And yet we didn't have to use up capacity utilization, let's put it that way. So the parts of the Company that are running hard right now are acetyls, which of course affects a lot of CASPI. The olefins is down, you might say artificially down because of the unplanned shutdown we had. So olefins would be 10 points lower utilization rate, say, than acetyls. But overall Company running at pretty good utilization rates. But as I said last time, there's still more capacity in most of our markets.

Okay, great. And Curt, I believe when you were discussing the uses of cash, you said that the goal is to offset dilution and perhaps be opportunistic. And obviously the last couple of quarters, back to the fourth quarter, certainly the first quarter and this past quarter, the rate of share buyback has been well in excess, I would hope, of offsetting dilution. Do you anticipate that level of spend to continue here in the back half of the year?

Well we have reduced share count, as you pointed out. I think if you just look through 6 months our actual share count is down 700,000 shares. You don't see it quite yet in the fully diluted share count just because of some of the timing and when the purchases occurred versus some of the options exercised. If I look at the repurchase level we're going to have, I know you're probably tired of this phrase but we're going to continue to do it at a measured pace and continue to more than offset dilution as we wrap up the year.

All right, so I'll take that as a yes.

He reserves all his rights to do what he wants to do with his cash based upon the opportunities he sees.

John Rosenwald with Rosenwald Enterprises.

Hello. Yes, I'm a shareholder and I see a bid of $93.75 in the pre market and $97 ask. It might be a good time to accelerate some of those share repurchases and take advantage of what seems to be a bargain basement price on the shares in relation to the results.

Well, I appreciate the advice. I appreciate you being a shareholder. I try not to think day-to-day but I haven't had a chance to go look and see what's happening in the market.

It just seems to be ridiculous. We had $103 stock yesterday and it should be at $108.

You would have thought record earnings. Let me use your comment -- and I appreciate what you're saying. And as the CEO, it always falls on deaf ears if I complain about my valuation. But I love the quality of earnings we just turned out. For some crazy reason people would have been happier if it had come in this mercurial spread as compared to coming across all 4 of our businesses driven by the value proposition of our products in the marketplace. So I think we have high quality of earnings. I think sometimes it just takes the market a while to realize what they've got. But thank you for your question, John.

There are no further questions in queue at this time so I'd like to turn the conference back over to today's speakers for any additional or closing remarks.

Thanks, again, everyone, for joining us this morning. A web replay, a replay in a downloadable MP3 format and the accompanying slides for this conference call will be available on our website from 11 AM this morning. Thanks again and have a great day.

Thank you, ladies and gentlemen, for your participation. Again this will conclude today's conference call.