伊士曼化學 (EMN) 2013 Q2 法說會逐字稿

Welcome to the Eastman Chemical Company second quarter 2013 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.Eastman.com. We will now turn the call over to Mr. Greg Riddle of the Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Okay. Thank you, Jenny. 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; Mark Costa, President; Ron Lindsay, Senior Vice President; and Josh Morgan, Manager - Investor Relations.

Before we begin, I will cover four items. First, during this presentation you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the Company's second quarter 2013 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-Q, filed for first quarter 2013 and the Form 10-Q to be filed for second quarter 2013.

Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core or non-recurring costs, charges and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our second quarter 2013 financial results news release, which can be found at Eastman.com in the Investors section. Projections of future earnings in the presentation also exclude such items as described in the second quarter financial results news release.

Third, this presentation includes revenues and operating earnings on a pro forma combined basis, assuming the acquisition of Solutia had been completed prior to second quarter 2012, that compare post acquisition results to pre-acquisition pro forma combined results. More information on pro forma combined results is in our second quarter 2013 financial results news release. Lastly, we have posted slides that accompany our remarks for this morning's call on our website in the Presentation & Events section. With that, I will turn the call over to Jim.

Thanks, Greg. Thanks everyone for joining us on a bright sunny morning here in east Tennessee. I will begin on Slide 3. As I always do on these calls, I will take just a moment to provide an update on our most recent outlook statements.

First of all, progress on the Solutia integration continues to exceed our expectations. We have been one Company for just over a year now. I can say we are ahead of where we thought we would be last July. As is his normal practice, Curt will provide you with an update and some more color in his section. But as I have now stated for several quarters, I'm quite pleased with how the integration is going and how well these businesses and cultures have come together to create value.

Next, in February, we raised our full-year 2013 EPS expectation to a range of $6.30 to $6.40, a 17% to 19% growth rate over 2012. Today, we are increasing that guidance again, to $6.40 to $6.50, as we see additional strength in both our Fibers and Specialty Fluids & Intermediate segments, partially offset by continued challenges in Adhesives & Plasticizers. We also said we expected to generate between $600 million and $650 million of free cash flow in 2013 and we are on track to achieve this.

Finally as always, management committed to remaining disciplined in our capital allocation. We continue to believe that prudent resource allocation, focused on financial return metrics, is what delivers the best long-term performance in this industry.

Now, on slide 4, I will review the Eastman Corporate results. Operating earnings increased second quarter 2013, versus second quarter 2012, primarily due to higher sales volume in four of our five segments and higher capacity utilization, which led to lower unit cost. In particular, the Advanced Materials segment had strong volume growth in our Tritan copolyester product line, particularly for durable goods. The Specialty Fluids & Intermediate segment also had a strong quarter, with higher volume in both fluids and olefin in the Intermediates contributing nicely to earnings growth.

The operating margin for the quarter was 18.6%, a 160 basis points improvement year-over-year and a greater than 100 basis point improvement over the first quarter. Second quarter EPS was $1.80, Eastman's best EPS on record. With this level of earnings, we are well positioned to achieve our fourth consecutive year of double-digit earnings growth. So while the global economic environment remains mixed and somewhat unpredictable, our second quarter earnings results were a continuation of the strong start we saw in the first quarter.

On slide 5, I will highlight our results by geographic region. Our largest region, North America, was down less than 1%. So basically flat with it primarily being a case of lower selling prices resulting from lower raw material cost.

We had a really nice quarter in Asia-Pacific, up 11% year-over-year, And driven primarily by strength in both our Fibers and Specialty Fluids & Intermediate segments, as well as significant growth in our Tritan copolyester. You will recall, our first quarter year-over-year growth was also 11%. So we've had a very good start to the year in Asia-Pacific.

A big factor at play here is in China, where our portfolio is benefiting from an emerging middle class and a focused shift to a consumer economy, and our portfolio is less exposed to the declining infrastructure spending in the region. I will also point out that, we have done a particularly good job on execution in this region, in particular with some of our oxo alcohols this quarter, as our team was pretty nimble and was able to move some material when it made economic sense.

Revenue in Europe was flat for the quarter. Frankly, given the state of their economy, this is really solid performance. Latin America revenue was up $6 million or about 5%. So our geographic diversity continues to be a source of strength for our portfolio. Our second quarter results reflect that.

Moving next to the segments in slide 6, where I'll begin with Additives & Functional Products. Sales revenue increased primarily due to higher sales volume. This was particularly true for solvents, as we continue to benefit from the strengthening US building and construction market. For tire additives, Crystex insoluble sulfur volume was higher year-over-year, while anti-degradant volume was lower in what remains a very challenged over-supplied market. Operating earnings decreased slightly, largely due to lower earnings in the anti-degradant product lines, while the operating margin remained above 24%, within the range we provided for this business at our Investor Day in December.

Looking at the full-year, we're expecting second half earnings to be slightly higher than first half as tire additives are expected to benefit from somewhat higher sales volume, improved capacity utilization and lower raw material and energy costs in the second half of the year. Our solvents product lines are expected to benefit from higher sales volume, in part, due to an expansion of ethylene oxide derivative capacity at our site in Longview, Texas. As a result, we continue to expect full-year 2013 operating earnings of approximately $410 million, which would be a solid improvement over 2012, in an economic environment that remains challenging.

Moving next to slide 7 and Adhesives & Plasticizers. Second quarter results for this business reflect ongoing challenges, primarily for the adhesives resins product lines, where we continue to face multiple headwinds. First, focusing on adhesive resins, we continue to see demand weakness in consumables, in particular for packaging tape and labels. Coupled with a weak demand, the market is also experiencing increased supply, contributed primarily to increased raw material availability -- rosins in particular. These factors combined have led to lower seller prices. In addition, customer destocking has also been a factor in the first half of the year, though we are cautiously optimistic that this is largely behind us.

For Plasticizers, we continue to face competitive pricing from producers, who in response to slower growth in Asia and European markets have increased exports to other regions. We also continue to see manufacturers of phthalate-based plasticizers trying to defend market share.

Looking at the full-year, we expect operating earnings to be approximately $200 million. There is downside risk to this number, reflecting the limited visibility we currently have on our adhesives resins business.

With that said, as I stated on the first quarter call, we remain confident in the two key long-term growth drivers for this business. First, solid growth from increased used of hygiene products, such as diapers in fast expanding markets, particularly Asia. Second, substitution of phthalate plasticizers with non-phthalate plasticizers in Europe and the US.

Advanced Materials is on slide 8. They had a strong quarter. Year-over-year sales revenue increased with contributions from all three underlying businesses. Tritan had another fantastic quarter, with volume up over 70%. That's seven-zero-percent, primarily in the durable goods market. If you recall, last quarter, we were up around 40% year-over-year. So we are really seeing strong adoption by the market, as we get wins across several applications and geographies. As a result, we are expanding our Tritan capacity by approximately 25%, which we expect will be online around the middle of next year. We continue to evaluate options for more significant expansions in the future.

Interlayers volume increased reflecting stronger demand in the Asian and North American transportation markets. Performance films volume was also higher, as that business really had a nice quarter. Operating earnings increased primarily due to higher sales volume and higher capacity utilization, which led to lower unit costs as well as improved product mix.

We continue to sell more premium products in this segment -- Tritan copolyester;, V-KOOL brand window films; and the interlayers with acoustic properties. This mix improvement, along with improved volume and higher utilization, is expected to continue to drive our earnings growth consistent with what we told you at Investor Day back in December. The operating margin for the quarter improved to just under 13%, a nearly 250 basis point increase year-over-year.

For the full-year, we are expecting the distribution of earnings to be similar to the past few years, with first half earnings just under 60% and second half earnings just over 40%. We are expecting a decline in second half earnings, due to copolyester's [mineral] layers manufacturing shutdowns in the third quarter and seasonally slower demand. As a result, we expect 2013 operating earnings to be approximately $250 million. Given the continuing weak auto market in Europe, as well as lower demand in areas like packaging and displays, this would be very strong performance, we think.

Next is Fibers on slide 9. Another great quarter for this great business. Revenue increased with both volume and price up. Earnings were a record at $116 million, due primarily to higher selling prices. For full-year 2013, we're raising our earnings expectations to approximately $450 million, which means we expect earnings to be slightly higher in the first half of the year compared to the second half, as we anticipate higher raw material and energy costs, namely wood pulp in the second half, based on how these costs flow through our system.

Lastly, I will give you a quick update on our joint venture with China National Tobacco Corporation to expand acetate tow capacity in China. We are on track for the facility to come online during the third quarter. We expect qualification of material will take place through the end of the year. Therefore, we expect to begin to recognize earnings from our equity investment in the joint venture in early 2014. We also expect to begin recognizing revenue and earnings from acetate flake sales to the joint venture during the second half of this year.

I will finish out the segments on slide 10, with Specialty Fluids & Intermediates. Sales revenue increased year-over-year, as we hit higher volume in both olefin based Intermediates products and Specialty Fluids. For olefins, we benefited from having a full quarter of output from the furnace we added to our Type IV cracker, which came online at the end of the first quarter, and also from identifying opportunities to move some of our butanol from Texas into the Asian market.

For Specialty Fluids, the higher volume was primarily due to the timing of customer fills. Operating earnings increased significantly year-over-year, primarily due to higher volume, with lower raw material and energy costs largely offset by corresponding lower selling prices.

Sequentially, operating earnings increased by $23 million, or almost 25%. We saw improvement throughout the segment, largely due to increased volume, which was up 7%. Also the operating margin for the quarter was over 17%, an increase of about 250 basis points over the prior year quarter and about 170 basis points higher sequentially. For the full-year, we are raising our operating earnings expectations to approximately $410 million, reflecting strong earnings expectations throughout the segment.

I will end on slide 11, with an update on our 2013 outlook. We're at the halfway point for the year and have had very solid results from our portfolio of specialty businesses. We continue to benefit from our leadership position in attractive end markets, from the diversity of the end markets we serve, and from our broad geographic footprint. Given our strong first half of the year, we are raising our full-year expectations for 2013 EPS to a range of $6.40 to $6.50. This is despite slow global economic growth and weakness in certain markets like European autos and adhesive resins. We are expecting earnings in the second half to be slightly lower than the first half, due to seasonally lower volume.

I would add that in the third quarter, we also had several shutdowns that I previously mentioned. But in the fourth quarter, we expect higher year-over-year capacity utilization, which we expect will result in lower unit costs compared to what we had in the fourth quarter 2012. We remain on track to achieve our fourth consecutive year of double-digit earnings growth. I remain confident we are well positioned to continue to deliver double-digit earnings growth for the next two years and beyond. With that, I will turn it over to Curt.

Okay. Thank you, Jim. Good morning, everyone. Moving ahead to slide 13, I will review some of our financial highlights for the second quarter. We generated $362 million of cash from operating activities in the quarter, primarily due to strong net earnings. Working capital increased by $46 million, primarily due to increased receivables. We also made a $13 million contribution to the US defined benefit pension plans and continue to expect the full-year contribution will be approximately $120 million.

Free cash flow for the quarter was $216 million, with CapEx at $100 million. Finally, our cash balance, which includes cash equivalents, was $234 million at the end of the second quarter.

During the quarter, we also incurred $18 million in net asset impairment and restructuring charges, primarily for closure of a photovoltaics production facility in Germany. The site produced ethylene vinyl acetate for use in photovoltaics, an end market that has been very weak for some time now.

Our tax rate for the second quarter was 30.9%. This is a bit below our previous guidance of a rate slightly less than 31.5%, with the difference primarily attributed to investment tax credits from the State of Tennessee related to our recently announced future capital expenditures at our Kingsport site. We expect our tax rate for the remainder of the year to be approximately 31%, assuming no dramatic change in foreign earnings mix.

On slide 14, I will walk you through our estimates for free cash flow in 2013. Consistent with our previous guidance, we project operating cash flows of roughly $1.3 billion. The full-year operating cash estimates include our projection for continued strength in earnings, as well as the following items.

First, slightly higher working capital, as a result of increased revenue and a broader geographic footprint, with the majority of the working capital build in the first half of the year, worked down in the third and fourth quarters. Second, funding of balance sheet accruals such as the annual environmental funding, of approximately $30 million, primarily for legacy Solutia sites and restructuring accruals for site closures in Brazil and Germany.

Third, any Solutia restructuring and integration costs that are excluded from our earnings projections. Lastly, as previously noted, an anticipated $120 million contribution to our US defined benefit plans.

Also consistent with our prior guidance, we expect 2013 capital expenditures to total approximately $525 million. This capital spending will be more in the second half of the year, due to normal operational trends, as well as timing for our growth projects such as our Specialty Fluids expansion in Wales. So putting this all together, we reaffirm our 2013 free cash flow expectations to be between $600 million and $650 million, with the midpoint of this range representing a growth rate of greater than 30% over the 2012 total.

Next on slide 15, I will provide an update on the Solutia integration. We remain well on track to achieve the synergies we expected when we acquired this business last year. As the slide indicates for the cost synergies, we expect to achieve greater than a $100 million run rate by the end of this year. On the tax synergies, we are on track to utilize at a minimum, approximately 50% of the NOLs by the end of 2015 and have also put in place structures to help lower our effective tax rate.

For the revenue synergies, while these remain difficult to quantify at this point, we are excited by the commercial improvements and new product development projects that will be added further throughout this transaction.

As we noted last quarter, we reached a major milestone in April, with the successful integration of the rubber additives product lines, part of our Additives & Functional Products segment, over to our SAP system. We remain on track to complete SAP migration of the remaining former Solutia businesses in late 2013 to early 2014 time frame.

The Solutia acquisition remains a very value-adding transaction for our shareholders. The Solutia transaction and some of the divestitures we have completed over the years, Eastman has demonstrated a commitment to evaluate our portfolio of businesses and assets to ensure we are obtaining the best value for our shareholders.

As another example, we have been evaluating options with our excess ethylene position, as summarized here on slide 16. As a reminder, we have four crackers at our site in Longview, Texas. We have one larger cracker, with approximately 800 million pounds of annual ethylene capacity. We have three smaller crackers, each with approximately 300 million pounds of annual ethylene capacity. One of these three smaller crackers has been idle since 2007.

We use all of the roughly 600 million pounds of propylene we produce and buy about 300 million pounds annually. We use about 50% of the ethylene we produce, with the remaining 700 million pounds of excess ethylene sold into the merchant market. There is a common carrier ethylene pipeline between Longview and Mount Belvieu that is not owned by Eastman.

Our focus has been to look at options to monetize or otherwise improve the economics of the approximately 700 million pounds of excess ethylene position, while retaining our reliable and cost advantaged integrated position for our specialty and proprietary products.

As part of the effort, we recognize the safe and reliable operation of our crackers is essential to ensure reliable supply of our materials for specialty and proprietary product production. We believe that ownership of our larger cracker is essential for our integrated site integrity. We also intend to retain the cost advantage of our fully integrated position to propylene, since losing this advantage would be trading volatility in propane for even greater volatility in propylene. Therefore, options under consideration range from a capacity reservation fee to divestiture of the two smaller and one idle crackers.

In addition, ethylene could be used as raw material for a new on-site derivatives facility that another party could build or could move off-site over the common carrier ethylene pipeline. To size this for you, over the last couple of years earnings from the approximately 700 million pounds of excess ethylene sales have been between 3% and 5% of overall Eastman earnings.

In terms of status, we're making good progress. The data room has been set up for some time now. There have been a number of management presentations, as well as a number of visits to the Longview site. There have been multiple parties that have expressed interest. In addition, there are various complexities to work through, such as feed stock mix to ensure adequate supply of propylene for our needs or how to price such propylene if we were to sell any of the three smaller crackers.

Furthermore, we have assumed third parties would continue to have reasonable access to the common carrier ethylene pipeline. However, earlier this month, Westlake, the common carrier pipeline owner at the site, modified the tariff on the pipeline and effectively eliminated the ability of a third party to move ethylene off-site, which had not been the case up to this point. Eastman yesterday filed a legal challenge with the Texas Railroad Commission, which is the governmental entity that regulates pipelines in Texas. We are confident in our position as stated with the authorities. Resolving this issue has caused some delay in our efforts thus far.

This extra time has enabled additional parties to visit the site, hear management presentations and join the process. However, if resolution to this matter is prolonged, it will continue to delay our efforts.

One other comment, as mentioned in the last call, we feel investors are spending probably a little too much time on this issue. We are a large Company with a great portfolio of businesses. It doesn't necessarily make sense to me to decide whether or not to buy Eastman stock based on what we do with our ethylene position alone. We will continue to be disciplined regarding decisions with these assets as we have demonstrated with our portfolio the last several years. We will update you further on our efforts as appropriate.

To close, on slide 17, we will also continue to be disciplined with our approach to capital allocation. As previously mentioned, we expect capital expenditures of $525 million, which is similar to 2012, when you factor in the $51 million Solutia spent in the first half of 2012, prior to the close of the acquisition. This reflects our commitment to pursue organic growth across our portfolio.

On the debt side, paying down a significant portion of the Solutia acquisition term loan will continue to be a priority for cash throughout 2013. During the quarter, we reduced the term loan balance by $350 million and on a net basis reduced our long-term borrowings by $100 million, effectively using our strong balance sheet to obtain more attractive funding in the commercial paper market and other sources of funding.

Moving next to joint ventures and acquisitions, as previously noted in the Fibers section, the acetate tow JV is on schedule to be online this quarter. Our Regalite hydrogenated hydrocarbon resin JV with Sinopec is supported by continued growth in the hygiene market. When this project is completed, it will be the largest hydrogenated hydrocarbon resin asset with a first quartile cost position located in a strategic part of the world. Working with both customers and our partner, we have the flexibility to adjust the timing of this project if it makes sense to do so. We're currently assessing our options.

Additionally, we will continue to evaluate opportunities for strategic bolt-ons. Lastly, we expect to continue returning cash to shareholders in the form of both dividends and share repurchases. During the second quarter, we repurchased $46 million of Eastman's common stock and paid $46 million in dividends. So with that, I will turn it back over to Greg. I thank you for your interest in Eastman Chemical Company.

Okay. Thanks, Curt. We have a number of people on the line this morning. We would like to get to as many questions as possible. So I would ask that you limit yourself to one question and one follow-up. So with that, Jenny, we're ready for questions.

(Operator Instructions) Kevin McCarthy, Bank of America Merrill Lynch.

I guess first off, two questions on Fibers. Your volume grew 8% in the quarter, after I believe it was plus 3% in the first quarter. I don't normally think of volume growth quite that strong in cigarette filter tows, so perhaps you could comment on what is driving that strength and whether or not you've gained any share.

Then the second piece of it would be the expected impact from your acetate tow JV in the back half of the year as that flows through earnings. Thanks.

Kevin, this is Jim. We upfront mentioned who was on the call -- I probably should have said, I thought it was very appropriate given the frankly, fantastic results of this quarter that the guys who were directly responsible for it had a shot at being on the call and getting some of the credit. So that's why Mark and Ron are on this call. With that, I will let Ron address the Fibers question.

Kevin, as far as second quarter, what we saw -- you've heard us talk about this business having a pattern through the year, in terms of deliveries and how we supply certain customers. So we get some of that noise one quarter to the next and you see some of that in our tow for second quarter.

We also had in the second quarter a pop-up in some acetate yarn demand as well, that helped us with some of that volume gain sequentially. We've been in a fairly poor demand environment there. We saw some rebound there, as well as some customers deciding to restock a bit in the face of some of that rebound. So that contributed as well in Q2.

Okay. Then I guess as a follow-up, and at the risk of increasing focus on an issue that you think people are already too focused on, Jim. I wonder if you could just elaborate on the pipeline tariff issue.

What exactly changed there, with Westlake? What is your case as to why it is inappropriate? What does it mean for the timing of any action that you may be able to take on strategic alternatives for the smaller crackers?

I will get Curt to talk about that part of the process. But let me -- Ron missed the second half of the question.

Yes. I didn't get to your question about the effect of the JV. First off, let me just comment that the JV is -- consistent with what was said earlier, but just a little more granularity, we do have the plant complete from a construction standpoint and have chemicals in it, so we're on track there. As we go through this, we've told folks all along, that we see the second half of this year as a period of startup. Getting the plant good and lined out and in qualifications. So we are going to see most of the impact really starting to hit us in 2014. We will be selling flake to the JV in the second half. You see that baked into our numbers.

One of the things you won't see quite as obvious in the second half as the first half is, we had some opportunity to sell some acetate flake in the first half, unrelated to the JV and that will balance out the first half/second half comparison a bit. So it won't be quite as obvious, when we see the additional JV -- the flake sales to the JV in second half. But I think you are going to mostly see this be an impact in 2014 and following.

Ron, I think you told me mix shows up in volume as well. They're looking at those volumes --

That's right. There is some mix effect there. Part of that yarn effect. Part of that flake effect and some tow.

Curt?

Kevin, regarding to your other question, if you compare the recent tariff versus what was in place previously, Westlake has in essence eliminated bilateral movement with the pipeline, as well as third parties' ability to do exchanges of ethylene. Through these actions, Westlake has a restricted use of its pipeline by any other third party besides Eastman.

In regards to timing, we just filed our objection with the governing body in Texas. We're still working through the timing. The good news is we still have the various parties interested in our excess ethylene position as we work through this. But to the extent that this resolution of this matter is prolonged again, it will affect our efforts to get something done.

Kevin, if you're on the Westlake call, you might want to ask them what they were doing? What they were trying to do when they changed the tariff?

Fair enough. Thank you.

Robert Koort, Goldman Sachs.

I was wondering if you could comment a little bit about the geographic spread of your volumes. You rightly attributed or characterized that as a favorable trait of the Company. But I was a little surprised at the US where it would seem industrial production has been reasonably okay relative to the world, you didn't have a little bit more robust results there. So could you maybe talk about the one or two things that held you back in the US?

Yes. It is funny, in this quarter, with how we performed, to have anything about something holding us back. We didn't feel too held back, in general, it felt like a pretty good quarter. I'm sitting here thinking I kind of like having about three-fourths of my revenue in North America and Asia, at least for the present and the foreseeable future. You want to add a little color, Greg?

Yes. On North America, as Jim mentioned in his comments, part of it is just you had lower ros. You had propylene that was down about 3%. Propane that was down closer to 8% or 9%.

I'd also mention that Adhesives & Plasticizers, where they've seen some challenging on the revenue side, about 60% of the revenue is in North America. So some what you're seeing is that challenge as well. But the remainder of the business was pretty strong in North America this quarter.

Could you provide, I don't know if you guys roll this up or have it at your fingertips, but what year-over-year looked like in various industries? I'm most interested in the auto tire and construction industries.

Go ahead, Mark.

Sure. I'm happy to cover that. What I would say is that from an end market point of view, tires has been relatively stable this year relative to last year. We have seen some slight improvements in demand -- on tire demand in Asia, but by no means are we seeing any signs of the anticipated restocking event for the tire industry. It is still somewhere out in the future. There is no clear indication of when that may occur.

In regards to building construction, certainly has been also solid. I wouldn't say that this seasonal demand pattern has been as strong as some past ones. So as we see this pickup in residential construction in North America, there is a bit of a lag effect for our markets, like painting a house takes a while before you get around to that step of the process. So I would call it solid, but not incredibly strong from a B & C point of view, so far.

But those two key markets, again consumables is holding together fairly well. I would just describe it as solid.

If I might just slip the last one in on the ethylene stuff as well, obviously this pipeline can be a challenge. Is that a two-way pipeline? Then are there any contract terms with Westlake that could also futz up the deal? Thanks.

As it relates to a contract with Westlake, as you would imagine when we sold our polyethylene businesses, there are various contracts between the two respective parties that are not necessarily out there in the public domain. The pipeline has the ability to move both directions, yes.

David Begleiter, Deutsche Bank.

Jim, just on Adhesives & Plasticizers, you lowered guidance again this quarter. What is the change versus what you had back in late April in terms of the guidance?

I will let Ron take that.

Yes, David, I think the view we have is similar in terms of the supply/demand kind of picture for both Adhesives & Plasticizers. What we're just -- continue to see is sluggishness in the end markets, as well as some supply that has come on, particularly in the resins area. That's just all resulted in a fairly competitive environment out there for pricing.

So I would say the difference in the last forecast and this one is we've just -- we got another quarter under our belt. We've seen a bit more how the market is shaking out. We are just reflecting that as we look out the rest of the year. Not a tremendous change in the view of the environment from first quarter.

I would say that we still -- that sluggish market or sluggishness in end markets, on the Plasticizers side, we continue to see in the midst of all of that, continued nice progress on switching. If you don't mind, I'd just take an opportunity to highlight that.

We talk about that some, but just to give you a sense of it. We made the acquisition of the Texas City site sometime back. Converted a line over, one of two, over to make non-phthalate plasticizers. We're filling that out exactly on plan.

It is versus what we thought it could do originally, where we're at about 90% capacity utilization. We are actually at a lower percent utilization because we have been able to push the capacity a little bit more. And then we have got a second one to go.

So in the midst of all of this, we still see that good story going on. But it is still a -- we do see a lot of competitive actions around pricing, given the softness in the end demand.

Jim, you mentioned also a shutdown cost in Q3. Could you detail those costs and by segment as well?

Well, I mentioned the two segments, I don't know, Curt, do you want to -- it is less than $10 million.

That's what I would characterize it, a little less than $10 million.

Frank Mitsch, Wells Fargo.

Jim, I'm not sure what I'm more impressed with, your record earnings or your ability to plant questions on other conference calls. (laughter)

I don't know if I could be, but I'm not on that conference call. I would be curious, just to ask them what were they trying to do in that process?

It will be very interesting to see it play out. On the EVA shutdown in Germany, how much more do you have left in the photovoltaics business?

Frank, what we have left is just going to be some assets we have in China. However, those assets are multi-purposed. We can do other things with those assets. That's what we are going to be looking at is, just how do we take that asset base and maybe support our other interlayer business and other Advanced Materials segment.

I don't expect to talk about photovoltaics again on a call.

Well, you're retiring at the end of the year, so --

I wasn't trying to be cute, Frank.

All right. That's fine. Curt, you talked about priority for the balance of the year, paying down debt. Following that, obviously, with a very good cash flow, how should we think about the positioning in terms of M&A? Or doing more than just offsetting dilution for your share repurchase? Can you talk a little bit more about the priorities of use of cash going -- after you finish making the paydown of the debt?

Thanks, Frank. As you know, we got some pretty good cash flows and feel good about that debt paydown as we get towards the end of this year. I think you also know our approach pretty well now on capital allocation. We're trying to look across all the four buckets of opportunities, trying to find the best opportunities we can.

We are focused on deploying capital for growth and actively looking at M&A opportunities. I would also say though our standards for M&A are probably as high as they have ever been in our past. Thus we are going continue to be prudent. But we are actively looking for ways to deploy capital for M&A and growth.

At the same time, we will continue to be returning cash to shareholders. Again, you can expect an increase in dividend, as we work that through our Board. Share repurchases continue to be a good use of cash. As we get into next year, we can do more than offset dilution and that will be a viable use of cash as we look across our different option sets.

If I could, Curt, let me just add on. So if you back up to what our priorities are. Number one priority, growth of the Company, in particular double-digit earnings growth throughout the foreseeable future.

Cash, we're blessed with this strong cash flow. It is one of the ways -- one of the things that gives us comfort on putting those targets out there. Obviously I need a lot of help from different parts of the world. We've given you all our expectations, what the economy will do, et cetera and markets will do. But having this strong cash flow is a nice cushion to have. That is -- as we go to decide how to use that cash, we think about accretive acquisitions, our share counts, et cetera.

PJ Juvekar, Citi.

This is Eric Petrie standing in for PJ. Just on the propylene to propane spread. Despite higher propane exports prices really haven't moved much due to high inventory levels. But as we work through this inventory, where do you see propane prices going and the resulting propylene to propane spread?

So I guess you could maybe give me a sense of your time frame, but let me just take a shot at it. First off, just for the remainder of the year, we are forecasting spreads to be slightly down from where they are. As we are going out, as you point out, there are opportunities coming on, or capacity coming on to export more propane. As we look out there, there is a variety of views as to how quickly that is going make a difference given not just inventories but production.

So we think, on balance there is some upward pressure on propane over the next several years that we could face, given that. But it is going to be hard to call exactly.

We do things along the way to help deal with volatility of propane. I think everybody knows, we do hedge. We have done some of that this year that has helped smooth things out. We do still feel like all in, that being backwards integrated to propane for our derivatives is a good place to be.

Great. Thanks. Then just on Crystex and Santoflex, tire volumes seems to be stabilizing. Where do you see volumes going particularly in the commercial truck market? As well as, can you comment on your recent price initiatives in anti-degradants from last quarter?

Sure. This is Mark. In regard to Crsytex first, we feel good about that business. It is actually holding together quite well. Demand has been solid and slightly improving on a year-over-year basis. So that business is continuing to contribute and improve earnings. So it has been a solid part of the business.

When it comes to the anti-degradants, the PPDs that we have -- as we said before, that is a very challenging business, that is where the year-over-year earnings challenge has really come from, for the entire Additives and Functional Products segment, it has been from this relatively small business. But we really faced a pretty severe compression last year as benzene prices went up dramatically in the second half of last year.

At the same time, price competition developed, due to the excess supply from the Asians. We've had some progress in improving price this year, as we mentioned we've been rolling out some initiatives to do that. I would say the improvements so far have been modest. Certainly benzene prices coming off are going to help in the back half of this year to the extent that they stay where they are.

But I would say it is a tough road there. It is an industry that is most likely headed to some further consolidation from our view. We feel very confident in our position in this industry. We have got the low cost position in the western hemisphere and feel like long-term this is a business that will improve from where it is today.

Andy Cash, SunTrust.

This is Jim Sheehan, sitting in for Andy. You gave some updates on what your expectations are for the full-year in 2013, for the various segments. I was just wondering if you could also comment on the corporate and other line.

If you look at the corporate and other line that is developing pretty consistent to what we expected. Last year, the corporate and other line was $125 million, of which $50 million was attributable to Perennial Wood. We've talked about that reduction being cut in half and, as well, some further improvements. So I think we've couched that probably around $75 million for the year.

Okay. Could you also provide some more color on your new -- your V-KOOL product, your interlayer products? What type of growth rates are you seeing there year-over-year?

Sure, this is Mark again. The performance films business is having a great year. In particular, the V-KOOL products -- those are our premium products, they're selling quite well. High double-digit revenue growth in that business, especially in Asia. So that part is going well. Overall, I would say that the sales environment in China for auto sales has weakened some but that product is outperforming the industry.

Thank you.

Laurence Alexander, Jefferies.

This is Rob Walker on for Laurence. I guess first, on Adhesives & Plasticizers, what needs to happen for the business to be in -- to grow sustainably again? How far is it away from tightening? Where do you think profits could get to in 2015?

This is Ron. Thank you. Let's see, as far as improving, what we've seen that has caused the issues here in the last several months has been some weakness in demand and then additional capacity. So I think the short version is, particularly in the resin side, we need to see some continued growth in the end use demand soaking up some of that capacity. I think it is going to be difficult to call exactly how long that will take, until we see what kind of growth rates are re-established.

But that's what it takes, is we need to see some of that additional product consumed. We do still feel like we've got some good value propositions. One of the areas there that Jim mentioned is the hygiene market, has higher-than-average growth and also tends to need higher performing adhesive resins, which is what we've got in our portfolio. It is the kind of product that we are going to get out of our new capacity in China. So we got a good cost position coming our way there, as well as we are in the market geographically where we see a lot of the growth opportunity.

As far as 2013, we see -- as far as the two parts of Adhesives & Plasticizers, probably getting closer to our original targets in 2015 on the PV side and taking a bit longer on the Adhesives side. But it's going to be hard to call at this point, until we see a little bit more clarity and just how strong the demand is going to be. But we are definitely pushing out from our earlier forecast for 2015, hitting those numbers out a year or two or so.

Okay. Thank you. Then with the exception of that segment, your volumes are very strong across your portfolio. What did volumes grow sequentially? Was this better-than-normal seasonality? What kind of volume growth is imbedded in your guidance for the back half of the year on a year-over-year basis? Thanks.

Well, I think what we'll characterize is the volume expectations for the second half of the year, it reflects primarily just lower seasonal demand in our volumes. I don't think we have a specific percentage out there today. But we will come back to you as we get those results.

On the second quarter, we always get a seasonal increase in volume first quarter to second quarter and we saw that again. I mean I actually felt pretty good about the growth we've had. I have looked around at some of the other guys in the industry. I don't feel bad at all about the volume growth we had in the second quarter nor our expectations for the remainder of the year.

Nils Wallin, CSLA Investment Bank.

On Advanced Materials, have you fully sold out the TRITAN capacity as yet? Then if you are expanding, my understanding was that originally, the expansion you had recently was to basically fill out all of your polymer capacity with your monomer capacity. Does this new expansion require you to expand both monomers and polymers?

Nils, thanks for the question. I have been waiting for my Tritan question all day. It is certainly one of the most exciting product launches we've had in the Company in our history I think. It has grown certainly beyond our expectation this year. We're excited about the prospects going forward.

As you mentioned, we are selling quite a bit, but we are not at capacity yet. We still have some capacity to grow with the market. But we are moving very quickly to debottleneck that plant and extend its capacity from 60,000 to 76,000 tons, which we will have online next summer. So excited about the growth. Certainly looking at stretching the capacity. We also have a much larger expansion in development where we can add a much larger chunk of capacity to continue supporting the market growth.

Great. Thanks. Just on the Longview cracker, if you were to sell the smaller 300 million pound crackers, what would that do to your overall propylene position? While retaining your 800 million pound cracker?

This is Ron. I will address that. Curt described our process of selling this excess ethylene position. We want to retain a good cost base propylene position to support our various derivatives. You might recall that the propylene produced at the site is only part of what we need. We have also got a longer range supply agreement with Enterprise for when their PDH plant comes online. All of that together will make us fully backwards integrated in propane based cost for our propylene derivatives. So as we go forward with the process, our focus has been to sell that ethylene position -- that merchant ethylene position but retain a good propane based cost position for propylene.

Thanks very much.

Mike Sison, KeyBanc.

Nice quarter.

Thank you.

I appreciate Solutia's integration going well, maybe ahead of expectations as you noted. Could you give us an update though in terms of sales volume? Since you've owned it, it's certainly -- a lot of businesses are a little bit less than we thought heading into this year. But maybe frame up where you think the businesses are at across the board and what the upside potential could be.

I'm going to let Mark hit that because he is closest to it, but one of the things he was pointing out to me, was to really look at it on a gross margin basis, so you don't get confused with the cost allocations. I'm jumping down the income statement a little bit, beyond what you asked. But Mark, do you want to give him some color on the Solutia business?

Sure, as we've discussed in the past, going from 2011 to 2012, we certainly hit some headwinds with the European economy and some of the Solutia businesses, given their exposure to Europe. That hasn't improved significantly yet. But we are very well positioned to grow these businesses. Overall, the gross margin dollars this year will be higher than last year for these businesses. So they are stable and well positioned for growth.

All the key products, whether it is Crystex, the interlayer products, performance films, have sufficient capacity to support growth and economic recovery in those businesses, as you look over the next three years.

More importantly, the premium products are doing quite well. So the acoustic sales and interlayers is very solid growth. We're setting records in acoustic sales in the last two months, which is certainly a very strong mix upgrade there. As I mentioned, the Crystex products are doing well. We have several new products in development that we're preparing to launch next year and feeling excited about that. In Ron's business, specialty fluids is doing quite well and exceeding expectations.

So overall, I think they're very well positioned. It does require an economic recovery or specifically some end market recovery in tires and building construction. We need the European economy to solidify and start moving in at least a positive versus negative direction. But we feel good about it.

Great. Then in terms of SAP for the tire additives business, it is great that you got that on there. Can you maybe talk about some of the benefits you expect to see from that being rolled in there? One of the earlier ones that you tend to get in SAP is pricing, maybe an update on that?

You hit a great chord for us. Eastman, our historical growth and earnings performance frankly has been driven by some very sophisticated understanding about our markets and our pricing in capturing the full value and using SAP for that insight. So we've been quite excited to get SAP integrated into Solutia and apply those pricing tools that we've developed, into those businesses and are already starting to see some of that benefit.

So we do expect to gain a lot of benefit and pricing insight not just in the rubber business, but in the Saflex product range and the performance films product range. So we expect that to be another contributor for revenue synergies or margin synergies-- however you want to define it -- in the next few years.

Mike, if I could add, as you probably know, getting those SAP implementations is also going to enable us to get those cost synergies as well as continue to pursue additional productivity gains in 2014 and beyond.

Duffy Fischer, Barclays.

Jim, you got the $8 number out there. You've talked about it a couple different ways. One, kind of coming from organic growth. Then one, using the cash flow.

It sounds like using the cash flow, you still feel very strongly that you get there. How would you handicap being able to get there with just organic growth at this period?

That is a tough one, Duffy. Thank goodness I don't have to handicap myself. (laughter) I mean we have got a history of using every line of the income statement. We do what it takes to hit our numbers and hopefully give you a little extra.

But I got the genesis of your question, it is that you know as I do that it is a tough environment out there. Mark was just leading into it, with looking for some end market recovery in some of our key end markets, looking for Europe to get a little better, which was really significant for the old Solutia businesses. So I would not bet against us, frankly.

But as I'm heading out here in a few months, I've got the highest amount of confidence that the guys are going to do everything they can from our side of the table to make it happen. But you never get guarantees in life; as I said, you need the economy to give you a little help.

But we're going to use all of the tools we got because, we think it is really important for our shareholders to keep driving that track record of earnings growth year-over-year. That's what separates you from being the more commodity diversified guy who is up one or two years and then down four. When we start stringing these four or five or six years together of strong earnings growth, people have to think about you differently. That's our game plan.

Fair enough. Then on the phthalates and non-phthalates, on that mix, how much more can the phthalate guys cut price to try to maintain market share? Are they getting close to their cash costs at this point where you can say that they've pulled it out -- or fired all the bullets they can? Or can they still continue to cut price, do you think, more from here?

Well, it is hard to know exactly, but what I would say is, instead of talking about what they can do, just tell you what our customers are telling us. They see this as just a, depending on which one you're talking about, how urgent they are but it is just inevitable. Ultimately, it is not going to be a price issue for them. It is just a matter of how quickly they make the switch.

Some have seen just a corporate strategy that this is the right thing to do, get on with it. Others have been a bit more followers. We're seeing that dynamic as well, where they may have not been so interested and they see some of their competitors doing it and now they have gotten more interested. So I think that side of it is just kind of a near-term dampener maybe. But all in all, we see that dynamic just good and strong and continuing.

Vincent Andrews, Morgan Stanley.

This is [Ian] in for Vincent. On Advanced Materials, could you quantify how much of the strength was due to auto and transportation demand?

Mark?

This is Mark. Certainly. Advanced Materials had a stellar quarter. We're really excited about it. The primary driver of the earnings improvement in the quarter was really Tritan, more so than the automotive sector. So we've had phenomenal growth in Tritan. That is a very high margin product for us. It is both volume and mix improvement for the segment.

Performance films also had a very solid quarter and improvement with their sales, not just in Asia but we actually had very strong growth in the after-market window films in North America, actually up 8%.

The third contributor was interlayers in the order of contribution. The reason is we see very solid volume growth globally where things are holding together. But Europe has been a big part of our revenue, as Saflex and an important part of our margin contribution from a geographic mix point of view. So a very solid quarter for interlayers. But not an exceptionally strong one.

The automotive segment overall is growing but it depends where it is growing. I do want to come back to the underlying mix in the acoustic products has been performing quite well. Very consistent with our Investor Day presentation, our strategy is to drive the mix up, have solid volume growth, leverage the capacity utilization of this business to improve the earnings. We're seeing all three of those levers play out as we've laid out in our strategy.

Okay. Thank you.

Okay. Thanks again for joining us this morning. A web replay and a replay in downloadable MP3 format will be available on our website beginning approximately at 11 AM. Have a great day. Thanks very much for your interest in Eastman.

Again, that does conclude the call. We would like to thank everyone for their participation today.