伊士曼化學 (EMN) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company third-quarter 2012 earnings conference call. Today's conference is being recorded. This call is being broadcast live on Eastman's website, www.Eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Thank you, Maura. And good morning, everyone, and 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 Josh Morgan, Manager of Investor Relations.

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

Second, earnings per share and operating earnings referenced in this presentation exclude Solutia acquisition financing, transaction integration, and inventory costs and charges. As well as asset impairments and restructuring charges net. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the Solution acquisition transaction financing, integration and inventory costs and charges, and the asset impairment restructuring charges net are available in our third-quarter financial results news release. And the tables accompanying the release. Available in the investor section of our website, Eastman.com.

Third, this presentation includes sales revenue and operating earnings on a pro forma combined basis assuming the acquisition of Solutia had been completed prior to third-quarter 2011. That compares post-acquisition results to pre-acquisition pro forma combined results. For more information on pro forma combined results, see the Solutia acquisition section in our third-quarter financial results news release. Also, on October 15, we furnished to the SEC a Form 8-K with pro forma combined historical financial information for our new segments. In this 8-K you will find sales revenue, operating earnings and depreciation and amortization for 2009 through the first half of 2012 for our new segments.

Lastly, we have posted slides that accompany our remarks this morning on our website in the presentation and events section. With that I'll turn the call over to Jim.

Thanks, Greg, and good morning, everyone. I will start on slide 3. As is my normal practice, I will start by holding us accountable for our key outlook statements. As you are aware, we were able to close the Solutia acquisition on July 2, meeting the mid-year commitment we made to you back in January when the deal was announced. Let me reiterate how excited we are to have Solutia as part of Eastman. And how confident we are in the value this transaction will create. both in the near and long term.

We will go into greater detail during our upcoming investor day, highlighting why these businesses are so attractive and fit so well with our strategy. In his section, Curt also give a brief update on how the integration is progressing. As well as provide a summary of the transaction from the standpoint of the opening balance sheet.

Next, back in July, we indicated our expectation was for full-year 2012 EPS to be approximately $5.30. And we've slightly raised that expectation, and I will talk more about that in a moment. Lastly, we indicated we expected to generate $1 billion of free cash in 2012 and 2013 combined. Again, we are on track to deliver on this commitment. While I don't want to give too much away ahead of the great story we will share with you on November 5, what I will say today is that given all of the portfolio work we have done over the last several years, including the Solutia acquisition, we now have a portfolio of businesses that we expect to produce solid consistent earnings growth and cash generation for years to come.

On slide 4, I'll hit the Eastman corporate results. You can see sales revenue on a pro forma basis declined slightly as lower selling prices, primarily due to lower raws and energy costs, were partially offset by higher sales volume in most segments. Pro forma combined operating earnings increased due to lower raw material and energy costs and higher sales volume, partially offset by lower selling prices. Third-quarter EPS was $1.57, which is a record for our Company. Demonstrating the strength and diversity of our businesses during the challenging economic environment. I will also point out that we had a lower-than-expected tax rate during the quarter, which Curt will discuss in his section.

Moving next to slide 5. And, as this is the first time we have presented results under the new structure, in each of the segment sections I will take a moment to remind you of the major components of each business. Of course we will give you a much more thorough overview in 10 days during our investor day. Beginning with Additives and Functional Products, this segment consists of the rubber materials product lines from Solutia's former Technical Specialties segment. The Specialty Polymers and Solvents product lines are Eastman's former CASPI segment. Sales revenue for Additives and Functional Products was relatively stable, down 1% as higher volume in solvents were offset by lower selling prices due to lower raw material and energy costs, particularly for propane. Operating earnings were up substantially as higher volume and lower raw material and energy costs more than offset those lower selling prices. We expect the Additives and Functional Products segment to deliver strong results in Q4, albeit with a typical seasonal decline in volume.

Next on slide 6, the Adhesives and Plasticizers segment consists of the adhesives product lines formerly in the CASPI segment and the plasticizer product lines formerly in the PCI segment. Sales revenue was unchanged, with offsetting factors. Volume increased as we continue to realize the benefits of customer substitution from phthalate plasticizers to Eastman's broad portfolio of non-phthalate plasticizers. Largely offsetting the increased volumes was lower selling prices in response to lower raw material and energy costs. Operating earnings increased as higher sales volume and lower raw material and energy costs more than offset those negative lower prices. We expect the Adhesive and plasticizers segment results to decline somewhat in the fourth quarter due to normal seasonality.

On slide 7 is the Advanced Materials segment. This consists of Eastman's former Specialty Plastics segment and Solutia's former Performance Films and Advanced Interlayer segments. Sales revenue was unchanged, as higher volume was offset by the negative impact of a stronger US dollar and lower selling prices. Operating earnings declined primarily due to lower sales volume in the Advanced Interlayers product lines due to the weakness in Europe and the negative impact of lower capacity utilization. In the fourth quarter we expect Advanced Materials earnings to decline due to normal seasonality and declining demand, particularly in Europe and Asia. And our efforts to reduce our inventories.

Specialty Fluids and Intermediates is on slide 8. This segment consists of the specialty fluids product lines from Solutia's a formal Technical Specialties segment and the oxo and acetyl intermediates product lines from the PCI segment. Sales revenue declined 10% as lower selling prices were partially offset by higher sales volume. And the lower selling prices were primarily in our olefin derivative product lines and in response to lower raw material and energy costs. For example, propane and ethane prices declined by one-third or more in third-quarter 2012 compared with third-quarter 2011. As with Additives and Functional Products, and Adhesives and Plasticizers, this Specialty Fluids and Intermediates segment receives about one-third of our propylene spread benefit, and the majority of our ethylene spread benefit. Operating earnings increased substantially as lower raw material and energy costs, in the benefit of our favorable olefins position more than offset lower selling prices. Fourth-quarter operating earnings for the Specialty Fluids and Intermediates are expected to reflect continued solid volume, but also seasonally higher propane costs.

On slide 9 is Fibers. And as you might expect, we did not change this segment. Fiber sales revenue increased due to higher selling prices in response to higher raw material and energy costs, particularly for wood pulp. Operating earnings were flat as higher selling prices were largely offset by higher raw material and energy costs. Fourth-quarter earnings for Fibers are expected to continue to be strong.

Finally, on slide 10, as we enter the seasonally slower fourth quarter, the global economic outlook continues to remain challenging. Our view is that Europe will remain stable at a recessionary level. In Asia Pacific, particularly in China, growth has slowed but we are not seeing any signs of further weakening. And we expect the US to remain solid, as it has all year. We are expecting higher raw material and energy costs towards the end of the year. For example, we expect propane prices to increase as we move into winter, as propane is used for heating, particularly in the Northeast. We have extended the shutdown of one of our crackers in Longview, Texas by approximately three weeks to the middle of November due to a need for additional maintenance on unit equipment. And this is expected to have a slight negative impact on results in the quarter.

Given our outlook for a stable economy, we expect our businesses will remain strong, as they have throughout 2012. As a result, we are slightly increasing our 2012 earnings per share expectations to a range of $5.30 to $5.40. This would be more than 10% over our 2011 EPS. And would be the third year in a row of double-digit earnings growth for Eastman. I expect that trend will continue going into 2013. And look forward to sharing more with you during our investor day on November 5.

With that, I will turn it over to Curt.

Thanks, Jim, and good morning, everyone. I will begin on slide 12 by reviewing our solid cash performance in the third quarter. Operating cash was $353 million, driven by solid net earnings. Free cash flow for the quarter was strong at $197 million. Capital expenditures were $120 million during the quarter. For the year we are reducing our expectations for capital expenditures to approximately $450 million. And, of course, during the quarter we paid our dividend of $36 million. This continued solid performance keeps us on track to meet our commitment of generating over $1 billion of free cash flow in 2012 and 2013 combined.

Next on slide 13 is some detail on our tax rate for the quarter. It came in below the 34% we projected, primarily due to two factors. First, we settled income tax audits, both in the US and outside of the US, during the quarter. These resulted in approximately $8 million of benefit. In addition, we benefited from the reversal of tax reserves due to the expiration of relevant statute of limitations. And this was about a $5 million benefit in the quarter. These factors won't recur in the fourth quarter and as a result we are expecting our fourth-quarter rate to be approximately 34%. For the year we expect our tax rate will be approximately 33%. And for 2013 you should expect that the rate will be lower. And I will give you more detail on that during our investor day discussions.

On slide 14 is an update on the Solutia integration. We've made a good progress since the deal was closed on July 2. We have completed our opening balance sheet. And much of that is now reflected in our results. Our new segment structure is now in place. And work has been underway since the deal closed to implement the structure. And I must say, our newly-aligned businesses have been operating very effectively, as demonstrated in our results in the third quarter. As Jim mentioned earlier we will cover each segment and their respective strategies when we hold our investor day.

One of our most important priorities is continue to retain key talent from this acquisition. And we have been successful to date. The feedback from our new employees has been very positive. And their professionalism continues to be outstanding. We also continue to make good progress with our functional consolidation of areas, including finance, HR, IT and supply chain, et cetera. The bottom line, we have made great progress on the integration, and we remain very confident we will achieve the synergies that we've discussed with you in the past.

I'll end on slide 15 with one last reminder. That we are hosting an investor day on Monday, November 5. We are again holding the event at the Midtown Century Center in New York at third Avenue and 48th streets. We will begin with lunch at noon and expect to conclude around 4.30. Through the day we will 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 the senior leaders of Eastman. I look forward to seeing you there.

And with that, Greg, I will turn it back over to you.

Okay, thanks. Maura, this concludes our prepared remarks and we are ready for questions.

(Operator Instructions)

David Begleiter, Deutsche Bank.

Jim, some talk about MLP structures for olefin assets. Can you talk about your thinking about dropping down some of your olefin assets into an MLP structure?

Yes, we actually noticed that. So thanks for bringing it up. And it gives me a chance to talk about what we've been able to do in Texas. And I'm going to turn it over to Curt to get specific on MLPs. But just a quick review. I'm fairly proud of our track record on our crackers and what we have done. We got a jump on that, restarting crackers when we saw how the world was changing. And we have been benefiting from that for a while. And then we got a really good contract with Enterprise, which takes care of our internal needs and gets us as producer economics. So that got us up to the point where we'd taken care of ourselves. And then we could look and say, is there further value we can create. And judging by inbound calls, that mainly Curt has to take, my sense is the world thinks there is more value we can create there and so then the IRS came out with this letter. And let me flip it over to Curt.

David, we are aware of the July 2 ruling letter. Like many in the industry, we are still evaluating what this might mean for Eastman as a source of value creation. It's a little harder to think it through completely with our existing operating assets, given the integrated nature of our plants, but we are still doing that. It clearly becomes an additional factor to consider with our non-operating assets, like the idle cracker that we have sitting in Longview, Texas. Or even the potential future investments in the olefin conversion unit that we discussed previously. And, as Jim mentioned, it is fair to say we've had a variety of interest expressed by others in these options, even before that ruling came out. But it is really too early to exactly determine what are the best ways to create value here. I have a lot of confidence in the business team that manages these assets and you know Eastman will be judicious in our evaluation.

That's very helpful. And just on the operating businesses, Jim and Curt. Can you talk about how Crystex performed in the quarter?

I think it was fine. Let me put that in context for you, though. In other words, it was similar to year-over-year, and similar to last quarter and if you think about the marketplace they are in -- in fact, not just Crystex, a number of our product lines, not just Solutia's either, guys, our heritage businesses. It is a tough world out there. Europe is definitely in recession. I guess there's pockets of strength, like Germany, but definitely recession in Europe. Asia softened up quite a bit during the year.

Even in North America, as much as we say it looks good on a relative basis, it's really nothing to brag about traditionally, when I look back at past years and how strong we have run in the past. So Crystex, Saflex, our own polymers -- I think they're doing well in what looks like very down markets and the proof is in the pudding. With everything we've got going on -- macro economics, doing a big integration of a large acquisition like Solutia -- and we still post record earnings. So I'm very proud of the guys.

And just last, Jim, can you quantify the impact of the extended cracker downtime and the inventory reduction in Advanced Materials in Q4?

Yes, and I'm glad you raised that. I put it in my comments because I read some of the early reports from you guys and you are all kind of scratching your head -- what about the fourth quarter. It sounds like you're actually taking this down. We got bit. It's not huge. It'll be, I would guess, less than $0.10. Of course, we're not back up and running yet, either. But it is not, like I say, a big number. But it is enough to take a little of the bloom off the rose, or whatever. Again, I think back and I say -- yes, but if at the start of the year, if you'd told me which way the macro economic world was going to go, and that you would end up with a cracker issue at the end of the year, and you'd still be able to add to your forecast and what you said you would do, versus having to come down, like some of the other folks have had to do, I feel pretty good about the strength of our businesses. But, yes, it's going to bite us for probably less than $0.10.

Thank you very much.

Vincent Andrews, Morgan Stanley.

Could you give us your view on propane? Obviously, you expect it, like most people would, to go up because of the winter. But there is a thesis out there that it's actually going to move meaningfully higher regardless of the winter. So what are your thoughts?

I guess we're not in that letter camp, at least not yet. We are still just thinking seasonally on propane. Obviously it came off quite a bit year-over-year. And, again, just for everybody on the call who may not be as deep into this, because it's not that big a part of our business anymore, but we are really interested in that spread over the propane-ethane to our derivative products. We tried to factor in all the movements we can see when we gave you that fourth-quarter guidance, that there might be a little squeeze on that spread in the fourth quarter, and that is why we shook out where we are. We will talk more about next year but I can just tell you I don't see it hurting us next year. Let's put it that way. I think we will continue with the kind of strength we had in that spread this year into next year.

Okay. And then, secondly, could you talk a little bit about Saflex? I know it's an annual contracting business. And obviously European autos have been weak this year. So how do you feel about volume and price in that business going into next year?

It's probably just a little too early to talk about it. Actually have Mark Costa in Europe right now chatting with a few of those customers, getting to know them a little better. Talking about relationships, longer term game plans. Which is the way would like to work with our customers. We are obviously a major key supplier with a very strong product line. I think there was some ground lost last year by the Solutia team as they looked to trade offs between Europe and Asia. We are going to try and be smarter about that this year. But I won't be able to give you anymore color. Probably even on Investor Day it will be hard to give more color on that unless Mark's got something he can share with us coming back from Europe.

Okay, thanks very much.

Frank Mitsch, Wells Fargo Securities.

Gentlemen, I'm not sure what is the bigger upside surprise -- your records this quarter or Greg Riddle's 5-K time.

We're still amazed that too, Frank.

Very impressive, to say the least. Obviously great results, but can you talk a little bit about your volumes by geography in the third quarter and what your expectations are?

Again, I'm doing this from memory and the guys will help me out because I told Greg ahead of time, if I got a regional question he was the man, because he has the stuff nailed. I know volumes were up in Asia, and that was probably attribute that to our Fibers business. Latin -- well, I shouldn't go to Latin America. Let me turn it over to Greg rather than me trying to do it. Greg?

In Asia, certainly we had a good quarter. I'd say that was probably driven by the Fibers acetate tow. We also had a good quarter in especially plastics, in Asia. Maybe a little bit down in Specialty Fluids and Intermediates. If you think about North America, North America was down. On the revenue side it was down but that was more of a pricing story. Volumes were flattish, maybe up a little bit in North America. And then, as you would have expected, we did see some down volumes in Europe, given the economic situation there.

And you would anticipate those trends to play out in 4Q? Is it bottoming?

The bigger trend in 4Q is just going to be the seasonal impact on us, Frank. I've been here long enough to learn, that's not to be under estimated. Most of the business typically come off in fourth quarter. As I listen to other companies talk, we really don't have much different to say about the regions of the world and what we see on the end-market demand than others. I appreciate the fact that our portfolio of businesses is diverse enough across customers, markets, geographies, et cetera, that when something seems to get weak, like European autos, we've got enough other places to pick up the slack and continue growing earnings.

You mentioned in the Adhesives and Plasticizers segment that pricing followed raws down. Can you talk about the ability or inability to hang onto pricing in that segment?

It's similar to a number of segments, that in many areas it's a spread game. In Adhesives, in particular, when the market is being quite tight, you have been able to hold onto spread. And you have seen spreads increase not just for us but for competitors, as well, in the adhesives market. And a strong demand for those hydrogenated hydrocarbon resins that go into diapers, et cetera. That has been a good business, not only for us but for our customers, typically. Plasticizers, I would say, just my experience, there's a little more transparency there and so you're a little more likely for pricing to move with the raw, but I would say overall, again, it is a spread game and that is what we play.

All right, thank you. See you in a few days.

Edlain Rodriguez, Lazard Capital.

Jim, just a quick follow up on the pricing issue. For the fourth quarter, as we expect prices to, one or two years to go up, like propane, do you expect to see prices for many of those moving up, as well? Or is there a lag in when you are able to do that?

There is a little bit of a lag. I think I shot a quick comment in there earlier that there will probably be a little squeeze in the fourth quarter. We had of little benefit in the third so you probably get squeezed in the fourth. I try not to worry too much about it quarter to quarter, and that is why I step back and say this was a very good year for that spread. In particular the ethylene spread was very good this year. Next year, it may come in different parts, different quarters, but next year I would guess that spread will continue to be a real strength for Eastman.

Okay. Just another question on the integration of Solutia. Now that you have it under your belt, how comfortable are you with the synergy numbers you gave prior to the closing of the deal? And any progress on that, any update on that?

Yes, Curt is accusing me of having amnesia because somehow the $100 million we promised is turning into a floor, and we're looking for higher numbers. But let me turn it over to Curt because Curt is the lead on the integration.

Let's just remind ourselves of the three buckets, and let me just through it briefly. The first bucket is taxes. We feel very confident that we will capture the tax synergies we've discussed, both in the form of using the NOLs, .33 of which we will use over the next three years. As well as implementing tax strategies that will get us towards that 31% tax rate. On the cost synergies, we have broken those cost synergies down into three categories. The first, about one-third being corporate cost that go away day one. And we have achieved those. Secondly, functional costs, where we have redundancies but we've captured some of those. Others that we have identified really are needed as we go through implementation of systems going into the 2013 year. But if you look at the cost synergies combined, I would guess by the end of the year, of that $100 million we will probably already be halfway there on a run rate basis.

I would also like to highlight just the business synergies. As we have talked about business synergies, they are a little longer term but I still like the opportunities that are there. They are the long-term revenue synergies we have talked about, like in Advanced Materials, that will give opportunities for those businesses to figure out how to bring better value to our customers. Secondly, I also think there's going to be an increase in scale and capabilities of manufacturing and technology. That is going to accelerate some of our product development of our gen 2 acoustic product lines, given our polymer science capabilities. As well as we look to improve the reliability and cost operations pursued to bottlenecks, everything else at these sites, because you know Eastman is good at that. And then lastly, I also think we will continue to accelerate the development of commercial capabilities, such as contracting and pricing. So when you put those altogether, I feel very good about achievement of the cost synergies and the long-term potential of this transaction.

Just quickly on cash flow, you continue to generate a very strong cash flow. Acquisitions are probably off the table for now because of Solutia. Can you remind us what the priority for cash is going forward again?

Yes, I will let Curt do that in a second. But just on acquisitions, you are right in terms of where our priorities are. Let's generate the cash, let's get this thing under our belt, pay down some debt. Having said that, we have the financial strength, we have the bandwidth that if there was something that was just exceptional, we don't have to let it go by without getting our dog in the hunt. But the odds are, the way we would set the hurdles, would be so high for us to find something interesting enough that we would want to get involved with a small bolt-on. And I do mean small. It would be nothing of size. Odds are, it's going to go just the way you laid out, which is we will generate the cash, we will pay down the debt, and then we will look around for other ways to grow. Do you just want to comment on the uses of cash?

Yes. The uses of cash, our priority is our investment grade credit rating. We remain committed to that. We will have a level of deleveraging as we finish up this year as we go towards the end of next year. And our commitment is roughly to pay down $1 billion of debt during this time frame. But as we do that, and as we demonstrate progress on that, then that does allow us to look across the different buckets of capital allocations. A bolt-on strategic acquisition, as Jim talked about. We have the ability to look at, even looking at share repurchases, and when is it time to start thinking about that, at least to offset dilution. So we will have options to think about as we get a start to next year and make progress on our deleveraging.

Okay, thank you, guys.

Laurence Alexander, Jefferies.

I just wanted to delve a little bit into the Additives and Functional Products volumes. Can you break down a little bit where you are seeing the volume growth, if there is any niches within that business that are particularly strong? Then the second thing, could we clarify when you say that you think 2013 will be up at least 10% from 2012. Just to be clear on the base, is that just off your reported EPS or off of a pro forma including Solutia for the first part of the year?

Let me take it in pieces. Quite a bit of volume strength, and strength in the solvents market right now. And I'm seeing it not just us, but just seeing that with competitors. I think we have a bit of an advantage because we're so North American-based. And so you can really see the flow-through of our spread and how we have segmented our market. North America is the place to be for that. That is a lot of the strength that you see in that area. In terms of the 10% up, basically we're saying it should have -- it's more than 10% -- we're saying it should have a 6 in front of it next year. So that is what we are shooting for.

And to get to that greater than 6, is it's basically off that $5.30-ish type of base -- $5.30, $5.40 base. You get some benefit of having Solutia full-year integration benefits. But then also you are looking for growth within those businesses.

Perfect. And there isn't any real tax swing that is helping there. That is just off the organic side, correct?

There will be some tax benefits. As I mentioned in my comments, we will not be at a 33% tax rate going into next year. We expect a lower tax rate. So there will be some benefit of a lower tax rate.

Okay, thanks.

PJ Juvekar.

Can you discuss demand for Solutia's Crystex product, given the slowing tire demand? A couple of companies have come out and lowered their forecast. Discuss the outlook going forward. And then quickly, is solar a non-core business for you?

What was the last part of the question?

The solar business, is that a non-core business?

On Crystex, I mentioned before that, I would call it steady right now at a, let's say, reduced level, if I can put it that way. So when I look year-over-year and sequentially, not huge changes. That is another area we are in the middle of discussions for next year. I think, PJ, in the long run, this may sound a bit conceited, but I think our business guys are going to be a little smarter about that marketplace. And so we are in negotiations now. I don't want to add a lot more color but I am bullish on that business, and in particular our position and what we can do with our cost position and our scale, et cetera, long term. That is definitely a very good business.

I love the fact that we are across all the tire guys, all the regions, replacement versus OEM, et cetera. We got the good exposure there. I look at the results and think about what is going on in the tire market around the world right now. And just you can salivate on what it will be like when there is a recovery in the transportation sector, in tires. Again, we will see if we have some more color on it but fantastic business with long-term good forecast for that business.

On the photovoltaic, that has gotten some press from others earlier this week or last week. It would be really hard for me to say that is core for Eastman. I think that long term there is value there. It is hard for me to believe there isn't somebody else who would see more value or that it would be more core for than Eastman. But, we haven't made any decisions on that yet, and when we do we will let you know. You might remember, I did have that report up to Curt so that the P&L guys did not have to spend time and be distracted by what's a fairly small business for us.

Right. And then, quickly, Jim, you mentioned that you're going to take inventories down in areas like performance films. Is that a fourth-quarter comment or do you believe that you can run Solutia assets with lower inventories? Thank you.

Actually, the comment was more around the specialty plastics business. Although, I've got to be honest, between now and year-end I'm going to be looking at it across the whole company. By now you guys are starting to know us. We're somewhat conservative. We try and remove all the hurdles, roadblocks to hitting our targets. I very much want to have next year's number have a 6 in front of it. I want us to be able to run well next year.

I think just with all the uncertainty, financial cliff, et cetera, it is prudent not to walk into year end with excessive inventories. I think we will be smart about it. There is some place on the raws where I actually want to build inventories because I can see what is happening pricing-wise. Finished good inventories, it is usually better if you are lower, but you have to pay attention to where you are going to have turnarounds, et cetera. We are willing to make the sacrifice on operating rates a little bit to watch our inventories, but it's not a blanket statement. What I said earlier was really pertaining more to specialty plastics than anything else.

Thank you.

Bob Koort, Goldman Sachs.

I was wondering if you could talk a little more, explore this fixation on olefin's and spreads. It seems a little bit odd to me. But can you tell us, in the pro forma Eastman, what percent of revenues might come from ethylene and propylene derivatives? And then within that subset, how many products do you have that are like polyethylene or first-level derivatives where there is pretty quick pass-through versus more negotiated pricing with your customers?

Let me make a general comment, then maybe either Curt or Greg may want to hop in. It's not a big part of our business anymore. And with Solutia it's obviously become a smaller piece. I can't ignore it, it has been a real tailwind for Eastman. So, as much as I would rather talk about the longer-term things and our derivative products, and where we are growing the company, et cetera. It is clearly a benefit to have crackers in Texas. We laid out which segments share some of that benefit. Some years better than others but, again, to me it is not the main driver for why you'd want to be in Eastman or what our performance has been in terms of total shareholder performance, which goes all the way back to '09. But maybe Curt or Greg, do you want to just?

Yes. I don't know that we should size it today. But we are going to have Investor Day in just a few days, as we have mentioned. And obviously this will be a topic that will be discussed at that date.

Okay. Maybe an angle around that. I think you guys mentioned some caution about propane into the winter. But if I look out at the strip price today, it is basically a flat line all the way through winter, right around $1, which is just about where propane is today. Is there enough liquidity in that market where you could de-risk your fears about near-term propane prices?

And don't think of it as a fear, per se. We're just trying to tell you what we think could possibly happen. You are pretty safe going into winter saying propane may go up. We do, do some hedging. We factored in what we know about the lag in pricing, and our expectations when we gave that guidance. So I'm not looking for people to get real worried about the spread near term. We're just trying to be prudent in saying that would be a logical expectation, if propane could move up at the end of year and you probably wouldn't have a chance to follow as well with your pricing. We are prudent in terms of we do hedge raws, we hedge currency, we hedge interest rates.

You made one comment on the tire markets, which I found interesting, about needing some enthusiasm there. If I look at the replacement markets, particularly in Asia where the car park is finally getting at an age where there will be the first rounds of replacement tires outpacing OEM in volume. Can you have a down Europe but an up total Eastman because of the growth in the other markets? The end markets?

I would think so. We can go back and look at it but I would think so. Remember, somehow Europe overall, because we did Solutia, somehow people think we have huge exposure. Somehow people all of a sudden are more worried about Europe, whatever. It's still less than 25% of our sales for the Company overall in Europe. It is more important for the tire market, clearly. We know the big guys are there in Europe and that is good business for us. But, again, you have to think longer-term around the globe. And you're absolutely right to point to Asia and, frankly, North America, South America. Again, I'd take a longer-term view and I'm thinking if these businesses can perform the way they are right now with the way the world is, we've got some serious upside ahead of us.

Great, thanks very much.

Jeff Zekauskas, JPMorgan.

Some of your competitors in filter tow are rationalizing capacity. Are there any opportunities for volume gains in the context of that?

I think the biggest impact on volume for us in tow will be when our JV comes up in China. You will see some increase there. But, again, take a little bit longer-term view of the fibers market. It's a fairly steady market. You've got that growth in Asia offsetting the rest of the world, basically. I like our position, I like having an asset in Korea, I like having a JV in China. I love the cost position that we have here in Kingsport and that we can serve our European customers from what we've got in England and Workington. It has been a fairly steady market. I'd say most of the players in the industry have been quite disciplined. I don't expect any of that to change.

What's hard for you to see, when you look at the numbers, is some of the numbers move around inside our business, like this past quarter. Yarn was fairly weak, as you might image, given what is going on in clothing, retail, et cetera. And tow was quite strong. But overall I expect fairly steady shares with us picking up a little bit because of the China JV.

Okay. Your general working capital management was pretty terrific in the quarter. Did you drop your operating rates in the third quarter relative to the second to get your inventories all in line? Or did your operating rates really not change very much versus the second quarter?

Operating rates did come down third quarter over second quarter by a little bit. Again, it blows my mind. We were in the 80%s, I'll say that much, at least for the Heritage business. And, as you might imagine, the Solutia businesses would have been lower than Eastman's level and yet we set record earnings. The best I have ever seen this Company do operating rate-wise is about 92%, 93% in the quarter. Again, I realize that there has been investments made. We're living with that fixed costs, fixed burn rate now but I have the capacity to grow in a lot of areas, deliver record earnings, not fully utilizing all my capacity across all the lines. So that part feels pretty good to me.

To tie the utilization rate to inventories is probably giving us too much credit. I would say part of it had to do with just the raws coming down. I'm going to let Curt comment.

Actually, Jeff, just to make sure we're completely transparent. If you look at the cash flow statement on table 5, you see inventory actually being a source of cash flow. But just keep in mind, purchase accounting, we wrote up inventory $75 million in turnaround and sold it. So, $75 million of that benefit that you are seeing is actually because of that inventory turn. You take that $75 million off that inventory and we actually increased inventories in the quarter.

Okay. You're spending quite a lot on developing businesses relative to last year. Is that turning out to be a good investment or a less good investment?

Overall a good investment, but it's also a lever, Jeff. I told you before, a high priority is having a 6 in front of next year's number. So we pretty much only work on things that we think have long-term value. But we can control the pace on which we work on things. So as we see the world slow down, for example, we've talked internally about we could slow down on our perennial wood product. We don't have to keep the spend up at the level it is. We could slide that out a little bit. Other areas, like our microfibers, I think it's going to be full speed ahead.

So, yes, I think we are spending the money prudently. We can gate how fast we spend that money based upon the economy and the opportunities we see. And, no bones about it, we've got to be disciplined. We can't fall in love with something. If something is not cutting it, we got to be willing to move on. But it is good. We're trying to set up some long-term growth and you got to spend some money to do that. But I'll just say it one more time. We can control the rate at which we spend, if we need to.

Okay. And then, lastly, I think Curt said that he had immediately gotten the corporate costs out and so that means there is, call it, $65 million of costs still to come out. And it looks like you think that you are going to get, I don't know, another $15 million in the fourth quarter. If you have to look at your segments, where is the $65 million? How do you allocated the $65 million across your segments? And how do you allocate the $15 million for the fourth quarter?

And I got a bunch of VPGMs waiting for Curt to answer this question. (laughter) And he's got to answer it before we set their targets for next year.

Jeff, that is an art not a science, as you well know. As I mentioned, we will probably be at, at least a 50% run rate on that $100 million. So we are probably going to be, on a run rate basis, around that $50 million. The corporate costs tend to get shared amongst the group. Most noticeably the two large businesses with Solutia, Crystex and the Saflex product lines. But, again, what you are doing with that synergies, you are also then, leveraging the infrastructure you have at Eastman, which gets shared by all of the group. But I would say a good portion of it will be showing up in Advanced Materials and Additives and Functional Products. And the rest split amongst the groups as we get more of those synergies next year on the cost.

Curt, would it be a simple benchmark just to say revenue would be -- for someone outside the Company -- revenue would be a good way to look at it in terms of a rough sharing?

If you're talking about just corporate costs, revenue would be a rough share. It's still functional overlapping.

So for modeling purposes, if they just went by revenue, that is not a bad--.

Okay, thank you very much.

Nils Wallin, CLSA.

A question about your Additives and Functional products. In the release you mentioned some competitor manufacturing outages helped with the volume. Is this a market share gain? And as those outages come off, will you lose that volume or do you think you may hold onto it?

I will let Greg jump on that.

It was really on the solvents product lines. And that is really some capacity that was down as a result of Hurricane Isaac around August. So obviously that is back up. But that is really what we were referencing in that reference.

Okay, thanks. And then it seems like Latin America continues to show a significant strength for you relative to peers. And I know, obviously, that you have got some fiber going through Mexico. So is it mainly the Mexican business that is driving those results? Or there's other businesses in there too that are doing well?

I don't think of fibers as being a big player for us in Latin America, really. It's more Brazil would be the biggest, then Mexico. There is the time at which that was reversed. And then it one-third, one-third, and one-third for the rest of Latin America. Now it's probably Brazil is slightly bigger. I think we have an excellent management team down there. Probably a better mix of products gets sold in Latin America in general. Probably more specialties get put down there. Great, do you want to --?

We did a small acquisition down there, as well.

If you're just talking about growth in revenue, yes, we did do a plasticizer acquisition in Brazil. But overall Latin America's been a good market for us. It is just not -- I'd love for it to be a bigger percentage of our business.

Got it. And then, finally, would you update us on the Tritan expansion? Are the volumes fully sold out there? And just how the plant is operating.

I never expected to be sold out this quickly. When you add one of those big 30,000 ton lines, it usually would take a couple years to fill out. We got a little spoiled with the first line, that it filled out so quickly. We had some favorable tailwind's with being bisphenol-A-free, et cetera. This will be a more traditional fill out. In fact, maybe even a little slower, just given how the economy is going. I would say overall the acceptance of Tritan is still quite strong. When we get to Investors Day, you're going to see a slide that shows a bunch of brands that have bought into Tritan, and you're going to love this slide.

Great, look forward to it. Thanks very much.

Duffy Fischer, Barclays.

We you look ahead to 2013, can you talk about the puts and takes? So you will have the JV coming up in tow in China. You talked about some benefit this year in the solvents from the hurricane. Can you just walk through the laundry list of things that might be pluses and negatives as we look next year, year over year, that happened this year that won't happen next year?

Duffy, I can and will, and we'll do it 10 days from now. So the story at the Investor Day will be much more about 2013, actually out to 2015. And we will hit it then. The guidance I'm giving today is we still expect a 6 in front of the number.

Okay, fair enough. And then if you looked at CapEx that you have reduced here just recently, can you walk through what are those things that you are foregoing at this point? Was it just macro environments that drove those decisions?

I think what you have there is a set of business guides and manufacturing teams that are being disciplined with the economic outlook out there. So I think we are just slowing the pace of some of the investments that we have out there. There is no one single project at this point that we've singled out. We're taking our time to study and evaluate the Kuantan expansions in Malaysia. We are rethinking through the timing of our expansions, such as the Texas City. But a lot of it is just more economic and just being cautious when we should spend the capital.

Great, thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Jim, if I put the Fibers business on the side as an unchanged segment, if you will, and consider the other four, where do you think trailing 12 months margins would compare to normalized levels? That is to say, are there any of these four segments that you think are materially above or below what you would consider a prospective normalized level?

I may get Curt or Greg to help me on this. But I can tell you, to start, I don't see the macroeconomic environment to be anything like what I would call a normal level. I do think we are worse than what I hoped the average economy is going to be over the next 10 years. The States maybe not so. The States is decent. You have to start getting into segment by segment. So to the extent we have businesses that have housing-related or transportation-related, you've got to believe that is below normal environment, in my mind.

And so then you look at the individual businesses and how they are performing. And we've given ranges for different businesses in terms of where we think their earnings will be in terms of margins. And then you can compare where we are today. But Curt, do you want to add how you see things going?

Yes. We'll get into the margins. I think the only area that I would maybe point out today that is probably below its potential is Advanced Materials. There has been significant investments made in that business line. Some of their end markets are pretty soft. Those investments have been made. We are ready to get the returns off those investments. We just need a better global environment and market environment for the Advanced Materials segment. The rest of them are pretty solid and we will get more of that into the Investor Day.

And if you get within the segments, to try and be balanced, solvents is clearly doing quite well right now. Which is making up for the rest of that segment that is probably below some kind of average trend line. I agree with Curt, we can get into it during Investor Day.

Okay, thanks for that. And then I just wanted to come back to the subject of the capital budget. Some of your peers across the industry have made pretty wholesale changes. It sounds from your comments like you'd be making more surgical changes to it. But could you comment on what the level of maintenance CapEx would be for the combined company now, in case you did need to take a more significant change approach there?

I will let Curt give you that. But I will say, we feel like we're on a bit of a different path than some of the other companies. We did a lot of the heavy lifting over the last three years in terms of our portfolio. I also think that doing the Solutia acquisition gives us a clear path to how we keep growing earnings double digits. So while others may be out there wondering how are they going to do it, and they're not posting record quarters, and they are having to scramble and go at it from the cost position, we think we've always been pretty disciplined on cost.

I'll just give you one example that I wanted to squeeze in. I'm going to use your question to do it. But just on things like headcount, we use the phrase around here, it's easier not to hire than to fire. So when we announced the Solutia deal, we put a hiring freeze on different functions to free up spots for some of the people to help us get those synergies, et cetera. We just think a little differently. So we are in growth mode right now. You have seen that we can be disciplined. You see how we acted in '08, '09, how we can handle cash, not just on the capital line but across working capital, our expenses, et cetera, so that has not changed. We are there if the world turns south on us.

With that, Curt would do we usually say maintenance is?

I would say at Heritage Eastman we used to talk about a $200 million type of number. Heritage Solutia's probably a $50 million, maybe a little bit more, type of number. So about $250 million is the profile of capital maintenance that we require, plus or minus 10%.

Okay, great. Thank you very much.

Bill Young, ChemSpeak.

Two quick things. Could you please bring us up-to-date on the progress being made on your new additive for tires? And, of course, the Solutia acquisition seems to fit into that pretty well. And, secondly, maybe little more transparency, if you have it, on the performance films area.

I will start with performance films. I don't know how much more we want to say about the additive for tires, other than I think tires are going to be very good for us. I think it was Saturday night live baseball has been very good to me. I think tires are going to be very good to us. As a matter of fact, let me just hit that now. We're using our technology in a number of ways, across a number of markets.

Tires is a place we know from the Eastman side, from resins. Obviously the Solutia products are very big in that marketplace, as well. We are finding ways to work together with customers. We think we have got something pretty good that we will talk more about on investor day in terms of solving some of the problems the tire makers have. That could be quite attractive. Realize, every time you work on something like this, though, with the product life cycles, and how long it takes to get into tires, et cetera, it's not a quick term pop. It takes a little while to create that value. What was the second part?

Performance films.

This is one I like. I have to admit, I didn't know much about it. In our part of the world, people don't put a lot of films on their cars. Asia, they do. I think it has some of the best growth prospects in the portfolio. I think it is an area where we underestimated how much Eastman can help in terms of manufacturing, operational excellence type stuff, commercial processes. This is one I like. The guys in Solutia who work in this business already appreciate being a part of Eastman in terms of the problem-solving.

Are you having problems in Asia now? You emphasized that before. You said it is a big product in Asia with performance sales.

Yes, and I think that business is dependent upon some new auto sales levels. If they come off, then that business will be impacted. But there will be more innovations and more other areas we can penetrate.

Okay, thank you.

Thanks again, everyone, for joining us this morning. A web replay and a replay in downloadable MP3 format will be available on our website beginning approximately 11.00 AM this morning. And if you didn't hear, we have having an Investor Day on November 5. Look forward to seeing you there. If you have not already RSVP'd, please do so. Thanks very much.

Again, ladies and gentlemen, this concludes today's conference. We thank everyone for joining us.