伊士曼化學 (EMN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eastman Chemical Company second-quarter 2012 earnings results conference call. Just a reminder, today's conference is being recorded. This call is also being broadcast live on Eastman's website, www.Eastman.com.

We will now turn the call over for opening remarks and introductions to Mr. Greg Riddle of Eastman Chemical Company's Investor Relations. Greg, please go ahead.

Thank you, Debbie. Good morning, everyone. Thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; and Fernando Subijana, Manager of Investor Relations.

Before we begin, I will cover two items. First during this presentation you will hear certain forward-looking statements concerning our plans and expectations. Actual results could differ materially from our plans and expectations. Certain factors relating to future expectations are or will be detailed in the Company's second quarter 2012 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for the full year 2011 and the Form 10-Q to be filed for second-quarter 2012.

Second, except where otherwise indicated, Eastman financial measures referenced in this presentation are non-GAAP financial measures such as earnings per share and operating earnings that exclude Solutia acquisition, financing transaction integration costs, and a second-quarter 2011 gain from the sale of a previously impaired asset.

In addition, Solutia earnings are presented as adjusted EBITDA, which is defined as net income before interest expense, income taxes and depreciation and amortization and certain items that affect comparability and non-cash stock compensation expense.

A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures including a description of the Solutia acquisition transaction financing integration costs, the gain from the sale of previously impaired asset and Solutia adjusted EBITDA are available in our second-quarter financial results news release and the tables accompanying the news release available on our website, Eastman.com.

Lastly, we have posted slides that accompany our remarks this morning's presentation on our website in the presentations and events section.

With that, I will turn the call over to Jim.

Thanks, Greg. Good morning, everyone. I am told we've got a record number of people on the phone this morning, so thanks for joining us. That could be because we are doing it on a Tuesday but more likely it's because we have a little bit more to talk about with not only our heritage business but also the Solutia business.

Let me start on slide three. As is my normal practice, I will start by reviewing our key outlook statements. First, when we announced the Solutia acquisition back in January, we indicated we expected to close the transaction midyear 2012 and thanks to a lot of hard work, we were able to meet that timeline closing on July 2 and we are very happy to have Solutia as part of Eastman. Obviously I'll talk more about Solutia's second-quarter results in a few minutes and then Curt will talk about our progress on integration and synergies in his section.

Next, back in April, we indicated we expected our full-year EPS to be approximately $5.30 in 2012 and we are still on track for that target. And I would remind you that this would be 10% earnings growth. And lastly, we indicated we expected to generate $1 billion of free cash over the next two years and again we are on track to deliver on that commitment.

Given all the portfolio work we have done over the last several years including the acquisition of Solutia, we now have a portfolio of businesses that we expect will generate solid, consistent earnings growth and cash generation for years to come.

On slide four, I will cover Eastman corporate results. Sales revenue declined 2%, driven mostly by the Specialty Plastics and Fibers segments. Operating earnings increased with particular strength in the CASPI and PCI segments. Second-quarter EPS was $1.40, slightly below second-quarter 2011 EPS and I would remind you that last year's second-quarter EPS was a record for any quarter and second-quarter 2012 is the second-highest EPS we have ever reported.

We also had a higher tax rate year over year, up about 300 basis points primarily due to the mix of earnings being more domestic. And overall, our heritage Eastman businesses continued to deliver strong results despite an uncertain global economic environment.

Before I give some color on the heritage Eastman segments in that slide five with CASPI, I will remind you that second quarter will be the last time we report on this basis. When we announced the close of the Solutia transaction, we also announced a new organizational structure with five segments and we will report on that basis beginning with the third quarter.

With that said, sales revenue for CASPI was pretty stable year-over-year, down 1%. Operating earnings increased to a quarterly record of $114 million, up $10 million year-over-year and $16 million sequentially. They were able to increase spread primarily in solvents as the decline in raw material and energy costs was only partially offset by lower selling prices which were down 1% and we continue to expect the underlying CASPI business to deliver strong results in 2012, albeit with some seasonal decline in demand.

Fibers is next on slide six. Revenue was down 4% year-over-year with the big driver being an unfavorable shift in product mix. Operating earnings were down slightly year-over-year but as you know, operating earnings for the Fibers segment can move around quarter to quarter based on customer buying patterns. What is more important is the annual earnings growth we've been able to deliver and we continue to expect that Fibers will report a very strong year increasing earnings for the ninth year in a row.

PCI is on slide seven. Sales revenue was unchanged but there were a few moving parts. Volume increased 4% and a favorable shift in product mix helped revenue by 2%, both due to higher acetyl sales in the US and the impact of the Sterling and Scandiflex acquisitions, both of which closed in the third quarter last year. Selling prices declined primarily in the olefin derivative product lines due to lower raw material and energy costs.

Operating earnings increased both year-over-year and sequentially, primarily due to lower raw material and energy costs and a benefit of producing versus purchasing olefin. We currently expect olefin cracking spreads will be favorable in 2012 compared with 2011 due to both the continued benefit of the propylene spread and improvement in ethylene spreads.

These spreads are expected to narrow somewhat in the third quarter but PCI's businesses should have a strong second half of the year.

On slide eight is Specialty Plastics. Sales revenue year-over-year was down 6% primarily due to lower sales volume that was partially offset by a favorable shift in product mix and higher selling prices. The volume decline was mainly in the US and Europe and was for co-polyester products going into the consumer and durable goods markets. Sequentially volume was about flat. Of course volume in the first half of 2011 was very strong and we expect the year-over-year comparisons will be a little easier in the second half of the year.

The favorable shift in mix was primarily due to higher sales of cellulose esters into the LCD market where we saw some acceleration in the second quarter from fairly low levels in the first quarter.

Operating earnings were down $4 million year-over-year, primarily due to lower sales volume and resulting lower capacity utilization. Sequentially operating earnings increased $8 million due to the higher sales into the LCD market and lower raw material costs particularly for paraxylene, which was down slightly from first quarter.

Looking at the year, we expect normal seasonality in the second half of the year but continue to expect specialty plastics business to have a solid year.

Next up on slide nine is a summary of Solutia's second-quarter results. As a reminder, Solutia earnings are not included in our second-quarter results since the acquisition closed on July 2 but we thought it obviously made sense to provide you with some color on their performance.

Sales revenue declined by 4% year-over-year. This was driven by the exchange rate effect of a strengthening dollar primarily versus the euro. Volume overall also declined slightly with an increase in both the technical specialties and performance film segments, more than offset by a decline in the advanced interlayer segments, which includes photovoltaic.

Adjusted EBITDA declined to $115 million from $141 million in the year-ago quarter. Most of the EBITDA decline was in the advanced interlayer's businesses and there were three primary factors. First, lower sales volume for the Saflex product lines in Europe and this was for both the architectural and the auto market. Second, lower sales volume and margins for the photovoltaic encapsulants product lines. And third, costs associated with growth initiatives, particularly for Saflex and Crystex.

Curt will talk more in his comments about the favorable financing we obtained for the transaction, the progress we're making on integration and achieving the cost synergies we have targeted, and the very strong cash flow we are expecting over the next two years.

Turning now to our outlook on slide 10, there continues to be significant uncertainty regarding the global economy. Our view is that Europe is near or at a recessionary level but we are not anticipating things to get worse. In Asia-Pacific and particularly in China, growth has slowed but we don't see signs of further weakening there either. The US remains solid and we expect that will continue.

Factoring in our strong first-half earnings, our expectations for normal seasonality in the second half of the year and our expectation that raw material and energy costs will continue to be less volatile than in past years, we expect to generate earnings growth in 2012 compared with 2011. This earnings growth is driven primarily by two factors, solid performance of our heritage Eastman business, which continue to deliver strong earnings and earnings in the second half from the Solutia businesses.

One other factor is the higher tax rate which as I mentioned earlier was up in the second quarter. We expect this will continue in the second half of the year and the corporate rate for the remainder of the year will be approximately 34%. And I remind you that we continue to work through purchase accounting related to the Solutia acquisition.

Considering all of these factors, we continue to expect 2012 earnings per share of approximately $5.30, which would be an increase of about 10% compared to 2011 and would be our third consecutive year of double-digit earnings growth.

Now I started a practice of having a one-minute CEO spotlight and this time you will see it on page 11, slide 11. I wanted to talk about the new joint venture that we are just announcing and as I do this, I want to compliment the CASPI team for all the work not only for putting up the quarter they put up but at the same time nailing this one down and just kudos all around for an excellent 90 days.

I will conclude my comments then on slide 11 by announcing a joint venture with YPC to build a world scale hydrogenated hydrocarbon resins plant. Let me remind you that we have a successful JV with our partner, YPC, that has been producing hydrogenated resin since 2001. This new plant at 50,000 met tons will be much larger than the existing China facility.

As you can see in the chart, Eastman has been aggressively expanding its presence in this growing market. We estimate that the global market is growing at 7% on a compound annual basis and this explains why although we have been continually adding capacity, we have been on allocation for most of the last several years.

Market growth has been fueled by hygiene adhesives with disposable diapers being the most important driver. Overall diaper consumption is only 20% to 25% of potential demand in the high penetration and developed countries but very low penetration in the rest of the world. Additionally new more sophisticated diapers require increased quantities of hydrogenated hydrocarbon resin.

Another growing application is hot melt packaging adhesives. New formulations enabled by our resins are replacing more traditional adhesive as they reduce downtime and production lines, which therefore increases throughput.

As a summary, the capacity that we will be bringing to the market represents two years of market growth and will be located in the region of the world that we expect will experience the highest part of that growth.

With that, let me turn it over to Curt.

Thanks, Jim. Good morning, everyone. I will start reviewing our solid cash performance in the second quarter, as highlighted on slide 13.

Cash from operations was $316 million. This is driven by continued strong net earnings. Working capital was up slightly in the quarter and it's about flat for the first half of the year. Free cash flow for the quarter was a very strong $194 million. Capital expenditures were $87 million and I will talk more about our full-year expectations for capital expenditures in a few minutes.

Of course we paid our dividend in the quarter, which was $35 million. This solid performance keeps us on track to meet our previous free cash flow expectations for the year for heritage Eastman.

Next on slide 14, I will review the financing for the Solutia transaction. As you can see from the table, we were able to obtain very attractive financing for the acquisition. The notes were significantly oversubscribed and we ended up increasing the allocation of the 30-year notes from originally $300 million to $500 million. The weighted average interest rate of 2.8% is better than our previous expectations.

Going forward with this new financing, we now have an annualized interest rate cost approaching [$190 million] for the Company including amortization of some pre-issuance interest rate hedges. This level of interest costs will decline as we delever over the coming months.

Overall we are very pleased with the financing for the transaction and I want to congratulate our treasury team and their partners in achieving such a great outcome.

Next are some comments regarding integration on slide 15. Even though the acquisition closed on July 2, we began planning our integration efforts shortly after the deal was announced. We have a number of cross-functional teams leading integration effort and they are doing an outstanding job.

One of our key priorities is retaining key talent from the acquisition and we've been successful there to date. The feedback from our employees on the acquisition has been very positive and the professionalism exhibited by everyone I have encountered at Solutia sites have been outstanding.

As Jim mentioned earlier, we do have a new operating structure with five segments. We've been under way since close to implement this new structure, aligning activities with the new business responsibilities and importantly, everyone is remaining focused on serving our customers.

We also have a good start on merging the capabilities of the functions of the two companies in the areas like finance, HR, IT, supply chain, etc. And lastly, we also have received positive feedback from customers and suppliers that the transition post closing has gone well. While still early, we are off to a very good start on our integration efforts.

Thus we remain committed to the cost, tax, and revenue synergies we announced back in January as listed here on slide 16.

Starting with costs, we have identified cost synergies of approximately $100 million and are now developing specific implementation plans. These include reducing corporate costs, which you would expect for two public companies. About a third of these cost synergies were day one synergies that we had targeted and we have already achieved those synergies and we will see the benefit of those in the second half of this year.

We also see potential synergies in the purchase of raw materials and we are working through different options and opportunities there. We expect this combination will result in improved manufacturing and supply chain processes across all of our businesses. We remain highly confident that we will achieve a $100 million run rate of cost synergies by the end of 2013.

Moving next to tax synergies. These remain a source of value for the acquisition. Solutia has approximately $1.3 billion of NOLs that we can utilize over the next 15 years, of which half will be utilized on the next three years on an accelerating basis.

There are also foreign tax credits well in excess of $150 million that can be utilized over the next 10 years. And the combination of Solutia's geographical profile and efficient tax funding should still enable us to reduce our corporate tax rate to approximately 31%.

On the revenue synergy front, we have been working closely with our businesses since close and we continue to have the confidence that these are real but will take some time to realize. We also believe Eastman will bring strong commercial capabilities to supplement the existing Solutia businesses, which will improve overall profitability in the medium and long term.

In sum, we are on track to achieve the targeted synergies in each of these areas.

Let's turn to slide 17 and talk about capital allocation. At first I would like you to point to the bottom of the page and the banner listed there. We are on track to meet or exceed our target of $1 billion of free cash flow over the next two years. You can expect we will remain balanced on allocating that free cash flow with a bias towards deleveraging over the next 18 months. While we do so, you can also expect we will continue to pursue value-creating deals.

On capital expenditures, the combined Eastman and Solutia capital expenditures for 2012 should be approximately $500 million with $400 million for heritage Eastman and about $100 million for the Solutia businesses in the second half of the year.

On debt, I already mentioned that we issued $2.4 billion of public debt and the new $1.2 billion term loan.

On joint ventures and acquisitions besides the new Regalite joint venture that Jim just discussed, we are also on schedule for our joint venture with China National Tobacco Corporation for 30,000 ton -- met ton acetate tow capacity, which is scheduled to be on line mid 2013.

On the dividend, it continues to be reasonable for investors to expect that as we continue to grow earnings that the dividend would grow also and of course that will be a discussion we have with our Board.

As we achieve an acceptable level of deleveraging, share repurchases will be considered as part of our capital allocation choices just as we've done in the past prior to Solutia acquisition. The main message here is that we are on track to deliver very strong cash over the next several years and beyond. And we will be disciplined in our capital allocation choices.

Finally turning to slide 18, I would like to invite you to join us at our 2012 Investor Day in New York scheduled for the afternoon of November 5. We are again holding the event at the Century Center in New York City. This meeting is a great opportunity to share with you our vision and our growth plans, showcase the depth of our product lines and our product innovations, and give you a chance to interact with senior leaders of Eastman.

I look forward to seeing you there and with that, I will turn it back over to Greg.

Thanks, Curt. This concludes our prepared remarks. Debbie, we are ready for questions.

(Operator Instructions). David Begleiter, Deutsche Bank.

Thank you, good morning. Jim, just on the Solutia businesses, can you comment on perhaps second-half expectations? If you did [241] of EBITDA in the first half, what would you expect their EBITDA to be in the back half of the year?

Good morning and first of all, I just want to say what a little smart-aleck you are for your title on your alert, guidance reaffirmed, corrected. I am teasing you because I felt a little funny about that. I will get to your question on Solutia but I felt a little funny about that because we did beat and then here we are, we didn't raise our guidance. And I know that goes through people's minds and you're kind of getting to it asking about Solutia's second half. And obviously we are just getting to know these businesses, getting to see the decisions they have made recently, let me put it that way.

I would guess the second half will look something like the first half maybe even a little lighter than their first half just talking from an EBITDA perspective. But I don't have a lot of surety around exactly what those numbers are going to be. That's why we kind of kept it at $5.30. We can see our businesses are performing quite well, quite strong. We can see the opportunities we got inside Solutia, how quickly we can get in there and make things happen, we will see. But I am guessing second half if you use roughly the first half, that's probably not bad.

That's helpful. Jim, just on the propane, propylene benefit in Q2, can you comment on that? You mentioned it will be a little bit narrower in Q3 and Q4 as well?

Yes, but it's still going to be a great year for the spread. I talked about how I wanted to kind of get away from talking about that. We even sized it for you one year just so you could see that it wasn't all that huge for us and yet it feels really good when it's going our way, I've got to tell you. It is a nice wind at our back.

So the spread is going to be there. Again the one thing as people think about spread and they look at some of the other names, one of the things they got to remember is the way we go to market and we are really just exploding through derivatives and we are trying to be more stable for our customers in terms of pricing. So we are not always getting every last penny when the raws go up. On the flipside, we don't always give it back.

So partly what you see, a great quarter this quarter where that lag was probably working for us, margins coming in a little bit over the next couple of quarters when maybe the lags were working against us but we've got a little bit different strategy than some of the guys who are a little up pipe from us you might say.

Just lastly any restocking, destocking trends you can call out in the businesses in June and/or July?

That's a good question. I didn't really see anything that caught my attention. Curt looked at the orders. I guess the orders were staying fairly strong when we looked at our order book before the conference call. But that's thinking more of the heritage Eastman businesses, but didn't really hear a lot of comments on customer destocking (multiple speakers).

David, when we look at -- you've heard us talk about or looking at our order books three weeks and eight weeks out. Generally speaking those trends remained to be pretty solid. However, the only exception where we saw some weakness was some packaging and durable goods in Asia in our Specialty Plastics business.

Thank you very much.

PJ Juvekar, Citi.

Good morning, Jim. Jim, your pricing in PCI was a little weak with -- and that's understandable given lower propylene prices. The recent (inaudible) contract settled down 10%. So you've seen this pricing weakness is likely to persist in second half. So wanted to get your comments on that and what can you do obviously some of this weakness.

Greg is trying to get my attention, so you've got some color you want to -- ?

I agree. It was down 5% and that's very much reflective of the lower propylene prices and as we just talked about in terms of lag, sometimes it takes a little while for the pricing to catch up with the lower raws so you might see some of that in the second half of the year.

The second question was on again a little bit follow-up on propane to propylene. You could have a situation where propylene is a bit weak but as we approach winter, propane could go up especially given that you've got (inaudible) and export terminals starting up. So given that, what is your outlook in second half and beyond?

It seems like you're asking the same thing to try and get a different answer different ways. You're right the winter can move propane around some. We do typically do some hedging in the wintertime to try and shield you guys from that to a certain extent so we don't have to talk that much about it.

You know, I would say overall the markets have not done a fantastic job of calling where propane, propylene spreads kind of go. I remember last year with some trepidation we talked about how we ought to have a little bit of a tailwind at our back and it's probably a pretty decent tailwind at our back this year.

But you're right, no one can predict what the winter is going to do, so that could move your raw material. I just once again remind people that our pricing strategy on our derivatives really doesn't just track 1X the propane, ethane.

I guess the only other color I would give you, PJ, is obviously it is the ethylene side that is quite beneficial when I look at year-over-year comparisons. Propane to propylene fairly similar as we think about what the year is going to look like but the ethylene is the one that is outperforming and you know we keep half of that internally and sell half.

Okay, thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Yes, good morning. Jim, you are expanding Regalite capacity so often that it's becoming a challenge to keep up with the various projects here. So with regard to your latest joint venture here with YPC in China, maybe can you just talk a little bit about the relationship with YPC, what the size of the Regalite business is today to the extent that you can comment on that as well as margins? And do you expect this level of growth to continue over the intermediate term? Just a little bit more color around this hydrogenated hydrocarbon business would be helpful, thanks.

Yes, it's one of the bright spots and when we lay out how we are reorganizing the Company and our reporting segments, you are going to have more visibility into this business because the adhesives piece is going to be with the plasticizer piece and you're going to see a couple of really strong growers with decent earnings, decent double-digit earnings. So overall one of the bright spots deserves the capital, some of the better returns when you line up all your capital projects. The relationship with YPC is exactly what you would want. You would want a partner like a Sinopec partner. You would want to be in China.

The other part you didn't but that deserves some credit. We got fantastic relationships with the multinational global customers here, very strong. It's with them that we are comfortable -- it's our relationship with them that gets us the comfort to go ahead and do this expansion because we can see where the product is going to go that comes out of this plant. We know -- basically know the names for who's going to be taking this product, who wants this market because this market has been so tight. So I can go on and on on this segment.

I don't want to size it for you. You can probably get an indication of size when you look at some of the expansions that were done. This is more than just a Regalite that is in there. Did we talk about the revenue for this, for Regalite specifically? I don't think we ever have but good, growing business, significant. You're going to see more of it when it's put together with the plasticizer business.

Safe to say this is a premium margin business for you?

Yes, the hydrogenated hydrocarbons is the good stuff.

Okay. Second question, Jim, I understand you are hard at work extracting the various synergies, but to the extent that the external environment today is presumably weaker than what everyone would have thought several quarters ago, are there additional levers that you can pull in terms of cost extraction, restructuring initiatives either on the legacy Eastman side or on the legacy Solutia side? And I guess similar question for CapEx in terms of cash maximization, how are you thinking about that in terms of contingency planning?

The answer is yes. Most smart management teams won't talk exactly about all the different levers that they could pull. You are right that the economic environment is not quite as good as we would want. Let's face it, Europe is pretty much in recession right now, or at least the bulk of Europe is in recession, so the way I'm looking at it, I am seeing what Solutia looks like when one of its major market segments is in recession. And if I think about it, as we head to being more diversified as we are, so we are not quite as dependent on North America and get diversified by geographies and by markets, there's always going to be something that's a headwind. There's always going to be something that's a tailwind.

I happen to think that's one of the strengths of Eastman right now that as you look across the Company, we can talk positively about the cracking spreads but then kind of moan together about what Europe looks like. Long-term I think this is going to steady out our earnings and help us continue that double-digit earnings growth.

When I look within Solutia and think about the synergies, I feel really good about the $100 million. In fact, if you will let me just a little back of the envelope way I think about this sometimes, if you think about the interest expense we picked up being about $100 million a year and the synergies we are going after being about $100 million a year; and then if you get aggressive on your synergy targets over time and say maybe we can get a little more out of that and say, well, I issued some extra shares, what's the dividend carry on those extra shares I issued; you could get to the point with time that your synergies were basically covering your carrying costs of the debt of buying this thing.

So, therefore, what you got left is the cash flows off of the business less the CapEx that pay off your debt. And again, because of the environment, yes, negatively economically but strong financial market wise, this one is going to look really good. I can look inside the businesses and see that some of the stuff, some of the decisions they've had to make which admittedly have had more of a short-term focus, they've been more restrained in terms of coming out of bankruptcy, I can just see things already that we're going to do differently as we focus on a balance between short and midterm say results, and very confident that you are going to see what these businesses can really do.

It will take us a couple of quarters here for a lot of that to kick in. I agree with Curt, I think the timing would be through 2013 that we will be able to capture these synergies. I am sure we will be looking at $100 million as a floor and saying we've got to do better than that.

In terms of other levers, let's be honest, they pulled a few levers back in the last recession and did some things. I don't see anything as dramatic as they did three or four years ago for us. I think we're going to be able to focus much more on the opportunities, how we can help them in product development, how we can help them in manufacturing, how we are going to accelerate some of the stuff they wanted to get done, capture the value earlier.

But having said that, I think we've got a bit of a track record and I think we should get credit for knowing how to handle ourselves in various different economic environments. When we say we're going to do $5.30 this year and next year is going to have a 6 in front of it, we're going to be taking the actions necessary to make that happen.

Very good. Thank you, Jim.

Edlain Rodriguez, Lazard Capital Markets.

Good morning. Thanks and hi, guys. Just a quick question on CASPI. Jim, back in April you had mentioned how all of CASPI's business lines were at high levels with many products now being sold out. How has that changed since then? And how do you see the domain data mix for the second half of the year?

I wish I could go ahead and do this quarter over and over and over again. That would be pretty cool. I don't remember saying there was a lot sold out. I know in particular we were talking about the resins business being on allocation and quite tight. On some of their other businesses particularly their polymers some of the really high-margin stuff, maybe stuff that we are the only ones in the world to make it, we never let the utilization rate get too high without debottlenecking and adding some capacity. So it's rare that on the -- I was using the phrase really good stuff -- the really good stuff, the stuff that we are the only ones who make, it's rare that we would ever get into a sold-out situation. We just don't want to ever do that to our customers.

So we've got the juice left to meet it. I think the issue probably comes down more to the demand we see around the globe and the different end markets. And guys, it's tough out there. One of the things I am proud of is that we were able to deliver these results the way the world looks right now. I mean, Europe is a mess and then you can go kind of market by market whether it's building and construction in particular durable goods, things like that. It's very soft out there.

So we'll see how CASPI does. I think last time we gave guidance for the full year we thought they would be around 380 or so. I think they're going to do better than that obviously with what they've got under their belt already but we'll just have to see how they do. But I'm not worried about capacity or market share, things like that. If anything it's just more that in market demand in places like Europe.

Okay, that makes sense. One quick question like longer term like in terms of acquisitions, now that you have Solutia, do you feel that the portfolio is complete now or do you still think that there is some room for more additional bolt-on acquisitions in the Eastman legacy businesses and where do you see there is a need for that?

Okay, we will start with our mandate. Our number one mandate is to grow the value of the Company and in particular grow the earnings of the Company, so we're going to do that on two legs and of course there's always the organic growth. You are asking about the inorganic piece. We just took a really big step with Solutia. We deserve a little bit of time to get it under our belt.

I wanted to echo, by the way, Curt's comments. The employees of Solutia have just been fantastic. I think they are pretty upbeat about being part of a larger chemical company. We're not meeting any resistance when it comes to getting synergies and getting things done. In fact there's a lot of excitement about how we can grow these businesses together.

Part of that excitement comes from that we will have the ability to do bolt-ons in their existing businesses if we see the opportunity but also in the core businesses. Having said that, we've got the opportunity. We will have the financial strength to do that. Of course top priority for cash is paying down debt here in the near term.

But then the issue is is there really much in the way of bolt-ons out there and that's kind of where you were coming from. We will just have to see.

I've got to tell you, I was a little disappointed we didn't see more bolt-ons in the 2010, 2011 timeframe. We did a few in the plasticizer world. There may be some more out there but we take such a disciplined approach in terms of what we're willing to pay and does it drive us in the direction we want to go? I don't want to pull up a lot of hopes for -- there's going to be a lot more bolt-ons or something coming.

If it makes sense, we will do it, but I am not sure how many there are in the core business.

Okay, makes sense. Thank you.

Duffy Fischer, Barclays.

Good morning and congrats on closing the deal. On the Solutia part itself, I guess one, it wasn't under your control but how did that 115 number kind of come in relative to your expectations for the business sitting from the outside?

Then when you think about moving from a nearer-term view that the Solutia management had to kind of your medium to longer term view, does that really mean that margins are going to come down as we're going to put some more SG&A R&D through these businesses to get them to grow more over time?

Yes, let me start there. That's not the signal I was trying to send. Let me start with the beginning of your question, the 115. That was a disappointment, no doubt about it. I was hoping that they would do a little better. I can understand that three months before your company gets sold you might not expect crackerjack results. I know that they had some things that I might think of as more one-time or at least I hope they are one-time with some bad debts, adding to environmental reserves and things like that but still it was a disappointment.

It was mainly around Europe and it was mainly Saflex and the photovoltaic business. And I think we know how to help both of those businesses. When I talk about short-term versus medium term, it doesn't necessarily mean spending more money. A lot of it just has to do with how you approach the market and some of the decisions you make in terms of your contracting, your pricing, relationships you have built with your customers, etc. so maybe you are not just going quarter-to-quarter maximizing earnings. Maybe what you are trying to do was think a little bit longer term with your key customers and take a longer-term approach to value capture out of a marketplace.

So I think I said it before, I see opportunities or things we will do differently and I'm guessing that you won't be able to see much of that through the rest of this year that '13 will be a year of transition and it when we get to 2014 you're really going to like the way these businesses look.

Okay, and then shifting to specialty plastics, a little smaller business, but copolyesters was taking some pretty good market share so for volumes to be down that significantly was a surprise to me. Do you think there was an inventory effect there or can you talk a little bit more about the market share you are taking with copolyesters and what's happening with volumes there?

I can and maybe Curt wants to add some color because I feel like I'm doing all the talking here. But I can tell you the place I see that got hit was really the durables and Mark Costa was giving me the example yesterday about you know, Jim, when the economy is tough people just aren't out buying new blenders and new durable goods that might have our copoly in it. You saw a nice pickup in the CTA cellulose triacetate that goes into the displays and flat screens. That really helped Asia and helped that business sequentially.

But I would say they are very much exposed to the durable goods part of it. They've got a lot of work underway to move their mix to things more like medical, etc. but that takes time. I would say on the Tritan line, the second line we brought up, we filled that first one out really fast. I'd say we got kind of spoiled on that one.

Tritan when you think about the market it's going into, it's fighting the same kind of durable goods battle right now, so that was flat and it's probably going to take us a little longer to fill that second line out. But that doesn't shake my confidence. I can see the value proposition. I know we've got a good product. I know we will take share from some of the competing materials.

The other thing I might add is that some of their businesses are more economically sensitive than others. The great thing about that, we've made the investment. We have the capacity so when those end markets come back, this business is well positioned to improve its performance.

Great. Thanks, fellows.

Bob Koort, Goldman Sachs.

Thank you, good morning. I appreciate your comment about you deserve maybe credit for some stuff that you guys have done over time. But I guess when I look at your margin structure, it sort of says specialty but when I look at your multiple, it screams commodity. Maybe this is a function of your historic legacy in polyethylene and PET, but I'm just curious what can you guys do or how do you think you get to a reasonable shareholder or investor regard for your portfolio when it seems stuck sort of in the history?

I very much appreciate the question. It's one that quite often we ask people on your side of the desk. Look, we all know multiples are sticky. We know there's lots of CEOs out there trying to jawbone them up, etc. I never bought that really has any kind of lasting impact.

I do think a lot depends on how we talk about ourselves and think of ourselves and how we represent our businesses, so just to be very open talking about things like volume doesn't sound as much like a specialty business as just talking about end markets and growth in end markets. And as we roll these businesses together and we get our new segments, I think it's going to be clear to people just the results of all the work that has been done and what we see as our prospects for growth and our margins. So I always have a hard time if someone says specialty versus commodity and then you say, well define specialty and then you get five or six different answers. To us what we are driving and I think people are going to have to eventually recognize is we are driving year-over-year earnings growth and we are doing it whichever way is the most efficient and makes the most sense.

We have a great financing market. We saw an opportunity with Solutia to pick up some quality businesses and put it into a portfolio of other businesses that have strong cash flows so you really don't have to leave opportunities on the table like maybe you do if you come out of bankruptcy and were pretty inhibited in your cash flows. I think it's just a matter of time but how quickly the market gets there, I'm not sure.

Can I ask you on your portfolio in the quarter, you had a 1% price decline which was clearly far better than a lot of commodity companies but it was still a decline. You mentioned you try not to price your products on sort of a cost basis. So for a typical of Eastman product, how often do you reset pricing and how do those contracts look?

As much as I would love to say it's just all specialty, part of that is the fact that the raws came off -- they actually expanded spread in the Company overall when I look at just price versus raw materials and energy, it actually expanded a little bit. But you know, much of our markets, much of our businesses, the pricing is more quarterly, annual in some places like Fibers. Probably the correct way to do it is to have pricing formulas that are more monthly, frankly monthly to quarterly but again, it just depends on the products.

So that would be true for the more heritage commodity like stuff or the more specialty stuff that's priced off of value propositions, some of the stuff in CASPI for example would just get repriced once a year, Fibers just once a year, some of the Solutia businesses are just once a year. So we will try and hit the right mix, the right blend working with our customers on what works for them.

Okay, thanks very much.

Jeff Zekauskas, JPMorgan.

Good morning. One of the themes of Eastman since you announced the Solutia transaction has been your tax savings and yet in the second half you now think that that tax rate will be 34%. So did you run into obstacles that are keeping you from using some of the NOLs or some of the tax strategies that you thought you could employ?

I will let Curt take this one.

Jeff, no; the answer to that is no. What you're seeing right now is just simply the effect of a more predominant earnings mix in our US versus outside the US. We think over time that will correct itself.

As it relates to implementing tax planning or tax efficiency structures, we are in the process of doing that today. A lot of that will be put in place the end of third quarter, some going into fourth quarter. So we do believe we will see the benefit of a tax structure and so we will get those benefits. And if you get some reasonable return to the mix of domestic and foreign earnings, that's what gives us comfort to get to that 31% rate.

On the usage of the NOL, we are still highly confident to use that. You saw in our S4 we thought that number is going to be about $675 million. We still feel good about that number. Maybe it will be even a little bit better.

So I don't think that you expected that your tax rate would be that high for the second quarter and I think about the conditions under which you bought Solutia and that was a world in which ethylene prices were $0.55 a pound and order of magnitude they dropped into the high $0.30s, now they are in the low $0.40s. So presumably the raw material synergies that you expected from Solutia really should be much larger than what you originally expected. So are you getting more -- because you must have higher pretax income with this higher tax rate, so are you getting more raw material synergies that you forecast in the second half that's offset by a higher tax rate?

Let me start off and then curt may want to add. But again, the tax rate had more to do with where the earnings are. As you know the way most companies get that lower tax rate is by having more overseas earnings and lower tax jurisdictions. When I think about raw material synergies, it's not what price ethylene is at any one point in time. It's what we're going to be able to do within our supply chain in terms of buying their raw materials, etc. or the swaps that we will do with other companies. So I don't know, C Kurt, do you want to --?

Jeff, if you're talking about the two aspects of your question, I think first of all as it relates to the tax rate, yes, that tax rate is higher than we probably envisioned back in January so if you think about just kind of our expectations at that time, what you are seeing is Eastman's businesses are probably doing a little bit better. Solutia's business doing a little bit worse but then offsetting some of that tax rate impact is the better financing that we had in place.

As it relates to the $100 million of cost synergies, we have assumed some modest improvement in raw material savings and logistics savings. I think a year or so from now when we talk about and report out how we did against those synergies, I think we will do better than that particularly on the raw material side.

Lastly in the last conference call, you talked about I think in 2015 being able to buy 300 million pounds of propylene or effectively something like that from PDH producer and I guess now it's clear that that is enterprise.

So when you did that deal, do you have to pay an upfront fee that gives you cost economics and if you do, is at $100 million or $50 million or if you don't, why is it rational for them to just give you manufacturing economics in propylene?

Actually, Jeff, there's no upfront fee and in fact, there's a contract that gives us propylene even sooner than the plant being finished that's also advantaged. So we will get some benefit even before the plant comes online.

Why does it make sense for them? Because they have the surety of a nice credit like Eastman taking a big chunk of their offtake and they build up the plant. They really could accept a lower return -- it is still a good return by the way -- but they could accept a lower return because they have such a low-risk project. At least that's the way I would analyze their side of the table.

Okay, thank you very much.

(Operator Instructions). Frank Mitsch, Wells Fargo Securities.

Good morning, Jim.

Good morning, Frank. I was wondering where you were.

Just laying back, I'm actually watching The Today Show, some of the Olympic coverage, and I noted that you said that you guys had the second-highest quarter this past quarter so that would give you the silver medal, but we are all expecting gold here. Can we see gold medal performance in the third quarter?

That's going to be tough, Frank. That's going to be tough. My guess -- we are not really giving quarter-by-quarter guidance but if you were a betting man, you would say it's going to look similar to the second quarter. Now realize we didn't go into it a lot but there's going to be a lot of noise and confusion because you know when you buy a company you write all their inventories up to market and there is all that kind of stuff we are going to have to guide you through. But assuming that the world kind of holds together here, you are probably going to have a similar -- speaking just of the heritage businesses -- a similar kind of quarter.

But my guess is then there is some level of accretion that comes with Solutia. So I mean you are really only -- you're guiding to an average of $134 million per quarter the next two quarters is what you are guiding to with that $530 million number.

And realize some of the headwinds here, though. Curt was just talking about one with Jeff on the tax rate being a headwind. The Solutia businesses are underperforming where we had hoped they would be this year. Not worried because we think we see what we can do with those businesses and there is still fantastic value in the long-term there with those businesses.

The interest expense came in a little better than we thought. We got this mix of headwinds, tailwinds and we're just trying to give you the straight up that it's looking like $530 million. As one of the reports said, maybe I had a little bit of a cushion the last time we said $530 million and we've got to do a little more work to hit it this time.

Well, let's take a look at Solutia. You said you know -- you said you know how to help those businesses so you said Saflex in Europe was obviously difficult. Global auto builds are pretty good. So globally I would anticipate Saflex is doing fine as a product but obviously in Europe it's suffering but you're getting growth in the US. You're getting growth in Asia so then that begs the question photovoltaics, what's your game plan on that business?

Just on that -- on Saflex first of all, Europe is an important market for them so hopefully they've talked about that before but it is their more profitable market so a dollar of sales in Europe is not the same as a dollar of sales in Asia. And so that's -- so it hurts when Europe is down and you think about the automakers in Europe, etc., I don't see that being a long-term trend. We see that coming back.

In terms of photovoltaic, what can I tell you? We didn't think we paid a lot for it as we valued the company. I think we've said that before. They are definitely under pressure. We deserve a little bit of time to assess what a turnaround plan would look like, the probability of success on that turnaround plan for that business. And we are not the most patient people. The shareholders of Eastman are not always the most patient people and I would expect we'll have more to talk about on that, what our path is going forward on investors there.

Okay, all right. And I was struck by Curt's comment that you expect to spend $500 million this year of which $100 million is Solutia in the second half of the year. That seems like a rather high number for Solutia, very high number for Solutia.

Don't annualize that.

If I might add, one of the growth aspects that Solutia brings is expansion options in Kuantan, Malaysia to serve the Asian market. Obviously that is one of the levers we will look at as we continue to look at how the economies are shaping up and we will see if we have to make adjustments to that. But that's kind of where we are at to start out of the gate.

All right, my early betting line is that you don't spend $500 million this year, but that's just me.

Lastly, Jim, you flagged out the Fibers buying pattern being a negative in the second quarter. Is this business traditionally lumpy good, lumpy bad? Second half of the year lumpy good?

I have got zero worries about Fibers, Frank. If I put my list of worries down on a piece of paper, Fibers doesn't even show up on the page. So it was in Asia. It was the classic customer buying pattern. I think we are going to be close to selling out on tow this year so I'm not worried about which quarter it comes then. I think for the year they are going to have a very good year.

Thank you so much.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. Curious about in PCI, how much Sterling and Scandiflex added to volumes since you haven't anniversaried those two acquisitions.

Well, it did help. They were not huge. I don't know, Curt, you got any kind of --?

I will tell you, it is a help but not as material as (inaudible)

Okay, then on your cellulose esters and triacetates into LCD, is your mix somewhat geared more towards panels than LCD TVs? Because we saw certainly some weakness in LCD TVs in developed markets so I'm just curious. It seems like you performed a little bit better than the overall market. What was driving that?

I'm not sure. I don't know exactly what the mix is between the two. I know we are in several layers on the screens. I think that usually what moves our results is more the customers and their inventory decisions and I know they got fairly light in inventories and had a lot of make up to do after the first quarter, so I think that drove it.

So I don't know if you can extrapolate our results to the end market results because of the way this supply chain works. It's not always the most logical so I think our customers had their inventories get fairly low and then had to play some catch up and do some buying.

Nils, if I could just come back to remind on Sterling, we talked about the acetic acid business that came with that. That's about $100 million of revenue a year. The real benefit of that plant acquisition will be as we start up this new PC asset -- plasticizer asset. You will start seeing that benefit over the coming quarters.

Right and I think you said you could get to $200 million at some point in a couple years. Is that still --?

That's still the path, yes. Absolutely.

Got it, just a question on Europe. It seems from at least your comments during the call it's a lot worse than expected and yet in the prepared kind of slides, you said it doesn't seem to be deteriorating anymore. So could you help parse those two? What are you seeing that suggests that it's not getting any worse? Because it certainly seems from your comments that it's not too good.

I hear you. The bit about it being worse than expected, I was really thinking more of Solutia's business and their exposure to Europe and how that went with the auto builds being negative in Europe year-over-year versus the rest of the world. So for the -- for our heritage business or for the combined entity, I don't think there was that big a difference between first and second quarter if I look at the volumes, how they came off a little bit more in the second quarter than what it was for the first half of the year, right. But not -- a difference between 6% for the half and 7% in the quarter, something like that.

So I don't know, maybe there's a little bit of hope in there as well but I just -- as we look at the order patterns that we can see, talk to the customers, I just had two weeks in Europe getting -- hitting a bunch of countries and our different locations, etc. There seems to be a disconnect between the talking heads on TV back here and what the guys in the trenches in Europe are seeing, so our best guess I will just say it that way, our best guess is that Europe just got kind of putters along down here at the level it is at through the end of the year.

Got it, then just one last question if I may. It seems like at least on your currency in Latin America, you didn't suffer nearly as much as a headwind as many of your peers. You saw large single-digit declines. What is -- is there a different exposure to your business that you were able to offset that? What caused it to be less of a headwind?

So you're talking about the euro I think is what you mentioned?

Latin America, actually.

Latin America, I think --

The Brazilian currency is the only thing I can think of.

Yes, and it comes down to how we price some of our products that we export to those marketplaces.

Got it, thank you very much.

We've got time for one last question, please.

Andrew Feinman, Iridian.

How do you like that?

Squeaked in under the wire.

I was just wondering if you could give us any update on Tritan II and acetylated wood?

Yes, thanks, Andy. It's exciting stuff. I mentioned Tritan a little bit earlier that it's probably going to take us a little longer to fill out that second line than maybe we first thought. It's not -- frankly hardly anything to do with Tritan, everything to do with the economy and the durables goods markets etc., like I was mentioning before.

But I would say that's a fantastic product. We will fill the line out. It is going to take share from the other materials, just going to take us a little bit longer.

On the acetylated wood, and thanks for giving me a chance to talk about it, in the market right now both pro-channel and big-box channel getting the results in, obviously it's still early. I think we're going to have good customer acceptance. We are learning some stuff about coating versus not coating, etc. But I think we've got a good one there but we're going to want to do it at a measured pace.

When you deal with the retail market, you only get one chance to put a good brand out there so we are going to want make sure we do it the right way. I can tell you just from the manufacturing point of view, the little semi-works if you want to call it that plant that we built here in Kingsport running very well, getting more capacity out of it than we thought, typical Eastman fashion people continually finding ways to improve the process, get in this case more board feet out of the same plant.

Decent market acceptance but we've got some fine tuning to do in terms of how we go to market and what the end product looks like, which segments we go into. So it's still a bit early but overall quite positive.

Thank you.

Thanks again for joining us this morning. A Web replay and a replay in downloadable MP3 format will be available on our website beginning at 11 a.m. this morning. Have a great day, everybody.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.