伊士曼化學 (EMN) 2014 Q3 法說會逐字稿

Good day and welcome to the Eastman Chemical third-quarter 2014 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Greg Riddle. Please go ahead.

Thank you, Kim, 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'll 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 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 third quarter 2014.

Second, earnings per share and operating earnings referenced in this presentation exclude certain non-core or nonrecurring costs and charges. 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 2014 financial results news release and that can be found on Eastman.com in the Investors section. Projections of future earnings in the presentation also exclude such items as described in the third-quarter news release.

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

Thanks, Greg. Good morning. It is shaping up to be a beautiful day here in the Smokey Mountains, a beautiful fall day and Happy Halloween. I'm happy to say for our shareholders we have a treat, not a trick, of great results this quarter and a good outlook for the fourth quarter next year.

This has been an exciting quarter for Eastman as we have made solid progress towards our global goal (technical difficulty) becoming a leading specialty chemical company. We delivered strong EPS in the third quarter despite continued global economic uncertainty. And I'm proud to say we're on track for our fifth consecutive year of compelling earnings growth in 2014.

Earnings growth is a reflection of how our world-class technology platforms have enabled great success in establishing leadership positions in key end markets, diversifying into attractive end markets and geographies, and enabling an advantaged cost position through vertical integration and advantaged raw material positions.

In September we entered into an agreement to acquire Taminco, a highly successful global specialty chemical producer, with a clear focus on niche markets built on their world leadership position, alkyl amines and derivatives.

Taminco has the number one or two global market share position for the vast majority of the chemicals it produces, making it a very exciting addition to our portfolio. Today I am pleased to report that the closing process is on schedule and we expect the transaction to close by the end of the year. We couldn't be more excited about the addition of this great company to our portfolio.

Also during the quarter I was most excited to see the results of our innovation, leveraging our world-class technology platforms. Our strong growth of innovative high-value Specialty Products was a big driver of our earnings growth in the quarter and will be in our future, especially in the Advanced Materials segment.

And lastly, we generated $355 million of free cash flow in the quarter which reaffirms the quality and the strength of the Eastman portfolio. And I am confident that this strength will continue to be a great value driver for investors in the future.

As we move on to slide 4 I will cover our third-quarter corporate results. Our portfolio businesses posted solid year-over-year revenue growth of 3% with four of our five segments delivering very strong growth. The higher revenue is primarily driven by higher volume and improved mix in Advanced Materials as well as higher volume in Adhesives and Plasticizers. Pricing is also higher particularly in Specialty Fluids and Intermediates segment. Operating earnings increased by 5% year over year driven by revenue growth in Advanced Materials, Adhesives and Plasticizers and Specialty Fluids and Intermediates and the continued reduction in raw material and energy cost.

Earnings per share improved by 12% driven by higher operating earnings and a lower share count. The lower share count reflects our continued commitment to return cash to our shareholders and fully deploy our balance sheet. All in all our strategies continue to get great results and I'm confident that we have put ourselves in an excellent position to continue delivering these results for shareholders through this year and the years to come. With that I will turn it over to Curt.

Okay, thanks, Mark, and good morning, everyone. I will begin on slide 5 with a review of the Additives & Functional Products results. Sales revenue was higher by 3% primarily due to higher selling prices and higher sales volumes for coatings products lines. That was attributed to stronger demand in several key end markets, particularly building and construction and durable goods.

Revenue growth in coatings was somewhat offset by lower sales volume for Crystex insoluble sulfur primarily due to lower demand in both Asia and Latin America. Operating earnings were lower by $9 million primarily due to higher raw material energy costs, particularly for propane, and costs related to the development of our next generation Crystex rubber additive technology.

The higher raw material and energy costs reflect the flow-through effect of higher cost inventory with inventory turns for Specialty Products typically taking a bit longer than other parts of our portfolio.

Looking ahead to the fourth quarter we expect both revenue and earnings to have a strong growth year over year and to be about flat sequentially due to solid demands for coatings product lines, strong volume improvement for tire additives product lines, particularly in Asia-Pacific, lower raw material and energy costs and lower fixed cost for Crystex due to our intent to close a manufacturing facility and as we ramp down development costs from higher levels. As a result we expect operating earnings will be approximately $400 million for the year.

Given the headwinds this business has faced this year and the investment we are making in Crystex for the future, we view these us solid results. In addition, AFP is well-positioned for solid earnings growth in 2015 and beyond supported by great technology platforms, leadership positions in attractive end markets and advantaged cost positions.

Adhesives & Plasticizers is on slide 6 and they reported another solid quarter. Sales revenue increased by 8% as higher sales volume more than offset lower selling prices. The higher sales volumes in adhesives resins was primarily attributed to stronger end market demand, particularly for packaging and hygiene.

The higher sales volume for plasticizers was attributed to the continued substitution of phthalate-based plasticizers with non-phthalate-based plasticizers, with Eastman 168 non-phthalate Plasticizer volume growing about 13% in the quarter. Lower selling prices for plasticizers was attributed to the continuation of global competitive pressures resulting from weak demand in Asia-Pacific.

Operating earnings increased by $11 million primarily due to higher sales volume and higher capacity utilization in adhesives resins that resulted in lower unit costs. Operating costs were also lower and this includes targeted cost reductions that are helping us this share and will continue to help us into 2015.

Looking forward to the fourth quarter, in addition to the seasonality we typically see in this segment, we anticipate some constraints for key raw materials in adhesives resins to result in lower volume year-over-year. This raw material supply issue is the result of a shift to lighter feedstocks across the industry resulting in [fewer] byproducts. It isn't unique to Eastman and our feedstock flexibility provides an advantage in a tight raw material environment.

For the full year we expect Adhesives & Plasticizers earnings to be approximately $190 million. This level of earnings would be approximately 10% higher versus 2013 and reflects a stable foundation for future growth.

Moving next to Advanced Materials on slide 7, revenue growth accelerated in the quarter with year-over-year revenue sales up 4%. The 5% volume increase was primarily due to continued strong growth for premium products across the segment. Premium product growth was driven by Eastman Triton co-polyester, which was up 15%, as well as Eastman Visualize material, interlayers with acoustic properties and V-Kool window film, each of which continues to benefit from strong adoption in their respective markets.

Operating earnings increased by $11 million driven by higher volume and improved product mix. The Advanced Materials segment had a strong quarter and continues to deliver earnings growth and higher margin supported by three drivers we have previously discussed: higher volume, improved product mix, and fixed cost leverage as we fill out previous capacity expansions.

Looking at the fourth quarter, we expect normal seasonality to impact demand across all major product lines and associated lower capacity utilization. However, we expect operating earnings to be meaningfully higher year-over-year resulting from a continuation of mix improvements across the segment, favorable raw material costs particularly in co-polyesters and lower fixed cost.

As a result for the full year we are tightening our range toward the upper end of what was previously provided and now expect operating earnings to be between $290 million and $300 million, reflecting an expected double-digit earnings growth for this segment versus 2013.

Next is Fibers on slide 8. Sales revenue declined as lower acetate tow sales volume more than offset higher selling prices and higher sales of acetate flake to Eastman's China joint venture.

The lower acetate tow sales volume was due to the impact from additional industry capacitation for acetate tow, primarily Eastman's joint venture with China National Tobacco Corporation, flattened demand in China that has resulted in a reduction in imports, and customer buying patterns which we have experienced before in this segment.

Operating earnings were basically unchanged as higher selling prices and lower raw material and energy costs were offset by the lower acetate tow sales volume and resulted in lower capacity utilization which resulted in higher unit costs.

Looking ahead to the fourth quarter, we expect a sequential pickup in earnings due to customer buying patterns for acetate tow positively impacting our results. For the full year we continue to expect operating earnings to be approximately $480 million which would be a solid improvement over 2013 earnings.

I will finish up the segment reviews with Specialty Fluids & Intermediates on slide 9. Sales revenue increased primarily due to higher selling prices for intermediate product lines. The higher prices were largely the result of supply tightness in multiple markets, most of which we do not expect to continue through the fourth quarter.

Revenue in the quarter was also positively impacted by the aviation turbine oil business we acquired from BP. You will recall we closed this transaction during the second quarter and have gained a growing specialty business that aligns well with our existing Skydrol Aviation fluids business.

The higher intermediate selling prices and the addition of the aviation turbine oil business revenue was partially offset by weaker sales volume in heat transfer fluids, as well as lower intermediate sales volume resulting from greater demand internally for downstream derivatives.

The lower sales revenue for heat transfer fluids is to due to delays or cancellation of industrial products -- projects and we continue to expect this to continue in 2015. Year-over-year operating earnings increased due to higher intermediate selling prices and the benefit from the acquired aviation turbine oil business, partially offset by higher raw material and energy costs as well as lower sales revenue for heat transfer fluids.

Looking to the fourth quarter we expect continued strong performance in the intermediates product lines driven by solid demand and lower propane costs as well as the continued benefit from aviation fluids product lines. However, we also expect normal seasonality demand and for demand weakness in heat transfer fluids to continue.

In addition, this segment is impacted the most by the cost from a maintenance shutdown at the largest of our crackers at our Longview site. The shutdown occurs every -- once every five years and we expect the impact to be approximately $20 million for the Company.

The shutdown has been recently completed and was done in a safe and timely manner. This was not a trivial shutdown given the various complexities involved including the weather. So I want to thank the Eastman team involved for their diligent efforts and demonstrating once again the operating capabilities of this Company.

Anyway, taking this together and recognizing the volatility inherent in the business, we continue to expect operating earnings for the full year to be in the range of $300 million to $320 million.

On slide 10 I'll cover some other financial highlights. One of my favorite topics, during the quarter we generated a very strong $560 million in operating cash. This again, reflects the solid net earnings that was the main driver as well as our working capital discipline and previous years during the quarter our working capital turned from a use to a source of cash.

Our cash flow in the quarter was also -- reflects timing of lower cash tax payments and the timing of pension payments which will occur in the fourth quarter. Our free cash flow in the quarter was $355 million including $53 million in dividends. Capital expenditures totaled $152 million in the third quarter and we continue to expect our full-year 2014 capital expenditures to be approximately $575 million.

With the expectations for cash from operations approaching a record of $1.4 billion for the full year we are on track for full-year cash flow of approximately $600 million. Besides dividends we have returned cash to stockholders with share repurchases of $50 million in the third quarter, bringing our total share repurchases to $410 million through the first three quarters of the year.

You should expect that for the next couple years our focus will be on deleveraging following the close of the Taminco acquisition. While we are deleveraging we do expect to continue to offset dilution with share repurchases.

Lastly, our tax rate for the quarter was approximately 27% below the second quarter due to a reversal of a deferred tax reserve. But it is essentially flat compared to the third quarter 2013 when we received a benefit for adjustments to the tax provision to reflect the finalization of our 2012 Federal tax return.

We continue to expect our tax rate for the full year to be approximately 28%. It could be lower if a package of tax extenders, including the various business and R&D tax credits is signed into law later this year. So with that I will turn it back over to Mark.

Thanks, Curt. On slide 11 I'll review our outlook for 2014. I'm excited about the strong earnings growth that we've seen through the first nine months. As I look forward into the fourth quarter of 2014 we expect it to continue to grow.

We expect sales revenue year-over-year to increase roughly in line with global GDP. And this reflects continued growth of our specialty products, particularly in Advanced Materials; increased volume in Additives & Functional Products driven by higher coatings volume and strong volume improvement for tire additives, particularly in Asia-Pacific; and solid revenue growth in Fibers due to the customer buying patterns.

So far this quarter we are seeing strong orders through October across the Company. Of course there is always some risk of more than normal destocking with the current economic uncertainty, but we don't see any evidence of it yet.

We also expect some favorable raw material and energy tailwinds to improve earnings. As a result we expect operating earnings in the fourth quarter to be up strongly year over year. The increase is expected to be pretty much across the Company.

Taking all of this in account, I'm very excited about being able to revise our guidance for 2014 to be approaching $7 a share, which will be our fifth consecutive year of earnings growth. We believe this momentum can continue in the years going forward.

And that brings me to our last slide, which is our Investor Day, which is scheduled for next Thursday, November 6 in New York. I am very excited about how we're going to bring our growth strategy to life which will deliver outperforming earnings growth and a very strong free cash flow for our shareholders.

We will discuss how we've transformed our portfolio into a leading specialty chemical company. Within this portfolio I'm particularly proud of the progress we are making with delivering innovative products to the market. And we will discuss the strength of our core businesses and how they are well-positioned to deliver solid revenue growth and sustainable margins.

I'm confident that our strategy will create great value for shareholders now and into the future. There are more details on our website in the Investors section. I really look forward to seeing as many of you as can make it next week and with that I will turn it over to Greg.

Okay, thanks, Mark. And since we'd like to get to as many questions as possible, please limit yourself to one question and one follow-up. With that, Kim, we are ready for questions.

(Operator Instructions). David Begleiter, Deutsche Bank.

Mark, just on acetate tow as you head into yearend negotiations, what are you hearing from your customers about underlying demand, specifically in China, for tow and cigarettes for 2015 and beyond?

Good morning, Dave. So the Fibers business is one we are certainly paying a lot of attention to and trying to make sure we have a good understanding of the market. What I would say is that we see demand as basically relatively flat in China this year relative to last year. And as we look at that I think that it's principally driven by austerity measures, from what everyone is telling us, as opposed to a broader set of trends.

So as we think about austerity measures, they tend to have a one-time effect. And so, as we look at population growth and other factors you can see a scenario where demand in China could improve going forward, probably at a moderated level to the past, but continue to deliver some level of growth. So that our view on China.

So when you add that together with the rest of the world where you still have growth in Asia-Pacific and some other parts of Eastern Europe and Latin America, you can see a scenario where global demand growth is slightly improving going forward.

Now as we think about specifics to 2015 and what is going on in this year, there are two things to keep in mind. One is part of the reason demand is down this year is our joint venture with CNTC. So as they bring that joint venture online they're obviously going to shift volume to running the joint venture full, like they do the other joint ventures, and then that is going to have an impact on import volumes.

And we've taken our share of impact on those import reductions this year, which of course is more than what you would have expected with flat demand. So there is a bit of that going on this year that factors into it. There is some debate and speculation around to what extent there is inventory that needs to be destocked in China, if they are producing -- expecting growth which didn't materialize.

So we also view that there is always some moderate amount of inventory correction that you could see next year or as part of what is going on this here. But overall I think the important thing that investors need to understand is we see this business being stable, we see the demand being stable, and as well our earnings being stable going forward from this business.

And if we don't see that demand materialize, we do have our actions we can take in managing our cost structure to respond to keep earnings stable again. So that is where we see it, we'll spend a lot more time talking about this at Investor Day next week.

Very good. And, Mark, just on Crystex. Could you talk about underlying demand and when do you expect that demand to actually pick up going forward?

First of all, we've already seen it pick up. So October we saw a strong rebound in orders in Crystex especially in China which is where we saw the most destocking. It is important to remember that we're highly levered to commercial and truck tires as opposed to passenger tires as you compare us to reports of our downstream customers. There's 10 times as much Crystex in a truck tire as a passenger tire.

And so, October volume is actually on a global basis the strongest month of orders we've seen in 24 months. So we are already seeing a good rebound. Of course we need to see this continue into November and December. But at least we are off to a good start.

Thank you very much.

Vincent Andrews, Morgan Stanley.

Could you just speak a little bit to the customer buying patterns in Fibers? Is that just sort of a seasonal thing, is it a trade load or --? And what gives you the confidence that it will swing back in 4Q, which I typically think of as a time where these guys look to manage inventory levels going into the end of the year.

Good morning, Vince, and I think the old word that prior CEOs at Eastman have used is chunky. And I think that customer buying patterns don't have some sort of predictable seasonal pattern in the Fibers industry. There's a lot of different factors that go into how they manage their purchases.

And we can already see improved orders from China in the fourth quarter. So I'm pretty sure we can see what is going on and we expect volume to improve. So it was just a shifting of order patterns as they were adjusting some inventory in third quarter versus forth.

Okay, fair enough. And could I ask, on the cash flow statement you had very strong cash generation. In one of the items there was like $101 million that came on the other line, what was that?

Vince, that is an example of the cash tax payments in third quarter this year is lower than they were last year. So that is the primary driver.

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

John Roberts, UBS.

I assume you view the Texas Railroad Commission ruling as favorable. Do you expect that to be appealed? And will that allow you to restart a process to explore any transactions for your olefins capacity?

This is Curt. Just to remind everyone, there is three disputes with Westlake over that pipeline. Two of the disputes was the hearing that was held earlier in this year around bidirectional flow and swaps. And there is a hearing that has been held on tariff that we are still waiting for a ruling.

But on those first two items, the ruling was issued by the examiner, as you indicated, on October 20. The ruling was in favor of Eastman as they found Westlake's removal of bidirectional flow and exchanges as an unlawfully discriminatory action against Eastman. We are not surprised by that ruling given our position and our outstanding legal team.

So parties do have the ability to appeal this decision within 15 days. We are just going to wait that 15-day period out and see what happens. Until then just your comment, we have continued to explore options with our excess ethylene position. The timing unfortunately has been impacted by this activity with Westlake. But we will continue to explore those options now that this ruling is out there.

And then as a follow-up, how much of your revenue would you expect to see some price pressure from customers or competitors if ethylene, propylene and other petrochemicals start declining as a result of lower naphtha prices?

I will take that question. Just on the Westlake part I wanted to add one additional comment which is we are committed to try and reduce the earnings volatility of our Company which is why we are looking at selling those crackers. But I need to remind investors that this is not a material event whether we keep those crackers or we sell them.

The bulk ethylene is about 2% of our earnings stream this year and it is just not what people should be focusing on. And it is a great segue into your second question which is what is the impact of the $85 oil scenario on Eastman.

And we of course are spending a lot of time thinking about that and trying to assess what that impact might be. And at a high level I don't think there is a substantial impact to Eastman. And I will walk you through our logic and give you a rough idea of what the impact could be.

So most of the press I read says that the blended oil going down to $85 is primarily a supply driven event. So first I am going to talk about this holding demand constant, because if it is supply driven it is not a -- we're not having a macro economic recession debate here. And there are really sort of three drivers to keep in mind when you assess Eastman as we think about this impact.

The first is of course our raw material costs will improve. As propane prices drop we will benefit from that. That will be somewhat mitigated by the hedging strategy we have in place. Also you have to remember that about a third of our purchased -- raw materials purchased propylene, not propane, and we'll see benefits of lower purchase propylene cost coming into us. So we'll see a tailwind there.

The other side of the equation of course is what is -- will propylene and ethylene prices due to us. Well first of all, we don't sell a lot of -- we don't sell any propylene and we only sell a modest amount of ethylene, as I mentioned, when it comes to total earnings for Eastman.

We sell derivatives, a lot of those are Specialty Products. And as raw materials fall we generally tend to add stickiness in our prices that don't fall as fast as our raw materials and therefore we will capture some value on the way down as you think about 2015.

The third part that is quite important is that we are not just -- olefins is only 15% of our overall earnings this year, if you look at it from a pure cracking spread point of view. And so you've got to remember that the other vast majority of Eastman benefits generally from a lower raw material environment.

And so, the third component is our raw materials in paraxylene and benzene and things like [VAM], [PBO 8s] are all going to improve. And again, those are Specialty Products that have stickiness with raw materials moving and we should benefit.

And then we can shift to the demand equation. If it is a supply driven event with $85 oil then this is going to be a great economic stimulus for the world. And it's going to help improve cost structures for consumers, for governments that should help everyone from China to Europe to the US.

So I can make an argument that we will have a demand offset there too. But ignoring demand for a moment and just holding demand constant, I would say that the impact to us is roughly around $0.25 in EPS as a potential headwind. And then if you believe that the world is going to be stimulated by $85 oil and we'll get growth out of it then we will offset some of that $0.25. So, overall not material.

At the end of the day Eastman is just not an olefins play. We continue to sort of get lumped into that category by some and they seem to be missing the fact that we've significantly transformed our portfolio. This is becoming a smaller percentage and as we grow our Specialty Products and add Taminco to our portfolio it is going to become an even smaller percentage of our EPS in 2015.

And, Mark, if I can just clarify, John, that 25% EPS headwind is going into 2015.

Yes, sorry. This is a 2015 analysis. We actually feel good about our position for 2014.

Thank you.

Duffy Fischer, Barclays.

A question kind of on competitive dynamics. The Chinese are building out a lot of propylene molecules over the next couple years. And they are trying very hard to get some of the downstream derivatives where you guys would compete like 2-EH. When you look through your propylene derivative portfolio how do you think you are set up competitively versus kind of this onslaught from China over the next several years?

We always look at the competitive situation. The reality is it is already very competitive in China from a supply -- oversupply point of view and our margins have still held up quite well. The vast majority of our 2-EH and other propylene derivatives that we sell out of SFI are sold in North America where we have a better industry structure and a better cost structure.

And we tend not to compete so much in Asia-Pacific with those kind of products. And then when you get to the Specialty Products, we are not competing on a basis of propylene prices anyway, we are competing on value. So I don't think it's going to be significant.

Okay. And then on the due diligence you did on Taminco, one of the push backs I'm getting from some investors is it gives you Ag exposure at a point when most investors don't want Ag exposure. When you did your due diligence what kind of downside, if Ag went into a two-year down cycle let's say, could we see out of that business?

We of course looked at the Ag exposure both short-term and long-term. And first, from a long-term point of view, we feel great about the long-term macro trends for Ag. So really the question is just short-term is there some risks specifically in crop products like corn and soybean with where prices have gone to demand for us?

And when you really dig into the Taminco portfolio, the amount of exposure in total earnings that they have to row crops is not that high. Their whole crop protection business actually goes into high-value products, fruits, vegetables, things like that where we don't see any risk to demand trends. And they've got a great pipeline of new growth products going in crop protection.

Some you're really talking about a small part of the functional means that go into Ag. And if we -- we know there is some exposure there, we factor it in our valuation and we still feel good about our guidance.

Terrific. Thanks, guys.

Frank Mitsch, Wells Fargo.

Good morning. Hey, you talked about a potential $0.25 headwind in 2015, which begs the question how are you thinking about 2015 in general and obviously that $8.00 marker that is out there?

Mitch, I know I can always count on you asking this question, so I appreciate it. Well, in this case I'm actually going to beg off a little bit to Investor Day. We've put together a very compelling and exciting story about how Eastman is going to grow earnings in 2015 and beyond for next week. And I don't want to steal our thunder from next week.

But the short answer is, I think we're going to do fine in 2015. I still feel confident we're going to grow Eastman's earnings in a strong way into next year. And then the Eastman -- and then the Taminco acquisition and the Commonwealth acquisition will add great earnings accretion to that growth.

So we still feel good about that. Obviously if we stay on an $85 oil scenario next year there will be some mitigation to that growth, that $0.25 roughly. But you have got to keep in mind that $0.25 out of our total EPS is a very small number on a percentage basis. And it doesn't change our ability to grow -- deliver good growth in earnings next year over this year.

All right will I certainly appreciate the teaser for the meeting next week. And then just on A&P, you talk -- adhesives looks like the second quarter now where -- with pretty good growth. How sustainable do you look at that? And then obviously on the plasticizer side you are still seeing some price competition, what is the outlook there?

First of all we feel great about how this business has stabilized and how it has improved this year and how we expect it to continue delivering earnings growth into the next couple years which we'll of course address next week as well.

On the adhesive side what we see going on is demands come back. We had soft demand in 2013, as we all know. But hygiene, hot metal adhesive packaging, which is a very sophisticated application that requires high-performance resins, we are seeing great growth in that and great demand coming to us.

And then on the supply side the industry has just become tight again and that has allowed us to improve our pricing power and capture the value that we create for our customers. So we see that as a good thing. The rosin crops came in a little below average and then the crop outlook for next year is that that is just finished in the rosins are collecting off the hills today. It looks like it is going to be slightly below average. So the industry looks like it's going to stay tight going into next year.

Plasticizers, demand for growth has been very strong as people continue to switch to non-phthalate plasticizers. And then the spread compression has offset that this year. But we expect that to moderate because where pricing has reached I think we are reaching a point of stabilization on the pricing front as we go into next year.

Thank you so much.

Bob Koort, Goldman Sachs.

I was wondering if you could give us an update on your PDH off take, that plant, when you expect to actually start receiving material and how that might compare to the original timeline?

Hey, Bob, this is Greg. I think what enterprise has said publicly is that that would be online in early 2016. And I think that's just a little bit later than originally anticipated.

And is there -- I know you guys had some sort of bridge agreement until that plant started up. Do you get the favorable cost plus economics during that bridge period or do you have to wait until that unit is actually producing?

There is a propylene market contract that is in place started in 2013 and --.

We are seeing the benefits of those today and that will continue until that product -- project is coming online.

And relative to somebody else asked earlier about oil and you mentioned it is much ado about nothing maybe for Eastman, I think you were right to point out you are not a olefins company. I am curious though, given your feedstock base and some of your Appalachian coal exposure relative to maybe peers that are more oil-based.

Would you expect to see some compression in margins as maybe coal prices locally don't necessarily match up with what oil prices are doing globally? Or would we expect your raw material basket to echo changes in oil pricing?

Hey, Bob, that is a great question. First of all, we love our cellulosic acetyls dream and its profitability and it is coal based here in Tennessee where we are one of the few companies in the world, certainly the only Company really outside of China that does coal gasification successfully. And that position has translated a lot of value for us.

When you look at the final products where we are selling, those aren't really based on naphtha in the competitors cost structure. It is more of a natural gas kind of competition. And the vast majority of our cellulosics that come off of our coal are very high-value specialty products that aren't trading on movements of raw materials on a daily, monthly or even annual basis.

Got it, that's helpful. Thanks very much.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. With regard to the volume declines in acetate tow and you were also mentioning that you had Eastman specific things that you could pull if you didn't see demand. What are those Eastman specific things?

Would you consider closing any capacity going forward? And then, at what level in terms of margins would you say it is time to start -- time to start taking control of the market on your own?

Well, certainly there are a number of different choices we have in front of us. One of those choices is capacity. But we are not going to make any snap decisions here. There is a lot of uncertainty in what is going on in the Fibers market obviously with the change of demand pattern in China. I think we're getting a good grip and understanding of that.

We are still in the beginning of contract season right now to see how our contracts will play out and therefore what our volume will be next year. And more importantly, what we think is going to happen with volume on a long-term basis, not just reacting to short-term events. And then we'll make the appropriate decisions of what is the best way to manage our cost structure if we see demand pressure. But I'm not going to get into those details until it is appropriate.

Understood. And then on Tritan, the 15% growth is obviously quite strong. Would you be able to parse out from much of that is just the capacity expansion versus market share gains and what type of growth rate you expect for that product going forward?

Hey, Nils, this is Greg. The debottleneck that is coming online here in the fourth quarter is happening in the fourth quarter. So that would not have affected the kind of growth that they had in the third quarter. So that is still to come as the debottleneck gets completed.

But, just to brag on the Tritan product and the team that has delivered such great growth across so many markets and applications -- this is a great business. We've seen tremendous growth out of this business. Last year it was incredible this year and has been very strong.

We see all kinds of applications coming our way in the future and new end markets like medical that we haven't even touched yet. So we are going to continue investing against this and growing it.

Thanks very much.

Kevin McCarthy, Bank of America.

Just to follow up on Advanced Materials market. I think you cited a number of factors there driving it to the high end: better mix, raw materials, lower fixed costs. I was wondering if you could just kind of walk us through those issues, provide a little bit more color, and where you are seeing the positive variances by product line. Is it mainly Tritan or in the other pieces of the segment?

Good morning, Kevin, and great question. We are extremely happy with how Advanced Materials has been performing through the last few years and what we expect going forward. And it is a specialty product mix upgrade story that is very consistent all the way back to what we said at Investor Day in 2012, and it is across the board. So, yes, Tritan is showing tremendous growth and improvement.

It is a high-margin product. We've got a great patent position, which we will be able to sustain this advantage in the marketplace for many years to come. So that is part of it, but that is not the only part. If you look at the interlayers business, we are seeing tremendous growth in our acoustic interlayer products that go on automotive windshields, not just further adoption of different OEMs but starting to put the acoustics on the side windows. So just an acceleration of growth relative to underlying demand, and that is a great product and we're excited about the next generation of products we see there.

And then the window film business also showing good growth in China and North America. We are still in the beginning of implementing our growth programs there, so we see a lot of growth coming from that as we go into the future. So it is really across the board that we see this story, and we have a lot a capacity available in this segment. So we don't have to spend much capital except for Tritan, to continue to grow and leverage that capacity so we get the fixed cost benefit.

And the other great thing about this business is the assets are very flexible. So as we grow the high-end value products, we can shift and make those on the same assets we have been making some of the more core products over in the past. So we just get a lot of leverage in this business.

Appreciate that. Then a second question if I may for Curt. Propane has been very volatile; started off the year as a trick and at the moment anyway it looks like a treat, but you have got a lot of hedges in place. Can you talk about 2015, and what can you tell us about hedge levels and ratios so we think about the economics versus the volatility?

As a reminder, the intent of our commodity hedging program as you indicated is really to reduce earnings volatility related to input costs, particularly like propane and natural gas. And as I discussed earlier in the year, we kind of changed our hedging philosophy. Instead of just going out six months out, we now go out multiple years to take advantage of the forward curves as the year progresses.

So specifically on propane, I would characterize we have hedged a substantial portion of our purchases for the remaining of fourth quarter, as well as 2015. You can imagine us taking those positions -- our team was taking those positions during the course of this year, which was probably just over $1 as a lot of those forward curves were reflecting at that time. We do use a combination of swaps and options, and so we still get to enjoy some of the benefit as propane comes down going into next year. But the swaps, obviously, are helping us kind of get a predictable cost flow and reduce earnings volatility.

And as a reminder, hedging is just one of the things we are doing to reduce the amount of focus the investment community tends to have on our olefins exposure. So this hedging program not only helps achieve reduced earnings volatility, but it should lessen the focus on olefins for this Company.

Thank you, Curt.

Jeff Zekauskas, JPMorgan.

Do you expect your filter tow volumes to grow next year? And if you do, by what magnitude?

Good morning, Jeff. As we look at filter tow volumes next year, we don't expect them to grow. We think that they're going to be stable to modestly down based on the logic that I just laid out. But we still see the earnings being stable. There is multiple factors, including pricing and raw materials, that go into our view of earnings and how we manage it, as well as the actions we can take.

Okay. And I guess to follow up on Kevin's question, if propane stays at $0.90 and you are hedged at $1 or a little bit more than $1 with some offsets, what is the effect on the income statement? Do you take hedging losses or how exactly does that ripple through the income statement?

Yes, basically what that does is that would just -- you would still have the purchases, underlying purchases of those lower raw materials, but as a cash flow hedge it would offset some of that lower raw material cost.

From an earnings standpoint then that has the same type of effect, it provides a stable cost position and we now could have volatile earnings that go up and down around that propane. And that was factored into our analysis that Mark talked about where the net impact going into next year would be roughly $0.25 per share.

And, Jeff, just -- those hedges are just going to follow where propane is used. So it will show up in the segments that use that material.

And then lastly, do you have a view on propylene for next year as to where you think it will settle and what exactly that -- and is your view that that would have a positive economic effect on you or a negative economic effect if it were lower?

Hey, Jeff, this is Curt. That is age question we are going to be presenting next week as part of our overall view of what is going to help drive earnings growth for next year as one of several factors of input. So if you don't mind, stay tuned until next week.

Okay, great. Thank you so much.

James Sheehan, SunTrust.

A question on the tire market. What gives you the confidence that we are seeing a real pickup in the tire demand? Is it rather than just a seasonal impact? And also could you give us an update on your development of your rolling resistance product? Thank you.

Sure. So the tire businesses -- they've got a great strategy they are going to share with you next week that talks about Crystex being a solid source of earnings and these growth programs as you just mentioned.

When it comes to demand, from what we can see from our customers and what you are going to see in their calls, is I think demand is stabilizing and improving overall globally for primary demand in tires. Obviously we're going to benefit from that. I think we're still doing a good job of defending our market share in the Crystex business and holding onto that growth as it comes our way.

To remind everyone, we always expect to lose a little bit of market share, so we expect to grow at half the rate of the market in a Crystex sense of the world. And the hard data I have right now is very strong orders in October showing a recovery out of the third quarter. But as I said, I would like to see several months in a row before we can call a recovery in sort of destocking and softness in tires.

From a growth program point of view we are seeing great success on our two top growth programs, we will tell you a lot more about that next week at Investor Day. But the hydrocarbon resins that are going in as performance additives to improve wear -- improves traction on the tires is showing a lot of interest across a number of our tire OEMs.

And so, we feel very good about that and seeing strong growth. And then our cellulose esters also going into -- as a performance additive for the tires is showing great excitement by our lead alpha customer. We think we are headed towards commercialization soon on that. So we feel great.

Thank you. And on filter tow, you mentioned the possibility of further inventory adjustments next year. I am just wondering how long can the product actually be stored before the customers actually have to replace it?

The life of the product is not a material issue for the inventory adjustments here, so I wouldn't be worried about that.

Thanks a lot.

Mike Sison, KeyBanc.

Hey, guys, nice quarter. Mark, when you think about the portfolio now and Taminco coming in by year end here, what percent of the portfolio do you think in terms of your earnings power now is more specialty than the more commoditized stuff going forward?

Hey, Mike, thanks for that question. That is a great set-up for Investor Day. We have actually spent a considerable amount of time evaluating -- first of all getting some clear definitions about what is specialty versus commodity and a third category we will share with you next week. And really getting a much clearer understanding of the entire portfolio of Eastman as well as thinking about Taminco and how that all fits and continues to transform our portfolio into being a much more stable variable margin business.

So I think that we'll give you a lot more insight. What you're going to see is a great story of the commodity part of Eastman's portfolio becoming a very small percentage of our total. And I'm looking forward to sharing that with you next week.

And, Mark, if I might add, because it's a great opportunity to also highlight the pop of the value of Taminco. We expect that to close before the end of the year. Mark and I have actually had the benefit of going out and meeting the Taminco team and further understanding their businesses.

And I think we are very excited about the quality businesses that they have, the quality and capabilities of the Taminco team. And I think that acquisition will be very complementary to the direction this Company is going.

Sounds good. And then real quick on Additives & Functional Products. This is the third year in a row earnings have been sort of flattish here. What do you think needs to happen to get that business back on the growth trend longer-term?

As you look at AFP, first of all the revenue growth has been great. So we're seeing strong revenue growth in the coatings areas and some of our other formulated products. Obviously we had some slow demand in tires but we may be turning the corner there as we have discussed.

The challenge this year hasn't been revenue, it has been cost driven and a number of those cost factors I think are to some degree isolated to this year. So you had the huge prepaying increase and cost structure increase that impacted several of our businesses including AFP. You had some of the plant outages that came in.

And then we've had some specific growth investments we are making around our next generation of technology for Crystex that provided a headwind this year that it shouldn't continue into next year. So we see revenue growth continuing into next year, we see the cost situation improving relative to this year and feel confident about delivering earnings growth next year from AFP.

Great, thank you.

Laurence Alexander, Jefferies.

I guess two questions, one and the spirit of counting chickens before they are hatched. Taminco was fairly vocal about having a pretty rich pipeline of fast payback acquisition targets such as the formic acids deal that they did.

Is there any strategic or integration-related reason why if their math checked out you wouldn't pull the trigger on those ideas faster than they could have? And secondly, on FX. What do you see as the headwind at current levels for Q4 and for next year.

So on the acquisition front I will take that question, I will give the FX to Curt. On acquisitions I do think they've got a robust portfolio of small bolt-on opportunities to continue building and extending their world leadership position that they have in alkylamines and, like you said, formic acid, which is a nice related product to their markets. And we don't see any reason why we wouldn't continue to pursue those kind of opportunities.

Clearly we are going to be focused on delivering in the next two years from some of the debt we take on to buy Taminco. So we're not going to be doing any other large acquisitions until we have improved our debt metrics. But that doesn't mean we can't do small bolt-ons that have a great fit and create a lot of very quick payback for our shareholders. And so, we will look at those and do those where they make sense.

On currency, Lawrence, our primary exposure is the euro, we have some exposure to the yen. On the euro we do have an active hedging program that helps reduce the volatility from currency fluctuations. You see that in our sales table when you continue to see currency not having any real material impact on revenues.

When we look at going into fourth quarter and some of the volatility, there is a slight headwind, but again, mostly that's mitigated by our currency program. I think as we get into 2015 we will talk more next week. As the euro stays in that 1.25 to 1.30 level it will continue not to have a material impact on his going into next year.

Thank you.

And as we have no more questions I would like to turn the conference back over to Greg Riddle.

Okay, thanks again, everyone, for joining us this morning. A Web replay and a replay in downloadable MP3 format will be available on our website beginning a little later this morning. Have a great day.

And that does conclude today's conference. Thank you for your participation.