伊士曼化學 (EMN) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Eastman Chemical Company second-quarter 2015 earnings conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website at www.eastman.com.

We will now turn the call over the Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Okay, thank you, Chrissy, and good morning, everyone, and thank you for joining us.

On the call with me today are Mark Costa, Chairman and CEO; Curt Espeland, Executive Vice President and CFO; and Louis Reavis, Manager Investor Relations.

Before we begin, I'll cover two 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 2015 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first-quarter 2015, and the Form 10-Q to be filed for second-quarter 2015.

Second, earnings per share, operating earnings, and EBITDA referenced in this presentation excludes certain non-core costs, charges, and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of excluded items, are available in the second-quarter 2015 financial results news release and the appendix to these slides that accompany our remarks this morning, both of which can be found on our website, www.eastman.com in the Investor section. Projections of future earnings in the presentation also exclude such items as described in the second-quarter financial results news release.

With that, I'll turn the call over to Mark.

Good morning, everyone, and thank you for joining us. I'll start on slide 3. I'll begin with the strategic highlights for the quarter and the first half of 2015. We had an outstanding second-quarter results, clearly demonstrating the strength of our portfolio of specialty products and the benefits of our focus on execution. Adjusted EPS in the second quarter was a record for any quarter and establishes a new level of earnings for the Company, and we set a record for the first half of any year as well. When you consider the headwinds we are facing, we have demonstrated the power of our strategy of aggressively transforming our portfolio toward specialties.

The value of innovation driving growth and improving our mix, and the benefit of our advantage cost positions. As we discussed in the first-quarter call, we expected strong growth in our high-value, innovative-specialty products. And now you can see that we delivered that strong growth, from acoustic interlayers to our display products to Tritan copolyester, and many others. As volume growth continues in these products, they also improve our product mix, contributing to our strong margins. This shows the strength of our portfolio, as we were able to hold onto price relative to declining [roz] and more than offset the propane hedge in currency headwinds.

In addition to strong organic growth, performance for Taminco continues to be solid and on track, as the diversity of end markets and the strength of these business models enable us to navigate a difficult business environment. We also remain very pleased with the progress on the integration and the achievement of synergies. And I'd add that our bolt-on acquisitions from 2014 are also performing very well. The Commonwealth film business, the aviation turbine-oil business, and Knowlton, which is accelerating innovation in our microfibers business. Cost management also remains an area of focus for us. We continue to make good progress, keeping costs relatively flat with strong productivity gains.

SG and R&D as a percentage of sales remains in the lower quartile of our peers, reflecting our focus on costs, our integration, and our scale. At the same time, we are increasing resources and spending on innovation programs. And the cash engine continues to generate strong cash flow, with a record $450 million of free cash flow in the second quarter. When you look at the first-half performance, I want to emphasize that we're delivering earnings growth through our specialties and our acquisitions. This overall, exceptional level of performance was a direct result of the talent, focus, and dedication of Eastman employees around the world who find a way to make a difference every day. Now I'll turn it over to Curt to discuss corporate and segment results.

Thank you, Mark, and good morning, everyone. I'll start with our second-quarter corporate results on slide 4. Overall, sales revenue increased primarily due to revenue from the businesses we acquired in 2014. This was partially offset by lower selling prices, which largely reflected lower raw material energy costs, lower-fiber segment sales volume, and foreign exchange rates. Our operating earnings increased, primarily due to the strong performance in the Advanced Materials segment, and earnings from acquired businesses.

Operating earnings also improved as we continue to hold onto value in the quarter, reflecting a specialty and special position nature of a significant portion of our product portfolio. These were partially offset by the impact of propane hedges, lower volumes in our fiber segment, and an unfavorable shift in foreign exchange rates. Our operating margin increased by 100 basis points to 19%. Overall, earnings per share increased to a record $2.01 per share, a very strong quarter as we continued to deliver earnings growth.

Moving next to the segment results and starting with additives and functional products on slide 5. Revenue increased due to both sales of acquired Taminco businesses and higher coatings, product-sales volume, attributed to stronger demand in key end-markets such as transportation and building and construction. This was partially offset by lower coatings and other formulated product selling prices, which reflected lower raw material and energy costs.

An unfavorable shift in foreign-exchange rates was also a headwind. Operating earnings increased year over year, primarily due to earnings from acquired businesses, with the Heritage Eastman businesses about flat. We continue to expect strong full-year earnings growth for this segment due to earnings from acquired businesses, with earnings in the Heritage Eastman business relatively flat, as solid volume growth offsets the effects of currency and propane hedges.

Next is adhesives and plasticizers on slide 6. Sales revenue declined 11%, primarily due to lower prices reflecting lower raw material costs and an unfavorable shift in foreign exchange rates. We continue to see a favorable shift in product mix, due to strong volume growth of differentiated, hydrogenated, hydrocarbon resins in the hygiene and packaging markets and non-phthalate plasticizer substitution in North America. In the first half, this volume improvement was offset by limited availability of key raw materials in non-hydrogenated resins, and declines in plasticizer sales outside of the United States.

Operating earnings increased in the second quarter, as improved spread for adhesives was partially offset set by currency. For full-year 2015, we expect to continue to improve our product mix, with strong growth in hydrogenated, hydrocarbon resins and non-phthalate plasticizers. We expect this will be partially offset by the impact of currency and the propane hedge. Taken together, we continue to expect adhesives and plasticizers will deliver strong earnings growth for the year.

Now to Advanced Materials on slide 7, which is delivering on all elements of their strategy: volume growth, mix improvement, and fixed cost leverage. Sales revenue increased due to higher sales volume and mix improvement across the segment, and sales of products of the acquired, performance film business. This strong volume growth was partially offset by lower selling prices, primarily for copolyesters, due to lower raw material and energy costs and unfavorable exchange rates. One other point on second-quarter volumes, during our first-quarter call, we said destocking in the early part of the first quarter had subsided by March and that we were seeing momentum heading into the second quarter. We believe restocking in the second quarter was a contributor to the strong volume growth.

Earnings for the quarter were a record, primarily due to higher sales volume and improved product mix, especially for Eastman, Tritan, copolyesters, and interlayers for acoustic properties. Operating earnings also benefited from improved margins, reflecting our value proposition, the benefits of fixed-cost leverage, and earnings from acquired businesses. These items were partially offset by unfavorable shift in foreign exchange rates. On the full-year outlook for Advanced Materials, they delivered an outstanding first half of the year. We think you should look at first two quarters together, with the first quarter somewhat lower than it otherwise would have been due to destocking, and the timing for lower cost flow of goods through the inventory.

The second quarter was stronger, in part due to restocking and the flow-through of lower raw material costs. For the back half of the year, underlying business performance should remain very solid. We expect to continue to have year-over-year volume growth and mix improvement; however, it is typical for volumes to be seasonally slower in the back half of the year, and we expect that again this year. And raw material and energy costs are expected to increase moderately in the back half of the year. With all that said, Advanced Materials is positioned for very strong earnings growth in 2015, which should give them momentum heading into 2016.

Now fibers on slide 8. Second-quarter revenue, volume, and earnings were about as expected, up slightly compared to the first quarter and down year over year. We attribute the decline in revenue and earnings year over year to inventory destocking, as we've previously discussed. Despite the decline in volume, operating margins held at 31%. On our full-year outlook, we continue to expect acetate tow volumes will increase in its second half of the year. Based on orders on the books and discussions with our customers, we are expecting tow volumes will be about 20% higher in the second half of the year compared with the first half. And we will continue to benefit from the action we took earlier this year to reduce costs by shutting down our UK acetate tow plant. Taken together, we are pretty much on track with our previous guidance, albeit maybe slightly lower today than we thought back in April.

I'll finish the segment review with specialty fluids and intermediates on slide 9. Sales revenue increased due to sales of products of acquired businesses, partially offset by lower selling prices, particularly for olefin-based intermediates. Operating earnings decreased due to earnings from the acquired businesses being more than offset by the impact of propane hedges. Looking at the full year, we have a number of factors impacting results. We expect to continue to benefit from volume growth and earnings in acquired businesses.

Sales volume for the Heritage Eastman business is expected to be about flat, as solid end-market demand is offset by increasing internal uses of intermediates for both Taminco businesses and growth in Heritage Eastman business, as well as lower, polymer intermediates volumes. And we continue to project propylene and methylene prices to remain low for the back half of the year, negatively impacting olefin margins. We also expect the impact of the propane hedges to be significant for this segment for the balance of the year, as the cost of the hedge flows through inventories. We therefore expect overall earnings in 2015 to be somewhat lower than 2014 earnings.

On slide 10, I'll transition to an overview of our cash flow and other financial highlights for second quarter. We continue to do an excellent job of generating cash with second-quarter operating cash flow of $591 million. Net earnings were solid, and we continue to be disciplined with working capital. It's probably also important to note here that we had nominal income tax payments and no contributions to our US pension plans in the quarter. These payments will be more heavily weighted to the second half of 2015. We generated $450 million of free cash flow for quarter, capital expenditures totaled $141 million, and we are on track for full-year capital expenditures of between $700 million and $725 million, as our underlying capital schedules are also weighted to the second half of the year.

And our second-quarter dividend was $60 million, and our effective tax rate for the second quarter was just over 27%. We continue to expect our full-year tax rate will be between 26% and 27%, reflecting the continued benefits of our improvement and business operations, and also reflecting our expectation that our friends in DC will sign the tax extenders, including the R&D tax credit and accelerated depreciation, into law before the end of the year. Given our outstanding first half, we're on track for excellent financial performance in 2015. And with that, I'll turn it back over to Mark.

Thank you, Curt. Before I get into our outlook statement, I wanted to reflect on the progress we've made in improving our portfolio. On slide 11, you'll see four key financial metrics that demonstrate the strength of our performance over the last five years. Top left, we've had very steady and improving adjusted EBITDA margins over the last five years, which demonstrates both the quality and stability of our portfolio. Top right, our EPS CAGR at 18% over the last five years is also industry-leading and demonstrates the value of our diversified portfolio, our acquisitions, and our ability to focus on delivering results.

Bottom left, our free cash-flow yield from 2014 was also industry-leading and demonstrates the quality of our portfolio and the value of our advantage-cost positions derived from our large scale integrated assets. And bottom right, over the last five years, we generated an industry-leading 23% compounded total shareholder return, creating outperforming value for those shareholders who have owned us. And the first half of this year continues this trend of strong performance in margins, earnings, and cash flow.

And that leads to our 2015 outlook for -- on page 12. We're off to a great start to the year with our first-half results, setting a record for the quarter and for the first half of the year. As I've mentioned, this performance is a result of excellent growth by our specialty businesses. In particular, our high-growth, innovative products are driving mix improvement, which contributes to our strong margins, and we also expect demand recovery in tow and our fibers business. We are also seeing attractive accretion for Taminco in the bolt-on acquisitions. And relentless cost-management is also contributing to our strong performance. We expect the momentum from these factors will continue into the second half of the year. We also expect to face challenges.

The global economy continues to be slow, raw material and energy costs are an increasing challenge; current movements in oil and olefin prices are a good example, and the US dollar has continued to strengthen. In this less-than-ideal business climate, we remain focused on what we can control, which is executing our strategy to deliver results. We've done a good job at the first half of the year staying focused, and I'm very confident that we'll maintain our focus in the back half of the year. When you net the positive momentum and the challenges together, we expect to hold onto the gains of the first half, and we expect second-half earnings to be similar to last year. As a result, we are confident that 2015 will represent the sixth consecutive year of solid-earnings growth for Eastman, and that is a track record we're going to build on going forward.

Turning next to capital allocation on slide 13, this chart shows our expectations for cash generation from 2015 through 2017. We had a very strong operating cash flow in the quarter, and we expect this will continue given the quality of our businesses. While we were generating significant operating cash flow, we were also making meaningful investments in organic growth initiatives such as Tritan, Crystex, and PVB interlayers. When you subtract the CapEx from the operating cash, it results in very strong free cash flow that we expect will still be above $900 million for 2015. And we expect our cash generation will increase in the coming years so that for the period of 2015 to 2017, we would generate greater than $3 billion of free cash flow. In the short term, our first priority for this cash will be repaying approximately $1 billion of debt that financed the Taminco acquisition.

Through the first half of this year, net debt declined by $280 million. By the second half of 2016, we should bring our metrics back in line to an investment-grade credit rating through the combination of paying down debt and growing EBITDA. We will continue to fully deploy our balance sheet in a disciplined and balanced manner. Beyond delevering, we have increased our dividend 4 times in the last four years, and over this time, the dividend has almost doubled from an already attractive low. And it is reasonable for investors to expect the dividend will continue to grow as earnings grow. As you do the math, you will see that we still have significant free cash flow after delevering and dividend payments.

While we are very excited about the value we are creating from our acquisitions, we do not expect to complete any large acquisitions through 2017. We have been very disciplined in our acquisitions with a focus on generating attractive returns on capital, earnings growth, and further enhancing the quality of our cash flow. However, I believe the transaction multiples are getting too high, making it more difficult for acquisitions to meet our financial return expectations. More importantly, we are very focused on delivering results from our specialty portfolio as a robust set of growth platforms, and successful integrating and driving results from our recent acquisitions.

Therefore, you should expect cash will be fully deployed in an increasing dividend and share repurchases. Of course, we remain open to bolt-on acquisitions if they're very attractive and have a strong fit with our existing businesses. Over the last five years, we've been very disciplined and balanced in our capital allocation decisions as we grow the Company and generate optimal returns. That balance and discipline will continue going forward.

I'll close on slide 14 with how we are doing so far on the key themes for 2015. These are the same as we shared in January, and you heard us emphasize each throughout this presentation today. We are delivering on what we set out for ourselves in 2015. Our performance is outstanding in a dynamic business environment; on a range of key metrics we are delivering great results. Our EBITDA margins demonstrate that we have a robust portfolio of attractive specialty businesses, with limited, commodity exposure and advantage-cost positions.

We are on track for our sixth consecutive year of solid earnings growth and for free cash flow would exceed $900 million, something that only a very small percentage of S&P 500 companies have been able to do in the last 10 years. We continue to make progress, driving growth in our specialties, improving product mix with high growth of our innovative margin -- high margin products, and our acquisitions are on track for creating value. We maintain our commitment to fully deploy our balance sheet in a disciplined and balanced manner. And this discipline, for the next year, means returning our very strong free cash flow to shareholders.

We've got a great strategy, a great portfolio of businesses, and simply an outstanding group of employees that continue to execute. I'm very confident in our ability to continue creating value for all of our stakeholders. Thank you for joining us this morning. I look forward to your questions. And with, that I'll turn it over to Greg.

Okay, thank you, Mark. We've got a lot of people on the line this morning, and I'd like to get to as many questions as possible. So please limit yourself to one question and one follow-up. With that, Chrissy, we are ready for questions.

(Operator Instructions)

David Begleiter, Deutsche Bank.

First on fibers, your volumes were down a little bit more than they were down in Q1, while your competitors showed a little bit slower volume decline. Why didn't your volume growth decline slower in Q2 versus Q1, at least year over year?

Good morning, David, how are you?

Good, thank you.

On the fibers business, volumes played out exactly as we expected from the beginning of the year. So with our customers who have a slightly different mix than our competitors, so you really shouldn't compare us to them. We expected this kind of volume through the second quarter, and we're very encouraged to see the volume come back by about 20% into the second half of the year versus the first half of the year. I think that what we see is exactly on track to what we expected on that recovery and the destocking seems to be abating.

Very good. And just on advanced materials, phenomenal quarter. Any sense how much you may have over earned in Q2 versus a normalized run rate, given the restock and the lower PX cost?

First of all, advanced materials just had a stellar first half of the year, and we're incredibly proud of all the innovation effort of the employees in that group delivering on a series of investments we've been making for years. And as we said, in the first half of the year, we saw volume be a bit slower than we would have liked in the first quarter, and we knew that was destocking as we're debating a lot of prices with our customers. And once we got that resolved, we saw the volume come back. So you do have a bit of destocking/restocking event in that second quarter. But I really do think, as Kirk mentioned in the prepared remarks, the first half of the year when you combine it together, is a good way to look at the performance of this business, which was just outstanding.

And it's also important to keep in mind, when you look at the volume growth of this business, Curt mentioned in the first-quarter call that we had shifted ethyl acetate from advanced materials to [addison] function on products. So the strong -- the volume growth is actually even a bit stronger in the second quarter and the first half than you see by about 2 percentage points in advanced materials, and as you look at ASP, about 2 percentage points less. Because that's a fairly low margin product, so it's really affecting volume more than it is profit. So when you look at all that, it comes together as a great first half of the year. That product mix and strength of volume growth on a year-over-year basis we see continuing into the second half of the year. But it is very important to keep in mind what Curt said, which is it's a seasonal business, so demand will seasonally come off in the second half of the year versus the first. So if you look at history of this business and how it's performed first half, second half, I think that's a reasonable expectation here.

Thank you very much.

Duffy Fischer, Barclays.

Yes, good morning. Another quick question on tow. Very good margins in the first half, given the volume decline. Can you roughly quantify what the overhead absorption was on a down 20% volume number?

Well, we look at all the moving parts, Duffy, so we don't really break out that individual piece. But I would keep in mind that even if there is some fixed-cost absorption this business had, we're able to compensate for some of that with the actions we took with our shutdown of our UK [working tin] facility. As a whole, we've always said this business is doing well, and we expect it to continue to have operating margins greater than 30%.

Fair enough. And then I think you referenced on pensions that we should expect a little more cash outflow in the back half of the year. Roughly how much are you targeting?

For the US defined benefit plans, our expectations will contribute about $100 million, and that'll all be in the second half of this year.

PJ Juvekar, Citi.

Yes, hi, good morning.

Good morning, PJ.

Mark, ag commentary has been generally quite weak from all the ag chemical producers, which are your or Taminco's customers. So can you discuss Taminco's ag outlook?

Sure, Taminco had a very good second quarter. We had solid volume growth both in the functional means that go into the row crops, as well as a nice performance in our crop protection business, which goes into the more perishable fruits, vegetables, and flowers. As we look at the rest of the year, we expect volume to remain solid on the crop protection business. On the functional means part of that business, we expect the volumes to off a bit, consistent with the industry. It's very important to keep in mind though that the row crop business, corn and soybean, that everyone else is talking about in their earnings release is only 10% of the revenue of Taminco. So it's not a significant driver of the overall earnings portfolio, and it's actually done quite well in the first half of the year. So it's not that significant for us.

The great thing about Taminco is like Eastman; we have a very diversified portfolio of end markets from the ag, the food, feed ag exposure, as well as the water treatment, personal care, and other industries. So you're not really tied to any one market too much. I think that's what's robust about their portfolio and I think that's robust about Eastman's portfolio where we don't have any end market more than 15% of our total revenue. And in this volatile economic times, that gives us a lot of diversity and strength to be consistent in earnings.

Thank you for that. And can you discuss the outlook for some of your propylene (inaudible) oxos? Given your hedges that are in place, how do you see the diluted pricing playing out in the second half? Thank you.

Sure. I think that it's always a spectrum of specialties to the commodities. So the specialty side of our olefin derivatives, whether it's our Texanol in ketones that we sell as a functional products or a few of the other products that we have, you're going to maintain good price discipline and hold onto a lot of value relative to [rods]. Specialty positions will also have some durability in that and the commodities, obviously are going to follow prices down. So in general, I think we've done a great job of holding onto value, especially in AFP, to some of that value to offset the hedge cost and the currency headwinds that that segment has. Same thing, to some degree, in the placticizer business. And then obviously SFIs follow propylene down a little more quickly, given the nature of their products. They've done a great job, actually in holding onto value in the first half of the year. But as we look at the second half of the year, those prices are going to catch up to the propylene and ethylene prices that they're associated with.

Vincent Andrews, Morgan Stanley.

Thank you, and good morning, everyone. Question here, you referenced good coatings volume, and we've seen so far that it's been a weak environment for the downstream coatings customers. So what do you attribute the strength in your volume to? And was that a restocking or how should we think about it?

Good morning, Vincent. What we saw is a good sequential improvement from first quarter to second quarter, as -- similar to advanced materials, you had some of the destocking events play themselves out in the first quarter. But I'd say our volume growth on a year-over-year basis when you look at coatings is very consistent with our downstream customers. So you're seeing 3% to 4% volume growth. Remember that adjustment I just gave you around ethyl acetate. We got to take about 2% out of the AFP segment. And then tires was obviously a little bit less than that. So good solid volume growth, but I wouldn't call it strong. This whole coating season hasn't really played out as anyone hoped.

Okay, and just as a follow-up, the non-hydrogenated resin raw materials and then the lack of availability, what -- can you remind us what that's all about and how that's going to evolve over the back half?

Sure. So a trend has been going on since 2010 that connects back to shale gas and the driving of cracker feed slates and refiner feed slates to lighter and lighter feedstocks. Because what we basically do is take C5 and C9 resin oil that is a byproduct off of those crackers and upgrade them into resins. So as these feedstock slates have been moving lighter, you have limited availability of those raw materials to turn into tackifying resins. And we saw demand continue to be strong and grow from packaging through hygiene and some other applications, and then you continue to have limited raw material availability. And that created the constraint of (inaudible) relatively tight that's given us some pricing power.

We do expect some of that dissipate a little bit in the non-hydrogenated resins. We're finding more raw material availability, so we'll be able to pursue more growth. Of course that will also reduce some of the tightness in the marketplace. I would also note that Eastman is very unique in our capability of using a wide spectrum of raw materials and turning them into resin (inaudible). So this environment, while it's hard to find raws, it gives us a real competitive advantage.

Aleksey Yefremov with Nomura Securities.

Yes, good morning, thank you. In your fibers business, is it fair to say that margins should improve in the second half because of higher volumes?

Certainly we'll see some improvement in asset -- in capacity utilization rates as we go into the second half, but I wouldn't call it material. We try and run our plants on a fairly even basis in a business like this. We knew that the restocking was going to come and improvement in demand. So we've been pretty steady on that. So I think that the margin should stay pretty similar.

Thank you. And now in advanced materials, submit a longer-term question, where are you in the adoption cycle for both new interlayers products? And for Tritan, how do you expect those volumes to keep growing in 2016?

We expect very strong growth in those products going into 2016, as well as many other products in advanced materials. So on Tritan, this is our BPA-free plastic that's an alternative to polycarbonate for all types of houseware applications and medical applications. And there's a very large addressable market in front of us where we have plenty of room to grow. That's why we've done the de-bottleneck on that asset, as well as have another capacity expansion planned.

Interlayers is another great story. We've seen tremendous double-digit growth in the acoustic interlayers, which is the very high value product that we sell that quiets the cabin in the car or allows you to lightweight the glass in the car to improve your fuel efficiency. And not only are we seeing good adoption from luxury down into mid-level cars, we're also gaining more square meters per car because people are starting to use acoustics on the windshields and the sunroof. I mean beyond the windshields into the [sidelams] and into the sunroof. So real estate is increasing, the number of models is increasing, it's just a great story. I would also highlight other things going on in advanced materials. So we have some new display products are going into mobile devices, showing tremendous growth and very high margins. And performance films business had a good first half of the year, and I expect it to have a very good year next year as well.

Thank you.

Frank Mitsch, Wells Fargo.

Good morning, guys, and congratulations on the record quarter.

Thank you, Frank.

I was planning on bringing up my question to Curt, asking who his friends were in DC, but I'll save that for another time. I want to talk about cash flows over the next couple of years. You're projecting over $900 million free cash flow this year, and according to the chart, looks similar next year; let's call it $2 billion over the next two years. You're going to spend $1 billion on debt pay down. You're going to spend $400 million on dividend. You're talking about maybe $100 million on pension. So and based on your commentary regarding M&A and the non-likelihood of that occurring is certainly nothing of a large order of magnitude, That essentially leaves $0.5 billion on share buyback for the next two years. Am I interpreting that correctly?

Frank, this is Curt. First of all, in the math, you see that trajectory, that is off of both improved operating earnings, and if we look at our investor day deck, if you recall, we also expected our capital expenditures to moderate in 2017 over 2015 and 2016. As it relates to your math of what free cash flow remains after we finish our deleveraging and paying our dividends, I would say yes. There's a good healthy, nearly $1 billion available, in general terms, for free cash flow to deploy. And as we've said before, we expect our balance sheet to be fully deployed during this time period.

All right, terrific. Thank you so much, and I just want to get an update in terms of the 2015 headwinds. I believe you've said in the not-too-distant past that you thought the propane hedges were $0.40 to $0.60 of headwind; FX was $0.25 of headwind, and fiber destock was $0.20. Do you have any update on those three metrics?

Well, let me update you on the first two, and fibers I think is generally consistent with our expectation; maybe a little worse. But generally speaking, pretty close to our expectation. If you think about the impact of producing versus purchasing olefins, we've talked about that last about being roughly around $0.60 a share. The short answer to that question is there's not been a material change to that, but I cant resist to always remind people what is considered into that $0.60 a share. So recall, we purchase -- we produce about 55% of the propylene that we need; we purchase the rest. We consume half of the ethylene we produce, etc. So you know those aspects.

On the cash flow itself, the cash flow hedges were about two-third hedged this year, and just over 50% next year. Cracking spreads are expected to compress in the second half of the year, given that continued volatility in olefins that Mark talked about. In addition, just don't forget the hedges are going to be weighted more second half of the year as it flows through the inventory. So we're trying to mitigate this through the various operating activities, as well as the advanced feedstock mix where we're now 70% propane.

And then finally again, I would think about the concept of cracking spreads is theoretical for us, because the vast majority of the olefins are sold through derivatives. So if I think about the impact, the hedge impact is probably going to be a little greater in the third quarter than the fourth quarter through that flow-through. But at the tame token, the guys are still going to try all they can to hold onto pricing. So we'll see how this plays out. We continue to see volatility in olefins, but we'll just have to try to stay nimble as possible to try to keep that impact to roughly $0.60 a share.

On currency, last we talked about that, we talked predominantly just specifically the euro. And we said that was going to be roughly $0.30 a share impact. That remains the same. Albeit, we're facing a little bit more currency headwind just from some of the other basket of currencies we deal with. And so for example, just in second quarter, our currency headwind was $30 million alone. So the $0.30 per share impact for the year on the euro is about the same. We're facing a little bit more headwind just because of the other currencies that have been devaluing against the dollar.

Specifically the yen is the one that's driving some of the challenges.

Thank you so much.

Nils Wallin, CLSA.

Yes, good morning and thank you for taking my question. On advanced materials, very impressive incremental margin. Would you help us understand all the different elements that went into that? Was there mix? Obviously, your profitability was -- had a great result compared to the revenue growth.

Sure. So this story is consist with what we've been talking about with this business since 2012. There are three elements: there's volume growth, there's mix, and there's fixed cost leverage. We've made a lot of investments in this business, both organically as well as several of the acquisitions sitting in this business. And as a result, you have a great EBITDA margin in this business when you look past the DA; very high variable margins. So who you deliver volume and then significantly improve mix because the products are growing at the double-digit rate within this segment, like Tritan, like acoustic interlayers, parts of the performance films business in North America and China, you have tremendous variable margin that drops the bottom line because of the fixed cost leverage. So it's really a win on all three fronts, showing what this business can do.

Got it. And then on fibers, was there any transactional benefits from currency in that business for the quarter?

Fibers had some exposure to currency but it's modest relative to the overall profitability of that business.

Got, it thanks very much.

James Sheehan, SunTrust.

Thank you. Could you talk about what you're seeing in terms of tire demand globally and update us on your Crystex business?

Sure. So the tire demand situation is pretty -- our view is probably pretty consistent with the global tire companies. North American, US, tire demand has been quite solid, and good growth for us has been offset by challenges in China. There's clearly two things going on in China: one is their own economy has slowed down. That's reduced the amount of tires they need. You have to remember Crystex is highly leveraged to commercial tires, so that is a challenge in China. Plus the Chinese are facing significant challenges in exporting products out of China to the US, due to tariffs, as well as currency is not helping them when they try and go to Europe. That market is very challenged on that front. That's been a challenge all year long, and already embedded in our record earnings in the first half of the year as well as our outlook. And I think that's going to continue this way. I think the destocking in China that's going on should play itself out this year.

And I'm not sure if I caught this correct, but could you just quantify what your spread benefit was in the second quarter in SFI?

Well, we don't quantify, when you say spread (inaudible) in SFI, we don't think of it in those terms, Jim. When we look at the $0.60 per share, that is pretty much a full-year outlook. Then it does -- that impact of producing versus purchasing olefins, a fair bit of that does show up at SFI almost roughly two-thirds.

It's important to keep in mind when we talk about that $0.60, Curt said something, which is it is a theoretical spread; it's not actual earnings. Right? So that is if we are selling propylene ethylene into the marketplace, and while we do sell some ethylene to the marketplace, we don't sell any propylene and -- or half of the ethylene. We turn that into derivative products that have their own pricing dynamics, and in many cases, those prices are not falling as fast as propylene ethylene. So the headwind for us is being offset by great, great work by our front-line teams out there holding onto value in the marketplace.

Thanks a lot.

John Roberts, UBS.

Good morning.

Good morning.

Is the Texas railroad decision finalized now, and if so, did Westlake appeal it?

John, the disputes continue with Westlake. The Texas Railroad Commission has had a ruling, but that is being contested by Westlake. Nothing really more to update you there, other than what I like is our legal team and the efforts we have. Because every time we've had -- faced these challenges, our team has won. But it's just going to take time to work its course.

In the advanced materials in the adhesives and plasticides is where you've got a lot lower paraxylene costs, I imagined, and also in plasticizers, probably a lot of aromatics there as well. Can you hold onto that for an intermediate period of time? Will it be multiple quarters before you might have to either respec some products where customers might want lower costs or somehow pass that through?

Sure, John. On advanced materials, the PX has been a nice tailwind. But the vast majority of the earnings we're generating in advanced materials has been through volume and mix. We certainly are benefiting from a nice [paradigm tailwind] in that segment that's giving us some of the earnings there, as prices are a little bit sticky in how they follow PX down, but a lot of that in the play out through the year. So I think that there's some of that that could be a headwind to 2016, but as I look at that segment going into next year, the volume and mix momentum is superior some of that spread expansion. So we'll be able to carry earnings growth into next year.

Adhesives and plasticizers, we certainly have seen some benefits also from PX, as it gets turned into DMT from making the plasticizers. But the margin compression of that industry due to Asian competition has been pushing prices down pretty quickly with raw materials. So there's no margin expansion in the adhesives and plasticizers segment due to plasticizers. That is just the volume mix upgrade story of selling more North American plasticizers, non-phthalate plasticizers, which is more attractive based on our advantage cost position than selling in Europe and the US. So that's not really a contributing factor to the margin improvement on A&P.

Thank you.

Bob Koort, Goldman Sachs.

Thank you, good morning. You guys had mentioned success in raw materials falling quicker than product prices. I'm just wondering is the flow-through of your hedges and lower market prices for some of these raws relative to your product prices? Do you think that spread overall for the Company improves, declines, what do you see happening sequentially into the second half?

Thank you, Bob. In the second half of the year, I think that the -- when you look at the all-in spread, like I said earlier on the SFI side, I think the margins are going to compress with the propylene prices coming off, and obviously the hedge is fixed. So you're going to see some compression there, and the majority of the propane hedge goes into SFI. You'll see some of that also flow into AFP, and to a lesser extent, A&P. So that will certainly be a factor going into the second half of the year. There's a lot of other great things going on if volume and mix, and holding onto price in some of the specialties, it helps offset some of that headwind, but it's certainly a factor.

Would you say there's something, I'm guessing you would, but unique to your own portfolio? It's pretty remarkable if you've got to absorb that hedge that you've been able to see some margin benefit, I guess maybe it's in some of the other segments. But I would have expected maybe the market competitors who don't have that hedge issue to be a little bit more aggressive. Is there just something about the end markets have been a little more disciplined around pricing? Or is it just your own product mix is unique, and you do have a few problem parts where that hedge is really dingy? Or how should we think about that?

First of all, I think we do have a fairly unique product mix in some places, especially our specialties that we make that are olefin-derived, are very unique to us where we have very strong market leadership and market positions. And so there we're in a good position to fight and hold onto value. I think we've got great teams that have spent a lot of time focusing on how to create value and find value in the marketplace. And it's also important to keep in mind that the way we're creating value right now is a little bit different than the average olefin players.

So we're very North American-focused in our olefin position, and so we're not benefiting at all from the outage-driven tightness in Europe that's driving a lot of earnings up. So that's not in our numbers, and therefore, not a headwind when those outages get removed. And then in North America, as you've noted, we certainly have spent a lot of time trying to get into more attractive end markets and segments with our olefins, because we can be, given our smaller size in olefins, be very -- more niche-oriented, and I think that's been quite helpful. But even there, we're not really expanding margins this year because of the hedges you've noted, which I would certainly prefer to have the earnings in cash without the hedge this year. But it does also help us out when we go into 2016, where we're not going to have as much of -- that much of a headwind as we go into 2016 because of the hedge.

Mike Sison, KeyBanc.

Hey, good morning guys, nice quarter. In terms of your outlook for the second half, you did a nice job growing your earnings in the first half. I think you mentioned flattish year-over-year growth in the second half. So any particular reason that the second half is going to be more difficult to grow in the second half, and maybe point out some of the areas of concern and maybe some of areas of potential upside?

Sure. So as I noted on the upside, I think we continue to see good year-over-year volume and mix improvement over the second half of last year in the specialty businesses. And we expect that to continue to drive growth. We expect the acquisitions, of course, to continue to provide attractive earnings accretion, and we're happy about the recovery in volumes in tow. But as we clearly guided, those positive momentums do get eroded as you -- propylene prices and ethylene prices create some challenge for us relative to our hedge, as well as currency being a challenge as we go into the second half of the year.

So when you net it all together and you see a little bit of slowdown in the economy affecting volume growth rates compared to what we experienced in the first half of the year. And to be clear on the economy, that's really a global economy point I want to make. From our point of view, China is not that big of a deal. China is only about 10% of our revenue in total for the Company, including fibers. And it's important when you're thinking about Eastman, that's not a real driver for how we're going to move forward. We're very focused on only specialties in China. We don't sell any commodities there; we're very focused on consumer durables, not infrastructure. And in a way, two of our biggest products going into China, which is fibers and how to (inaudible) tires, which are pretty high margin, we've already basically embedded the China economic slowdown in our current earnings for this year. So that part isn't really a big driving factor for us, but the overall economy is obviously not growing nearly as fast as we would have liked.

And Mark, if I could add just if I think about some of the volatility we faced, you see some volatility just in recent olefin prices, specifically propane and propylene. So we're going to have to see how those play out. The hedge does offset some of that impact, but the hedge in the second half of the year will be about $30 million higher impact than it was in the first half of the year. So that's weighing in our results as well.

Okay, great, thank you. A quick question in additives and functional products. I think you mentioned heritage Eastman would be flat year over year in 2015 versus 2014. If you were able to look at the heritage business on a constant currency basis and less the propane hedges, what type of growth do you think the inherent businesses are generating?

Very solid earnings growth. You'd see the number be quite a bit higher. I'm not going to talk about it from an AFP point of view, but if you actually look at it on a corporate point of view, and exclude both the benefits of the currency hedges and the headwinds of the propane hedges, we'd be $0.50 a share higher as a Company this year. And that really gives you a great demonstration of the quality of our specialty portfolio and the quality of this businesses and the market positions. We're very niche-focused, which is a huge advantage in times like this and how we maintain attractive market structures. And so the business is doing great before you get to financial hedging, and AFP would certainly be better as part of that.

Great, thank you.

Laurence Alexander, Jefferies Financial.

Good morning. Two quick ones. As you look at your specialty businesses, are there any end markets where you feel you have a good line of sight to acceleration over the next two to four quarters?

I think that -- I'm not sure I'd frame it as acceleration but I think we've got a great position to maintain great momentum. So we've had great year-over-year growth in our specialties in our volumes and our mix, especially in advanced materials, of course. We expect to keep that momentum going in the second half of this year.

And as I think about 2016, I think that those specialty businesses position us quite well to deliver earnings growth in 2016 over 2015. So we'll have great momentum from those specialty businesses. We will continue to have good accretion from the cost synergies flowing in through the acquisitions, and all of that gives us great momentum. And a lot of the headwinds that we have this year will neutralize as you go into 2016, and I think that positions us really well to keep earnings going and offset -- all chemical companies are benefiting, to some degree, from prices being sticky to [roz] and have some spread expansion in their earnings this year. I think ours is relatively limited for some of the points I've already made on this call. When you net it all together, I think that momentum is what gives us confidence that we can keep growing earnings for our seventh consecutive year into 2016.

And then if this choppy environment continues for the next three to four years, is there any shift in your thinking about your degree of balance sheet leverage?

No, I think our balance sheet leverage, we are guided by our investment-grade credit rating, and that would continue to be our guiding as we make strategic choices. What I would have to say on capital allocation, as Mark talked about, if we're facing this choppy market and that extra free cash flow that we have towards the back end of the three-year time period is in absence of attractive M&A, we're going to be repurchasing shares and returning cash to shareholders.

Jeff Zekauskas, JPMorgan.

Hi, good morning.

Morning, Jeff.

There was a $145 million cash inflow from other in the fund-flow statement, what was that?

Jeff, those are a couple -- there's various miscellaneous items in that line item. One example for example is just our current tax accounts. Since our payments were nominal, we're basically building a current tax payable in the first half of the year, particularly in the second quarter. And then that gets alleviated in the second half of the year, and those tax payments get in there. Also impacting that is just the timing of crude salaries and the settlement of hedges. So I think you'll see that line item that helped us in the second quarter will moderate and reverse the second half of the year.

And in the quarter, the price effect for the Company as a whole was negative 6 -- was negative 7, and I think for the six months it was negative 6. How much did your raw materials fall? Like if you had to do a comparable percentage change?

I don't know if I have the percentage, Jeff, but when I look in absolute dollars all in, our raw materials declined about $220 million in the second quarter, and about $180 million in the first request.

I'm sorry, how much in the first?

$180 million in the first quarter.

Okay, great, thank you so much.

That concludes our question-and-answer session for today. At this time, I would now like to turn the conference back over to Mr. Greg Riddle for any closing comments or remarks.

Thank you again, everyone, for joining us this morning. There will be a web replay and a replay in downloadable MP3 format available on our website later this morning. I hope you have a great day.

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