伊士曼化學 (EMN) 2015 Q3 法說會逐字稿

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

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

Thank you, Nikki, and good morning everyone and thanks for joining us. On the call with me today are Mark Costa, Chairman and CEO; Curtis Espeland, Executive Vice President and CFO; and Louis Reavis, Manager, Investor Relations.

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

Second, earnings per share, operating earnings and EBITDA referenced in this presentation exclude 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 the excluding items are available in the third quarter 2015 financial results news release and the appendix to the slides that accompany our remarks this morning, both of which can be found on our website, www.Eastman.com.

Projections of future earnings in the presentation also exclude such items as described in the third-quarter financial results news release.

With that I will turn the call over to Mark.

Good morning, everyone. I will start my comments on slide three. We had a solid third-quarter in line with our expectations delivering strong earnings and cash flow and improving EBITDA margins to about 24% in a tough environment. We are continuing to benefit from improvements we made to the Company resulting in a more specialty portfolio and we continue to show the benefits of a robust and diverse portfolio in both the breadth of our end market positions and geographic diversity.

Most importantly, our specialties are driving our growth. Advanced Materials, Adhesives & Plasticizers and Additives & Functional Products lead our earnings growth this quarter and for the year.

We are seeing some great innovation-driven growth across the portfolio. For example, in window interlayers within Advanced Materials, we are delivering very strong volume growth and expect to set a record in overall volume with significant mix improvement as our premium acoustic and heads-up display products volumes grew more than 20% year-over-year.

With Acoustics, we continue to see strong macro trends to reduce noise in the cabin and overall weight leading to greater penetration to a wide range of auto models.

In Advanced Materials, our recently launched displays product used for Polaroids or film in high-end mobile devices, is delivering very strong earnings growth this year. This great innovation enables dramatically improved optical properties when viewing mobile devices at an angle, it contributes to thinner devices by enabling more than a 50% reduction in film thickness.

In Additives & Functional Products, we are realizing a compelling synergy as solutions market connect in tires has enabled double-digit growth in our tackifying resins as a performance additive for traction eco-efficient tires. We are becoming the preferred innovation partner in the industry given Eastman has the most diverse set of technology platforms and deep application development capability relative to its competitors.

What I like about all of these examples is that we are delivering earnings growth through volume and mix upgrade in a tough environment.

In addition, our acquisitions continue to deliver in this challenging environment. We are on track for $0.50 accretion. Taminco results remain solid due to the diversity of its portfolio and strong market positions. We just completed our SAP cutover in nine months with no customer disruptions which is a great accomplishment and lets us ramp up our efforts on some of the cost and operational synergies.

Commonwealth has been an outstanding acquisition for Advanced Materials expanding our films product portfolio into paint protection films which we were growing rapidly through our own distributor network. And the aviation turbine oil business we acquired from BP has integrated nicely with our existing aviation fluids.

We are also doing an outstanding job on cost management, keeping costs relatively flat with strong productivity gains and within this, we continue to shift our resource mix towards our growth programs. Our strong performance was able to offset some increasing headwinds in declining olefin prices and a strengthening dollar particularly in some emerging markets.

We continued to deliver strong free cash flow of $208 million in the third quarter and over $600 million through nine months and we continue to expect free cash flow of $900 million for the year.

None of this would be possible without the strong commitment of the talented Eastman employees throughout the world. Together all this puts us on track for our sixth consecutive year of earnings growth.

Now I will turn it over to Curt to talk about corporate and segment results.

Thanks, Mark, and good morning, everyone. I will start with our third-quarter corporate results on slide four.

Overall, sales revenue increased primarily due to revenue from the businesses we acquired in 2014 along with increased volume and mix improvement in our specialty businesses. This was mostly offset by two factors. First, lower selling prices particularly in Specialty Fluids & Intermediates and Additives and the Functional Products which largely reflected lower raw material energy costs. And second, the negative impact of foreign currency.

Our operating earnings increased primarily due to earnings from acquired businesses and strong performance in Advanced Materials and Adhesives & Plasticizers. With our heritage businesses, there were two key drivers of this performance; volume and mix improvement especially in Advanced Materials, and our value-based pricing relative to raw materials reflecting the specialty and special position nature of a significant portion of our product portfolio.

These were partially offset by propane hedges and the unfavorable shift in foreign currency exchange rates. Our operating margin increased by 100 basis points to almost 19%. Earnings per share was $1.84 for the quarter primarily reflecting higher operating earnings. Year-over-year earnings per share declined slightly as higher operating earnings was offset by higher interest expense and also other charges of $13 million primarily reflecting volatile emerging market currencies negatively impacting our foreign denominated balance sheet transactions in the quarter.

On a year-over-year basis, these other charges were about a $0.09 headwind for the quarter and we do not expect this kind of magnitude in the fourth quarter. Overall, a strong quarter with particularly solid results in our specialty businesses.

Moving next to the segment results and starting with Additives & Functional products on slide five. Revenue increased due to the sales of acquired Taminco businesses. 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 the acquired businesses offset by propane hedges. We continue to expect strong full-year earnings growth for this segment due to earnings from acquired businesses. We expect earnings in the Heritage Eastman businesses will be similar to the previous year as solid volume growth continues to offset the effects of propane hedges and currency.

Next is Adhesives & Plasticizers on slide six. Sales revenue declined 12% primarily due to lower selling prices reflecting lower raw material and energy costs and an unfavorable shift in foreign currency exchange rates. We continue to see a favorable shift in product mix due to strong volume growth particularly for our non-phthalate plasticizers due to substitution in North America. This was offset by a decrease in non-hydrogenated resin volume due to operational constraints.

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

Now to Advanced Materials on slide seven which continues to deliver on the elements of their strategy, volume growth, mix improvement and fixed cost leverage.

Sales revenue increased primarily due to sales of products of the acquired performance films business, higher sales volumes as well as mix improvement especially for inter-layers. This strong volume growth was partially offset by currency and lower selling prices primarily for copolyesters due to lower raw material and energy costs.

Operating earnings increased primarily due to increased volume and improved product mix, lower raw material costs, the benefits of fixed cost leverage and earnings from the acquired business offset by lower selling prices and currency. These are just outstanding results for the first nine months.

On the full-year outlook for Advanced Materials. we expect to continue to have year-over-year volume growth and mix improvement. However, it is typical for volumes to be seasonally lower in the fourth quarter and we expect again this year and we also expect some inventory management in the quarter.

With all that said, Advanced Materials is positioned for very strong earnings growth in 2015 which should give them momentum heading into 2016.

Now to Fibers on slide eight. Revenue declined 8% mainly due to lower volume primarily driven by lower acetyl chemical volume. Lower acetyl chemical volume was due to decreased sales to the acetate flake joint venture in Kingsport.

While acetate tow volume was down slightly year-over-year, it was up about 20% sequentially and is on track to be about 20% higher in the second half of 2015 compared to the first half. This tow increase reflects both slowing inventory destocking and customer buying patterns.

Operating earnings were about as expected, down year-over-year due to the lower volume but up sequentially as tow volume increased to slightly below the previous year's level. Operating margin was at 32%.

On our full-year outlook, we continue to expect second half earnings will be better than the first half with increased tow volumes but full-year earnings will be somewhat below what we expected in July primarily due to the lower acetyl chemical volumes.

I will finish the segment review with Specialty Fluids & Intermediates on slide nine. Sales revenue decreased as lower selling prices particularly for olefin-based intermediates and lower chemical and other mediate sales volumes more than offset sales of products of the acquired business. Operating earnings decreased primarily due to the propane hedges and lower volumes and chemical and other intermediates more than offsetting earnings from the acquired business.

Looking at the full-year, we now expect a number of factors impacting results. We expect to continue from the benefit from volume growth and earnings from acquired businesses. Sales for the Heritage Eastman businesses is expected to be about flat as solid end market demand is offset by increasing internal use of intermediates for both the Taminco business and the growth in Heritage Eastman businesses as well as lower polymer intermediates volumes.

Propylene and ethylene prices declined further than expected during the third quarter. We anticipate prices to remain low for the fourth quarter negatively impacting olefin margins. We continue to expect the impact of the propane hedges to negatively impact the segment for the fourth quarter as the [comps] of the hedges flow through inventories.

From a corporate perspective, we now expect a year-over-year headwind of producing versus purchasing olefins including the propane hedge to increase to about $0.80 per share for the full year versus our previous expectation of $0.60. The increase in the negative impact will be predominantly reflected in Specialty Fluids & Intermediates in the fourth quarter. We will offset some of this headwind with pricing actions for our derivatives but not all of it. As a result, we expect Specialty Fluids & Intermediates earnings in 2015 will be lower than 2014 earnings.

On slide 10, I will transition to an overview of our cash and other financial highlights for the quarter. We continue to do an excellent job of generating cash with our third-quarter operating cash flow of $368 million. Net earnings were solid and we continue to be disciplined with working capital. We contributed $90 million to our US pension plans in the quarter and expect to contribute an additional $10 million in the fourth quarter.

Capital expenditures totaled $160 million and we anticipate full-year capital expenditures to be around $675 million as our underlying capital schedules are weighted to the second half of the year.

We generated $208 million of free cash flow for the quarter and we continue to expect our full-year 2015 free cash flow will be around $900 million.

Our third-quarter dividend was $60 million reflecting a yield of 2% and our effective tax rate for the third 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 improvement in our business operations as well as reflecting our expectation that Congress will sign the tax extenders including the R&D tax credit into law before the end of the year.

If these tax extenders are not passed, this would be about a $0.10 per share headwind to our fourth-quarter earnings per share expectations. Given our strong first nine months, we are on track for an excellent financial performance in 2015 .

And so with that I will turn it back over to Mark.

Thanks, Curt. We have talked a lot about the benefits of our portfolio transformation and how that contributes to our consistent earnings growth and strong cash generation. On slide 11, we are giving you another way to look at it.

Portfolio transformation has been a key element of delivering strong earnings growth for quite some time on both organic growth as well as through aggressive actions to change our portfolio. We divested roughly $3.5 billion of revenue with EBITDA margins below 10%. We have acquired over $4 billion of EBITDA margins greater than 25% significantly upgrading the quality of our portfolio and our end market exposure.

Organically we have also grown our volume and most importantly upgraded our mix. This is both within our Heritage businesses and within the acquired businesses through great efforts and innovation programs and commercial excellence to focus our growth in the most attractive products, markets and geographies.

As a result of these efforts, you can see that a very different story has emerged from five years ago. We have strengthened the Company while also growing the overall earnings by 70%. So when you look at 2010, you can see corporate earnings were about $1 billion and fibers and SFI is around 50%, just over 50% of where our earnings came from.

And a significant story has evolved and changed as you look at the trailing 12 months of our earnings. Not only is it 70% higher, it is significantly higher quality so the AAA segments, Advanced Materials, Additives & Functional Products and Adhesives & Plasticizers grew 115% dramatically increasing growth and quality of earnings for shareholders and presenting a much more sustainable mix in how we are going to deliver earnings growth. And obviously now fibers and SFI being a smaller percentage of that total.

So it is a great story of the AAA segments delivering earnings growth which we can sustain going forward as well as fibers being a foundational part of our story delivering stable earnings and SFI being the engine that delivers the intermediates to support the growth in the specialties.

So that portfolio I think is really demonstrating and creating a lot of value for us this year and showing how we can continue creating value for shareholders going forward.

I think that is a good transition to our full-year 2015 outlook on slide 12. We have had a strong first nine months of the year with record EPS and cash flow. Our specialty businesses are leading the way with growth in innovative product lines resulting in improved mix and overall doing a great job of holding onto value. We've also done a great job remaining disciplined in cost management. And as I mentioned previously, our specialty acquisitions are delivering for us this year and we expect they will contribute meaningfully to our growth going forward.

Of course challenges remain and in some places they are intensifying. Most notably, olefin prices which started to move against us in the third quarter and we expect this challenge will continue into the fourth quarter. We expect ethylene prices will recover in the early part of next year given the high industry cracker shutdowns schedule planned for the spring.

Overall we continue to focus on the things that we can control most notably executing our strategy to deliver results.

When you net all the things that we're doing well against the challenges we face, we continue to expect we will deliver our sixth consecutive year of earnings growth in 2015, something only a select few S&P 500 companies have ever done in the last 10 years. That is something we expect to build on going forward.

I will close on slide 13 with how we are doing so far in the key themes for 2015. These are the same that we shared with you in January and we have emphasized each throughout the presentation today. We will continue to make great progress on transformation towards the specialty portfolio. We are driving growth in our specialty businesses based on our world-class technology platforms that enable us to have strong leadership positions in an attractive set of niche markets.

We are accelerating earnings growth by improving our product mix with high growth of innovative high-margin products. We are achieving attractive earnings accretion from high-quality specialty acquisitions and creating value by adding attractive end markets and products to our portfolio. And we are generating industry-leading free cash flow based on our attractive market positions and advantaged cost positions.

We remain committed to fully deploying our strong balance sheet in a disciplined and balanced manner. Our first priority for capital allocation is completing a repayment of approximately $1 billion of debt associated with the Taminco acquisition and we are on track. Investors should continue to expect an increasing dividend which we have done for the last four years providing a greater than S&P 500 average yield. And after delevering, we will repurchase shares in the back half of next year.

Of course we remain open to bolt-on acquisitions if they are very attractive and have a strong fit with our existing businesses. Our performance through nine months is outstanding despite the challenging business environment. We are confident in our sixth consecutive years of earning growth and are on track for $900 million of free cash flow providing roughly an 8% yield.

We've got a great strategy, a great portfolio of businesses and simply outstanding group of employees that continue to execute. I am very confident in our ability to create value for all of our stakeholders.

Thank you for joining us this morning. I look forward to your questions.

Okay, thanks, Mark. We have got a lot of people on the line this morning and like to get to as many questions as possible so I ask that you limit yourself to one question and one follow-up.

With that, Nikki, we are ready for questions.

(Operator Instructions). David Begleiter, Deutsche Bank.

Thank you. Good morning. Mark, I know it is early but looking to 2016, can you grow earnings next year? If so, what are the key drivers, headwinds as well as tailwinds do you think?

Sure, Dave. I would have never guessed that question coming from you. So happy to talk about it. First and to keep the tempo, we are confident we can grow our earnings in 2016 relative to 2015. We have several tailwinds that I think are important. The most important by far is continued growth in our specialty segments so the AAA segments I think are all well-positioned to deliver earnings growth. The key drivers of that will be the volume and mix that they have, continuing to leverage the acquisitions that they have done as well to deliver that growth.

The second will be a net tailwind from the hedges coming off so you've got the propane hedge coming off, you also have some of the currency hedge coming off, the net that provides a tailwind. I think it is reasonable to expect that olefin prices next year relative to this year are likely to be higher especially given how low they have gone in the back half of this year with sort of supply gluts in ethylene and propylene. So that will certainly be helpful.

Of course there are the synergies that we have around the acquisitions, the cost synergies and even some commercial synergies and I would note that we are also planning on aggressively managing our costs across the entire company. We have done a great job in productivity this year and we are going to ramp up our efforts for more aggressive actions next year to improve our cost position in the marketplace.

Lastly, there is the strength of our free cash flow. So we will create value for shareholders in paying down our debt and then getting access to that free cash flow to repurchase shares.

So you add all those together and it is a nice set of tailwinds. There is one headwind that I think applies to every chemical company that has raw materials derived from oil. So we have been benefiting this year as raw material prices have dropped pretty rapidly and we have held onto prices in a number of our businesses expanding our margins. And of course as you go through the year you give some of that back with price and so that is great this year. Obviously if raws are flat next year, that becomes a bit of a headwind.

I don't think that is significant for us relative to some others because of the propane hedge and so much of our earnings are coming from cellulosics that didn't have spread expansion but there will be some of that headwind that nets against those tailwinds.

Then it comes down to the big uncertainties around the global economic factors around overall market growth and currencies. But assuming those are stable I think we are very well-positioned to deliver earnings growth because the tailwinds are quite significant.

I think we are just well-positioned for our seventh consecutive year of earnings growth and I think it is a great opportunity especially when you think about what we are delivering for shareholders in our earnings growth, our strong EBITDA margins, our cash flow yield, it is a great valuation upside.

Very helpful, thank you. And just on acetate tow destocking, where are we in that process?

So we are quite encouraged and happy to see demand come back exactly as we expected from the beginning of the year in tow. That sort of 20% improvement sequentially into the third quarter was great and we expect volumes to continue to be solid into the fourth quarter. So I think that when you look outside of China, destocking I think has run its course and when you look inside China, I think that you have got some risk of destocking continuing into next year.

They certainly have made progress in destocking from what we can see in the wholesale inventories but it is a little hard to know if they have gone all the way to achieving their objectives. But I think that overall what I would say is I would expect sort of flat demand for us next year so outside China, you have destocking ending but sort of the normal macro declines of cigarette consumption netting against each other inside of China.

You've got some expected growth in cigarette production as the Chinese National Tobacco Company continues to drive to meet its tax revenue growth targets. You've got some filter lengthening that is going on still and you've got this question around destocking and the chance of it being some but maybe not as much as this year offset by the [Disol] joint venture which started up in the middle of this year obviously continuing into next year.

So all those net against each other and it also feels sort of flattish. So global flattish situation when we look at demand for next year versus this year.

Thank you very much.

Aleksey Yefremov, Nomura.

Good morning. Thank you. Just a follow-up on fibers, Mark, do you think you can grow earnings in fibers if the demand is flat next year?

We have been saying this all year, I would expect earnings from fibers to be stable but I'm not going to call it as growth or down. I think it is going to be relatively stable. There is a lot of moving parts. We are in the beginning of our contract discussions with all of our customers on volume and price. And so we will comment more about that next year but I think it is stable which back to the 2016 earnings question, if it is stable it is not a headwind against the growth in the AAA segments.

In the AAA segments if we look short-term in the fourth quarter, do you think the raw material margin spreads can hold or do you expect to give back some of the pricing gains that you had so far?

As you look at the AAA segments, I think each segment has a different story and it is important to start my thinking about it from a stream point of you. So our cellulosics, which drives a lot of earnings obviously in fibers but also in Advanced Materials and Additives & Functional Products, there has been no spread expansion. That business based on value, are raw materials or coal, that is not a spread expansion story so that is quite stable.

Then you've got sort of olefins versus paraxylene as the other components within those AAA segments and on the olefin side while both olefin prices and ethane and propane have dropped given our propane hedge, we haven't had a lot of margin expansion in olefins anywhere in the portfolio when you look at it on a full-year basis. And so I don't think you've got a huge margin expansion problem in olefins.

So you are then down to paraxylene and I think you've got some tailwind in Advanced Materials associated with paraxylene for our co-polyesters and that has certainly been helpful. But I would put that in the order to third place of how we have driven earnings growth in Advanced Materials this year, volume and mix being the number one driver, the acquisition being number two and then that being number three. So it will certainly mitigate how we can grow earnings next year but I still think we will grow earnings.

In Adhesives & Plasticizers, the one place where we probably also have some margin expansion especially in adhesives where the industry has been really tight and we have seen great margins in that business and we expect those margins to come off a little bit as we go into next year. We also expect that to be balanced against volume growth in Adhesives as we have been able to get more access to raw materials and address some operational limitations that we had this year. And so that margin coming off versus volume growth will net against each other.

It is a little hard to call how that will play out but overall we look at the AAA segments and see earnings growth coming from those three segments delivering growth for shareholders next year.

Great, thank you very much.

John Roberts, UBS.

Good morning. What will be your propane strategy in the future as the hedges roll off?

I think right now we will continue to evaluate where we think propane is going as well as just what is the pricing of our propylene derivatives and ethylene derivatives. Our hedging for this year and next year are virtually done so there won't be any more hedging done at this point. Beyond that we will continue to evaluate as the market dictates.

So it sounds like you will be opportunistic rather than having some sort of programmatic strategy?

We will always have a programmatic strategy. I am just saying as it relates to the next couple of years, that strategy has already been executed.

Okay. And then Indorama recently acquired an idled ethylene Gulf Coast cracker for restart. Any opportunities for your idled assets especially given the drop in propane?

Well, if you are talking about our -- we have one cracker that has been idled and that has always been an asset we are always looking at ways to maybe create value. But predominantly at this point our focus has been on our derivatives. When you look at our crackers itself, I don't see bringing that cracker up at this point unless there is another party that feels they can use that excess ethylene that comes from that.

What we are continuing to look for is just how do we deal with our excess ethylene, still some good options out there, some things we have to work through as you know but our focus is how do we potentially get rid of that excess ethylene from our portfolio?

Thank you.

Frank Mitsch, Wells Fargo.

Good morning and nice job with the specialties this quarter, gentlemen. Mark, quick question. I know you are Northern California-based or from 49ers or Raiders?

Raiders, grew up on the Raiders.

All right, awesome. We will set up a bet later on today for Sunday's game. In the discussion regarding Advanced Materials, talked a lot about the acoustic interlayers and the fact that has been growing I guess 20% was the comment made. I am just curious as to where we are in the spectrum of types of cars that this special product is going in and how much more penetration we might have? How much longer can we expect to see double-digit type growth out of that? What is the penetration like there?

Sure, Frank. The acoustic interlayers are just a fantastic product and it was greater than 20% volume growth this year. It has just been tremendous and we really started in luxury cars and we are just in the process of moving into the midtier cars with the acoustics in the windshield which both quiet the cabin and now they are doing trade-offs between do I quiet the cabin or do I take glass out to hit better fuel efficiency. So it is opening up a wide range of choices.

But I think that we are going to see, we are still just in the beginning of penetrating the overall market and I also see growth beyond just the windshield. So we are seeing people start moving to laminated glass on the side windows as well for both safety reasons as well as acoustic reasons.

So we are getting more real estate per car, more cars, we have several years ahead of us in growth from penetration point of view and we have a next-generation acoustic product that significantly improves performance over this one that is going to give us a whole nother leg of innovation and growth on top of it. So a lot of room to grow there.

And I would also note that heads-up display has got huge potential market in front of it relative to its current penetration. We are seeing a lot of growth there as people are trying to work on better mobility and safety for information provision to drivers in the car. So I think -- and we are making significant improvements not just with the current product but a whole nother next-generation product to allow a much bigger screen, much better clarity in the windshield. So this area is just on fire with innovation, it is an exciting space for us.

All right, terrific. I will wait on buying a new car so I can get all these neat little things.

Curt, when you talked about the $0.80 negative headwind on SFI for the balance of the year due to the decline in olefins and hedges, I guess you were expecting that to be a negative $0.60 at the end of Q2, now you are expecting it to be a negative $0.80. How much of that $0.20 delta was realized in Q3 versus Q4?

I would say, Frank, the $0.80 per share headwind is for the whole Company and that is a $0.20 impact. I would say some of that showed up in third quarter but a predominant piece of it is going to be showing up in the fourth quarter.

And then lastly, Curt, you also mentioned that if the tax extender, your anticipation is that the tax extenders will be passed by Congress before the end of the year and that $0.10 is embedded in our expectations for Q4. I'm not sure I actually caught what your expectations were for Q4. Can you clarify that?

Let me clarify my expectation on the tax rate, Frank. What I would indicate is that if the tax extenders are passed, our tax rate for the year will be closer to 26%. If they are not passed, they will be closer to the 27%.

All right, very helpful. Thank you.

Arun Viswanathan, RBC Capital Markets.

Good morning. I guess I had e a couple of questions on Taminco. Maybe you can just help us understand if this is tracking according to your expectations on the accretion and what your expectations are for next year? Obviously there has been some changes on the ag side, are those any concerns for you guys? Thanks.

So Taminco is definitely on track with our expectations except for currency. So as we look at the overall business, we certainly did feel like everyone else some pressure on the row crop related ag part of Taminco's business. It is important to remember that row crops were only about 10% of Taminco's business or just over 1% of Eastman's revenue. So it is not a significant factor for us but certainly we are tracking with what you are reading in the press of the big ag companies on row crops and that being off a bit.

That has been offset largely by strong performance in our crop protection business where we sell a great set of fungicides and soil fumigants and other products into perishable products that have done well this year and aren't caught up in this oversupply of corn and soybeans. So that part is sort of hanging in there together on a net basis.

Obviously the oil and gas business didn't grow as much as we expected upstream but we have actually seen good downstream growth offsetting some of that where we sell products into cleaning up the gas.

Water treatment, personal care doing quite well. So overall I think the revenue side of the equation is hanging in relatively well. They are doing a very good job of managing their costs like all of Eastman and providing good earnings accretion for the shareholder, synergies coming in as we expected. But we did take a hit on currency. That certainly wasn't in our plans when we looked at this acquisition 12 months ago.

Okay, great. I don't know if you talked about this but on the propane hedge, is there any way you can help us quantify like the year-on-year change that you expect now that your programs are complete for 2016 versus 2015? I mean you had like a $0.40 to $0.60 hit this year, probably at the higher end of that. Obviously it is likely to be less next year given the comps but how do you see it playing out?

First, this is Curt. And by the way, welcome to our call. I approximately you coming. Let me just clarify two things. First of all as it relates to our expectations, it is about and $0.80 headwind now for 2015 and that changes not because of the hedges, it is predominantly because of selling prices with ethylene.

But if you think about our hedge, we are all about two-thirds hedged in 2015 and we said that will just be above 50% in 2016. So that will give you some magnitude of the shift that will occur that will have a tailwind for us as it relates to lower propane hedge costs.

Okay and then just lastly on SFI, I mean obviously the business is challenged on the ethylene side. Is there kind of a long-term view on where this fits in the portfolio? You have been decreasing your commodity exposure over the last several years. Is that still kind of the objective or is this kind of a permanent member? And I'll turn it over. Thanks.

Certainly the Texas integrated site that produces the ethylene and propylene and we translate that into all of our specialties that we sell out of the site is a permanent member of the company and one that we are focused on keeping. As we have said since the summer of 2013, we have been looking to sell our small crackers that produce the excess ethylene which is the real volatility you are seeing today in our earnings in the start of the third quarter and you're going to see more of it in the fourth quarter.

We wanted to get rid of that since 2013 but our sales process got disrupted by Westlake. So we are still focused on doing that but the big cracker at the site produces all the hydrogen and steam for this site that runs all of our specialty businesses. You have to run that at an extremely high reliability rate because we are making products where in some cases we are the only manufacturer in the world in the specialties and so controlling and maintaining that integrated site is essential for our specialty business. So we are going to continue to focus on doing that.

We are quite proud of the fact that we haven't had a force majeure in 20 years across our sites and our customers put a lot of value on that because they know that they can count on us as being a reliable supplier in specialties. When there is very few alternative suppliers, it is a very significant part of our value proposition.

We are always going to get out of every bit of commodity we can. We have been doing it for the last seven years in the $3.5 billion of revenue we sold off so I think we are doing all we can. We will continue looking for those opportunities.

Mike Sison, KeyBank.

Good morning, guys. Nice quarter. Mark, when you think about -- you talked about the headwinds this year from fibers and specialty fluids becoming bigger. Clearly it is the specialty business is doing better. So if you total it up, how much better are the specialty business coming in this year than you thought at the beginning of the year and is there a way for you to maybe just help us understand the growth that they are generating in total for you this year to offset some of those bigger headwinds?

Sure, Mike, I will try that at a high level. The specialty businesses that have the growth, the AAA segments, they certainly are exceeding our expectations. They are delivering more volume and mix upgrade than we expected at the beginning of the year in a tough economic environment and obviously doing a great job of holding onto value in our pricing where it is appropriate as raws come off.

So I would say they are certainly ahead of our expectations. And I think fibers came out more or less where we expected this year so that has not been a surprise. And I do think it will stabilize out as we go into next year.

And then unfortunately offsetting some of the great performance that we have seen in the specialties has been the significant drop in olefin prices that have gone well past the value of oil in the middle of the quarter, in the third quarter into the fourth. That has sort of offset some of that great performance.

But the good news about the olefin price headwinds is I think they are relatively temporary because it is more of a supply driven thing and I think we will go to a more balanced situation next year from what all the experts seem to be saying. So if that is true then that pressure will come off and not be offsetting the growth in the specialties.

And if you thought about 2016 from the growth perspective from your specialty businesses, any reason why the growth wouldn't be similar 2015 versus 2014 that you could get a 2016 versus 2015?

I would love to be able to tell you it is going to be that great. But it is not going to be that strong when you look at the AAA segment on a 2014 to 2015 basis. Principally because one factor is not there which is the acquisitions have had a lot of earnings from 2014 to 2015. In addition, I mentioned that some of the spread expansion that every chemical country in this industry has this year associated with oil on prices versus raws is not really expected next year as I am thinking of raws thing sort of flattish with oil being flattish into next year.

If that is the case, you are focused on the volume and mix component of delivering earnings growth so it will certainly be moderated growth in 2016 versus 2015 but still growth and I think that is going to show up as very good performance as we all get into next year.

Thank you.

Jeff Zekauskas, JPMorgan.

Thanks very much. Good morning. How do you calculate your hedge cost? That is, is it simply the difference between the price you have paid because you have hedged versus the price of propane that you would have bought in the market? Or is it more complicated than that?

No, Jeff, that is generally the case. We do have some options around our hedging strategy but to a greater extent they are forward contracts and with forward contracts it is just simply the price of that forward contract relative to the price. And as we talked about before, a lot of forward contract was just around $1.

So what changed so that you thought it was $0.60 and now you think it was $0.80?

Jeff, that delta is not -- the propane impact hasn't changed, that is just a reflection of pricing of olefins but predominantly the collapse in ethylene.

So, Jeff, for example in ethylene prices we started the quarter out when we were still in the 34 range in the third quarter. We saw some spot drop all the way down to $0.18 at one point. We are in the sort of low to mid-20s now so ethylene has just come off tremendously and propylene has come off as well. So this is purely a ethylene propylene related issue especially ethylene relative to what we had originally expected.

Jeff, I just want to remind everyone, this is our estimated benefit of producing versus purchasing olefins. It is a theoretical calculation we try to provide which is influenced by the propane hedge but that is something that we try to provide to give some sense. You still have the pricing dynamics above and beyond it.

It is important when we put out that $0.60 to $0.80 change that $0.20 is not what we are going to actually feel. We are taking pricing actions to mitigate some of that pressure as we did already in the third quarter and we will continue to try and do in the fourth quarter. But it is certainly more pressure than we expected three months ago.

I am still puzzled. If the cost of the hedge is simply the difference between the propane price and your hedged propane price, the price of ethylene or propylene shouldn't enter into that.

Let me try and clarify, Jeff. When we talk about cracking spread headwinds, it is not a hedge comment. It is an overall cracking spread comment. So we are looking at the cracking spreads that we have of ethylene and propylene prices minus the cost to produce those products of ethane and propane and the hedge all rolled in was a $0.60 headwind relative to 2014 when we started the year.

So when you go to where we are today, nothing has changed on the hedge but what has changed is ethylene and propylene prices for the cracking spread calculation have come down significantly from where we were three months ago and creating some compression. But it is important to keep in mind that we don't sell propylene in the marketplace, we sell derivatives so each product the specialty products obviously are going to do a better job on holding onto value versus some of the commodities and SFI as propylene comes down. The same story with ethylene which is predominantly sitting in SFI.

So if you weren't hedged, would your spreads have contracted as well because propylene has come down really, really fast and so I would imagine that propylene derivative prices would have come down at a slower rate. That is, is the squeeze the function of your hedge or it is the function of the relationship between propylene and its derivatives?

It is both. If you think about hedge for a second cracking spreads have compressed this year versus last year. And then on top of that, we have an additional cost headwind associated with the propane hedge. So both of those contribute to the 2014 to 2015 cracking spread calculation but you are right in the specialty businesses like Additives & Functional Products, we have done a great job of holding onto value and price relative to how propylene prices have dropped but even there you start giving it back over time.

In SFI, a lot of those products, the price moves pretty fast with propylene and ethylene so the drop in those prices drop revenue pretty quickly with the drop in ethylene and propylene and then you've got the cost structure on the other side.

Okay. And then just two more quickly.

How about one more quickly, please?

Then we will try one more quickly. Were your volumes affected by your hedged position? In other words, if your cost of propane were lower, would you have sold more tons of stuff and so you were limited because of your cost structure or did it not affect your volumes?

The hedge had zero effect on volumes. We price based on value in the marketplace, it has nothing to do with volumes.

Okay, great. Thank you so much.

Bob Koort, Goldman Sachs.

Thank you, good morning. Curt, I think you said something about next year it is going to be more about volume and less maybe about some spreads to drive earnings. I guess I was just hoping you could give us some sense of what you expect overall in volumes, it seems like this year the globe had grown some but the volumes haven't been very powerful. Would you expect there to be any improvement next year? Obviously the specialties side doing well but do you think the broad portfolio can get GDP type volume growth next year and why would you not think so?

I think that we will certainly see volume growth in the AAA specialty businesses consistent with GDP and then levered up by some of our innovative high-margin products growing much faster than GDP. So I think that when you look at Advanced Materials, the end markets that we are serving there from consumer durables to transportation and medical, all of those markets are I think expected to grow well next year and we feel good about growth next year over this year.

But as Functional Products same thing, I think coatings will continue to grow and there is probably upside in residential housing in North America when you look at the housing start rates so that should be relatively good. Tires has been a really tough year this year where we have been sort of flat in volume as China has come off with a lot of desto0cking and slowdown in their economic situation and that has been offset fortunately by North America and Europe. But again, tire volumes sort of flattish this year globally for Crystex and PPDs. And then of course strong tire resin growth on top of that giving us overall growth.

I would actually expect higher growth in China to be better the rest of the globe continuing growing. So again, feel good about growth in tires next year because I think some of the destocking will be done in China.

And then Adhesives & Plasticizers great underlying market trends in hygiene and packaging for the adhesives as well as the non-phthalate conversions in North America driving a lot of volume growth. So over that, I think it is all good.

As I mentioned already, we expect volume and earnings to be relatively flattish in fibers and then SFI is just the engine that makes everything else run. So those KGs are a little deceptive because if we do shutdowns more than one year versus another for example, all of that volume variance for the total company shows up in SFI as we adjust the run rates of what we can sell that is left over in SFI after we have done all those specialty growth of those intermediates.

Okay, that is helpful. Then could you tell me what would you root for from an energy or oil price standpoint? Do you like what is optimal, a little inflation, a little deflation, flat in terms of how you respond to the market and what it does to your cost structure and maybe your customer behavior? Thanks.

I think that probably like most chemical companies, we all favor a steadily increasing raw material environment and a steadily increasing growth environment. So oil going up on a steady basis is probably the best scenario you can hope for. The worst thing for chemical companies is extreme volatility or where the price of oil and raw is flying up and down.

Laurence Alexander, Jefferies.

Good morning. Just a quick one. If the ag market stabilized and oil extraction industries return to sort of a midcycle level, what would your operational leverage to that be?

Well, as I just mentioned, a steadily increasing oil price would certainly be good for the overall company when it comes to products going into ag and oil and gas specifically obviously that would be volume upside for us relative to where we are today and give us some nice earnings growth especially through some of the Taminco businesses.

Would you have a sense for how much you are under earning in those businesses currently?

As I said in ag, I don't think we are really under earning because while we took a hit on volume coming off a bit in corn and soybean crops, we benefited from crop protection having a good seasonal year. So I don't think there was an overall big hit this year for us compared to some of the ag focused companies. But I think that there would be modest improvement for us, I'm not going to call out the specific earnings gain.

Okay. Thank you.

Nils Wallin, CLSA Brokerage.

Good morning and thanks for taking my question. First one on Advanced Materials, if acoustics is growing greater than 20% and it is something like 30% or 40% of the business, that would imply a higher volume growth year on year in Advanced Materials. But I think you came in at around 5% so is there something that is actually declining in volume or is it just the Tritan and the other performance films are just not growing as fast as acoustics?

Yes, so acoustics is a great product but it is only part of overall Advanced Materials which is a very big segment. So what we love about the overall Advanced Materials businesses, it is having a great year across a wide range of specialty products but some of the bigger volume products like copolyesters have a certain amount of limitation on how much they are going to grow that factors into that weighted average number that you are looking at.

I would also note that some offsets in performance films in emerging markets so you are selling films that go onto cars that are being sold, so places like Brazil, Southeast Asia and even to some extent China have not been great for us for some of the performance films. And so that has not been growing as much in some of those isolated markets. I would note that performance films is growing incredibly well in North America and in some of our distribution channels in China but overall it sort of nets out that way.

Understood, thanks. And then I believe in one of the questions or in your commentary you said that there had been no spread benefit and if it in cellulosics and you called out coal. But my understanding -- correct me if I am wrong -- I believe specialty pulp did come down in price so did your tow prices follow that or am I incorrect about the raw materials on the acetate tow?

We have talked about before the cost of our inputs for fibers is pretty well known a year in advance as well as the contract negotiations that we have been so some of that cellulosics impact on fibers has already been reflected and you see the pricing behavior of fibers in our numbers.

All right, thank you. Just one last one if I may.

Sorry, but we have got more the queue. Thank you.

PJ Juvekar, Citi.

Good morning. This is Eric Petrie standing in for PJ. Your Adhesives & Plasticizers margins have increased nicely over the last couple of years at 24% and I think that compares against a range of 17% to 20% that you gave it your investor day in 2013. So is this expansion more or less a function of lower raw materials or are we setting a new range going forward?

It is a mix of everything. So two stories in Adhesives & Plasticizers. On the Adhesives side, the industry has been tight giving us pricing power and obviously we have enjoyed that and improved our margins from that. But it is also important to note that we are also upgrading the mix within that volume that you don't quite see. So we are having nice growth in our differentiated hydrogenated resins that are going into packaging and diapers and other products like that that are going quite well. And we have had a bit of a decline in volume in our non-hydrogenated resins which are lower margin that have been restricted because of raw material availability and some operational issues.

So net, you have had a mix upgrade and some margin expansion in that story. On the Plasticizers side, you have had great volume growth offset by margin compression. As the Asian competitors have been trying to sell their non-phthalate plasticizers in Europe and North America with the lower oil price and of course we are shale gas-based in those products so we have been feeling some compression there.

So as you look at next year which I think is the key to this question is you will see some margins come off in adhesives because there is some more raw materials being made available that cause it to be tight. But we will have more volume growth next year than this year in adhesives offsetting that to some degree and we will see how that plays out as we get into January.

On the Plasticizers side, we should have good volume growth again next year and hope that the spreads stabilize and that should be a source of earnings growth. Overall, I think that the margin percentage will come down but we will still be in a good position to deliver good earnings out of this segment.

Great and then my second question, can you just update us on our market share of non-phthalate plasticizers in the US? What kind of utilization rates are you running at and do you have any expansion opportunities I believe with Sterling to expand capacity?

Take it in reverse order. We have plenty of capacity to grow in non-phthalate plasticizers and there is plenty of opportunity in this market to continue to grow. We are just beginning the full conversion of this market to non-phthalate so we have several years to run.

Vincent Andrews, Morgan Stanley.

Thanks very much. I will keep it to one question. Your foreign exchange rate impact year to date is minus 3%. Can you just remind us of what type of FX hedges you had on this year and how much of them extend into next year so we can think about that?

Sure, if I could break it down if you think (technical difficulty) currency, we are predominantly long euro. And we have tal1ked about that being roughly a headwind 30 share headwind, 2015 over 2014. That has benefitted about a 50% hedge, (technical difficulty) a little bit in 2016 the amount of it we have in place there. But we will still have a nice hedge to help mitigate some of that exposure.

And then on top, we have some other foreign currencies we have exposure to on a smaller scale like (inaudible) and others and so if I think about this year, that is probably another $0.10 per share headwind. And so when I look at currency for the full-year about 40% headwind, mitigated partially because of the euro hedge and we will have a good euro hedge going into next year still but just a smaller degree.

And the euro hedge for next year is a smaller percentage but the same rate as 2015?

Yes.

Okay, thanks very much.

Can we make the next question the last one, please.

Duffy Fischer, Barclays Capital.

Yes, good morning, fellas. A question back on interlayers, one of your big competitors was sold a little over a year ago. Is there any chance that that transition is part of a benefit that you are seeing today and may end up kind of being a little bit transitory then?

We certainly saw that the industry consolidated with Carlyle buying DuPont's business. But I wouldn't say that we are seeing growth this year because of that consolidation. I think that everyone is out there trying to compete as best as they possibly can. We are just enjoying a lot of growth because of our products and our value proposition for our customers.

Okay. Last one, on the outlook you are running about $0.20 ahead year to date on EPS. So if you took the very low end you could say Q4 could be down $0.20 year on year and still kind of make that up for the year. Can you just talk a little bit more about how we should think about Q4 relative to that?

Sure, so when you think about Q4 I would expect year-over-year earnings growth in the AAA segments, the specialty businesses are all focused and positioned to deliver year-over-year earnings growth. And then obviously with fibers if volumes stay similar to the third quarter into the fourth quarter, that is going to be a little bit less than the volume we had in tow last year so you're going to have a bit of earnings headwind there.

And then it is just down to SFI where you have the impact of the lower ethylene prices and the lower propylene prices showing up most significantly and that is going to bring your earnings down sequentially from third to fourth quarter.

So when you net it all together, we picked up some headwind relative to where we were at the beginning of the third quarter but I still feel very good about earnings in total for the year.

Great. Thanks, guys.

So I just want to make a quick summaries comment and we will wrap it up. So overall we feel great, we've been working on this strategy for a long time to deliver and change our portfolio to be more specialty oriented. You can now see how the power of that strategy is working and delivering grow through the specialty AAA segments. We are working hard to keep the fibers business stable and believe we can do that and that I think is a compelling story of how we can continue to deliver our seventh consecutive earnings growth next year with great margins, great free cash flow that gives additional upside to shareholders beyond the earnings growth and how we delever as well as repurchase shares next year.

So I just wanted to sort of really thank the Eastman employees as well for doing such a great job in delivering these results in a very difficult environment and showing what we can do with our portfolio. With that, I will wrap it up.

Thanks again for joining us this morning. A web replay and a replay and downloadable MP3 format will be available on our website later this morning. Thanks again for joining us and have a great day.

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