Eastman Chemical Company (EMN) — Q2 2017 Earnings Call Transcript

Good day, everyone, and welcome to the Eastman Chemical Company Second Quarter 2017 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website. We'll now turn the call over to Mr. Greg Riddle from Eastman Chemical Company, Investor Relations. Please go ahead, sir. Okay. Thank you, Anthony, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair 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 will be detailed in the company's second quarter 2017 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for the first quarter 2017 and the Form 10-Q to be filed for the second quarter 2017. Second, our second quarter and first six months 2017 earnings per share referenced in this presentation, using adjusted provision for income taxes and certain prior period earnings, also exclude certain non-core items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including the description of the adjusted items, are available in the second quarter 2017 financial results news release, which can be found on our website in the Investors section. Projection of future earnings also excludes any non-core, unusual, or non-recurring items and assume that the adjusted tax rate for the first quarter 2017 will be the actual tax rate for the projected periods. And with that, I'll turn the call over to Mark.

Good morning, everyone. I'll start on slide 3. We continue to make great progress in executing our strategy with second quarter operating results that were consistent with our expectations. The results demonstrate the strength of our specialty portfolio with continued volume growth of premium products and advanced materials and additives and functional products. As I have said many times before, we are creating our own growth through innovation and leadership in specialty markets. We’re seeing excellent progress in converting our top innovation programs into commercial orders across AM and AFP. In the first half, we delivered 7% volume growth in our specialty businesses, which is 2 to 3 times the underlying market. In a few moments, I'll share examples of just a few of the ways we are winning customers through innovation and our enhanced commercial capabilities. In addition to this specialty volume growth, we have done a great job implementing price increases to offset higher raw material costs, especially in the intermediates. We will see more of the benefits of these actions as we move into the second half of the year. From the cost management front, we continue to make great progress further improving our low-cost position, which is already within the lowest cost quartile in the industry. These actions enable us to invest some of our savings to accelerate our growth programs and improve our cost structure going forward. Our cash engine continues to generate impressive free cash flow as we remain on track to deliver approximately $1 billion of free cash flow in 2017, enabling an increasing dividend, deleveraging, and an accelerating rate of share repurchases. During the first half of 2017, we returned approximately $325 million to shareholders through share repurchases and dividends. These results demonstrate that we continue to execute on what we can control, from innovating throughout our enterprise to pricing discipline and returning cash to our stakeholders. Moving on to slide 4, we continue to upgrade the quality of our product mix by increasing revenue of high-margin specialty products through innovation and market development. These initiatives are accelerating as more customers validate our innovative differentiated products, which is driving demand today and into the future. One of our recent innovation successes is our main launch of TREVA, a proprietary engineered bioplastic in advanced materials based on our cellulosics, which meets the improved sustainability profile and performance needs of brands, fabricators, molders, and other companies across the value chain. Our innovative engineered bioplastic, leveraging our nearly hundred years of cellulosic expertise, is superior in chemical resistance, dimensional stability, and has excellent flow, all while being sourced from sustainably managed forests. Our customers treat it as the first genuine engineered biopolymer ever introduced in the marketplace. We can provide this polymer in scale today, which most alternatives cannot offer. This is a great example of what we can accomplish when we focus on creating our own growth. I'm extremely proud of the innovation team that brought this breakthrough from development to launch in a record time of less than two years. Another innovation in market development success is our Saflex heads-up display interlayer within Advanced Materials. We've long been a leader in this attractive market that has been growing our head sales by about 35% through the first six months of 2017 versus last year. Looking forward, we are launching our next-generation heads-up display product this year, which will improve image clarity for taller driver positions and windshields with complex curvatures, which is becoming a bigger trend in the market. Through our experience in working jointly with glass manufacturers and OEMs, we know how to enable best-in-class head optics as well as ensure a smooth launch of each head vehicle program. This success is a great example of the value of integration across technology platforms as it requires the integration of acquired PVD technology with our heritage plasticizer technology and optical expertise on specialty plastics. Finally, an update regarding our tire resins platform for additives and functional products. With new fuel economy standards coming in 2020, tire manufacturers are needing higher performing additives to maintain performance and safety standards. We are uniquely qualified to meet this need and have actually commercialized a new family of proprietary resins for a leading global tire manufacturer and are sampling a full range of resins with selected innovation partners. Lastly, tire resins already delivered double-digit volume growth over 2015. We expect that to accelerate to approximately 20% growth this year with margins above corporate average. This is a great example of revenue synergy from an acquired company that brought a strong market connection and application development capability combined with our unique resin technology platform. Impera tire resins, Saflex HUD, and TREVA are just three of the success stories that are part of our larger innovation and market development portfolio. On slide 5 is a higher-level look at our impressive innovation and market development portfolio. Our success in building this portfolio over the last five years is based on the integration of three critical capabilities that our competitors do not have: world-class technology platforms where we are by far the R&D leaders, having a superior manufacturing scale and reliability, and having strong application development capability as a true development partner with our customers. We’re realizing compelling benefits from significant investments which have been critical to all of our market application launches, as well as a deep market connection enabled by strong market share leadership and a long history with customers. These three capabilities are required to embrace market complexity and convert it into value, which is the only way you win long-term in a specialty business. This page provides insight into how this program is working across the company. We’re seeing compelling customer validation of our innovative differentiated and often patented products which enables strong growth into the future. In 2016, we delivered innovation and market development adding greater than 2% to our corporate revenue, and we’re on track to exceed that commitment in 2017. With the great success we’re having, we are raising the growth rate to greater than 2% from our previous 1 to 2% commitment on innovation and market development. On slide 6, Eastman’s competitive advantage is also based on a very unique capability relative to specialty competitors. Our vertical and horizontal integration is a critical advantage to our success in an increasingly competitive world. It’s much more than just a substantial cost advantage; it enables innovation, reliability, operational excellence, and dampens earnings volatility. Our greatest success stories of innovation over decades have come from integration across technology streams. Our most differentiated cellulose specialties include integration of asset yields and propylene derivatives. TREVA is another example of the integration of our polyester stream with asset yields and olefin platforms. We are extending this technology into Tetrashield, a recently introduced protective coating resin to help AFP accelerate their growth. There are many other examples of integration, a key enabler of our innovation and market development portfolio. Reliability and supply security in specialties are essential to our customers, especially for our non-proprietary products. Integration back to readily available raw materials and the operational expertise enabled by large integrated sites allows us to have an outstanding reliability record as we have not had a force majeure in over 20 years. Of course, we have a significant scale and cost advantage from keeping large integrated sites running full, which cascades throughout the streams into multiple product lines. This benefits our margins and allows us to be competitive and support our growth programs. We’re also adept at developing higher value products and leveraging our existing asset base to make them. For example, Tritan is made from a former PET asset and the heads-up display is made from the same assets as standard interlayers at much higher margins. Integration helps to diminish earnings volatility at the corporate level. The second quarter was an example of this as the chemical intermediates' performance helped to offset the timing recovery of raw materials in specialties. Although we value integration, this does not mean that we won't make the right portfolio choices. Our history of divesting approximately $3.5 billion of revenue since 2004 attests to that. We remain committed to working to divest a minimum of excess derivatives or potentially its derivatives. With that said, we see our integration as a source of value and a key enabler of innovation and cost reductions today and into the future. With that, I'll turn it over to Curt.

Alright, thanks Mark. I'll start with our second quarter corporate results on slide 7. Sales revenue grew as increases in additives and functional products, advanced materials, and chemical intermediates more than offset the decline in fibers. We did a nice job of driving volume growth in our more specialty product lines. We were able to raise prices in our chemical intermediate segments to offset higher raw material and energy costs. For the company, selling prices continue to improve sequentially and for the quarter, we're up more than 3% year-over-year. Operating earnings grew as increases in advanced materials and chemical intermediates more than offset declines in other areas. Our operating margin expanded both sequentially and year-over-year as we made good progress offsetting a material headwind from higher raw material costs. Overall, earnings per share increased year-over-year by 18%, reflecting solid operating earnings and other actions taken to deliver earnings per share growth. These positive results reflect our continued focus on managing the things we can control and taking actions to deliver earnings per share growth in what remains an uncertain global business environment. Moving next to the segment results with advanced materials on slide 8, which delivered a strong first half of the year. For the quarter, sales revenue increased due to higher sales volume across the segment, including premium products listed here on this slide. Operating earnings increased primarily due to higher sales volume and fixed cost leverage, partially offset by higher raw material and energy cost. Despite the headwind from higher raw material costs, advanced materials expanded its operating margin both sequentially and year-over-year. Sequentially, we delivered a 13% increase in earnings driven by volume growth, mixed improvement, and fixed cost leverage. This marks another strong six months for advanced materials as first-half operating earnings increased 8% or $18 million driven by a 6% increase in sales volume and lower unit cost due to higher capacity utilization. As a result, first half 2017 operating margin increased to 20%, which is approximately a 60 basis points improvement over the first half of '16, demonstrating the strength of this business in an environment of increasing raw materials and reflects the level of returns this business deserves given our investments. Overall solid results, which continue advanced materials' track record of success. For the back half of the year, underlying business performance should remain strong as advanced materials continues to execute its strategy of mid-single-digit volume growth, mixed improvement, and fixed cost leverage. We are delivering compelling proof of our ability to drive growth through innovation, even in a slow growth macro environment. Now to additives and functional products on slide 9, where results were in line with our expectations. Sales revenue increased year-over-year due to higher sales volume and higher selling prices for most product lines. Operating earnings declined as higher raw material and energy costs more than offset the impact of higher sales volume and higher selling prices. Sequentially, operating earnings increased 5% as sales volume increased 5% due to seasonality, and selling prices increased as we continue to work to offset higher input costs. Looking at full year 2017, we continue to expect mid-single-digit sales volume growth, which will be about double end-market growth. This volume growth reflects innovation and market development initiatives in this segment, including tire resins as well as acquired businesses such as fluids, solar projects, and tire chemicals. As we’ve indicated previously, strong volume growth in some of these acquired businesses has operating margins below the second half. We also expect to continue to work to offset input cost increases with higher selling prices, and therefore expect our operating margin in the second half of the year to be above the first half. Additives and functional products remain well positioned to deliver solid earnings growth for the year. Now for chemical intermediates on slide 10. Sales revenue increased due to higher selling prices attributed to higher raw material prices and continued improvement in competitive conditions. Operating earnings increased primarily due to higher selling prices, lower commodity hedge levels, and lower scheduled maintenance costs, partially offset by higher raw material and energy costs. Looking at full year 2017, we continue to do a nice job recovering from a trough 2016, as we increase prices to offset higher raw material and energy costs and benefit from both lower commodity hedge costs and our cost reduction program, which chemical intermediates receives the largest share. These actions will help to mitigate the anticipated headwind from weakness and ethylene prices during the back half of the year. Lastly, I’ll give you a quick update on our process for divesting our excess ethylene capacity and potentially certain commodity product lines. We continue to work with a variety of interested parties and remain hopeful we can find a mutually agreeable transaction. Given the current environment, these negotiations are taking a little longer than expected. I’ll finish up the segment review of fibers on slide 11, where results were in line with our expectations. Sales revenue decreased primarily due to lower selling prices, particularly for acetate tow, attributed to lower industry capacity utilization rates. Additionally, acetate tow sales for the second quarter were down 4% year-over-year, more than offset by higher sales volumes in acetate flake and acetate chemicals due to the timing of customer shipments. Operating earnings declined due to lower selling prices, partially offset by lower operating costs resulting from recent cost reduction actions. Looking forward, we expect earnings to modestly improve sequentially in the third quarter and further sequential improvement again in the fourth quarter as we realize we gain share lost early in the year, which we discussed back in our April earnings call. Our full-year view includes an expectation that acetate tow volume outside of China will be about flat for the full year relative to last year. We are taking all actions within our control to provide stability for this business moving forward, and expect fibers to continue to be a valuable business for Eastman. On slide 12, I’ll transition to an overview of cash flow and other financial highlights for the second quarter. We continue to do an excellent job of generating cash with first six months operating cash flow of over $480 million. Capital expenditures for the first half of 2017 totaled $279 million. We continue to expect our full year capital expenditures to be approximately $575 million. I remain confident in our ability to generate approximately $1 billion of free cash flow for the year. Looking at the balance sheet, we continue to expect a $350 million reduction in debt this year, which will occur in the second half of the year. Additionally, we remain committed to returning cash to our stockholders. Through the first six months, we returned $324 million through $140 million in dividends and $175 million in share repurchases. Our effective tax rate for the second quarter was 19%. We expect our full-year tax rate to be approximately 20%, which is on the low end of the 20% to 22% previously guided, reflecting the continued benefits of improved business operations and the impacts of expected tax effects. Overall, I'm pleased with the earnings and cash flow performance to start the year. And with that, I'll turn it back over to Mark.

Thanks, Curt. On slide 13, I'll discuss our outlook for 2017. We continue to benefit from our specialty businesses which we expect to deliver mid-single-digit volume growth for the year, which is two to three times the growth rate of the underlying markets. To deliver this, we are leveraging innovation and market development initiatives to drive growth in attractive end markets. We're delivering revenue synergies through improvements in the commercial execution capabilities of our acquired businesses. We've also taken actions to reduce costs in a disciplined way, which has allowed us to strategically invest in long-term growth and further improve our cost structure, and we are benefitting from a reduction in commodity hedge costs. We've improved the quality of our balance sheet, reducing interest costs, and we've made further progress on optimizing our business structures; our effective tax rate this year is expected to be slightly lower than last year. Finally, disciplined capital allocation continues to contribute to growth, including accelerating our share repurchases in 2017 compared with '16. All of these actions are helping to offset challenges we continue to face including uncertain global GDP, more than normal volatility in raw material and ethylene prices, and the other challenges we face in fibers. Putting all this together, on an operational level, we expect strong performance in line with previous expectations we outlined in January and our April calls. Our expectation for 2017 EPS growth has improved to 10% to 12%, which will be an excellent result in this business environment. We remain committed to our $1 billion of free cash flow target, which is one of the most compelling in the industry. On slide 12, let me summarize where we are. We have a strong portfolio of specialty businesses; we expect to deliver approximately 70% of our earnings from these high-quality specialty businesses. We continue to drive our own growth through accelerating innovation and improving commercial excellence across our businesses and improving our product mix. We're committed to using every lever we have in this uncertain environment, where we are returning a very strong free cash flow to stockholders. I also want to take a moment to say how proud I am of all of the Eastman employees. Building a long-term innovation-driven company is extremely hard; to cut costs aggressively at the same time. I deeply appreciate how everyone is driving for cost improvements and fighting for every revenue dollar across the company. At the same time, I am extremely proud of how our growth teams are staying focused on driving for commercial orders across all of our innovation programs. All of us at Eastman are committed to delivering both short-term earnings growth and building a business that can also deliver long-term earnings growth. I look forward to discussing our strategy for both short and long-term growth at Investor Day either late this year or early next year. Thanks for joining us this morning, and I look forward to your questions. With that, I'll turn it back to Greg.

Alright, thanks Mark. As usual, we have a lot of people on the line this morning. We like to get to as many questions as possible. So please limit yourself to one question and one follow-up. With that, Anthony, we are ready for questions.

Yes, good morning Mark. Wonder if you could bring us up to speed on where you stand in your specialty chemical businesses with regard to the gap between raw material cost inflation and selling prices. Where are you most confident that you've closed that gap and where do you have the most work still ahead, please?

Sure, and good morning Kevin. We’re feeling great about how we’re managing our overall portfolio. Our story is obviously about very strong volume growth and mix upgrade across the businesses, and we’re seeing that. Obviously, there was a spike in raw material prices in the first quarter and many of them have come off, and I think we’re making good progress on improving prices in AM and AFP where it really matters. On the AM side, we continue to see strong earnings growth for the year predominantly driven by volume and mix, but we’re also getting prices up in the polyester where we saw some raw material headwinds. You have to remember that in AM, the contracts for the interlayer business are annual fixed contracts, so those prices are fixed for the year based on the nature of that business, so that’s really about 2018. On the AFP side, as you saw, we already made good progress in getting our prices up, and I’d like to highlight that not only are our prices up, we also delivered outstanding volume growth at the same time. So, I feel good that we’re able to do both and are continuing to raise prices to offset some material headwinds in that business as we go into the third quarter. In general, we feel good about recovering the raw materials in AFP and feel good about the guidance we’ve given around the overall earnings growth for both businesses being strong in AM and solid in AFP on a full-year basis.

This is a follow-up Mark, you know you ticked up your contribution or expected contribution through 2018 from your innovation efforts. What changed there?

It’s just, you know, seeing tremendous engagement from customers and excitement around our top 10 innovation programs. We have this list that we’re very focused on; our platforms allow us to grow in multiple applications in markets. It’s amazing to see, the top 10 programs we have today are still the same 10 that we had three years ago. For those who move the growth portfolio, it’s amazing that all ten are alive and kicking and driving forward. Normally, you have some sort of dial on the way, so that’s incredibly encouraging. In the last six months, and what we see in the next six months, eight of those 10 are going commercial with commercial orders coming in. So, you just see growth happening all over the place in AM, AFP, and even these initiatives we’ve kicked off to help build fiber assets. In the tow business, we’re seeing great traction and success in orders in a few places with those new innovation efforts. TREVA is one of those examples; we’re seeing great growth in a new acetate yarn we launched, and there are a bunch of other things we’re not yet ready to talk about. But it's just exciting to see the growth across all three of these segments, and we have a lot higher confidence that we’re going to be more and more innovation-driven in our topline.

Good morning. Mark, just in advanced materials, volumes were up 3% in Q2 versus plus 10 in Q1. Was that just a matter of Q1 maybe pulling in some volumes from Q2? And is the first half number a better look at that business versus the 10 and 3?

Certainly, the first half is a better way to look at that business, David. There is a certain chunky nature to how the tracking business in particular performs. As I mentioned in the first quarter call, we saw a tremendous number of new business announcements around Tritan applications last fall that led to orders that were quite high, causing that spike in volume. Subsequently, once it fills the shelves, demand drops off a bit. There is just some of that cyclicality you see in the consumer durable business as you get wins. That was part of the story, David. Part of it is a bit of a pre-buy, I think, as people expected your prices to go up in the polyesters. They were pulling headwind volume, so we saw some of that, but it doesn't give us any concern about the rest of the year. And then we've seen auto OEMs obviously slow down a little bit in growth rates and consequently that slowdown hurt our business a little bit. But none of that, when you combine it together, gives us any concerns about the full-year number. Even on the auto side, we have many ways to grow even in a flat market. We're experiencing double-digit growth rates in acoustics and heads-up display interlayers, which is our huge earnings mix upgrade inside that OEM market. We’re also gaining a lot of real estate beyond the windshield into the side windows and sunroofs, allowing us growth above OEM build rates. So, we're feeling good about the business.

Very good. And Curt, just on the euro and FX, what's the impact of the euro in second-half guidance versus what you are expecting back in April?

Well again, as you look at the euro, it has improved of late, which is obviously favorable to Eastman. You saw in the second quarter it was roughly $1.10 versus $1.03 in the first quarter. So, what it's doing for us is going to be a slight positive if this continues, which is better than our overall guidance.

So, one of your competitors is merging its total assets with another player. Were you involved in any such discussions or are you proactively doing anything about your business?

Well, this is Curt. We believe we are the lowest cost assets in this industry, and with the actions we've taken over the last year, we're balanced on flake and tows. We've taken the actions we feel we need to take, P.J. It's not our practice to comment on what else someone is doing with their assets or their transactions. Right now, our focus is on taking the actions we can within our control to stabilize this business in 2018 and beyond.

Yes, I would say that we feel great about the actions we have taken. We do see the business stabilizing this year. As we've discussed in the past, we've got two-thirds of our volume in a multiyear agreement. As Curt mentioned, we've taken a lot of actions to reduce and align our asset footprint with the market and remain cost-competitive. In fact, we're the only company that's actually rationalizing assets since 2013 when this all started. As I just mentioned, we're making tremendous progress in our new applications to fill these assets into new markets. So, I feel really good about focusing on what we're controlling and how we're stabilizing this business, and we'll just have to see what other people choose to do with theirs.

Okay. And then one more question on pricing. Pricing has been an issue for the last six quarters. I see our Tritan bottles everywhere; that is good news; you're getting the volume. Why aren’t you able to get pricing? Or is that related to raw materials?

So, in Advanced Materials, I think that’s what you said about Tritan, P.J.? You just froze up in the beginning. What we’re seeing in that chain is great pricing discipline. We have kept our pricing down in our Advanced Materials business if you go back to ’14 through now in how we've managed that business. The other thing to keep in mind is the increases in raw material prices have been more moderate in that part of the world compared to what you saw happen in AFP and CI. The huge spikes in raw material numbers were really more in that side of the world rather than in the polyester chain.

Thanks, good morning everyone. Can I just ask on the free cash flow in the quarter and year-to-date? It looks like there has been a bit of a working capital bill that presumably is going to reverse in the second half of the year. Can you just sort of help us understand what’s happened and what’s going to happen to get to the billion dollars?

Yes, as we talked early in the year, our working capital requirements are seasonally higher in the first half of the year, particularly in the first quarter. If you take the first half of this year versus last year, our working capital requirements were $300 million this year versus less than $200 million last year. That is again our history, as traditionally working capital requirements are released in the second half of the year, and last year our seasonal increases in working capital were kind of helped by lower input costs. Taking that $300 million first half of the year impact of our operating cash flows, a good portion will reverse in the second half. On top of that, our CapEx requirements are different this year because of some large projects that we have currently underway. Our capital expenditures are peaking right now and will be lower about $100 million in the second half of this year compared to last year. We feel very good about our ability to generate the $1 billion of free cash flow.

Okay. And then if I could just ask a follow-up. There are $0.50 of cost reductions plan for the full year; can you give us a sense of how far along you are in those year-to-date and what's left for the balance of the year?

Sure, I’ll say it this way: our cost actions are on track to deliver that $100 million of cost reductions. This includes labor side optimization, energy efficiency, et cetera. Roughly 75% of the reductions are kind of in the manufacturing supply chain area, and because of that, CI feels a good portion of it that I mentioned before. We feel very good about that. Mark did mention as part of our innovation program, we’re making investments in market development, commercial, and tech service capabilities. In addition, we’re using some of these cost savings to make structural changes in our cost structures that will provide benefits in 2018 and beyond. Lastly, as you would expect, as we respond to business structures and look at tax reform, we’re having to spend some money working on our taxes. Roughly, you’ll see that; that’s beneficial to our overall effective tax rate. So, we’re using some of that cash to make those investments.

Good morning, gentlemen. Mark, you mentioned that you’re planning on having an investor day later this year or early next year. Is the timing of that contingent upon that announcement relative to the ethylene intermediates and the cracker divestiture sale?

No Frank, it's not contingent on that. As Curt said, we’re driving very hard and remain committed to doing what we can to exit that excess ethylene position, perhaps some of the derivatives. But that’s an independent process from running our company. We just think that it’s the right time as all this innovation is coming together, as we are improving how we can grow much faster than the market, create our own growth, manage at the same time. I think it’s just a compelling story, but we’d like to have a little more time to prove that out to establish the proper investment story because I think we are really on track to build an innovation-driven specialty company here. I’m quite excited about telling that story at the right time.

If I can add, it’s also just a function of finding the right date and the right venue.

Got you. Clearly, I mean 7% volume growth in the specialties is impressive. But coming back to the cracker sale, you did indicate that you're planning on a mid-year announcement; that negotiations are taking longer than anticipated. Is this a potential 2018 event?

Unfortunately, Frank, I've got a couple of dates behind us that haven't worked out. I have to say, I'm a little disappointed we haven't made the progress we hoped for. But again, we start multiple parties involved in the process, and negotiations are taking longer given current market conditions. You can see what the current market conditions are like. We remain committed to improving our portfolio; this is a potential transaction that remains a priority for us. I'll give you an additional update when I have something more concrete to say.

Fair enough, I appreciate that. Just lastly, staying on CI, you mentioned lower hedge costs helping out Q2. How should we think about, order of magnitude in Q2 and for the second half of the year benefits from that?

You’ll see, as you look at the 10-Q, the benefit of the hedges rolling off is about $45 million. In the second quarter, chemical intermediates get a good portion of that. That hedge rolls off will continue in the third and fourth quarters, again predominantly in CI. We’ve talked about this before as being roughly $0.50 a share. The other thing I think is important to remind you about CI is we’ve embedded in our guidance that ethylene prices will be lower in the second half of the year versus the first half, but our guidance is that prices will improve from the third quarter to the fourth quarter. I'd also remind you that when you look at our business in ethylene, that excess ethylene you should look at spot rather than contract prices as a proxy for merchant ethylene selling prices. As a whole, when I look at this business, CI is doing a better job holding on to derivative margins, probably better than I expected at the first part of this year, but that has been more than offset right now by ethylene margin compression in the second half of the year. So, when I look at trends for CI, I would expect some sequential decline in the third quarter due to these lower ethylene prices and seasonal demand for the egg sector. But it should still be favorable year-over-year. That trend will be similar going into the fourth quarter, but we will no longer have this favorable year-over-year comp in the fourth quarter.

Thanks very much. My recollection is that you have three major capacity expansions: Crystex, polyvinyl butyral, and Tritan. What's the timing of those three expansions; that is when do they actually come online?

The PVD expansion and the Crystex expansion are expected to be mechanically complete in the second half of this year, a little towards the later end of the year. The Tritan expansion is expected to be mechanically complete at the beginning of next year, probably in the late first quarter is what we're targeting for that.

Okay. So they are 2018 events, really?

Yes, I agree with that, Jeff.

Yeah. So, the price of propane is moving up. That is maybe at an average of $0.62 a gallon in the second quarter and now we're up at maybe $0.73. In the second quarter, you guys did a nice job of having your price increases more than offset your raw material cost inflation. Is the trend positive or negative given the movement of propane now?

It’s a good question. There is obviously a lot of volatility around some of these raw materials. So, it can be up today, and a week from now, it could be back down to $0.58. You know that’s just the nature of the world we live in. We feel good about our ability to manage prices relative to our rules, especially in CI. And we’re also, as I said, making good progress in the AFP business both in the second quarter and as we go into the third. So, we feel fine about that; obviously, extremity is always a problem, but we don’t see this as a major issue for us relative to our sort of 10% to 12% guidance. I would like to compliment the CI team, who have just done a phenomenal job on commercial excellence in managing pricing in the first and second quarters, and they’re on track, already in the third quarter, to do the same thing. Driven margin performance has actually been much better than we expected, and that’s helping manage some of these issues. Overall, we’ll just have to see how it plays out. I would also note that there are places where raw materials are coming off in a meaningful way, which is a benefit to the numbers as well, especially in AFP.

Great, thanks; good morning. I just wanted to go back to your guidance a little bit. It looks like the midpoint of your guidance now implies about 11% earnings growth for the year. And I think previously you had stated that the second half is going to be stronger than the first half. Is that still your feeling, and if not, why not? And then just curious about your thoughts for ongoing long-term EPS growth. I mean is the target kind of double digits for 2018 as well? Thanks.

First of all, we feel great about how we delivered in the first half of the year, and certainly the first half came in a bit better than we expected; some of that was through an improved tax rate, which is great for both earnings and cash. As Curt guided, we continue to sort of deliver that 20% rate and are always working hard to make it better. Most importantly, we see strong growth in solid earnings growth in AFP, especially while we’re delivering a lot of volume and managing a pretty volatile raw material environment, and I think that’s great proof about the quality of these businesses. That gives us good confidence for the back half of the year. I also want to emphasize that fibers are sequentially improving into Q3 over Q2 and Q4 over Q3. You know, some improvement is expected, and stabilizing this business is very important to us right now. All of that is quite positive; however, chemical intermediates unfortunately have some uncertainty; clearly, ethylene prices aren’t where we expected. No one anticipated the current situation if you look at how people were forecasting ethylene in the first half of the year. So, we’ve got to deal with that as well as just comment on propane. When you put it all together, we feel the 10% to 12% is very balanced in our outlook. If you do the math, that implies that the second half of the year is maybe just slightly lower than the first half of the year because we pulled a bit of earnings forward in the first half. I’d say we’re very balanced; that’s the word I’d use. But we feel good about the range and our ability to deliver in this range with all these moving parts. Yes, on long-term, to answer that question: We're building a growth engine showing we can grow faster than the market because we create our own growth through commercial excellence and innovation. There is no reason that's going to stop; let them continue to drive in 2018. We expect fibers to stabilize, and there’s always a certain amount of uncertainty in chemical intermediates. Overall, we are in a position to deliver strong attractive growth in 2018 over 2017.

And once we lock down our investor day, we'll have more to provide you on that topic.

Sure, and then just as a follow-up. Maybe just give us your thoughts on propylene spreads and how that affects your own product pricing. Do you expect to continue to be able to achieve some price increases if propylene prices kind of stabilize or go lower? Thanks.

Yes, on that front, the propylene spreads are doing a lot better than the ethylene spreads, as you can do your own math. We do also—we don't buy—we buy approximately 40% of our propylene needs, so that’s relevant; we are producing the other part on it in propylene. Those costs are still being worked off as we continue to drive for price increases in places, especially in AFP. So, I would say with that, we are having good progress on that. Again, I think we're in good shape to manage the price versus the raw materials game in the specialty arena.

Good morning. Thank you. In chemical intermediates, it appears that the chemicals market and plasticizers' markets were fairly tight in the first half. Given potential changes in supply in the second half and next year, do you think this level of margins is sustainable?

No, we're expecting prices to come off a little bit in those businesses; that's embedded in our outlook for the second half of the year. To your point, there has been some supplies that have come on, and there have been some supply disruptions in the first half of the year that compounded that situation. All of that is included in our forecast, but the margins, even with that included, are recovering in a pretty attractive way, and we feel good about how that turns into next year. I'd also add that, while that's all going on, we have seen a real benefit from our antidumping case against the Korean plasticizer producers, which has been ruled in our favor where duties have been put in place, and that has shifted trade flows on that business pretty dramatically in favor of us here in North America. A broader note, I'd also mention that applies to CI and even more so in AFP; another upside we're seeing that's helping to drive some volume growth is the competitive situation in China. We're seeing the Chinese authorities strictly enforce environmental regulations for the first time in the last six to 12 months, and it has really made a dramatic impact. We have a lot of small competitors in AFP and some large ones in CI that are being shut down left and right by this enforcement, sometimes temporarily, and sometimes permanently, as they have to move their plants to proper chemical parks. This is a significant new challenge for us. It’s great because it’s impacting a number of competitors, especially in AFP where most of our competitors are these small plants, mom-and-pop operations that don't have much capability and can cause issues. They are under a lot of pressure, and even when they move to these chemical parks, if they can afford to do so, the cost to operate there, especially to clean up the wastewater produced, is going to be much higher. So, the cost structure is going to go up, which helps CI and is also starting to help AFP.

Great, thank you Mark. And I guess the second question is on AFP margins. What would be the normalized margin level after you’re done fully offsetting the raw material inflation? It’s just based on the 7% of volume growth I would think your margin should be higher than the 2016 baseline. Is it fair to assume that you’ll end up somewhere around 2016?

As we look at it, the current margins will sequentially improve a bit as we work the price versus raw material equation. It’s also important to keep in mind that there is a wide spread of spreads with these products in this business. A lot of the stronger part of our volume growth this year has been from some of our acquired companies; we’ve seen tremendous volume growth in our animal nutrition, chemical cares, and fluids business. We’ve made a lot of investments in improving commercial capabilities there and how we’re going to market, and we’re really seeing a return on that investment, or revenue synergy from those acquisitions. But those segments within AFP just naturally have lower spreads per kilogram than the segment average. So, it’s not margin compression; it’s just a bit of a mix shift. I want to emphasize that the high-value products are still growing with the market. We’re not seeing any volume growth in coatings or high-value tire additives, and those are all growing fine and a little bit above market, actually. But these others are growing a lot faster, and so you’re just changing the weighted average spread a bit. While you have that going on, it’s going to cause the net margin to be a little lower, but it’s not actually margin compression. Of course, we will continue to improve prices and benefit from a bit of a decrease in raw materials in the second half of the year, which will help the margins. In addition, as you think about innovation programs going into 2018 and 2019, those will be above segment and company average margins. That will start driving the mix in the other direction as we move into 2018 and 2019, just like we do in Advanced Materials. Overall, it feels good, but the average margin is going to be a bit lower than the last couple of years as a result of that. However, we still feel good about it being around that 20%, maybe just a little bit below.

And Alex, if I could just add, if this business delivers mid-single-digit volume growth and operating margins of 20%, I’m going to be pretty happy seeing it both.

The key to remember is our story is about driving volume growth and sustainable margins over time through innovation. I think we’re doing great on that.

Thank you. Could you give us some more color on your tire resins business? How are volumes doing there, and what’s your pricing outlook in the second half? Should it be higher or lower?

Sure. We discussed this in the last quarter call and nothing has changed from those comments. The market growth rate is actually quite strong; we've sort of upgraded our view about underlying market growth in hygiene and user packaging, which are the biggest drivers of our demand. It’s now sort of growing at 5 to 7%, which is great. It has caused the market to be tight, especially in 2015 and 2016, as there was limited supply, leading this business to have some attractive margins. We have acknowledged and mentioned this before that those margins are coming off this year because there has been added supply in C5s, and we've seen some of those prices come off as a result. At the back end of this year, one of our competitors in the hydrogenated side is going to be bringing on a new plant in Asia, and that will also put some pressure on margins. Not a concern long-term; the margins here are attractive and above the segment average, and we're happy about how this business is performing. The margins will obviously be pressured by this, but what's more exciting for us is we're actually seeing a new trend of innovation in this business that we haven't seen in a while. That gives us a way to have a lot of growth and margin upgrade as we go into 2018, 2019, and 2020. There is a strong need for some new resins, and we're launching new resins right now with improved performance and proprietary advantages.

Great. And then you talked about your new product for tires and tire resins. Obviously, a lot of your demand profile there is driven by the new fuel efficiency standards. But you also talked about how you see the underlying tire demand developing in both truck and passenger tires.

So, demand overall, I mean globally, you get a better look at demand just by looking at tire companies for PCR and Truck. We are growing at the market and in some places better than the market. As I said before, we had some competitive disruptions caused by environmental enforcement in China; this is one of those areas where we're seeing that benefit in both ingredients in a material way and to some extent as well as in our Sulphur Crystex products. We’re growing faster than the markets, and that’s quite helpful. But overall, we see demand is solid and continuing to grow; however, the underlying market is pretty modest.

I have three quick ones. Just on the tax rate, what do you see as a likely range for 2018 to 2020? For the cellulosics portfolio, given the trends that you’re seeing in fibers now, do you think cellulosics as a product chain will be back in growth mode by the end of the decade? Lastly, can you characterize demand trends that you're seeing in your business in China, like how faster volumes are growing there?

Sure, I'll start with the tax rate. Right now, I think discussing the effective tax rate beyond 2017 is a little premature given all the discussions that are going on right now in Washington. Again, as Mark mentioned, we're going to continue to pursue every opportunity to optimize our business and tax structure for earnings and cash flows for the remainder of the year and going forward. I'm confident that we have a great tax finance and legal team that knows how to navigate whatever changes and actions may impact us. Let me just talk about tax rate more as we get more into the holistic discussion of 2018 and beyond.

Well, in terms of China and Asia in general, I don’t think the underlying market growth rates are materially improving; they're still pretty modest. But we are growing quite well in Asia for a few reasons. One is the macro trends that we've discussed for a long time around product safety and the emerging middle-income class, which is driving demand especially in China. People are looking for higher quality products, and our specialties are key to enabling those higher quality products. We’re seeing better than market growth because of that trend. We’re also benefiting from the Chinese consumers’ very focused on product safety; our Tritan products and made-in-America products are viewed as higher quality, more reliable, and safer. We’re seeing improved growth because of that trend as well. Additionally, I mentioned some of this environmental enforcement is helping us; not just local customers but more importantly our multinational customers who operate around the world. For them, security of supply is very significant, and they want to make sure that we’re providing specialty products that are essential for their production without inhibiting their ability to produce. A lot of different things are going well. When you look at our revenue growth in the Asia Pacific, it’s quite good, especially when you include the headwind from fibers. It’s also important to keep a mix set in mind that the majority of what we do in specialty is almost all of it.

One more trend that I should mention, as I alluded to with Kevin's question, is the weakening dollar, which helps our specialties as they compete across the globe. If that continues, the trend will be favorable to Eastman. For the second half of the year, we assume that it would be around $1.14 to $1.15, as an example.

Thank you. In your comments on divesting excess ethylene, you added potential derivatives. Do you have significant ethylene-only derivatives, or if you divested derivatives here, would it reduce your purchases of propylene?

No, when we look at potential commodity derivatives, those are typically where we add limited value. Those are predominantly ethylene-based derivatives. Propylene and propylene derivatives are where we add tremendous amounts of value, and those will still be strategic for us.

Four years ago, if PDH had existed, we would have built PDH units because our whole strategy in our specialties and AM and AFP, and even some of the new things we’re working on for fibers, often include propylene derivatives in the cellulosics as well as the polyesters. The ethylene is just a byproduct of what we’re trying to get, which is propylene, opposite of what most people do in this business.

Hey guys. You know on slide 5, nice job showing the different areas that are growing by new products and market development. When you think about bolt-on acquisitions, Mark, do you see any particular opportunities out there?

We’re always interested in bolt-on M&A. I think we’ve demonstrated a fantastic and impressive acquisition track record, both large and small, in integrating and creating value from acquisitions. We certainly see bolt-on M&A as an avenue for growth. To be clear, we’re not working on large M&A. But on the bolt-on side, we’re looking; I’d say the pipeline is in development. We’ve been so focused on the innovation programs and delivering organic growth that we haven’t wanted to get distracted, but we are starting to build that pipeline now. Hopefully, we’ll be adding to our growth through very accretive bolt-on M&A as we go into 2018 and 2019, but there is nothing imminent.

Right. Quick follow-up. Sounds like your specialty business is gaining momentum here as you enter the second half of the year. How much of the earnings growth do you think in the second half will be driven by the specialty businesses, given volume trends are still pretty good and you're going to catch up on raw materials?

Well, I think you can sense that we're seeing growth in our specialty businesses given the trajectories, the sequential declines in our chemical intermediates business, and some modest improvement in fibers sequentially. So, our earnings growth in the second half will certainly come from those specialties. Just keep in mind that the fourth quarter tends to have a seasonal impact on our specialty business, so you have to consider all those factors. But I agree with your comments; I really like the momentum that we're seeing in the specialty businesses.

I appreciate slide 5 and 6 and the insertion of your breadth and vertical integration. I'm wondering, I've seen a recent study that says from a share performance standpoint, specialty, commodity, or something in between. I would guess you'd say you're not in between, but maybe your valuation levels and some other metrics suggest the market thinks you are. So, I'm curious, strategically, what can you do? Do you buy more specialties, do you change your reporting structure to isolate your best businesses, or do you get more aggressive on portfolio adjustments as you look beyond just ethylene or some derivatives? Or do you think it’s simply getting back to attractive double-digit range growth that gets people’s attention? How do you think strategically and holistically as a company about breaking out of this valuation funk that you've been in for so long?

I think that it's vital; when we sell and think about it, we must ensure that everything we're doing in our strategy is focused on value creation for our shareholders. I actually think we've got a very unique capability as a specialty company. Not just in the things I talked about, like world-class technology and AD capability and market connection, but integration is a unique advantage in delivering sustainable, long-term growth and very unique products that our competitors can't do. Our competitors typically don't have the breadth. The scale allows us to have dedication and expertise in different technical areas and operational disciplines that specialty companies typically can't afford, given their smaller size. You’re going to start seeing competitive pressure on them relative to us as we leverage integration to win in the market. Our capital deployment is focused on the specialty side. If we continue to do well consistently, we will differentiate ourselves through consistent results year-over-year.

What you'll see over time is the amount of earnings coming from advanced materials and additives and functional products will continue to become a larger percentage of the revenue and earnings of the company. As we continue to make progress with those innovations, that's going to drive that, allowing us to potentially see fibers turn back into a growth story. Let’s see if we can execute, and deliver on those, and if we do, I think we’ll be rewarded in the marketplace.

So, could I distill that by suggesting if we saw a broader view in the Eastern five-year plan, there is a higher growth rate and dampened amplitude of earnings volatility?

Absolutely. You’re going to see the three segments over time grow, including fibers, because with all the new application development capability we’ve got, we expect specialties to become greater than 80% of the earnings of the total company. We're trying to do everything we can to minimize volatility in our stock; that’s why we’re trying to get rid of excess ethylene. There’s a lot of pressures created right now by aggressive cost and CapEx cutting and buying back stock among some of our peers, as well as speculation about who is going to break up or combine. It creates a context of evaluating how we can create value and we’re doing everything we can. I believe we’re building a consistent earnings result each year.

And overall, this is a set of businesses and programs that can deliver a billion dollars of free cash flow each year.

First question just around tow. When you capture back some of that market share in the back half for this year that you talked about, relative to maybe four or five years ago, is your market share back to where it was, above or below where it was, excluding China let’s say?

If we leave China out of it, our plan is to keep volumes flat to hold our share, which obviously means it’s slightly declined year-over-year with the overall market. But that’s our plan outside of China. And you know as I mentioned in the last call, China demand is down to about 10% of the revenue of this business or 1% of the revenue of the company. So, the uncertainty of imports next year on that side is less relevant. Overall, we feel good about how demand is going to be stabilizing in this business as we go forward from this year into next. We have all these innovation programs that will allow us to grow volume into new applications and leverage existing assets.

Okay, great. And then could you just give us an update on your large uptick agreement from the PDH unit, where that stands, what the economic impacts of that will be when it rolls through, and do you get made whole on any of the delays that were associated with that?

Yes, so I think the Enterprise have said that the PDH unit is expected to come online later this year. When it does, we will essentially integrate back to propane with our propylene needs. Currently, we produce about 55% of the propylene that we need, 40% to 45% comes from the market. In terms of the financial impact, several years ago, we indicated that maybe there would be a $30 million benefit from that unit coming online for us. Obviously, the world has changed a little bit in the years that have gone past, and therefore, the benefit may not be as much as we expected. We will still be happy when the unit comes online.

Great, thank you.

Okay, and thank you again everyone for joining us this morning. We'll have a web replay available around 11 am. We thank you for your time.