伊士曼化學 (EMN) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company second-quarter 2014 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 Eastman Chemical Company Investor Relations. Please go ahead, sir.

Thank you, Adam, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Chairman and CEO; Curt Espeland, Executive Vice President and CFO; 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 second-quarter 2014 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2013 and the Form 10-Q to be filed for second quarter 2014.

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 first-quarter 2014 financial results news release which can be found at Eastman.com in the Investors section. Projection of future earnings in the presentation also excludes such items as described in the second-quarter news release.

Lastly, we have posted slides that accompany our remarks for this morning's call on our website in the Presentations and Events section. With that I will turn the call over to Mark.

Good morning and thank you for joining us. I will start on slide three and I will begin this morning with the key highlights from our second quarter. We delivered solid EPS in both the second quarter and the first half despite the challenges we faced and we are on track for another year of solid earnings growth in 2014.

We continue to expect this will be our fifth consecutive year of earnings growth and I remain confident we will continue to grow earnings in 2015 and beyond. Earnings growth is a reflection of our leadership position in key markets, the diversity of the end markets we serve, and our broad geographic footprint as well as the value of our vertical integration.

I have spoken to you previously about Eastman's specific actions we are taking to increase our earnings in 2014. We continue to see strong growth in our high-value products driven by favorable macro trends and expect this growth will accelerate in the second half of the year. And we continue to benefit from the integration of Solutia, including the impact on our effective tax rate.

However, we also have some actions that are taking longer than we had expected. I have previously mentioned that the technology licensing we have been expecting in 2014 is more likely to be completed in 2015. While we are seeing good growth with the switch to non-phthalate plasticizers, this growth is currently being offset by competitive pricing pressure. And we are experiencing some softness in demand in our heat transfer fluids due to delays and cancellations of industrial projects.

As a result, on balance, we are moving a little slower than we had expected on these actions, meaning some of the benefit will spillover to 2015. But despite this and the other challenges we have faced so far in 2014, we remain on track for 2014 EPS guidance we gave you in January.

Also during the quarter, we completed the acquisition of BP aviation turbine oil business. This acquisition expands our footprint in the growing aviation fluids market. In addition, we issued $500 million of 30-year notes at an attractive interest rate of 4.65%. And, lastly, we generated $234 million of free cash flow in the quarter, once again confirming the ability of our portfolio to deliver very strong cash flow.

On slide four I will cover our second-quarter corporate results and I will start with some of the challenges we faced in the quarter. First, we had an unplanned outage at our Kingsport facility, which is our largest manufacturing site, due to a widespread power disruption. Although you never want something like this to happen, I'm proud to say there were no injuries or impact to the environment and that is due to the quick and professional response of the Eastman team.

The financial impact was an approximately $10 million negative hit in the quarter to operating earnings from increased costs. In addition, the lack of available material contributed to the decline in revenue, especially Fluids and Intermediates segment, given the integrated nature of our facility.

Also impacting revenue, and to a lesser extent operating earnings, was the spillover effect of the unplanned outage we had at one of our olefin cracking units in Longview, Texas, towards the end of the first quarter. This also limited the material available to sell, which again was most significant in the SFI segment.

In addition, we had the flow-through effect of propane costs from the first quarter, which also impacted the second quarter. You will remember that propane was as high as $1.60 per gallon in the early part of the first quarter. And though it came down and is now closer to $1.05 per gallon, we still had flow-through effects and these were most pronounced in SFI and Additives and Functional Products segments.

With all of that sales revenue was up slightly year-over-year for the quarter. Solid growth in our high-value product lines was mostly offset by declines in some of our core product lines and sequentially sales revenue was up 7% driven by higher volumes. Operating earnings were down slightly year over year as the benefit of continued improvements in product mix with growth in high-value products was offset by higher raw material and energy costs, site outage costs, and competitive pressure in some core products.

However, operating earnings were up $58 million, or 15%, sequentially and our operating margin for the quarter was approximately 18%. Earnings per share was up $0.12 year over year and, as we have said previously, we are using all lines of the income statement to increase our earnings with both a lower tax rate and a lower share count contributing to EPS improvement.

With that I will turn it over to Kurt.

Okay, thanks, Mark, and good morning, everyone. I will begin on slide 5 with a review of Additives and Functional Products results.

Sales revenue was higher by 5%, primarily due to higher sales volume for coatings product lines, which was attributed to strong demand across multiple end-markets. Higher demand improved sequentially and was flat year over year as growth in Europe and North America was offset by continuing destocking in China, particularly for commercial tires. Operating earnings were down slightly as higher raw material and energy costs, particularly for propane, more than offset higher sales volume.

Looking at the second half and full year of 2014, we expect volume will be stronger in the second half of the year compared with the first half as we won't have the impact of colder weather that impacted our North America business in January and February of 2014. And the destocking of commercial tires in China seems to be running its course. We also expect the impact of propane to moderate in the second half of 2014.

These factors, coupled with continued solid demand in the coatings market, should more than offset normal seasonality for this business.

We are also continuing to invest in enhancements to the technology for our market-leading Crystex product line with a full-year cost of approximately $10 million higher, mostly in the second and third quarter. We continue to see increasing competition for solvents, primarily due to economic weakness in China. As a result, we expect both revenue and earnings in the second half of the year will be higher than the first and continue to expect operating earnings will be between $410 million and $430 million for the year, albeit more towards the lower end of that range.

Adhesives and Plasticizers is on slide six. Sales revenue was higher by 6% as higher sales volume more than offset lower selling prices. The higher sales volume in adhesives resins was primarily attributed to stronger end-market demand and a lack of customer destocking that negatively impacted results in the second quarter of 2013. The higher sales volume for plasticizers was attributed to the timing of substitution of phthalate-based plasticizers with Eastman's non-phthalate based plasticizers.

Lower selling prices were in both adhesives resins and plasticizers and primarily due to continued competitive pressure that has continued for 2013. Operating earnings increased, primarily due to higher sales volume and associated higher capacity utilization, as well as lower operating costs in the quarter that included targeted cost reduction.

Looking forward to the second half of year, we expect the adhesives resins market to continue to stabilize at current levels with a more balanced market going forward, as well as stronger demand in key end-use markets including hygiene, packaging, and building construction. However, a competitor outage that had a positive impact on our results in the first half of the year is not expected to continue into the second half. An additional announced capacity of an adhesives competitor is still a headwind as well.

For plasticizers, we expect competitive pressure to continue to challenge margins, partially offset by continued strong volume growth. As a result, we now expect adhesives and plasticizers earnings to be above $175 million for the year.

Moving next to Advanced Materials on slide 7. Revenue was relatively unchanged as volume growth in our premium products was offset by lower volume in core products. Premium products' volume growth was driven by interlayers with acoustic properties and Eastman Tritan co-polyester, each of which continue to benefit from strong adoption in their respective market. The lower sales volume was for core products such as our Flexvue coated films.

Operating earnings was flat as lower raw material and energy costs and strong mix improvement were offset by the impact of costs associated with the unplanned shutdown at the Kingsport site and some other costs. Looking at the second half of the year, we expect year-over-year revenue growth for this segment to be between 4% and 5% due to strong premium product growth in several areas.

For Tritan, we see accelerated growth due to continued market penetration and some new customer adaptations supported by additional capacity scheduled to come online later this year. We expect strong growth for interlayers with acoustic properties as it is more widely adopted in the market.

Growth should also increase for cellulose esters for displays, including the benefit of a successful product launch of Eastman visualize material into mobile devices. And we expect a change in window film order patterns with more volume more balanced across the year compared with 2013 when volume was more frontend loaded due to in large part to the incentive structure.

These are expected to be partially offset by core product declines, including our Flexvue products, and a slight decline in revenue for core copolyesters due to continued competitive pressure in some of the lower margin product lines. As a result, we continue to expect operating earnings will be between $280 million and $300 million, and given the strong results in the first half of the year, Advanced Materials could be near the top end of that range.

Next up is Fibers on slide 8. Sales revenue increased as higher selling prices and sales of acetate flake to our China acetate tow joint venture more than offset lower acetate tow total sales volume. The lower acetate tow sales volume was due to the impact of additional industry capacity, including our new joint venture capacity in China.

Operating earnings increased as higher selling prices, sales of acetate flake to the China joint venture, and lower raw material energy costs more than offset lower acetate tow sales volume and higher operating costs resulting from lower capacity utilization and the unplanned shutdown at the Kingsport site.

For the second half of 2014 we expect lower acetate tow sales volume due to customer destocking in Asia-Pacific as they build inventory during 2013 in expectation of stronger demand levels that now appear to be flat versus 2014. We expect the impact of this destocking on our operating earnings will be most significant in the third quarter. As a result, we now anticipate Fibers operating earnings to be approximately $480 million, which would still be the 11th consecutive year of earnings growth.

I will finish up the segment reviews with Specialty Fluids and Intermediates on slide 9. Sales revenue decreased primarily due to lower sales volume attributed to two factors. First is the impact of the unplanned outages, both the first quarter weather-related outage at the Longview, Texas, side and the second quarter unplanned shutdown at the Kingsport site.

Second, sales volume was also declining for Intermediates product lines with the increased use of intermediates in the manufacture of higher-value downstream derivatives in other segments as we continue to value up our advantaged vertical integration. From a regional perspective, the largest volume decline was in the Asia-Pacific region, which is a more marginal market for us. Operating earnings declined year over year due to lower sales volume, higher raw material and energy costs, and costs for the unplanned outage at the Kingsport site.

Looking at the second half of the year for SFI, we expect revenue and margins for Intermediates product lines are expected to improve due to solid demand and lower propane cost, but this is expected to be largely offset by a maintenance shutdown with one of our largest crackers at our Longview site. This shutdown occurs every five years.

In addition, the aviation fluids market remains strong and we will benefit from our recent acquisition there. And demand for heat transfer fluids is expected to be soft due to delays or cancellations of industrial products, in particular for polymer manufacturing facilities in China and the renewable energy market. Taking this together, we expect operating earnings for the full year to be in the range of $300 million to $320 million for the year.

Moving next to slide 13. On June 2, we completed our acquisition of BP's aviation turbine engine oil business. The total purchase price for this acquisition was $283 million and was ultimately an asset deal. With this acquisition we gain a growing and nicely profitable specialty business that aligns well with our existing Skydrol aviation fluids business, allowing us to serve our customers with a more complete suite of product offerings.

As a result, we will be better able to meet the needs of the global aviation industry, which we expect will grow above GDP levels. This business is now part of the Specialty Fluids and Intermediates segment and 2013 annual revenues were approximately $100 million. Excluding acquisition-related costs, we expect this acquisition will be modestly accretive to 2014 earnings per share with full-year 2015 accretion expected to be in the high single-digit level.

This acquisition is an example of Eastman's deploying capital to a business where we have a leadership position in order to strengthen that position and accelerate growth. We are confident that the returns from this acquisition, as well as the results from the Commonwealth acquisition we expect to close later this year, will be consistent with our value creation expectations.

On slide 11 I will cover some other financial highlights. During the second quarter we generated $419 million in operating cash, in line with our expectation. Net earnings were solid and we had normal seasonal working capital increase for receivables. For the second quarter, we generated $234 million of free cash flow.

Capital expenditures totaled $132 million in the second quarter and we expect full-year 2014 CapEx to total approximately $575 million, which is slightly lower than previous guidance as some of our growth and infrastructure spending will shift into 2015. With expectations for cash from operations approximating $1.4 billion for the full-year, we are on track for free cash flow of $600 million, which excludes again our capital expenditures and our dividend.

We continue to return cash to stockholders, including share repurchases of $360 million through the first half of the year, of which $100 million was completed in the second quarter. We have $800 million left on our current $1 billion authorization and we continue to expect the pace of our repurchases to moderate in the second half of the year.

Lastly, our tax rate for the quarter was 28%, similar to first quarter and significantly below second quarter 2013, reflecting continued benefits from the integration of Eastman and Solutia business operations and legal entity structures. We continue to expect our tax rate for the full year to be approximately 28%. As a reminder, our tax rate excludes any potential benefits of tax extenders that could be passed by our legislators.

So with that I will turn it back over to Mark.

Thanks, Kurt. I will review our outlook for 2014 which is on slide 12.

Given the results in the first half of the year, we are on track for a fifth consecutive year of solid earnings growth. As I look at the second half of 2014, we expect sales revenue year over year to increase roughly in line with global GDP, reflecting acceleration of growth in our premium products and advanced materials, stronger coatings market benefiting the ASP segment, and continuing benefit from macro trends such as the move to non-phthalate plasticizers from phthalate-based plasticizers. These should be partially offset by lower acetate tow demand and normal seasonality.

Sequentially, we expect revenue will be similar to the first-half levels. Operating earnings from the second half should be up year over year and down sequentially. The year-over-year improvement is expected to be driven by growth in Advanced Materials as growth accelerates for premium products, including Tritan co-polyester displays, interlayers with acoustic properties, and window films.

And we expect a sequential decline will be due to costs from a high level of planned outages in the second half of the year including the major maintenance turnaround at our largest cracker in Longview, Texas, which Kurt mentioned in the SFI section.

We also expect to benefit from the capital deployment including both the acquisition that we have completed and share repurchases. As a result, we continue to be on track for 2014 earnings per share in the range of $6.70 to $7, which would be strong growth. As I think about the cadence of the second half, I would expect year-over-year EPS growth in both quarters, for the growth to be more significant in the fourth quarter.

Next is capital allocation on slide 14. In the second quarter we were balanced across each of the buckets in how we allocated capital. We continue to spend on the growth in our capital expenditures.

As we mentioned, we took advantage of the very attractive public debt market with an attractive offering. We completed a bolt-on acquisition during the quarter and are on track to close a second before the end of the year. And we continue to return cash to stockholders in the form of both share repurchases and a healthy dividend. Looking forward, I remain committed to a balanced deployment of capital.

We continue to look at the M&A market and are looking for opportunities that fit with Eastman. And we continue to review returning cash to stockholders through share repurchases and increasing dividend as a good use of cash. So I would expect more of the same as we put our cash flow to work.

On slide 15, lastly, I would like to remind everyone that we will be hosting an investor day in New York on Thursday, November 6. The main purpose of our investor day this year will be for our senior management to share with you our strategy for building on the progress we have made to grow earnings for years to come. We will be sending out more details via email shortly. I hope that you will be able to join us.

And with that I will turn it back to Greg.

Okay, thanks, Mark. We have a number of people on the line this morning and we would like to get to as many questions as possible, so please limit yourself to one question and one follow-up. And with that, Adam, we are ready for questions.

(Operator Instructions) Frank Mitsch, Wells Fargo.

Mark, you guys lowered your outlook for fibers down from 500 to 520 down to 480 and you mentioned the destock as having an impact. You also mentioned demand falling as part of the cause.

Are we near peak here? Is the impact of e-cigs capping future growth in that business? How should we think about that business into the future?

Thanks, Frank, and good to hear you this morning. Fibers is a great business. It has delivered 11 years of consecutive earnings growth and it produces a tremendous amount of cash flow, so we certainly are very pleased with this business. But as you noted, we think about the businesses as plateauing. I don't like the word peak.

What we are seeing is demand flattening out, not declining, but that does create some problems for 2014 and potentially 2015, specifically in China. They were building a lot of inventory in 2013 expecting normal growth in 2014, which didn't materialize, and so they are going through some inventory corrections in production and that is sort of the demand correction we are seeing in the back half of this year. What we don't know is in 2015, to the extent that there is continued destocking, to further correct demand. I wouldn't call it peaking, but it is certainly plateauing.

All right, that is very helpful. Obviously in a similar vein, you did maintain your 2014 outlook. I am curious if you have any updated thoughts on your targets for 2015, the $8 number and what might it take to get there?

Frank, I can't believe you asked that question. I never thought (laughter) the day it would come.

So as we think about 2015 and we certainly are spending a lot of time thinking about it and doing everything we can to deliver a great result, what I would say is we are committed to still driving towards $8 a share in 2015, but getting to $8 is becoming more of a stretch. Given what we know at this point, we can definitely see delivering double-digit earnings growth in the $7.50 to $8 range.

There is a number of factors that are really still very much going in Eastman's way driving our revenue and our earnings growth. We expect the economy to continue to grow, particularly we have some favorable positions in our top two end markets of transportation and building construction where we can see better than GDP growth there.

We continue to be very excited about seeing how we are valuing up the mix in our company. We have a number of high-value products across the Company like Tritan, acoustic interlayers, window films, coating additives, non-phthalate plasticizers, resins -- we are now taking into tires -- that give us very strong high-value growth improving our mix.

I think we also have a different strategy going into 2015 versus 2014 on our propane cost side. We have gone with a much more aggressive hedging strategy. We have shifted our mix towards 30% ethane on our crackers from 20%, so I think we are in a much better cost position to avoid that sort of spike and hit that we went through this year. We certainly intend to have improved operational performance next year so we have more product available to sell.

We have also got pretty aggressive productivity programs across the country holding costs flat. That means that the growth that we do get in the top line should fall to the bottom line.

And then the part I love best about our company is our incredibly strong free cash flow that we are fully committed to deploying. We have certainly already evidenced our commitment to be balanced in our deployment with the two bolt-on acquisitions that we did this year and the $360 million of stock buybacks we have already completed and still have $800 million left on our authorization.

So we have a number of things that help the growth math see how you drive towards $8 and that range of $7.50 to $8, but we also have some headwinds that we have to recognize. First, the economy, while it is growing, is certainly not growing at the rates that I think any of us would like. I would continue describing it as lackluster on a global basis and that creates a bit of a challenge.

In particular, I would say Europe is certainly encouraging to see some growth this year versus last year, but we also have to keep in mind we are coming off of a really low base. And then we have a few new things like this fibers question around demand next year and the heat transfer fluid demand slowing down this year. We think that will probably continue to be at modest levels next year with improvements in 2016 when we look at the plant build situation in China.

So those are some of the headwinds that we certainly hadn't factored in and if you think about investor day. But it is important to keep in mind we have got a great portfolio of specialty businesses, great diversity in our product lines, our end-markets, our geographies. We have great world-class technology platforms that allow us to continue to innovate to defend our current markets and margins, as well as find new applications to grow. And most importantly a very high EBITDA margin that produces a lot of cash flow for giving us a lot of options about how we grow.

So I would still feel confident we are going to deliver double-digit earnings growth still driving to the $8 a share as best as we can.

Thanks so much.

Vincent Andrews, Morgan Stanley.

Thanks and good morning, everyone. Just another question on fibers on the cost side of things. It looks like wood pulp costs are coming down and some believe that they may go down a lot more from here, and so I'm just curious how that flows through in terms of your contract structure.

Do you have some where that is passed through or is there discretion where you can try to hold on to a fair amount, if not all, of it? And I guess the complexity might be just sort of the volume situation that you referenced in your comments earlier.

Thanks, Vince, for the question. The fibers business is one that is great about its stability, which means we have a fairly predictable demand and price curve for the year because the contracts are done on an annual basis. So we go through those negotiations, we pretty much set our price and our contract, and then pulp does what it does and then we get those results. And that has certainly been a benefit as we have expanded our margin this year with pulp declining.

So if pulp continues to go lower next year you would expect to capture that?

Well, I think you have to remember it is always a balance in those contract negotiations going into 2015 of price and where pulp goes, and so we don't discuss those kind of contract negotiations ahead of time. But we will do our best, as we always do. I would remind you this industry has good discipline in its history and we would expect that to continue.

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

P.J. Juvekar, Citi.

Good morning. Mark, in Adhesives you mentioned increased resin supply. Can you talk about that? And have you seen China rosin prices come down?

Then you also talked about new competitor capacity. Can you just tell us how big that is?

Sure, P.J. The Adhesives business has got a lot of moving parts, as we have discussed on past calls. What we are excited and encouraged about is seeing the solid demand growth continue, especially in things like hygiene and hot melt adhesive packaging, and that growth rate has sort of gone back to what we would call normal and strong this year relative to what was relatively weak last year. So the demand side of this equation is to some degree back in gear.

On the supply side, the rosin capacity, which is an alternative to hydrocarbon resins, is a bit tighter this year where it was extremely loose last year with very low prices. And as we look at the people climbing up the mountains to pull rosin off of the trees this year, it looks like it is going to be more of an average to slightly tight year so we expect rosin prices to remain where they are, which makes them less attractive to use versus our tackifying resins, though we are encouraged to see that that is tightening up a bit and giving us some market stability.

When it comes to direct competitors and resin capacity, principally a company in Korea added a hydrogenated resin capacity that created some competitive pressure this year, but so far that seems to be relatively stable. I think that overall that has led to nice conditions in the first half of the year, which were also further improved by one of our competitors having a serious outage. As we look at the second half of the year we continue to see attractive growth and what I would call stability, but we do have some favorable things in the first half of the year that won't continue in the second.

Thank you for that. Quickly for Curt, with your efforts to bring down tax rates and use up NOLs from Solutia, can you talk about how much NOLs are left and where could your long-term tax rate go? Thank you.

So if we look at the overall tax rate, we continue to expect that to be 28%. The tax team is still working through different options by which to continue to lower that effective tax rate. I often characterize what the tax department was able to do with some of the Solutia businesses and legal structures was a triple or home run. Now they are working on singles and doubles, if you don't mind the baseball analogy.

I would also remind people that don't be afraid to call your legislatures, because if they get the tax extenders impact that could have a further reduction of our rate of about 1%. So we believe in tax extenders and what we have put in place is permanent tax fixes, tax adjustments our rate could be driving more towards 27%.

On the NOLs we have pretty much fed about two-thirds of the NOLs, $1.5 billion was going to be used kind of half of 2012, 2013, 2014, and 2015. And you just take that number and do some math off those to get you for pro-rated basis the amount you are going to get from the NOL tax benefit. So we will continue to have NOL benefit going into 2015.

Thank you.

James Sheehan, SunTrust.

Morning. Just with respect to the outage at Kingsport, I was wondering if you could discuss your monthly order trends and how they have progressed through the quarter and how you would have seen that flowing had the outage not occurred. And also if you could update us on your order books for July.

On the order books, if you think about most of our segments you were able to work through the outage by using your inventory and working with your customers trying to prioritize shipments, etc. So I would say the order books, while it had some delay in them, generally speaking our order books were still pretty solid through the second quarter for more segments.

The one that we highlighted is Specialty Fluids and Intermediates, as you know how our integrated streams work. To the extent some of the molecules aren't used by the derivatives, there are certain lower commodity product lines acetic acid that just aren't available for them to sell and so that is where you saw the declines in the second quarter in volumes. But, generally speaking, I think our businesses did a pretty good job working with our customers and keeping revenue going through the outage.

As we look at the July order books, everything is on track with the revenue growth outlook that Mark mentioned earlier across all the portfolio.

Thank you. On the propane and the cracking spreads you had identified about $0.30 to $0.40 of headwind in the first half. Just wondering how you would size that on how it reverses in the second half, if you can provide any insight.

So if you think about the propane costs and the impact of the spike up in first quarter and the flow-through affect you have seen in the first half of the year, we quantified that to be $0.30 to $0.40 the early part of the year. I would say as we look at the map today it is on the high end of that range, but now that propane is down at this more modest level -- I shouldn't say modest level -- at the current levels it is at.

And as you can imagine, Mark mentioned our hedging program. We are much more -- before we used to hedge only six months out to kind of give our businesses a little more time to price into it. Because of some of the volatility, as well as we just looked at how the forward curves have behaved, particularly with propane, we were much more aggressive getting our hedge positions in place going into this winter season than we had in the past. And we are looking to do that two years out as well because of some of that forward curve.

So as it relates to second half of the year that $0.40 roughly headwind is behind us and should moderate second half of the year. And that is reflected in our outlook.

Thank you.

Daviid Begleiter, Deutsche Bank.

Thank you. Mark, just on guidance for this year still a pretty wide range for the back half of 2014. What would it take to make the low end of the range and what would it take to make the high end of the range?

Good morning, Dave. Good question; we spent a lot of time looking at that.

First of all, I think that if I think about this year and the last call I was on I would have said we were at the top end of the range. Things were clicking along and I would say that we feel like we are probably moved a little bit more back into the range.

What has changed for us is on the positive side we see Advanced Materials and A&P doing much better than expected, but we also have some new headwinds in Fibers demand -- destocking, as we have mentioned, and some of the further slowdown in heat transfer fluids and, of course, the Tennessee outage. The low end of the range would take some other things that we don't know about in creating some challenges for us, like an economy slowdown or something else that pops up, but we are working hard to continue to deliver the best earnings growth we can for the year. And we still have strong free cash flow that gives us additional options.

And, Mark, just on Longview, can you size the impact of the outage and also give us an update on the tariff dispute with Westlake?

I'm going to let Curt answer this one.

Let me start with Westlake and then I will need a reminder of the first part of the question. But as you know, with Westlake we continue to explore options with monetizing our excess ethylene.

And specifically in regards to the dispute with Westlake, let me remind you that there is really three disputes. The first is the removal of the bidirectional flow with the pipeline. The second is removal of the exchange rights or what is often referred to as the ability to do swaps, and then the third dispute is around the change in the tariff rates.

A hearing was held on the first two items back in May and we are waiting on an examiner's ruling. Can't tell you exactly when that is going to happen. I hear it could happen any day, but we are still waiting for that ruling.

The rate tariff is scheduled for review in August, so we are still working through the Railroad Commission to get this resolved. We continue to be very confident that this will be resolved to our satisfaction.

Dave, the first part of your question was around the Longview outage; could you elaborate?

Yes, the impact, the dollar impact of the outage in Q3.

Well, Q2 I think --.

You are talking about the planned shutdown, Dave?

Yes, I'm sorry; the planned shutdown.

So this is Curt again. If you look at -- the impact of that is going to be predominantly in the fourth quarter. If you look at our maintenance costs in the fourth quarter on a year-over-year basis, the difference is going to be roughly about $25 million of higher maintenance costs in the fourth quarter this year and about $20 million of that is associated with the Longview turnaround of the cracker.

Thank you very much.

Bob Koort, Goldman Sachs.

Good morning. Two quick questions, if I might. Firstly, in the emerging markets, obviously it's not quite as robust as folks had hoped. I am just wondering if you are seeing in the change in underlying trends and what you think has to happen, particularly in Asia, to get things percolating.

Secondly, I noticed exceptional expense control at the SG&A line. Can you talk about maybe some specifics of what you have done and how much of that has traction to continue or how much of that might have been more short-term oriented? Thanks.

Hi, Bob, good morning. In regards to Asia-Pacific in particular in the emerging market growth, we have to be careful about how we look at that revenue number. The key driver of why the revenue was not what you would normally expect was the intermediate sales from the Specialty Fluids segment.

We have these large engines here where we make a lot of intermediates and we sell what is left over that we don't value up in the specialties. We focus primarily on selling those in North America and Europe where the margins are most attractive and then what is leftover we sell in Asia-Pacific.

So when they have outages like we have had in the first half of the year at both Longview and Tennessee the big impact on the revenue is those intermediate sales in Asia-Pacific, which are the lowest margin sales for us. So that is a big driver. When you strip that out I would say revenue growth in Asia-Pacific in the first half of the year was on track and solid.

The broader question around emerging markets in places like Russia, Latin America; fortunately for us we don't have much revenue in those regions and aren't being hurt by the dramatic slowdown in those economies this year. And we continue to be very confident about our ability to continue growing in Asia-Pacific.

If I could, Bob, on the SG&A. One of the things I love about the Eastman culture is we have had productivity embedded in our culture across our operations for years and that is why you see us not having to announce big, large cost reduction programs, because our people focus on that every day.

If you look at the SG line specifically, what you are seeing there is that same productivity mentality being applied to the SG&A line where again we are looking at ways we can keep our costs flat year over year as we offset inflation through productivity efforts, etc. Then on top of it what we are working on is where we spend those dollars and we are focusing a lot of that spend on our growth and our other initiatives to help grow the bottom line. So it has kind of been a shift where we spend it, and how we spend it is really, I think, also going to be in the DNA of Eastman as you look at us over the next several years.

The one thing that we do see, SG&A tends to increase a little bit in the second half of the year because of some seasonality spending that we have. But, generally speaking, what you are seeing in our SG&A line is the focus of Eastman and supports the growth efforts that we have.

Great, thanks for the help.

John Roberts, UBS.

Morning. Could you talk a little bit about how broad your strategy is in your functional fluids area? I mean there are a lot of other areas like metalworking fluids or a broader presence in de-icing and so forth. How broad should we think about the strategy here?

Currently, I would say we have three main product groups that we currently have that go into different applications. So we have heat transfer fluids that are principally used for that purpose where you have got significant issues about transporting heat from one location to another. So the polymer and chemical manufacturing plants use a lot of heat transfer fluids, concentrating solar power arrays; use a lot of heat transfer fluids as well and some other energy-related facilities.

That is a market area that we have been a very strong leader in four years. We continue to be a strong leader, but as we noted, we have hit some demand slowdown because there is not as many energy investments being made at the moment, although we do see that coming back in the 2016/2017 timeframe. Then on the polymer plant side in China we see a slowdown there of PET plants in particular, because they were significantly overbuilt and demand is catching up. But that fluid gets applied to specifically those areas.

Then, of course, we have got two different aviation-related fluids as well. We have been a long-term leader in Skydrol, which is hydraulic fluid for commercial aircraft, and then the acquisition of the BP turbine oil business allows us to also complement that with our customers for the turbine oil.

But right now those are the areas and applications we are in. Those products don't tend to go into a lot of other applications, although we like this area and this business. And so we continue to look for other opportunities to add fluids, other potential fluids to this portfolio. It's one of the areas we are looking at when we talk about M&A.

Okay. Then on your comment about fibers you talked about some stocking that went on in anticipation of Asian growth and now it is flat. Are you saying end consumption of fiber in Asia is flat for 2014 and would the outlook be flat again in 2015?

So what we are seeing is flat demand, I would say specifically in China. There are other places where we continue to see modest growth in Asia-Pacific, but in China, which is the big driver of demand in Asia-Pacific, we see demand being basically flat this year relative to last year, all the way down to cigarette consumption. It is not just a tow issue. That is what this destocking is about is continuing to correct cigarette inventory and, therefore, tow inventory for serving the market in China.

And what do see the actual end consumption? You were talking about the cigarette inventory consumption correction in China; you're not talking about down smoking?

Well, I think what we are seeing is there is less or flattening of the level of smoking in China. Used to modestly grow for many of the years, but with the austerity measures and some other things going on in China it has flattened out the amount of cigarette consumption.

Thank you.

Robert Walker, Jefferies.

Good morning. So propane will be a tailwind in the second half of this year, but what are you assuming in your 2015 outlook? Should it be a tailwind to 2015 versus 2014 or another headwind or flat?

So if you look at propane what I would suggest you do is that we look at the forward curve, and if you look at the forward curve and if you believe what it is telling you is that on average the total cost of propane will be lower in 2015 relative to 2014. And because of that forward curve, as I mentioned, we are probably looking at that forward curve and seeing that maybe some -- it would be prudent for us to put in some hedges to block in some of that lower propane cost for next year.

And just as you look at your M&A pipeline, how does that look and are you happy with your mix of end-markets? Or might you add another value chain?

We continue to look at the M&A market and we will continue to be disciplined about looking at the M&A market looking for attractive opportunities. But I would say we look for bolt-on acquisitions that reinforce the existing businesses we have and we are open to attractive additions of new legs to our company as well if they make a lot of sense.

Thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Good morning. Mark, you took your guidance up a little bit in adhesives and plasticizers. On the plasticizer piece of it it seems like we have been talking about price erosion for quite awhile. Could you comment on what the sequential trend is there and whether or not the phthalate-based higher cost producers are making any money? Just trying to get a sense of what the residual price risk is there.

So on the plasticizer side, on the growth side we feel great. We see continued strong growth as people switch from phthalate to non-phthalate plasticizers, but as you noted, we have continued to see increased price pressure last year and some of that has continued into the first half of this year.

Principally what is going on is that you have some players who make non-phthalate plasticizers in Asia that sold all of it traditionally into China. And with the slowdown of the Chinese economy they have been pushed out of China and looking for new homes in Europe and North America and putting price pressure on the market as they try and buy market share.

Those prices have come down considerably from the beginning of 2013 and we see that pressure lessening as we go into the second half of the year, so I think we are getting to a price point where the economics aren't making sense for further aggression by the Asians going after business here. But it is a little hard to call that precisely.

And then switching gears to Longview. As you move through the planned shutdown in the back half of the year, would your feedstock mix remain the same at about 70 propane/30 ethane through that process, or is there any opportunity to continue to tweak the ethane ratio a bit higher?

At this point I think we are at the 30/70 propane. This shutdown is a true maintenance shutdown, it is not reconfiguring the plant, and we don't see changing that mix.

Thank you.

Jeff Zekauskas, JPMorgan.

Thanks very much. How long is the cracker outage in the fourth quarter? When does it start and when do you expect it to be completed?

It starts towards the end of the third quarter and I believe, Jeff, that it is a three-week outage. Three to four, I'm sorry.

Three to four. And this is your billion pound cracker?

This is the largest of the four crackers, that is correct.

And then secondly, in terms of your propane outlook, if I understand what you've -- better yet, what was the EBITDA of the acquired BP business?

We haven't given the specific EBITDA, Jeff, for that business. I think what we have talked about is in 2015 it will be, on an earnings per share basis, high single-digit secretion. It is about $100 million of revenue and I think people have done some rough math off that. I have heard some numbers thrown around around $30 million, but we haven't disclosed specifically what the EBITDA is of that business.

Okay, great. Thank you very much.

Mike Sison, KeyBanc.

Good morning. In terms of Advanced Materials, you are looking for a pickup in sales growth in the second half of the year. What do you think needs to happen for you to hit those numbers and is some of it within your control to some degree?

Mike, I do think some of it is in our control. As we look at some of the high-value premium products we have in that segment we have been working hard on a lot of new applications in Triton where we have closed those opportunities. As you close them you can start seeing how that volume is going to roll in and so we see an acceleration in Triton volume growth in the second half relative to the first half.

It is other places like acoustic interlayers. We have had great growth in the first half and expect that to just continue going into the second half. There is a lot of OEMs that are switching to acoustic high-performance products versus the standard interlayers to quiet the cabin and pursue light-weighting of the car. And so that is a great macro trend, a great margin improvement, mix improvement for our business.

The window films side of the business also I think is one where we had shifted incentives and order patterns intentionally to even out orders to actual consumption with our market. And so we see good indications of those orders flowing in consistent with that intentional strategy.

There are, of course, always uncertainties. Part of the challenge we had in window films this year is a little slowdown in demand in places like Indonesia and Thailand due to macroeconomic factors that are beyond our control. But I think we can see a number of things going our way and there is always the things you don't expect that can either be favorable or unfavorable that play out, but as long as the economy remains solid I feel like we should be on a good track there.

Okay. Then when you think about 2015 for Advanced Materials, it has got a long way to go. Do you think it is just more of a delay to get to that number? Is the profitability potential of that business still where you think it could be longer term?

First of all, we don't see any sort of derailment on strategy in the Advanced Materials segment. It is doing great this year and likely to perform at the high end of the range. And I think it is going to deliver very attractive earnings growth next year.

It is obviously not going to get to $380 million if you want to go back to 2012 investor day. I think we commented on this in the past. There are certain things that have changed that have slowed down the rate of growth in that business, particularly the European demand in things like automotive and architectural buildings for the interlayer business. It just hasn't come back from what we would have assumed back in 2012.

But the premium products are growing strong, including interlayers. The window film business is growing strong. The main issue this segment has had in getting to that original guidance is just overall macroeconomic growth being off of what we would have assumed. So I see us continuing to deliver consistent earnings growth over several years in this business.

Great, thank you.

Nils Wallin, CLSA.

Good morning. Thanks for taking my question. A question on outlook for hydrocarbon resins. I know Exxon is building a fairly sizable plant over the next couple years and wondering what you think about the long-term prospect for that part of the business.

The hydrocarbon resin business obviously has gone through some serious adjustments, if you look at its performance in 2012 to 2013 and now starting to recover in 2014. It is still a great business. It has got attractive EBIT margins. It has got ROIC that is 2 to 3 percentage points above its EBIT margin, so it is creating a lot of value on a cost of capital basis for our shareholders.

Certainly there are questions around demand and supply going forward, like the Exxon announcement you just mentioned, but we see it continuing to be a stable good business at this point. Demand trends are very favorable. There is plenty of hygiene and hot melt adhesive packaging and other things that drive to demand for this business. We will continue to look at the supply demand balance to make sure that it is going to be value-creating going forward and make decisions as appropriate.

Got it. Then just as there seems to be an interplay between pricing for rosin versus hydrocarbon resins, and obviously you have capacity in both, would you be able to give us a sense of how that might change your margin or mix effect as those two play off one another?

I think when we think about rosins, which is a lower quality alternative to hydrocarbon resins, especially our hydrogenated hydrocarbon resins where we have a more differentiated position, they play a factor in creating price pull, if you will, on the market downward if there is a large excess supply of rosins and those prices are quite low.

Last year was an exceptionally bad year for rosin prices in that they were quite low. What we see now is back to more of a stable situation, but it is a crop and it will have a certain amount of volatility to it going forward in the future. So I don't think anything has changed in that dynamic as we look at this business.

And I think that as people go to more high-performance products we continue to benefit from that trend, because in particular our hydrogenated hydrocarbon resins are the high-quality alternatives. If you want a high-quality diaper you go hydrogenated resins because rosins have an odor. If you are going to a high-performance packaging facility, you are going to go with hydrogenated resins. So the macro trends is the emerging middle income class is upscaling what they want; drives favorable demand to our product technology.

So would you say there is a meaningful share shift or share gain by the hydrogenated hydrocarbon resins away from rosin and how might large that be?

Yes, I think there is when rosin prices are sort of stable. When rosin prices become really cheap like they did last year and the economy is weak, the customers will make trade-offs and accept a lower-quality adhesive formulation and favor those economics and make those kind of switching choices in their formulation. So that is going to happen sometimes.

But in general, if you look at stable relative pricing situation over a long term, we should see some continued share shift. I wouldn't say it is dramatic, but share shift towards our technology.

Great. Thank you very much.

That concludes today's question-and-answer session. Mr. Riddle, at this time I will turn the conference back to you for any additional or closing remarks.

Thank you, Adam, and thanks again, everyone, for joining us this morning. A web replay and a replay and downloadable MP3 format will be available on our website beginning at approximately 11 AM this morning. Have a great day.

That concludes today's conference. Thank you for your participation.