伊士曼化學 (EMN) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company's third-quarter 2013 earnings conference call. Today's call 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, Christy, 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; Mark Costa, President and CEO Designate; and Josh Morgan, Manager Investor Relations.

Before we begin, I will cover three 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 third quarter 2013 financial results news release and in our filings with the Securities and Exchange Commission including the Form 10-Q filed for second-quarter 2013 and the Form 10-Q to be filed for third-quarter 2013.

Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core or nonrecurring 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 third-quarter 2013 financial results news release which can be found at eastman.com in the investor section.

Projections of future earnings in the presentation also exclude such items as described in the third-quarter financial results news release. And lastly, we posted the slides accompanying our remarks for this morning's call 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 begin on slide 3. And as I always do on these calls, I will take a moment to provide an update on our most recent outlook statements. First of all, we have executed very well on the Solutia integration and are at the point now where I can say it is largely complete. Curt will provide you with an update and a bit more color on this topic in his section but let me state again what I've said on several of these calls now and that is that I'm very pleased with the success of the integration and how well these businesses and cultures have come together to create value for our shareholders.

Next in July, we raised our full-year 2013 EPS expectations to a range of $6.40 to $6.50 from the previous range of $6.30 to $6.40 so we raised $0.10. Today we are adjusting our guidance back down those $0.10 to $6.30 and $6.40 and I will talk more about that in a few minutes.

We also said we expected to generate between $600 and $650 million of free cash flow in 2013 and we remain on track to achieve this. And finally, as always, we committed to remain disciplined in our capital allocation. If you look at how we've put our capital to work this quarter and go back to our track record over the past several years, I hope you would agree that we have been very prudent in our choices and focused on creating value over the long term.

Next on slide 4 are the Eastman corporate results. Operating earnings increased third quarter 2013 versus third quarter 2012 as higher sales volume in the Additives & Functional Products and Advanced Materials segments as well as higher pricing in fibers more than offset continued challenges in Adhesives & Plasticizers and the impact of higher raw material and energy costs.

The operating margin for the quarter was 17%, about the same as it was in third-quarter 2012 despite weakness in Adhesives & Plasticizers and higher raw material and energy costs.

Third-quarter EPS was $1.68 and with this level of earnings we remain well-positioned to achieve our fourth consecutive year of double-digit earnings growth. And while the global economic environment remains mixed and somewhat unpredictable, our third-quarter results reflect the underlying strength of our portfolio of specialty businesses.

Next on slide 5, I will highlight our results by geographic region and you will notice we were higher across all regions with our largest, North America, up 3% as we continue to see strength in the transportation and building and construction markets. We also had another solid quarter of growth in Asia-Pacific, up 5% year-over-year and growing 11% in each of the first two quarters -- after growing 11% in each of the first two quarters.

The growth is primarily driven by strength in both our Fibers and Specialty Fluids and Intermediates segments as well as significant growth in our Tritan copolyester within Advanced Materials.

As I mentioned on our last call, we believe a significant factor is China's transition to a consumer economy and their growing middle class and our portfolio is well-positioned to take advantage of this transition and less exposed to the declining infrastructure spending in the region.

We grew revenue 3% in Europe which was our first positive quarterly comparison this year and this was driven largely by the Additives & Functional Products and Advanced Materials segments. And Latin America revenue was up a couple million dollars at just under 2%. So our geographic diversity continues to be a source of strength for our portfolio and our third-quarter results reflect that.

Moving next to the segments in the slide 6 where I will begin with Additives & Functional Products. Sales revenue increased primarily due to higher sales volume across several product groups and this was particularly true for solvents as we continue to benefit from the strengthening US building and construction market supported by recent capacity additions at our Longview, Texas facility for our ethylene oxide derivatives. Higher volume for cellulosic polymers and Crystex and soluble sulfur also contributed to the higher revenue attributed to increased demand in the transportation market.

Operating earnings increased largely due to the higher sales volume partially offset by higher raw material and energy costs particularly for propane.

Looking at the fourth quarter, we expect operating earnings to be up year-over-year but to decline sequentially consistent with our normal seasonality you would expect in this business and higher raw material and energy costs. As a result, we continue to expect full-year 2013 operating earnings of approximately $410 million which would be a solid improvement over 2012.

Moving next to slide 7 and Adhesives & Plasticizers, our third-quarter result reflects the continued challenges this segment is facing with both the Adhesives and the Plasticizers businesses impacted. Focusing first on adhesive resins, increased competitive supply primarily due to increased availability of key raw materials continues to impact the business unfavorably. Additionally, we continue to see demand weakness in consumables particularly for tapes, labels and packaging.

However, we expect solid long-term growth from increased use of hygiene products such as diapers in fast expanding markets particularly Asia. For plasticizers, we continue to face competitive pricing from producers who in response to slower growth in Asian and European markets have increased exports to other regions. At the same time, we also continue to see existing manufacturers of phthalate based plasticizers trying to defend market share.

Taken together, these factors resulted in lower selling prices and ultimately lower earnings for this business in the third quarter. On the positive side, we continue to benefit from the substitution of phthalate plasticizers by non-phthalate plasticizers driving demand growth.

Looking at the full year, we expect operating earnings to be approximately $175 million.

Advanced Materials on slide 8 and they had another strong quarter. Year-over-year sales revenue increased primarily due to higher sales volume from Eastman Tritan co-polyester where volume was higher by greater than 70% year-over-year. We continue to see strong adoption for the brand across multiple applications and geographies and as previously announced, we are expanding Tritan capacity by approximately 25% which should be completed by the middle of next year.

Interlayers volume increased year-over-year mainly due to higher sales of the acoustic product line. Operating earnings increased primarily as a result of increased demand for specialty plastics products including both Tritan and core co-polyesters resulting in higher sales volume and higher capacity utilization which led to lower unit costs.

The operating margin for the quarter increased year-over-year to just under 12%, an increase of about 160 basis points. For full-year 2013, Advanced Materials remains on track for operating earnings of approximately $250 million.

Next is Fibers on slide nine and another great quarter for this great business. Revenue increased due to higher selling prices in response to higher raw material and energy costs particularly for wood pulp. Operating earnings were $113 million, a nice increase over last year. For full-year 2013, we continue to expect operating earnings of approximately $450 million, about a 16% increase over 2012.

And lastly, I will give you a quick update on our joint venture with China National Tobacco Corporation to expand acetate tow capacity in China. The facility is operating. It's currently in the process of qualifying material. We did recognize a small amount of revenue in earnings from acetate flake sales to the joint venture during the third quarter and therefore we are on schedule to recognize further earnings from our acetate flake sales and the earnings from our equity investment in the joint venture in early 2014.

I will finish out the segments on slide 10 with Specialty Fluids and Intermediates. Sales revenue increased year-over-year primarily due to higher sales volume for olefin-based intermediates sold into Asia-Pacific as well as improved pricing in several product lines.

Operating earnings were lower year-over-year primarily due to higher raw material and energy costs more than offsetting higher selling prices. Sequentially, earnings declined primarily due to higher raw material and energy costs particularly for propane as well as the timing of project fills in the specialty fluids business.

Operating margins for the quarter were 14.5% lower both year-over-year and sequentially but still quite solid. For the full year, we are revising our operating earnings expectations to approximately $380 million and this would be more than $20 million of earnings growth for the year and would be another solid year for the segment.

Next on slide 11 is our outlook for the full year 2013. My main message here is we are on track for our fourth consecutive year of double-digit earnings growth with our outlook indicating growth in 2013 versus 2012, we will approach 20%. This type of consistent earnings growth reflects a few things.

First, roughly two-thirds of our sales revenue is in product lines where we have a leading market position. Second, the end market and geographic diversity that we have are sources of strength. And we continue to leverage our world-class technology platforms in asset yields, olefins and polyesters.

So looking specifically at the remainder of 2013, we expect fourth-quarter to be seasonally slower, the pace of global economic growth remains uncertain, Europe continues to be weak but not really getting worse and China is slower in certain end markets including building and construction.

We also expect the challenges for the Adhesives & Plasticizers segment to continue and we expect raw material and energy costs will be higher in the fourth quarter. So as a result, we adjusted our expectations for 2013 EPS to a range of $6.30 to $6.40.

And lastly, we added a page and I thought it would be helpful to give you a view of some of the building block actions we are working on to deliver earnings growth in 2014. So I'm not setting guidance for 2014 but I wanted you to have this list. It's not an exhaustive list, it does not reflect our views on economic growth nor on the olefin spread but these are items that are Eastman specific.

So the first category is where we are serving growing markets by increasing capacity for our innovative products and the first example listed is our Tritan copolyester which we expect will grow by about 50% this year over year and where for minimal capital we are increasing capacity by 25%.

It also includes our Eastman 168 non-phthalate plasticizer which has grown by 30% this year and where again for minimal capital, we can increase capacity by 15% and our position to increase capacity by another 15% in the near future.

And as I previously mentioned, we are on track with our acetate tow joint venture in China.

The second category is improving mix with premium products primarily in the Advanced Materials segment. Examples here include our acoustic interlayers and our V-Kool performance films, both of which have made good progress in 2013 and we expect will accelerate in 2014 as well as our Tritan co-polyester.

The third category is technology licensing and it's not really anything new for Eastman. In 2005, we licensed our acetyl technology to Sipchem and then in 2007, we licensed acetyl technology to Chang Chun Petrochemical. And you may have seen that earlier this week we announced we have developed with JM Davy a proprietary technology for the production of ethylene glycol which we are bringing to the market for licensing.

We are well positioned to generate revenue from licensing in 2014 and believe it will be repeatable in subsequent years.

The last category we have listed on this slide are synergies from the Solutia transaction including some meaningful commercial and operational synergies and we are on track here and Curt is going to give you an update during his section.

When we put all the actions we are taking together, we see them contributing somewhere between $0.50 and $0.75 per share in 2014 which keeps us on track for double-digit earnings growth in 2014.

And I will end by saying how proud I am of what Eastman employees have accomplished over the past four or five years and I strongly believe the future is very bright for Eastman especially with Mark and his team. They are the right leaders for the time and I will also just throw in kudos to our Board of Directors, one of the most important things a Board has to do is make sure you have a smooth CEO succession and I can tell you so far -- and I think Mark would concur -- this feels about as good as it gets, as seamless as it can be. So very much I appreciate the way the Board has handled this process.

With that, I will turn it over to Curt.

Thank you, Jim, and good morning, everyone. Moving to slide 14, I will review some of our financial highlights for the third quarter.

We generated $427 million of cash from operating activities in the quarter primarily due to strong net earnings. Working capital decreased by $81 million primarily due to lower receivables. We also made a $75 million contribution to the US defined benefit pension plans on top of the $24 million we made in the first half of 2013. We continue to expect the full-year contribution will be approximately $120 million.

Free cash flow for the quarter was $255 million which is net of capital expenditures of $125 million and dividend payments of $47 million. Finally, our cash balance was $222 million at the end of the third quarter.

Third-quarter results were impacted by the $86 million benefit due to an interim remeasurement of our Eastman OPEB plan obligation. This remeasurement was triggered by a planned change in life insurance benefits during the quarter.

Additionally, we also incurred $9 million in costs related to the Solutia transaction and $3 million in restructuring charges for severance associated with the continued integration of Solutia.

Finally, our tax rate for the third quarter was approximately 27%. This is lower than our previous expectation of 31% primarily attributed to an adjustment to the tax provision to reflect the finalization of the 2012 consolidated US Federal income tax return. We expect our tax rate for the fourth quarter to be approximately 31% assuming no dramatic change in foreign earnings mix.

Next on slide 15, I will walk you through our estimate for free cash flow in 2013. Consistent with our previous guidance, we project operating cash of roughly $125 billion. The full-year operating cash estimate includes our projection for continued strength in earnings as well as those items noted on the slide. We expect 2013 capital expenditures to be approximately $500 million, a bit lower than our previous guidance.

The fourth quarter will still be our highest quarter for the year due to the normal operating trends as well as timing for growth projects including our specialty fluids expansion in Wales.

So putting this all together, we continue to expect our 2013 free cash flow expectation to be between $600 million and $650 million with a midpoint of this range representing a growth rate of greater than 30% over the 2012 total.

Next on slide 16, I will provide an update on the Solutia integration. As Jim noted, we continue to make great progress with our integration efforts. Earlier in the year, I highlighted the successful migration of our rubber additives business over to Eastman's SAP system. Today I am pleased to say our interlayers and specialty fluids businesses were migrated at the beginning of October. This is another major accomplishment as these migrations are quite complicated and our SAP implementation team led by Mike Behal deserves a lot of credit.

And we are on track to move over the remaining former business of Solutia early next year.

While the Eastman team has more work to complete, our integration efforts are moving more towards business as usual as one integrated Company. On cost synergies, we remain on track to deliver a greater than $100 million run rate by the end of this year. This is about 5% of the acquired revenues. Additional opportunities are being pursued as part of our ongoing productivity efforts. I expect by the end of 2014, our run rate will be closer to 6% of acquired revenues.

We are also progressing well with tax synergies. First, we were able to implement some tax structure changes in the second half of 2012 that have impacted our effective tax rate including the return to provision adjustment I mentioned earlier. These combined with our other continuing actions we are taking resulted in an expectation that our 2014 effective tax rate will be approximately 30%.

Second, we now expect to utilize approximately two-thirds of the $1.3 billion of NOLs by the end of 2015. All in all great work by our tax team.

From a business synergy standpoint, our results are benefiting from improved commercial and operational efficiencies and that will continue in 2014. In addition, we remain focused on long-term product development projects that will further add value to this transaction.

So our integration efforts are going extremely well. One final example of that, a comprehensive cultural survey was recently completed by Towers Watson. The results of that survey suggest our two strong cultures have effectively been integrated and our combined Eastman culture going forward is comparable to high-performing companies in their database. As a result, this acquisition continues to be a value adding transaction for our stockholders.

To close on slide 17, we will continue to be disciplined with our approach to capital allocation. As previously mentioned, we expect capital expenditures of $500 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 that is aligned with the overall growth in our end markets.

On the debt side, paying down a significant portion of the Solutia acquisition term loan has been a major priority for cash this year. During the third quarter, we reduced our long-term debt by an additional $250 million. The $600 million in total payments we have made since closing the transaction in third quarter of 2012 plus the effective use of our strong balance sheet to obtain more attractive funding in the commercial paper and other credit markets has reduced the original $1.2 billion term loan to just $150 million.

In the other two remaining areas on the slide, we will continue to pursue joint ventures and acquisitions and we expect to continue returning cash to our stockholders in the form of both dividends and share repurchases.

During the third quarter, we repurchased $35 million of Eastman common stock and paid $47 million in dividends to our stockholders. During the first nine months of 2013, we have returned over $200 million to our stockholders.

So with that, thank you for your interest in Eastman Chemical and I'll turn it back to Greg.

Thanks, Curt. We have a number of people on the line this morning and we'd like to get to as many questions as possible. So please limit yourself to one question and one follow-up.

With that, Christy, we are ready for questions.

(Operator Instructions). Duffy Fischer, Barclays.

Jim, on plasticizers and adhesives, when you first came out with the issues first quarter of this year, you gave us a number that was lower but had kind of said there was more downside to that number than upside until you got a handle on it. Now that we have been dealing with that for a couple three quarters, do you feel good that we've gotten underneath what the pain will be in going forward we can actually grow from here or is there still more downside than upside as you look at that?

Duffy, let me make a comment and then on this call you will probably notice that I seem to be doing the shuffle pass quite often because I understand -- my ego accepts the fact that you probably want to hear Mark and Curt talk about a lot of these issues going forward but just on this business segment, I do think we are starting to get a handle on what it is. Let's just say we know the problem is. I think you can still get surprised in terms of how competitors act, etc.

If I can take the longer-term picture and then maybe Mark will want to comment a little bit about what he's seeing nearer-term. But longer-term, so this segment is probably going to be down in the valley and I'm guessing maybe as much as a couple years. Does it ever get back to the peak margins it had? It's hard to see that it gets back there but again, we've been surprised before.

On the other hand, I can easily see a time when it's performing noticeably better than it is today. I just wanted to take the opportunity to say when you look about one segment under stress like this, this says to me where the strength of the overall portfolio comes through. If you think about it, this segment is definitely underperforming and yet we are still going to come in for the year up 20%-ish and it's going to be on the strength of all the other segments we have.

We are still going to hit and maybe exceed the original guidance we had for the year. So with that, I don't know, Mark, what more do you want to say maybe about the two pieces of Adhesives & Plasticizers.

Sure. Thanks, Duffy, and I certainly would support all of Jim's comments on this. It's still a good business and it still provides a good attractive return even at these margins. We are certainly not at all happy with the performance and want to find every lever we have available to improve it. But a lot of the challenge we have right now is a supply demand imbalance, as Jim noted in his prepared comments.

I am not about to call it a bottom at this point. I don't think we have yet to have enough information but I certainly now see signs that are both positive and negative about the situation. So on the negative side, we certainly continue to see weak demand and have not seen a recovery in demand. The good news is destocking seems to be behind us which was an additional demand headwind that we faced through this year. And I think that's going to stabilize and not be a challenge as we move forward.

So that's going to help. In regards to the supply side, as Jim noted, the supply is long but we also see some signs of stabilization there. Rosin prices which has been the key low priced raw material that has put the pressure in this market on adhesives has gone up meaningfully in price and if it stays at this higher level, it will take some of the pressure of substitution of hydrocarbon resins towards rosins that will reduce a little bit.

So those things help balance things out a little bit. On the plasticizers side, this is more of a demand-based issue where we just need demand to start recovering. If it does, especially in Asia, it will draw that Asian supply that's putting margin pressure here back into Asia that will help.

But I want to emphasize that the strength of demand on the plasticizers side is quite good. Our volume is growing quite strongly on the non-phthalates and offsetting some of that price pressure. We don't have as much of that benefit in adhesives right now.

Okay. One of the businesses that's been a rock star, fibers, one of your competitors is out with a pretty significant price increase again for next year. Price obviously over the last three or four years has been very beneficial. When you look out over the next one to three years in that business, can you continue to get mid single-digit pricing that's accretive to margins over that period do you think?

This is Jim again. Let me just say, yes, it is a great business. We have a great relationship with our customers and obviously one major customer where we got a joint venture that we are filling that plant out. We respect our customers a lot. We don't like to negotiate price with either customers or suppliers on earnings calls. We approach it more of a partnership but I think both sides of the table realize that we both have to create value and as we look at the negotiations with raw materials and negotiations that we're having with our customers and what they value, by the way, the service, the reliability, the having the product there at a high-quality when they need it, I would expect this business earnings to continue to grow.

Great, thank you.

Andy Cash, SunTrust.

Hi, this is Jim Sheehan in for Andy. Good morning. I'm just wondering your thoughts now on long-term growth. You've talked about double-digit growth possible over the next two years. Do you still have confidence in that in the context of continued pressures in adhesives and plasticizers or pressures from raw materials?

You just named the two headwinds and we all see them but, yes, our objective is double-digit earnings growth. We've done that for four years. Let me tell you what gives me some of the confidence in this. And you are right, any one business segment can go through a rough patch. We know which one it is this time. We know the raws can move around but this Company has tremendous cash flow. And we've said all along, and I've been saying it back from my CFO days, the way to differentiate yourself in this industry is how you apply your cash, what do you do with it.

So we are going to drive organic growth as strong as we can. There will be some years where that gets us perhaps all the way there, some years more likely where it gets you most of the way there and then you have to be smart with what you do with your cash, whether it's acquisitions or buying back stock.

But we think what our shareholders want and the best way to create long-term value is the double-digit earnings growth. And that's why we threw that slide in at the end just to show you that there is chunks of earnings we can be working on. In this case it's a list 2014 over 2013. There's other things we do that are going to make 2015 better than 2014.

So we are a fairly conservative bunch. We never make guarantees about the future. Things can always change. But I like the portfolio of businesses we have. You see the strength that we could grow earnings the way we did this year even with one of the business segments having weak performance.

When I put on top of that that we can use our cash, I feel very good about the next several years in terms of earnings growth.

Thanks. And a follow-up on non-phthalate plasticizers. When do you think the inflection point is going to be when the tailwind from substitution into non-phthalate plasticizers is greater than the headwind from some of the lower pricing you are seeing from some of the phthalate competitors?

This is Mark. That's a good question. What we seem to see is in some indications that demand is going to improve in 2014 over 2013 from the housing and construction market, the commercial flooring market, the key things that drive our demand. So that's I would say encouraging about next year when it comes to phthalates.

When it comes to competitive behavior, it's always a bit difficult to predict on when the aggression of some of the competitors will abate. But I'd say on the phthalate side, things feel like they can improve to some degree as we look forward.

Thank you very much.

Robert Koort, Goldman Sachs.

Thank you, good morning. You gave some Eastman specific actions and I guess I thought maybe we'd see something around the contract with Enterprise on your propane. So can you talk a little bit on how much a benefit that could be, what your hedge position might be? And then also any updates on optionality for your olefins crackers?

Let me let Curt start it off.

So let me go in reverse order I think in your questions. First on where we stand with our efforts in Texas. We have had an initial hearing with a hearings officer for the Railroad Commission to provide clarity on the process going forward trying to resolve that dispute we talked about last quarter. We hope to obtain such clarity fairly soon and that will help us understand what the next steps are.

So we have continued interest in our 700 million pounds of excess ethylene both on and off site but continued uncertainty around this common carrier access is negatively impacting our ability to get something done. So we will see how this plays out there.

I think, Bob, you had asked about hedging as well. We continue to look at hedging as a viable way for us to reduce volatility. We have had a program in place for a number of years. Given some of the recent volatility in our input costs, we continue to look at what kind of hedging we could provide in 2014. We haven't really quantified that for anyone yet but it's kind of early yet. But we continue to have a good hedging program.

And the Enterprise contract is really more a 2015 event.

Okay, and then on the Adhesives & Plasticizers, I think you guys guided to $175 million of operating profit. Can you give us -- are you comfortable giving us any sense of how big the non-phthalate plasticizer chunk of that might be?

Of the $175 million earnings?

Yes sir.

Yes, I don't think we've broken that out. Obviously that's the part that's growing. We talked about how it's growing 30%. I think what you are seeing right now, and I think Mark did a good job explaining it, you are getting the pressure from the phthalate guys who -- same thing we would be doing, being as sticky as possible as they give up share and trying to hold onto as much volume as possible. But eventually I think that wave is going to crash over them. I don't think we want to go to breaking out the earnings by down that low.

Okay, thanks.

P.J. Juvekar, Citibank.

Just a quick question on Adhesives & Plasticizers. The pressure point seems to be in adhesives. The Chinese have added capacity and they are coming in a big way. Longer-term, do you want to keep fighting the Chinese or do you think there is other optionality?

I'm going to let Mark answer this because our plant in China -- people are going to be fighting us when it comes to a cost position but I hope this is kind of the last question on this segment only because it is our smallest segment. I think we've tried to spell out for you what we see there.

But, Mark, do you want to talk about the Chinese and -- ?

Certainly, the challenge comes not just from hydrocarbon resins, P.J, but also the rosins which is a large percentage of the total supply for adhesive. And there's certainly more rosin supply than anyone expected this year and that's where the vast majority of the price pressures come in the marketplace is the rosins, especially with the excess EVA from solar being available that is matched with the rosin to make an adhesive. And those prices as I noted improved.

If they stay up where they are, that takes some of that pressure off because it's less competitive than where it has been.

On the C5 direct competition, they are certainly some competition there and if demand growth in packaging, tapes and labels had been what everyone expected, it frankly would have been absorbed pretty readily in Asia-Pacific and not created as much challenge as we faced.

So that amount of supply is not the big issue if demand returns to what is more of a normal level and over a period of time would absorb that supply. So certainly an issue but it's not one that's permanent.

Okay, thank you. The automotive market seems to be improving. Even in Europe there are some positive data points. Have you seen an incremental tire demand, any signs of restocking? Thank you.

The automotive market I think was the question.

About automotive demand on the interlayer side, P.J.?

He talked about tires.

And tires? Certainly automotive has been a good story in North America this year and Asia has been solid. Europe has obviously not been great with another decline but I would say we see stabilization in Europe. We have seen an improvement in demand for both our interlayers products as well as our tires products. It's a modest improvement in demand, by no means a restocking event but at least the sign that the globe is stabilizing and starting to get better.

From a primary demand point of view, when it comes to tires, the Michelins and the Goodyears are better to call the restocking of the channel that is likely to happen at some point. It certainly hasn't happened yet. That would be upside for us in the future when that does happen.

Thank you.

Vincent Andrews, Morgan Stanley.

Thanks. Just a follow-up on the cracker situation. Can you just walk us through the legal process that you are in and give us a sense of what the next steps are and timing might be uncertain but what you think it could or might be?

I'll take a stab at it. I think we talked more about it on the last quarterly conference call too. But as you know, there was the -- Westlake made a change or attempts to make a change in their common carrier pipeline and basically we disagreed that they could do what they wanted to do and so it's front of the Railroad -- Texas Railroad Commission now.

The one hearing Curt mentioned -- it's not like you had the hearing and now you are waiting for an answer. You are just waiting to hear what the process is. So it may not move. In fact it does not move as fast as we would like it to move. But while you are trying to talk to other parties about what to do with the excess ethylene, they kind of like to know what their access is to that pipeline.

So not so much an Eastman issue. We have contractual rights etc., but as you talk about introducing a new party, it's important to them the use of that pipeline. And so that's an issue that we have to have resolved before we can proceed further with talking to third parties who are interested in those 700 million pounds. But we need to get this one resolved.

I wish I knew the timing. I'm almost betting it's going to take longer than either you or I would want it to take but we will see how quickly they can get this thing going.

And there is no legal avenue available to you other than the Texas Railroad Commission?

I wouldn't say no other legal avenue. I'm saying this is the right way to approach this issue. That's where we believe the jurisdiction is and that's where we should go.

And if it's -- just as a last point -- if it's not resolved in your favor there, what would you do?

Then we'd consider what our options are.

Okay, thanks very much. I will pass it along.

David Begleiter, Deutsche Bank.

Jim and Mark, I know in Crystex truck [busts in our photo] are a bigger impact than auto. Can you comment on any pickup in that market especially in Asia?

Sure. Demand has been reasonably good and truck and tire especially in the back half of this year from what we can see so that has been encouraging. As you noted, it's high leverage of Crystex usage in a commercial tire versus a residential tire so that has been feeling relatively good.

Sorry but to ask a question about the propane issue but can you quantify the impact of the higher propane prices in the quarter perhaps in Q4 and how much of that will be recaptured in your index-based pricing mechanisms?

I'm probably not going to get into it penny by penny but I would say to the extent that we had to come back down on our guidance that was probably the main driver that end -- still the uncertainty on the adhesive side. It's this Catch-22. We move more toward specialty. Specialty is priced less and less off of raws so you don't always have that 100% ability to pass through the higher cost. We have stepped up our hedging I guess I would say that, in terms of how far out we go and how much we do but we are trying to be prudent about that as well. We are not just grabbing any price we see in the marketplace.

We are managing it the best we can. It's interesting though if I could take the second, thinking about $6.30 to $6.40, $6.40 to $6.50, the moving around, if at the beginning of the year I'd said earnings were going to be up somewhere between 19% and 21%, everyone would have said that sounds pretty good but when you go back later and say you know what, earnings are not going to be up 21%, they're going to only be up 20%. I understand the aggravation but I'm just trying to keep it all in perspective that we are moving stuff around 1.5%, at most 2% when you look at it year-over-year. And I'll just pull you back to remember that what we are talking about is driving a machine here that grows earnings double digit year after year.

And just for Curt, one last thing, Curt. Is that tax rate for 2015 -- 30% stable for 2015 as well?

Yes, I would say the actions we are taking contribute to that 30% rate in 2014 and I'd also say we are not standing still; we are taking a harder look at what other things we can do to see if we can better that going into 2015.

Thank you very much.

Frank Mitsch, Wells Fargo.

Good morning and a hell of a run, Jim. It just seemed like yesterday that you took over a PET company and now you are running a propane to propylene spread company.

Frank, I am going to miss these phone calls I tell you.

Well, we can still arrange on a quarterly basis to have a call and I'll ask for your opinions on what's going on now that you are a lame duck, etc. During the conversations I didn't hear a heck of a lot regarding when you are talking about the four bucket uses of cash, the JV acquisition bucket. Can you talk a little bit about how the pipeline is looking and what your appetite is for doing something more in that area over the near and midterm?

Yes I will make a comment and then Curt may want to add on too. But I'm glad I work for an organization and have a Board that doesn't push me to do stuff that's marginal. If I can just say, we are going to try to be every bit as disciplined as we have been in the past about putting that cash to work on the M&A side. Honestly, I think it's a little bit tougher environment to see good the deals.

There are things out there that we like. Quite often the main issue is going to be is it at a price we like. We can be patient. We are not in it quarter to quarter. We can be patient. We don't mind sitting on cash. We know it's also a very valid use of cash to buy back stock and so that's something else we are going to have to look at and weigh that compared to what opportunities we see on the M&A side.

But as a shareholder of Eastman, I would fully expect that we are going to grow this Company both organically and we still will do M&A and maybe hotter or cooler based upon the environment we see out there and where things are getting priced and we are not afraid to use our cash to buy back stock and were not afraid to sit on cash when we think that's the right thing to do.

Frank, if I look at how our M&A team is busy right now; they are not on the beach I can put it that way. They are probably as busy as they've ever been because there is activity out there. I would though support what Jim said. There is probably a bid ask spread that is a still a challenge out there. People have got some pretty high expectations given some of the multiples that are out there.

So we are looking at several opportunities. I think some could fit us very well, but we will see if we can close these bid/ask spreads in this competitive environment.

Terrific. And a question for Mark. How do you think about $8.00 in 2015 and your confidence in being able to achieve that?

Frank, I've been waiting for that question all day. I'm surprised it took this long. It's a great question. We still feel confident about getting to the $8.00 a share. Obviously, we have to pull every lever available to us to get it.

As Jim noted, we have a number of things that we can do better in actions we control to improve earnings, as we laid out on that slide in his comments. There is of course the economy that, to some degree, has to be there and drive demand. And as Jim just laid out, we have multiple levers available to us with an incredibly strong cash flow available that goes beyond our organic needs, whether it be M&A or buyback.

So when you look at it, I think we are in very good position to continue and deliver that double-digit earnings growth.

Frank, I'm going to suggest to Mark and team, we put that $8.00 as a flag one point in time to rally the troops. That was a while ago. The much bigger driver is just that double-digit earnings growth. So you don't think, oh, I get to 15% and I'm done. And that double-digit earnings growth, whether it's 10% or 15% or if you have another 20% year like we had this year, that is really the key to creating long-term value.

And I also think that if we can do it consistently, you will eventually see it, see the improvement in the multiple.

Thank you so much and thank you, Jim.

Thank you, sir. I've enjoyed it.

Mike Sison, KeyBanc.

In terms of Solutia with the integration efforts largely complete, can you give us a little bit of color what's the next step where your focus is on? I know there is a lot of volume to be had there. Maybe some comments on how to recoup some of that volume in the businesses over the next couple years.

Sure, in regard to the Solutia business is we continue to be excited and impressed by the growing list of both commercial and operational improvements above and beyond the traditional synergies you get when you combine two companies. So I think we are going to see some real benefits on operational improvements in inter-layers and performance films, in particular next year over this year.

We are seeing significant improvements in how we do contracting and pricing and go to market, and the SAP integration that's gone so well this year allows us a lot more detail and insight about how to improve our pricing and capture value. And then the long-term innovation product portfolio looks quite robust in things that we can do, even including the crossing of Heritage Eastman and Solutia technology streams to create some new-to-world products.

So we feel great about this. The obvious big challenge has been European demand which has been a big part of their demand both in revenue and higher profitability in that part of the geographic mix. But with Europe appearing to have bottomed out and stabilized and if that starts to get a little bit better, that's going to help as well.

And Mike, if I could add on top of that then, one of the benefits of the combined enterprise is that continued strong free cash flow generation. So not only can we see the improvement that Mark talked about in the businesses, we also are just generating some significant cash that we can deploy either through M&A or returning to shareholders.

When I think about the portfolio of businesses we have today, there's just more options for us to explore and put that cash to work.

Okay, great. And then shifting gears to Additives & Functional Products. Volumes are up pretty nice in the quarter, up 10%; earnings are up 6%. The fourth quarter looks like earnings growth will be similar. It does look like being squeezed a little bit there. Are you having issues getting pricing? When do you think you can get better leverage there given the volume growth has been pretty good?

First, we are incredibly excited about Additives & Functional Products and how well it has performed this year in a record quarter despite having some raw material propane based headwinds in the third quarter. You certainly always see a seasonal drop-off in demand in this business into the fourth quarter which is largely what the issue is here.

There are a few additional headwinds as you noted around propane as that flows into solvents and with propylene prices coming off in October, it creates a bit of a challenge in the short term on how we can recover some of those propane costs. I think the bigger question will be what happens in the first quarter around propylene. There's some debate out there where the propylene prices might go and if they go up, that would be a very helpful factor.

So the leverage really isn't on the tire side issues?

No, no issues on the tires. In fact, tires is probably doing slightly better than our expectations going into the year. I wouldn't say significantly better on the Crystex side.

The big challenge we've had in tires is in the PPDs. That has been a headwind for the overall segment over last year where price competition stays pretty stiff in that market with the dramatic oversupply and benzene costs being pretty high. I certainly don't expect next year to be worse than this year so again, that will be -- not be a headwind into next year like it has been this year.

Great, thank you.

Nils Wallin, CLSA.

Thanks and good morning. One of the things I was surprised I didn't see in the Eastman-specific ways to drive earnings growth for 2014 is how you are going to invest in your innovation pipeline. So I was wondering if you'd be able to give us an update on what you see or your plan to grow perennial wood and surface or cut back on those to generate some better costs?

Great question. The innovation pipeline we have that spans from things like surface and perennial to Tritan where we are certainly seeing it deliver great earnings this year, micro fibers would be the one I'd love to highlight because I think it's got the longest term significant potential of the ones I just mentioned.

I think that portfolio is robust. As many of you know, innovation portfolios don't deliver dramatically out the gate and so it's not a huge contributor to earnings growth next year. But as you look out how we deliver double-digit earnings growth over the next five years, that innovation portfolio is a key driver of our results. But there's no big thing that's about to take off next year in that innovation portfolio.

Okay, great. And then just a little housekeeping. Would you mind explaining the composition of volume growth in Crystex? Was it new tires versus replacement, passenger tires versus heavy-duty truck?

I would love to have that level of insight from our customers about where our Crystex demand is coming from but unfortunately they don't break it down Mike that. We do look at the composition of their demand and try and guess that how that translates to our direct Crystex demand. But I would say that as David noted earlier, commercial tires is a bigger deal than passenger tires. Remember that 75% of tire demand for all of us is replacement tires versus OEM.

So as the OEM market shows dramatic improvement, that's not a direct impact for overall tire demand as much as some people might think.

Great, thanks very much.

Laurence Alexander, Jefferies.

Good morning. Two quick ones, just near-term what you are seeing on sequential trends in packaging, particularly any changes or deviations from normal behavior in the consumer products chain?

And secondly, as you are thinking about the bridge to 2014, any first read on pension expense and which of your segments do you feel it's a slam dunk that you can grow earnings or segment profits faster than 10%?

So I'm going to let Curt start first on the pension side.

On the pension side, pension expense really will be flat if not a slight tailwind.

And then Mark.

And then regarding packaging demand, that's been disappointing this year for us. It has been weak. That's one of the biggest drivers of our adhesives challenge and it also has led to a little bit softer copolyester demand than we would have liked. I don't think we have any clear indication that there is an upswing in that demand yet but it would be I think reasonable to expect that 2014 will be better than 2013 assuming the global economy keeps moving forward.

Chris Nocella, RBC Capital Markets.

Historically, you have done a good job of exiting businesses as they begin to have some more competitive pressures. So have any of your businesses moved into this bucket recently? And on the other side of that, can you unlock value by maybe spinning off or selling some of the higher-margin businesses that maybe aren't fully appreciated, something like fibers maybe?

Yes, you were breaking up just a little bit on -- did you give an example on -- ?

The businesses with more competitive pressures would be may be adhesives and plasticizers, something along that line.

First of all, I will take the complement on the portfolio management. I do feel like the Company has done a good job and I like the portfolio so much better now than what we had five, six years ago. And as you know, a lot of those changes happen before I took the helm so they were -- we have been at this for a while and I would expect we will continue being at it.

But the one thing I want people to remember is a lot of the Eastman strength comes from integration. So it's not -- we don't have all these just separate little boxes sitting out there where you just take it and you put a bow around it and you send it out to the public. You can do that -- some of the companies doing that more recently maybe they are getting around to doing what we did a few years ago.

But I don't think just seeing a valley for a business like I talked about with Adhesives & Plasticizers is a rationale for -- oh well first time they have a couple down years or whatever they are out of here. That's not the way we think. We really look at the value creation, the long-term path, how well it fits with Eastman, what the integration is. As you know, we make some of the raw materials for those businesses.

Having said that, we are going to do what is in the best interest of the shareholders whether it's looking at underperforming business, or hadn't thought as much about the flip side where you have a high-performing business and what do you do with that. I can tell you typically taxes get in the way which leads companies to spend which then leads you to say is something big enough to be standalone.

But the overriding driver I have seen when thinking about Eastman is the level of integration we have and how well things click both all the way from the technology side through our supply chain side. And in particular through our manufacturing integration.

That makes sense. The $0.50 to $0.75 a share for next year, how much of that is from the capacity expansion bucket versus the other three? Do expect CapEx to be higher or lower next year?

Curt may want to comment on the CapEx. What we did is we put together a list of projects and we wondered if people were going to say now put a number next to each one. We don't want to do that. I can tell you though I feel pretty good about those big building blocks and then that's not all there is. We didn't talk a lot about licensing but I think our licensing stream has improved greatly with this new EG technology. I think you are going to see a more consistent year in, year out income coming from licensing.

It's hard to oversell that because we haven't sold the first license yet but we wanted people to be aware that we think we are onto something really good here with that license. We're probably not going to break out the pennies next to each project. Curt, on CapEx for next year?

On CapEx, it's a little early, but here's how I normally think about CapEx. CapEx in normal times would be $500 million plus or minus 10%. I think next year there's probably going to be more on the higher side of that because we had some growth investments we want to make that we will be talking through. And in addition, there will be some infrastructure spending next year because of that natural gas conversion we talked about early in the year.

So I would say capital expenditures are going to be higher next year. We will probably quantify that for you in January. But even having said that, I still expect very good strong free cash flow generation next year.

Can we make the next question the last one please?

Kevin McCarthy, Bank of America.

Thanks for squeezing me in. Would you comment on current global operating rates in oxo alcohols, 2-EH and some of the butanols? Just trying to get a sense -- there's always been a lag on pass-through there. Just trying to get a sense for whether it's becoming any more difficult for you to pass along propylene costs irrespective of lag effects?

Kevin, in regards to run rates and propylene cost structures, all of our assets are running relatively well. What we like about our big engines is they do a great job of running the intermediates flat out and keeping us well-positioned in cost structure. Unfortunately, we have a good amount of capacity at some of the specialties to continue growing and selling.

I don't think that we've got a utilization headwind or tailwind that's significant in our future around the assets except for adhesives and plasticizers where demand is off.

In Asia, there is no question that the competitive situation is pretty significant as always and things like solvents and some of the commodity products out of SFI and we've seen some headwinds on a price basis in the third quarter and expect some of that in the fourth quarter. Did I answer your question?

Yes, that helps and maybe I'll follow up off-line as well. Just to shift gears a bit on your ethylene glycol, can you speak to the value add of the technology that you've developed? And it sounds like you are getting fairly close on something if you expect some revenue in 2014. Order of magnitude, would it be similar to your acetyls licensing that you've had in the past? What's the opportunity there?

Mark may want to add something too but the confidence for 2014 -- now I feel like we have got two horses now. We have the acetyl licensing we can do and we now have EG licensing we can do and we assume that the demand in China is going to be fairly strong for that EG licensing.

We are in this with a partnership with [Davy]. There's an understanding that we are not going to start talking about the economics around it. I might have gone too far when I just said that I think it's going to be pretty good and it's going to be fairly consistent. But I'm not sure I can add a whole lot more other than I'm going to want the Street to think of us as having a stream of income from licensing because we are going to be working very hard at making that more consistent, more real.

Okay and if I may squeeze in one final short one for Curt. Just coming back to pension, a number of companies across the space have talked about potential improvement in funded status. Do you have an early read on that and what could it mean for your cash injections in 2014 versus the 120 you indicated for this year?

As you are seeing the improve discount rate is resulting in some reduction in liability and that's going to improve funding status across our plans, both our pension plan and our benefit plans -- I'm sorry -- our OPEB plans. So I think we quantified in our 10-K a 25 bp change in discount rate is roughly a $100 million reduction in our pension liability.

So that's going to have a favorable trend and you already saw that with that remeasurement that was triggered in the third quarter. That's a reflection of that discount rate.

On pension funding, what I have talked about is what we really focus on is which what is required around the Pension Protection Act and so right now, I would still assume that we are going to contribute about the same amount we did this year over the next couple years.

Thanks very much.

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 at approximately 11 AM. Have a great day.

That concludes our call for today. Thank you for your participation.