Eastman Chemical Company
Q2 2013 Earnings Call Transcript

Published: 30 Jul 2013

[Operator:]

Good day, everyone, and welcome to the Eastman Chemical Company's Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

[Gregory A. Riddle:]

Okay. Thank you, Jenny, and good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; Mark Costa, President; Ron Lindsay, Senior Vice President; and Josh Morgan, Manager, Investor Relations. Before we begin, I'll cover 4 items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company's second quarter 2013 financial results news release and our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2013 and the Form 10-Q to be filed for second quarter 2013. Second, earnings per share and operating earnings referenced in this presentation excludes certain noncore or nonrecurring costs, charges and gains. A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our second quarter 2013 financial results news release, which can be found at eastman.com in the Investor section. Projections of future earnings in the presentation also exclude such items as described in the second quarter financial results news release. Third, this presentation includes revenues and operating earnings on a pro forma-combined basis assuming the acquisition of Solutia have been completed prior to second quarter 2012 that compare post-acquisition results to pre-acquisition pro forma-combined results. More information on pro forma-combined results is in our second quarter 2013 financial results news release. And lastly, we have posted slides to accompany our remarks for this morning's call on our website in the Presentation and Events section. With that, I'll turn the call over to Jim.

[James P. Rogers:]

Thanks, Greg, and thanks, everyone for joining us on a bright, sunny morning here in East Tennessee. I'll begin on Slide 3. As I always do on these calls, I'll take just a moment to provide an update on our most recent public statements. First of all, progress on the Solutia integration continues to exceed our expectations. We have been one company for just over a year now, and I can say we are ahead of where we thought we would be last July. As is his normal practice, Curt will provide you with an update and some more color on his section. But as I have now stated for several quarters, I'm quite pleased with how the integration is going and how well these businesses and cultures have come together to create value. Next, in February, we raised our full year 2013 EPS expectation to a range of $6.30 to $6.40, a 17% to 19% growth rate over 2012. Today, we're increasing that guidance again to $6.40 to $6.50 as we see additional strength in both our Fibers and Specialty Fluids & Intermediates segments, partially offset by continued challenges in Adhesives & Plasticizers. We also said we expected to generate between $600 million and $650 million of free cash flow in 2013, and we're on track to achieve this. Finally, as always, management committed to remain disciplined in our capital allocation. And we continue to believe that prudent resource allocation focused on financial return metrics is what delivers the best long-term performance in this industry. Now on Slide 4, I'll review the Eastman corporate results. Operating earnings increased second quarter 2013 versus second quarter 2012, primarily due to higher sales volume in 4 of our 5 segments and higher capacity utilization, which lead to lower unit cost. In particular, the Advanced Materials segment had strong volume growth in our Tritan copolyester product line, particularly for durable goods, and the Specialty Fluids & Intermediates segment also had a strong quarter with higher volume in both fluids and olefin and the Intermediates contributing nicely to earnings growth. The operating margin for the quarter was 18.6%, a 160 basis point improvement year-over-year and a greater than 100 basis point improvement over the first quarter. Second quarter EPS was $1.80, Eastman's best EPS on record. With this level of earnings, we are well positioned to achieve our fourth consecutive year of double-digit earnings growth. So while the global economic environment remains mixed and somewhat unpredictable, our second quarter earnings results were a continuation of the strong start we saw in the first quarter. On Slide 5, I'll highlight our results by geographic region. Our largest region, North America, was down less than 1%, so basically flat, with it primarily being the case of lower selling prices resulting from lower raw material costs. We had a really nice quarter in Asia Pacific, up 11% year-over-year and driven primarily by strength in both our Fibers and Specialty Fluids & Intermediates segment, as well as significant growth in our Tritan copolyester. You'll recall our first quarter year-over-year growth was also 11%, so we've had a very good start to the year in Asia Pacific. A big factor of play here is in China, where our portfolio is benefiting from an emerging middle class and a focused shift to a consumer economy, and our portfolio is less exposed to the declining infrastructure spending in the region. I'll also point out that we have done a particularly good job on execution in this region, in particular with some of our oxo alcohols this quarter, as our team was pretty nimble and was able to move some material when it made economic sense. Revenue in Europe was flat for the quarter. And frankly, given the state of their economy, this is really solid performance. And Latin America revenue was up $6 million or about 5%. So our geographic diversity continues to be a source of strength for our portfolio, and our second quarter results reflect that. Moving next to the segments on Slide 6, where I'll begin with Additives & Functional Products. Sales revenue increased primarily due to higher sales volume. This was particularly true for solvents as we continue to benefit from the strengthening U.S. building and construction market. For tire additives, Crystex insoluble sulfur volume was higher year-over-year, while antidegradant volume was lower in what remains a very challenged oversupplied market. Operating earnings decreased slightly, largely due to lower earnings in antidegradant product lines, while the operating margin remained above 24%, within the range we provided for this business at our Investor Day in December. Looking at the full year, we're expecting second half earnings to be slightly higher than first half as tire additives are expected to benefit from somewhat higher sales volume, improved capacity utilization and lower raw material and energy costs in the second half of the year. And our solvents product lines are expected to benefit from higher sales volume, in part due to an expansion of ethylene oxide derivative capacity at our site in Longview, Texas. As a result, we continue to expect full year 2013 operating earnings of approximately $410 million, which would be a solid improvement over 2012 in an economic environment that remains challenging. Moving next to Slide 7 in Adhesives & Plasticizers. Second quarter results for this business reflect ongoing challenges, primarily for the adhesives resins product lines, where we continue to face multiple headwinds. First, focusing on adhesive resins, we continue to see demand weakness in consumables, in particular for packaging tape and labels. Coupled with a weak demand, the market is also experiencing increased supply, contributed primarily to increased raw material availability, resins in particular. And these factors, combined, have led to lower selling prices. In addition, customer destocking has also been a factor in the first half of the year, but we are cautiously optimistic that this is largely behind us. For Plasticizers, we continue to face competitive pricing from producers, who, in response to slower growth in Asia and European markets, have increased exports to other regions. We also continue to see manufacturers of phthalate-based plasticizers trying to defend market share. Looking at the full year, we expect operating earnings to be approximately $200 million. And there is downside risk to this number, reflecting the limited visibility we currently have in our adhesives resins business. With that said, as I stated on first quarter call, we remain confident in the 2 key long-term growth drivers for this business

[Curtis E. Espeland:]

Okay. Thank you, Jim, and good morning, everyone. Moving ahead to Slide 13, I'll review some of our financial highlights for the second quarter. We generated $362 million of cash from operating activities in the quarter, primarily due to strong net earnings. Working capital increased by $46 million, primarily due to increased receivables. We also made a $13 million contribution to the U.S. defined benefit pension plans and continue to expect the full year contribution will be approximately $120 million. Free cash flow for the quarter was $216 million with CapEx at $100 million. Finally, our cash balance, which includes cash equivalents, was $234 million at the end of second quarter. During the quarter, we also incurred $18 million in net asset impairment and restructuring charges, primarily for closure of a photovoltaics production facility in Germany. The site produced ethylene vinyl acetate for use in photovoltaics, an end market that has been very weak for some time now. Our tax rate for the second quarter was 30.9%. This is a bit below our previous guidance of a rate slightly less than 31.5% with the difference primarily attributed to investment tax credits from the state of Tennessee related to our recently announced future capital expenditures at our Kingsport site. We expect our tax rate for the remainder of the year to be approximately 31%, assuming no dramatic change in foreign earnings mix. On Slide 14, I'll walk you through our estimates for free cash flow in 2013. Consistent with our previous guidance, we project operating cash flows of roughly $1.3 billion. The full year operating cash estimates include our projection for continued strength in earnings, as well as the following items

[Gregory A. Riddle:]

Okay. Thanks, Curt. We have a number of people on the line this morning, and we'd like to get to as many questions as possible. [Operator Instructions] So with that, Jenny, we're ready for questions.

[Operator:]

[Operator Instructions] And we will hear first from Kevin McCarthy of Bank of America Merrill Lynch.

[Kevin W. McCarthy:]

I guess, first off, 2 questions on Fibers. Your volume grew 8% in the quarter after -- I believe it was plus 3% in the first quarter. I don't normally think of volume growth quite that strong in cigarette filter tows. So perhaps you could comment on what is driving that strength and whether or not you've gained any share? And then the second piece of it would be the expected impact from your acetate tow JV in the back half of the year as that flows through earnings.

[James P. Rogers:]

And, Kevin, we -- this is Jim. We, upfront, mentioned too it on the call. I probably should have said I thought it was very appropriate, given the, frankly, fantastic results of this quarter that the guys who are directly responsible for had a shot at being on the call and getting some of the credits. So that's why Mark and Ron are on this call. And with that, I'll let Ron justify this question.

[Ronald C. Lindsay:]

Kevin, as far as second quarter, what we saw -- you've heard us talk about this business having a pattern through the year in terms of deliveries and how we supply certain customers. So we get some of that noise one quarter to the next, and you see some of that in our tow for second quarter. The -- now we also had, in the second quarter, excuse me, a pop up in some acetate yarn demand as well that helped us with some of that volume gain sequentially. We've been fairly poor demand environment there, and we saw some rebound there, as well as some customers deciding to restock a bit in the face of some of that rebound. So that contributed as well in Q2.

[Kevin W. McCarthy:]

Okay. And I guess as a follow-up, at the risk of increasing focus on an issue that you think people are already too focused on, Jim, wondering if you could just elaborate on the pipeline tariff issue, what exactly changed there with Westlake and what is your case as to why it's inappropriate and what does it mean for the timing of any action that you may be able to take on strategic alternatives for the smaller crackers.

[James P. Rogers:]

And I'll get Curt to talk about that as part of the process. But let me -- well, I missed the second half of the question.

[Curtis E. Espeland:]

Yes, I didn't get your question about the effect of the JV. First off, let me just comment that the JV is -- as we -- consistent with what was said earlier but just a little bit more granularity, we do have the plant complete from a construction standpoint and have chemicals in it, so we're on track there. As we go through this, we tell folks all along that we see the second half of this year as a period of startup, getting the plant, getting it lined out then qualifications. So we're going to see most of the impact really starting to hit us in 2014. We will be selling flake to the JV in the second half, and you see that baked into our numbers. One of the things you won't see quite as obvious in the second half -- first half is we had some opportunities to sell some acetate flake in the first half unrelated to the JV, and that'll balance out the "first half, second half" comparison a bit. So it won't be quite as obvious when we see the additional JV, the flake sales to the JV in second half. But I think, you're going to mostly see this being an impact in 2014 and following.

[James P. Rogers:]

And, Ron, I think you told me mix shows up and volumes as well. And they're looking at this volume...

[Ronald C. Lindsay:]

That's right. There's some mix effect there, part of that yarn effect, part of the flake effect and some tow.

[James P. Rogers:]

Curt?

[Curtis E. Espeland:]

Yes. Kevin, in regard into your earlier question, if you compare the recent tariff versus what was in place previously, Westlake has, in essence, eliminated bilateral movement with the pipeline, as well as third party's ability to do exchanges of ethylene. Through these actions, Westlake has restricted use of its pipeline by any other third party beside Eastman. In regards to timing, we just filed our objection with the governing body in Texas, and we're still working through the timing. The good news is we still have various parties interested in our excess ethylene position as we work through this. But to the extent the -- to the extent that this resolution of this matter is prolonged again, it will affect our efforts to get something done.

[James P. Rogers:]

And, Kevin, if you're on the Westlake call, you might want to ask them what they were doing, what they were trying to do when they changed the tariff.

[Operator:]

And we'll move to our next question from Robert Koort of Goldman Sachs.

[Robert A. Koort:]

I was wondering if you could comment a little bit about the geographic spread of your volumes rightly attributed there -- or characterize that as a favorable trait of the company. I was a little surprised the U.S. were -- it would seem industrial productions been reasonably okay relative to the world. You didn't have a little bit more robust results there. So maybe talk about the 1 or 2 things that held you back in the U.S.

[James P. Rogers:]

It's funny in this quarter with how we performed to have anything about something holding us back. We didn't feel too held back in general. It felt like a pretty good quarter. And I'm sitting here thinking I kind of like having about 3/4 of my revenue in North America and Asia, at least for the present and the foreseeable future. Would you want to add a little color, Greg, and...

[Gregory A. Riddle:]

Yes. On North America, as Jim mentioned in his comments, part of it is just you had lower raws, that you had propylene that was down about 3%, propane that was down closer to 8% or 9%. I'd also mention that Adhesives & Plasticizers, where they've seen some challenging on May -- on a revenue side, about 60% of the revenue is in North America. And so some of which you're seeing is that challenge as well. But the remainder of the business was pretty strong in North America this quarter.

[Robert A. Koort:]

And could you provide -- I don't know if you guys rolled this up or have at your fingertips, but what year-over-year look like in various industries? And I'm mostly interested in auto tire and construction industries.

[James P. Rogers:]

Go ahead, Mark.

[Mark J. Costa:]

Sure. I'm happy to cover that. I'd -- what I'd say is that from an end market point of view, tires has been relatively stable this year relative to last year. We've seen some slight improvements in demand, on tire demand on Asia, but by no means are we seeing any signs of the anticipated restocking events of the tire industry. It's still somewhere out in the future, and there's no clear indication of when that may occur. In regards to building and construction, it certainly have been also solid. I wouldn't say that this seasonal demand pattern has been as strong as some past ones. And so as we see this pickup in residential construction in North America, there's a bit of a lag effect for our markets, like painting a house takes a while before you get around to that step of the process. So I would call it solid but not incredibly strong from the B&C point of view this -- so far. But for those key markets, again, consumables is holding together fairly well. I would just describe it as solid.

[Robert A. Koort:]

And if I may, just slip the last one then on the ethylene stuff as well. Obviously, this pipeline can be a challenge. Is that a 2-way pipeline and then if there's any contract terms with Westlake that could also bust up a deal?

[Curtis E. Espeland:]

Well, as it relates to a contract with Westlake, as you would imagine, when we sold our polyethylene businesses, there are various contracts with -- between the 2 respective parties that are not necessarily out there in the public domain. And the pipeline has the ability to move both directions, yes.

[Operator:]

And we'll go to our next question from David Begleiter of Deutsche Bank.

[David L. Begleiter:]

Jim, just on Adhesives & Plasticizers, you lowered guidance again this quarter. What's the change versus what you had back in late April in terms of the guidance?

[James P. Rogers:]

I'll let Ron take that.

[Ronald C. Lindsay:]

Yes. David, I think the view we have is similar in terms of the supply demand kind of picture for Adhesives & Plasticizers. And what we're just continue to see is sluggishness in the end markets and as well as some supply that has come on, particularly in the resins area, and that's just all resulted in a fairly competitive environment out there for pricing. And so I would say the difference in the last forecast and this one is we just -- we got another quarter under our belt. We've seen a bit more how the market is shaking out, and we're just reflecting that as we look out the rest of the year, not a tremendous change in the view of environment from first quarter. I would say that we still have sluggish markets or sluggishness in end markets. On the plasticizers side, we continue to see in the midst of all of that, continue to have nice progress on switching. If you don't mind, just taking an opportunity to highlight that. We talked about that some, but just to give you a sense of it, we made the acquisition of the Texas City site sometime back converted a line over -- 1 to 2 over to make non-phthalate plasticizers. We're filling that out exactly on plan. It's, versus what we thought it could do originally, we're at about 90% capacity utilization. We actually have a lower percent utilization because we've been able to push the capacity a little bit more and have got a second one to go. So in the midst of all this, we still see that good story going on. But it's still -- we do see a lot of competitive actions around pricing, given the softness in the end demand.

[David L. Begleiter:]

And, Jim, you mentioned also a shutdown cost in Q3. Could you detail those costs and by segment as well?

[James P. Rogers:]

Well, we -- I mentioned the 2 segments. I don't know, Curt, you want to -- well, it's less than $10 million...

[David L. Begleiter:]

That's right, Curt, little less than $10 million.

[Operator:]

And we'll go to our next question, which comes from Frank Mitsch of Wells Fargo.

[Frank J. Mitsch:]

Jim, I'm not sure what I'm more impressed with, your record earnings or the -- your ability to plant questions on other conference calls.

[James P. Rogers:]

I can't well -- I don't know if I could be, but I'm not on that conference call. I would be curious, just ask them what were they trying to do in that process.

[Frank J. Mitsch:]

It'll be very interesting to see it play out. On the EVA shutdown in Germany, how much more do you have left in the photovoltaics business?

[Curtis E. Espeland:]

Frankly, we have left is just going to be some assets we have in China. However, those assets are multipurpose. We can do other things with those assets, and that's what we're going to be looking at, is just how do we pick that asset base and maybe support our other Interlayer business and other Advanced Materials segment -- materials.

[James P. Rogers:]

I don't expect to talk about photovoltaics again on the call.

[Frank J. Mitsch:]

All right, that's fine. And, Curt, you talked about priority for the balance of the year, paying down debt. And following that, obviously, with a very good cash flow, how should we think about the positioning in terms of M&A or doing more than just offsetting dilution in -- for your share repurchase? Can you talk a little bit more about the priorities, the use of cash going -- after you finish making the paydown of the debt?

[Curtis E. Espeland:]

Yes. Thanks, Frank. As you know, we got some pretty good cash flow and feel good about that debt paydown as we get towards the end of this year. And I think you also know our approach pretty well now on capital allocation. We're trying to look at across all of the 4 buckets of opportunities, trying to find the best opportunities we can. We are focused on deploying capital for growth and actively looking at M&A opportunities. I'd also say that our standards for M&A are probably as high as they've ever been in our past, and thus, we're going to be -- continue to be prudent. But we are actively looking for ways to deploy capital for M&A and growth. At the same time, we'll continue to be returning cash to shareholders. Again, you can expect an increase in dividend as we work that through our board, and share repurchases continue to be a good use of cash. And as we get into next year, we can do more than offset dilution, and that will be a viable use of cash as we look across our different options set.

[James P. Rogers:]

And if I could, Curt, let me just add on -- so if you back up to what our priorities are, our #1 priority, growth of the company, and in particular double-digit earnings growth throughout the foreseeable future. In cash, the -- we're blessed with this strong cash flow, and it's one of the ways -- or one of the things that gives us comfort putting these targets out there. Obviously, I need a lot help from different parts of the world and we've given you all our expectations of what the economy will do, et cetera, and markets will do. But having a strong cash flow is a nice cushion to have, and that is -- as we go to decide how to use that cash, we think about accretive acquisitions, our share count, et cetera.

[Operator:]

And we'll move to our next question from P.J. Juvekar of Citi.

[Eric Petrie:]

This is Eric Petrie standing in for P.J. Just on the propylene, the propane spreads, quite higher propane exports. Prices really haven't moved much due to high inventory levels. But as we work through this inventory, where do you see propane prices going and the resulting propylene to propane spread?

[James P. Rogers:]

Yes. So I guess you could -- maybe giving a sense of your timeframe, but as we -- let me just take a shot at it. First off, just for the remainder of the year, we're forecasting spreads to be slightly down from where they are. As we're going out, as you point out, there are opportunities coming on or capacity coming on to export more propane. And as we look out that there's a variety of views as to how quickly that's going to make a difference, given not just the inventories, but production. And so we think, on balance, there's some upward pressure on propane over the next several years that we could face, given that, but it's going to be hard to call exactly. We do things along the way to help deal with volatility. And propane is -- I think everybody knows, we do hedge and we've done some of that this year. This help smooth things out. We do still feel like, all in, that being backwards integrated to propane for our derivatives is a good place to be.

[Eric Petrie:]

Great. And then just on Crystex and Santoflex, tire volumes seem to be stabilizing. Where do you see volumes going, particularly in the commercial truck market? As well as can you comment on your recent price initiatives in antidegradants from last quarter?

[Mark J. Costa:]

Sure. This is Mark. In regards to Crystex first, we feel good about that business. It's actually holding together quite well. Demand has been solid and slightly improving on a year-over-year basis, and so that business is continuing to contribute and improve earnings. So it just -- it's been a solid part of the business. When it comes to antidegradants, the PPDs that we have, as we've said before, that's a very challenging business. That's where the year-over-year earnings challenge has really come from for the entire Additives & Functional Products segment. It has been from this relatively small business. But we really faced a pretty severe compression last year as benzene prices went up dramatically in the second half of last year, and at the same time, price competition developed due to the excess supply from the Asians. We've had some progress in improving price this year. As we mentioned, we've been rolling out some initiatives to do that. I'd say the improvements so far have been modest. And certainly, benzene prices are coming off or going to help in the back half of this year to the extent that they stay where they are. But I'd say it's a tough road there, and it's an industry that's most likely headed to some further consolidation, from our view. We feel very confident in our position in this industry. We got the low cost position in the western hemisphere and feel like there -- long term, this is a business that will improve from where it is today.

[Operator:]

And we will move to our next question from Andy Cash of SunTrust.

[James Sheehan:]

This is Jim Sheehan sitting in for Andy. You gave some updates on what your expectations are for the full year, in 2013, for the various segments. And I was just wondering if you could also comment on the corporate and other line?

[Curtis E. Espeland:]

If you look at the corporate other line, that's developing pretty consistent to what we expected. Last year, the corporate and other line was $125 million, of which $50 million was attributable to Perennial Wood. We've talked about that reduction being cut in half and, as well, some further improvements. So I think we've couched that, probably around $75 million for the year.

[James Sheehan:]

Okay. Could you also provide some more color on your new -- your V-Kool product, your Interlayer products? What type of growth rates are you seeing there year-over-year?

[Mark J. Costa:]

Sure. This is Mark again. The performance films business is having a great year. In particular, the V-Kool products, these are our premium products, are selling quite well, high double-digit earning revenue growth in that business, especially in Asia. So that's -- that part is going well. Overall, I'd say the sales environment in China for auto sales has weakened some, but that product is outperforming the industry.

[Operator:]

And we will go to our next question from Laurence Alexander of Jefferies.

[Robert Walker:]

This is Rob Walker on for Laurence. I guess, first, on Adhesives & Plasticizers, what needs to happen for the business to be and to grow sustainably again, and how far is it away from tightening? And where do you think profits could get to in 2015?

[Ronald C. Lindsay:]

It's Ron. Okay, yes, thank you. Let's see, as far as improving, what we've seen that has caused the issues here in the last several months has been some weakness in demand and then additional capacity. So I think the short version is, particularly in the resin side, we need to see some continued growth and the end use demand soaking up some of that capacity. And I think it's going to be difficult to call exactly how long that'll take until we see what kind of growth rates are reestablished. But as to what it takes is we need to see some of that additional product consumed. We do still feel like we got some good value propositions. One of the areas there, that Jim mentioned, is the hygiene market has higher-than-average growth and also tends to need higher-performing adhesives and resins, which is what we got in our portfolio, and this is the kind of product that we're going to get out of our new capacity in China. So we're going to get cost position coming our way there, as well as we're in the market, geographically, where we see a lot of the growth opportunity. As far as 2013, we see the -- as far as the 2 parts of Adhesives & Plasticizers, probably getting closer to our original targets in 2015 on the PV side and taking a bit longer on the Adhesives side, but it's going to be hard to call at this point till we see a little bit more clarity in just how strong the demand is going to be. But we are definitely pushing out from our earlier forecast for 2015, hitting those numbers out a year or 2 or so.

[Robert Walker:]

Okay. And then with the exception of that segment, your volumes are very strong across your portfolio. What did volume grow sequentially? Was this better than normal seasonality? And kind of what kind of volume growth is embedded in your guidance for the back half of the year on a year-over-year basis?

[Curtis E. Espeland:]

Well, I think what we'd characterize is the volume expectations for the second half of the year, it reflects primarily just lower seasonal demand in our volumes. I don't think we have a specific percentage out there today, but we'll come back you as we get those results.

[James P. Rogers:]

On the second quarter, you -- we always get a seasonal increase in volume, first quarter to second quarter, and we saw that again. I mean, I actually felt pretty good about the growth we had. I've looked around at some of the other guys in the industry, I don't feel bad at all about the volume growth we had in the second quarter nor our expectations for the remainder of the year.

[Operator:]

And we will hear next from Nils Wallin of CLSA Investment Bank. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division On Advanced Materials, have you fully sold out the Tritan capacity as yet? And then if you are expanding, my understanding was that, originally, the expansion you had recently was to basically fill all of your polymer capacity with your monomer capacity. Does this new expansion require you to expand both monomers and polymers?

[Curtis E. Espeland:]

Nils, thanks for the question. I've been waiting for my Tritan question all day. It's certainly one the most exciting product launches we've had in the company, in our history, I think. And it's grown certainly beyond our expectation this year, and we're excited about the prospects going forward. As you mentioned, we are selling quite a bit, but we are not at capacity yet. We still have some capacity to grow at the market, but we are moving very quickly to debottleneck that plant and extend its capacity from 60,000 to 76,000 tons, which we'll have online next summer, so excited about the growth, certainly looking at stretching the capacity. And we also have a much larger expansion and development, where we can add a much larger chunk of capacity to continue supporting the market growth. Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division Great. And then just on the Longview cracker. If you were to sell the smaller 300-million-pound crackers, what would that do to your overall propylene position while retaining your 800-million-pound cracker?

[Ronald C. Lindsay:]

This is Ron. I'll address that. Curt described our process as selling this excess ethylene position. We want to retain a good cost-based propylene position to support our various derivatives. You might recall that the propylene produced at the site is only part of what we need. We've also got a longer-range supply agreement with Enterprise for when their PDH plant comes online. All that together will make us fully backwards integrated and propane-based cost for our propylene derivatives. And so as we go forward with the process, our focus has been to sell that ethylene position, that merchant ethylene position, but retain a propane-based cost position for the propylene.

[Operator:]

And we'll go to our next question from Mike Sison of KeyBanc.

[Michael J. Sison:]

I appreciate you have Solutia's integration going well, maybe ahead of expectations, as you noted. Could you give us an update, though, in terms of sales volumes since you owned it? It certainly -- lot of businesses are a little bit less than we thought heading into this year, but maybe frame up where you think the businesses are at across-the-board and what the upside potential could be?

[James P. Rogers:]

I'm going to let Mark hit that because he's closest to it, but one of the things he is pointing out to me was to really look at it on a gross margin basis so you don't get confused with the cost allocations. And I'm jumping down the income statement a little bit beyond what you asked. But, Mark, you want to give him some color on the Solutia business?

[Mark J. Costa:]

Sure. As we've discussed in the past, going from '11 to '12, we certainly hit some headwinds with the European economy and some of the Solutia businesses, given their exposure to Europe. And that hasn't improved significantly yet, but we are very well positioned to grow these businesses. Overall, the gross margin dollars this year will be higher than last year for these businesses. So they are stable and well positioned for growth. All the key products, whether it's Crystex, that Interlayers products, performance films, have sufficient capacity to support growth and economic recovery in those businesses as you look over the next 3 years. More importantly, the premium products are doing quite well. So the acoustic sales in Interlayers is very solid growth. We're setting records in acoustic sales in the last 2 months, which are certainly a very strong mix upgrade there. As I mentioned, the Crystex products are doing well, and we have several new products in development that we're preparing to launch next year and feeling excited about that. In Ron's business, Specialty Fluids, is doing quite well and exceeding expectations. So overall, I think they're very well positioned. It does require an economic recovery or, specifically, some end market recovery in tires and building and construction, and we need the European economy to solidify and start moving in, at least, a positive versus negative direction. But we feel good about it.

[Michael J. Sison:]

Great. Then in terms of SAP for the tire additives business, great that you got that on there. Can you maybe talk about some of the benefits you expect to see from that being rolled in there? And one of the earlier ones that you tend get in SAP is pricing, maybe an update on that?

[Mark J. Costa:]

You hit a great chord for us. At Eastman, our historical growth and earnings performance, frankly, has been driven by some very sophisticated understanding about our markets and pricing and capturing the full value and using SAP for that insight. So we've been quite excited to get SAP integrated solution applied to those pricing tools that we've developed into those businesses and are already starting to see some of that benefit. So we do expect to gain a lot of benefit and pricing insight, not just in the rubber business, but in the Saflex product range and the performance films product range. So we expect that to be another contributor for revenue synergies or margins synergies, however you want to define it, the next few years.

[James P. Rogers:]

And, Mike, If I could add, as you probably know, getting those SAP implementation also then enable us to get those cost synergies, as well as continue to pursue additional productivity gains in 2014 and beyond.

[Operator:]

And we'll hear from Duffy Fischer of Barclays.

[Duffy Fischer:]

Jim, you've got the $8 number out there, and you've talked about it a couple of different ways

[James P. Rogers:]

Yes. That's a tough one, Duffy, and thank goodness, I don't have to handicap myself. I mean, we've got a history of using every line of the income statement. We do what it takes to hit our numbers and, hopefully, give you a little extra. But I got the genesis of your question is that you know as I do that it's a tough environment out there. And Mark was just leading into it with looking for some end market recovery in some of our key end markets, looking for Europe to get a little better, which was really significant for the old Solutia businesses. So I would not bet against us, frankly. And as I'm heading out here in a few months, I got the highest amount of confidence that the guys are going to do everything they can, from our side of the table, to make it happen. But you never get guarantees in life. As I said, you need the economy to give you a little help. But we're going to use all the tools we got, because we think it's really important for our shareholders to keep driving that track record of earnings growth year-over-year. And that's what separates you from being a more commodity-diversified guy who's up 1 or 2 years and then down 4. When we start stringing these 4 to 5 to 6 years together of strong earnings growth, people have to think about you differently, and that's our game plan.

[Duffy Fischer:]

Fair enough. And the on the phthalates and non-phthalates on that mix, how much more can the phthalate guys cut price to try to maintain market share. Are they getting close to their cash cost at this point, where you can say that they've pulled about -- or fired all the bullets they can, or can they still continue to cut price, do you think, more from here?

[James P. Rogers:]

It's hard to know exactly. But what I would say is, instead of talking about what they can do, I just tell you what our customers are telling us. They see this as just a -- depending on which one you're talking about, how urgent they are, but it's just inevitable. And then ultimately, it's not going to be a price issue for them. It's just a matter of how quickly they make the switch. Some have seen -- it's just a corporate strategy that it's the right thing to do, get on with it. Others have been a bit more followers, and we're seeing that dynamic as well, where they may have not have been so interested and they see some of their competitors doing it and now they're -- have gotten more interested. So I think that side of it is just kind of a near-term dampener maybe. But all in all, we see that dynamic is getting strong and continue.

[Operator:]

And we'll go to our last question from Vincent Andrews of Morgan Stanley.

[Ian Bennett:]

This is Ian for Vincent. On Advanced Materials, could you quantify how much of the strength was due to auto and transportation demand?

[James P. Rogers:]

Mark?

[Mark J. Costa:]

Yes, it's Mark, certainly. Advanced Materials had a stellar quarter. We're really excited about it. The primary driver of the earnings improvement in the quarter was really Tritan, more so than the automotive sector. So we've had phenomenal growth in Tritan, that's very high-margin product for us, and it's both volume and mix improvement for the segment. Performance films also had a very solid, solid quarter and improvements with our sales, not just in Asia, but we actually had very strong growth in the aftermarket window films in North America, actually, up 8%. The third contributor was Interlayers in the order of contribution. And the reason is we see very solid volume growth globally, where things are holding together, but Europe has been a big part of our revenue as Saflex and an important part of our margin contribution from the geographic mix point of view. So very solid quarter for Interlayers, but not an exceptionally strong one. The automotive segment, overall, is growing, but depends on where it's growing. I do want to come back to the underlying mix, and the acoustic products has been performing quite well. Very consistent with our Investor Day presentation, our strategy is to drive the mix up, have solid volume growth, leverage the capacity utilization of this business to improve the earnings, and we're seeing all 3 of those levers play out as we've laid out in our strategy.

[Gregory A. Riddle:]

Okay. Thanks, again, for joining us this morning. A web replay and a replay in downloadable MP3 format will be available on our website beginning approximately 11 a.m. Have a great day, and thanks very much for your interest in Eastman.

[Operator:]

And again, that does conclude the call. We would like to thank everyone for their participation today.