Gregory A. Riddle - Vice President of Investor Relations and Communications Mark J. Costa - Chairman and Chief Executive Officer Curtis E. Espeland - Chief Financial Officer and Executive Vice President.

David L. Begleiter - Deutsche Bank AG, Research Division Vincent Andrews - Morgan Stanley, Research Division John Roberts - UBS Investment Bank, Research Division Duffy Fischer - Barclays Capital, Research Division Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division Robert A.

Koort - Goldman Sachs Group Inc., Research Division Nils-Bertil Wallin - CLSA Limited, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division Michael J.

Sison - KeyBanc Capital Markets Inc., Research Division Laurence Alexander - Jefferies LLC, Research Division.

Good day, and welcome to the Eastman Chemical Third Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Greg Riddle. Please go ahead..

Thank you, Kim, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Chairman and CEO; Curt Espeland, Executive Vice President and CFO; and Josh Morgan, Manager of Investor Relations. Before we begin, I'll cover 3 items.

First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially.

Certain factors related to future expectations are or will be detailed in the company's third quarter 2014 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2013 and the Form 10-Q to be filed for third quarter 2014.

Second, earnings per share and operating earnings referenced in this presentation exclude certain noncore or nonrecurring costs and charges.

A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded items, are available in our third quarter 2014 financial results news release can be found on eastman.com in the Investors section.

Projections of future earnings in the presentation also exclude such items as described in the third quarter news release. Lastly, we've posted slides that accompany our remarks for this morning's call on our website in the Presentations and Events section. With that, I'll turn the call over to Mark..

Thanks, Greg. Good morning. It's shaping up to be a beautiful day here in the Smoky Mountains, beautiful fall day, and happy Halloween. I'm happy to say for our shareholders we have a treat, not a trick, as great results this quarter and a good outlook for the fourth quarter next year. I'll start with my comments on Page 3.

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

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

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

Taminco has the #1 or 2 global market share position for the vast majority of the chemicals producers, making it a very exciting addition to our portfolio. Today, I'm pleased to report that the closing process is on schedule, and we expect the transaction to close by the end of the year.

We couldn't be more excited about the addition of this great company to our portfolio. Also during the quarter, I was most excited to see the results of our innovation, leveraging our world-class technology platforms.

Our strong growth of innovative high-value specialty products was a big driver of our earnings growth in the quarter and will be in our future, especially in Advanced Materials segment. And lastly, we generated $355 million of free cash flow in the quarter, which reaffirms the quality and the strength of the Eastman portfolio.

And I'm confident that this strength will continue to be a great value driver for investors in the future. As we move on to Slide 4, I'll cover our third quarter corporate results. Our portfolio of businesses posted solid year-over-year revenue growth of 3%, with 4 of our 5 segments delivering very strong growth.

The higher revenue is primarily driven by higher volume and improved mix in Advanced Materials as well as higher volume in Adhesives & Plasticizers. Pricing was also higher, particularly in the Specialty Fluids & Intermediates segment.

Operating earnings increased by 5% year-over-year, driven by revenue growth in Advanced Materials, Adhesives & Plasticizers and Specialty Fluids & Intermediates, and the continued reduction in raw material and energy costs. Earnings per share improved by 12%, driven by higher operating earnings and a lower share count.

The lower share count reflects our continued commitment to return share -- return cash to our shareholders and fully deploy our balance sheet.

All in all, our strategy is to continue to get great results, and I'm confident that we've put ourselves in an excellent position to continue delivering these results for our shareholders through this year and the years to come. With that, I'll turn it over to Curt..

higher volume, improved product mix and fixed cost leverage as we fill out previous capacity expansions. Looking at the fourth quarter, we expect normal seasonality to impact demand across all major product lines and associated lower capacity utilization.

However, we expect operating earnings to be meaningfully higher year-over-year, resulting from a continuation of mix improvements across the segment, favorable raw material costs, particularly in copolyesters and lower-fixed costs.

As a result, for the full year, we are tightening our range toward the upper end of what was previously provided and now expect operating earnings to be between $290 million and $300 million, reflecting an expected double-digit earnings growth for this segment versus 2013. Next is Fibers on Slide 8.

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

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

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

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

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

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

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

The lower sales revenue for heat transfer fluids is due to delays or cancellation of industrial products -- projects, and we continue to expect this to continue in 2015.

Year-over-year, operating earnings increased due to higher intermediate selling prices and the benefit from the acquired aviation turbine oil business, partially offset by higher raw material and energy costs as well as lower sales revenue for heat transfer fluids. Looking to the fourth quarter.

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

In addition, this segment is impacted the most by the costs from a maintenance shutdown at our -- at the largest of our crackers at our Longview site. This shutdown occurs every -- once every 5 years, and we expect the impact to be approximately $20 million for the company.

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

Anyway, taking this together and recognizing the volatility inherent in the business, we continue to expect operating earnings for the full year to be in the range of $300 million to $320 million. On Slide 10, I'll cover some other financial highlights.

On one of my favorite topics, during the quarter, we generated a very strong $560 million in operating cash. This, again, reflects the solid net earnings that we -- was the main driver as well as our working capital discipline. And as with previous years, during the quarter, our working capital turned from a use to a source of cash.

Our cash flow in the quarter was also -- reflects timing of lower cash tax payments and the timing of pension payments, which will occur in the fourth quarter. Our free cash flow in the quarter was $355 million, including $53 million in dividends.

Capital expenditures totaled $152 million in the third quarter, and we continue to expect our full year 2014 capital expenditures to be approximately $575 million. With the expectations for cash from operations approaching a record of $1.4 billion for the full year, we are on track for full year free cash flow of approximately $600 million.

Besides dividends, we have returned cash to stockholders, with share repurchases of $50 million in the third quarter, bringing our total share repurchases to $410 million through the first 3 quarters of the year. You should expect that for the next couple of years, our focus will be on deleveraging following the close of the Taminco acquisition.

While we are deleveraging, we do expect to continue to offset dilution with share repurchases.

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

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

Thanks, Curt. On Slide 11, I'll review our outlook for 2014. I'm excited about the strong earnings and growth that we've seen through the first 9 months. As I look forward into the fourth quarter of 2014, we expect it to continue to grow.

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

So far this quarter, we're seeing strong orders through October across the company. Of course, there's always some risk of more-than-normal destocking with the current economic uncertainty, but we don't see any evidence of it yet. We also expect some favorable raw material and energy tailwinds to improve earnings.

As a result, we expect operating earnings in the fourth quarter to be up strongly year-over-year. The increase is expected to be pretty much across the company. Taking all of this into account, I'm very excited about being able to revise our guidance for 2014 to be approaching $7 a share, which will be our 5th consecutive year of earnings growth.

And we believe this momentum can continue in the years going forward. That brings me to our last slide, which is our Investor Day, which is scheduled for next Thursday, November 6 in New York.

I'm very excited about how we're going to bring our growth strategy to life, which will deliver outperforming earnings growth and a very strong free cash flow for our shareholders. We will discuss how we've transformed our portfolio into a leading specialty chemical company.

Within this portfolio, we're particularly proud of the progress we are making with delivering innovative products to the market, and we will discuss the strength of our core businesses and how they are well positioned to deliver solid revenue growth and sustainable margins.

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

Okay. Thanks, Mark. [Operator Instructions] With that, Kim, we are ready for questions..

[Operator Instructions] And we'll go to our first question from David Begleiter of Deutsche Bank..

Mark, just on acetate tow.

As you head into year-end negotiations, what are you hearing from your customers about underlying demand, specifically in China, for tow and cigarettes for '15 and beyond?.

David, so the Fibers business is one we're certainly paying a lot of attention to and trying to make sure we have a good understanding of the market. What I would say is that we see demand as basically relatively flat in China this year relative to last year.

And as we look at that, I think that it's principally driven by austerity measures from what everyone is telling us as opposed to a broader set of trends. And so as we think about austerity measures, they tend to have a onetime effect.

And so as we look at population growth and other factors, you can see a scenario where demand in China could improve going forward, probably at a moderate level to the past, but continue to deliver some level of growth. So that's our view on China.

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

Now as we think about specifics to 2015 and what's going on in this year, there are 2 things to keep in mind. One is, part of the reason demand is down this year is our joint venture with CNTC.

So as they bring their joint venture online, they're obviously going to shift volume to running the joint venture full like they do the other joint ventures, and then that's going to have an impact on import volumes, and we've taken our share of impact on those imports -- reductions this year, which, of course, is more than what you would have expected with flat demand.

So there's a bit of that going on this year that factors into it. There is some debate and speculation around to what extent there's inventory that needs to be destocked in China if they are producing -- expecting growth which didn't materialize.

So we also view that there's always some -- a moderate amount of inventory correction that you could see next year or as part of what is going on this year.

But overall, I think the important to tell -- the investors need to understand is we see this business being stable, we see the demand being stable and -- as well as our earnings being stable going forward from this business.

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

Very good. And Mark, just on Crystex.

Can you talk about underlying demand? And when do you expect that demand to actually pick up doing forward?.

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

It's 10x as much Crystex in a truck tire as a passenger tire. And so October volume is actually, on a global basis, the strongest month of orders we've seen in 24 months. We're already seen a good rebound. Of course, when we need to see this continue into November and December, but at least we're off to a good start..

And we'll move on to our next question from Vincent Andrews of Morgan Stanley..

Could you just speak a little bit to the customer buying patterns in Fibers? Is that just sort of a seasonal thing? Is it a trade load? Or -- and what gives you the confidence that it's going to swing back in 4Q, which I typically think there was a time where these guys liked to manage inventory levels going into the end of the year?.

Vincent, I think the old word that prior CEOs of Eastman have used is chunky, and I think that customer buying patterns don't have some sort of predictable seasonal pattern in the fibers industry. There is a lot of different factors that go into how they manage their purchases. And we can already see improved orders from China in the fourth quarter.

So I'm pretty sure we can see what's going on, and we expect the volume to improve. So it was just a shifting of order patterns as they were adjusting some inventory in third quarter versus fourth..

Okay, fair enough. And could I ask, on the cash flow statement, you had very strong cash generation in one of the items. There's like $101 million that came on the other line.

What was that?.

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

The next question comes from John Roberts of UBS..

I assume you view the Texas Railroad Commission ruling as favorable.

Do you expect that to be appealed? And will that allow you to restart a process to explore any transactions for your olefins capacity?.

This is Curt. Well, just to remind everyone, there's 3 disputes with Westlake over that pipeline. Two disputes was the hearing that was held earlier in this year around bidirectional flow and swaps, and there's a hearing that's been held on tariff that we're still waiting for a ruling.

But on those first 2 items, the ruling was issued by the examiner, as you indicated, on October 20. The ruling was in favor of Eastman as they found Westlake's removal of bidirectional flow and exchanges as an unlawfully discriminatory action against Eastman. We're not surprised by that ruling, given our position and our outstanding legal team.

So parties do have the ability to appeal this decision within 15 days. We're just going to wait that 15-day period out and see what happens. Until then, just to your comment, we have continued to explore options with our excess -- ethylene position.

The timing, unfortunately, has been impacted by this activity with Westlake, but we'll continue to explore those options now that this ruling is out there..

Okay.

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

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

The bulk ethylene is about 2% of our earnings stream this year, and it's just not what people should be focusing on. And it's a great segue into your second question, which is what's the impact of the $85 oil scenario on Eastman? And we, of course, are spending a lot of time thinking about that and trying to assess what that impact might be.

And at a high level, I don't think there's a substantial impact to Eastman. And I'll walk you through our logic and give you a rough idea of what the impact could be. So most of the press I read says that the brand oil going down to $85 is primarily a supply-driven event. So first, I'm going to talk about this holding demand constant.

Because if it's supply-driven, it's not a -- we're not having a macroeconomic recession debate here. And there are really sort of 3 drivers to keep in mind when you assess Eastman as we think about this impact. The first is, of course, our raw material costs will improve. As propane prices drop, we'll benefit from that.

That would be somewhat mitigated by the hedging strategy we have in place. Also, you have to remember that about 1/3 of our purchased -- raw materials purchase is propylene, not propane. And we'll see benefits of lower purchase propylene costs coming into us. So we'll see a tailwind there.

The other side of the equation, of course, is what does propylene and ethylene prices do to us. Well, first of all, we don't sell a lot of -- we don't sell any propylene, and we only sell a modest amount of ethylene, as I mentioned, when it comes to total earnings for Eastman. So we sell derivatives. A lot of those are specialty products.

And as raw materials fall, we generally tend to have stickiness in our prices that don't fall as fast as our raw materials. And therefore, we'll capture some value on the way down as you think about 2015.

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

And so the third component is our raw materials, paraxylene and benzene. And things like them [ph] , PVOH, are all going to improve. And again, those are specialty products that have stickiness with raw materials moving, and we should benefit. And then we can shift to the demand equation.

If it's a supply-driven event with $85 oil, then this is going to a great economic stimulus for the world. It is going to help improve cost structures for consumers, for governments, that should help everyone from China to Europe to the U.S. So I can make an argument that we'll have a demand offset there, too.

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

At the end of the day, Eastman is just not an olefins play. We continue to sort of get lumped into that category by some, and they seem to be missing the fact that we've significantly transformed our portfolio. This is becoming a smaller percentage.

And as we grow our specialty products and add Taminco to our portfolio, it's going to become an even smaller percentage of our EPS in 2015..

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

Yes, sorry. That's -- this is a 2015 analysis. We actually feel good about our position for 2014..

Our next question comes from Duffy Fischer of Barclays..

A question kind of on competitive dynamics. The Chinese are building out a lot of propylene molecules over the next couple of years, and they're trying very hard to get to some of the downstream derivatives where you guys would compete like 2-EH.

When you look through your propylene derivative portfolio, how do you think you're set up competitively versus kind of this onslaught from China over the next several years?.

We always look at that competitive situation. The reality is, it's already very competitive in China from a supply -- oversupply point of view, and our margins have still held up quite well.

The vast majority of our 2-EH and other propylene derivatives that we sell out of SFI are sold in North America, where we have a better industry structure and a better cost structure. And we tend not to compete so much in Asia Pacific with those kind of products.

And then when you get to the specialty products, we're not competing on a basis of propylene prices anyway. We're competing on value, so I don't think it's going to be significant..

Okay. And then on the due diligence you did on Taminco, one of the pushbacks I'm getting from some investors is it gives you ag exposure at a point when most investors don't want ag exposure.

When you did your due diligence, what kind of downside, if ag went into a 2-year down cycle, let's say, could we see out of that business?.

We, of course, looked at the ag exposure, both short term and long term. And first, from a long-term point of view, we feel great about the long-term macro trends for ag.

So really, the question is just, short term, is there some risk specifically in crop products like corn and soybean with where prices have gone to demand for us? And when you really dig into the Taminco portfolio, the amount of exposure in total earnings that they have to grow crops is not that high.

Their whole crop protection business actually goes in the high-value products -- fruits, vegetables, things like that, where we don't see any risk to demand trends. And they've got a great pipeline of new growth products going in crop protection. So you're really talking about a small part of the functional means that go into ag.

And if we think -- we know there is some exposure there we factored in our valuation, and we still feel good about our guidance..

And we'll move on to our next question from Frank Mitsch of Wells Fargo..

You talked about a potential $0.25 headwind in 2015, which begs the question, how are you thinking about 2015 in general and obviously, that $8 marker that's out there?.

Mitsch, I know I can always count on you asking this question, so I appreciate it. Well, in this case, I'm actually going to beg off a little bit to Investor Day. We've put together a very compelling and exciting story about how Eastman is going to grow earnings in '15 and beyond for next week, and I don't want to steal our thunder from next week.

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

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

All right. Well, I certainly appreciate the teaser for the meeting next week. And then just on A&P. You talk -- adhesives, it looks like the second quarter now we're with pretty good growth. How sustainable do you look at that? And then, obviously, on the plasticizer side, you're still seeing some price competition.

What's the outlook there?.

First of all, we feel great about how this business has stabilized and how it's improved this year and how we expect it to continue delivering earnings growth into the next couple of years, which we'll, of course, address next week as well. On the adhesives side, what we see going on is demand's come back. We had soft demand in '13, as we all know.

But hygiene, hot melt adhesive packaging, which is a very sophisticated application that requires high-performance resins, we're seeing some great growth in that and great demand coming to us.

And then on the supply side, the industry has just become tight again, and that's allowed us to improve our pricing power and capture the value that we create for our customers. So we see that as a good thing.

The resin crops came in a little below average, and then the crop outlook for next year is that, that's just finished and the resins are collecting off [ph] the hills today. It looks like it's going to be slightly below average. So the industry looks like it's going to stay tight going into next year.

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

We'll take our next question from Bob Koort of Goldman Sachs..

I was wondering if you could give us an update on your PDH offtake -- that plant, when you expect to actually start receiving material and how that might compare to the original time line..

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

And is there -- I know you guys have some sort of bridge agreement until that plant started up.

Do you get the favorable cost plus economics during that bridge period? Or do you have to wait until that unit is actually producing?.

There is a propylene market contract that's in place. It started in 2013 and....

And we're seeing the benefits of both today, and that will continue until that product has -- project has come in online..

And relative to what somebody else asked earlier about oil, and you mentioned it's a -- much ado about nothing maybe for Eastman. I think you were right to point out you're not an olefins company.

I'm curious, though, given your feedstock base and some of your Appalachian coal exposure relative to maybe peers that are more oil-based, I mean, would you expect to see some compression in margins as maybe coal prices locally don't necessarily match up with what oil prices are doing globally? Or would we expect your raw material basket to echo changes in oil prices?.

Bob, that's a great question. First of all, we love our cellulosic acid teal [ph] stream and its profitability. And it is coal based here in Tennessee, where we're one of the few companies in the world -- certainly, the only company really outside of China that does coal gasification successfully.

And that position has translated into a lot of value for us. When you look at the final products where we're selling, those aren't really based on NAFTA, and the competitor's cost structure is more of a natural gas kind of competition.

And the vast majority of our cellulosics that come off of our coal are very high-value specialty products that aren't trading on movements of raw materials on a daily, monthly or even annual basis..

We'll take our next question from Nils Wallin of CLSA..

With regard to the volume declines in acetate tow, and you're also mentioning that you had Eastman-specific things that you could pull if you didn't see demand.

What are those Eastman-specific things? Are you -- would you consider closing any capacity going forward? And at what level in terms of margins or -- would you say it's time to start taking control of the market on your own?.

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

Were still in the beginning of contract season right now to see how our contracts will play out and therefore, what our volume will be next year and more importantly, what we think is going to happen with volume on a long-term basis, not just reacting to short-term events.

And then we'll make the appropriate decisions of what is the best way to manage our cost structure if we see demand pressure, but I'm not going to get into those details until it's appropriate..

Understood. And then on Tritan, the 15% growth is obviously quite strong.

Would you be able to parse out how much of that is just the capacity expansion versus market share gains? And what type of growth rate do you expect for that product going forward?.

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

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

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

And we'll take our next question from Kevin McCarthy of Bank of America..

Just to follow up on Advanced Materials market. I think you cited a number of factors there driving it to the high end, better mix, raw materials, lower fixed cost. I was wondering if you could just kind of walk us through this -- those issues, provide a little bit more color and where you're seeing the positive variances by product line.

Is it mainly Tritan or in the other pieces of the segment?.

Great question. We're extremely happy with how Advanced Materials has been performing through the last few years and what we expect going forward. And it is a -- it's a specialty product mix upgrade story that's very consistent all the way back to what we said at Investor Day in 2012. And it's across the board.

So yes, Tritan is showing tremendous growth and improvement. It's a high-margin product. We've got a great patent position, which we -- we'll be able to sustain this advantage in the marketplace for many years to come. And so that's a part of it. But that's not the only part.

If you look at the interlayers business, we're seeing tremendous growth in our acoustic interlayer products that go on automotive windshields, not just further adoption of different OEMs, but starting to put acoustics on the side windows, so just an acceleration of growth relative to underlying demand.

And that's a great product, and we're excited about the next-generation products we see there. And in the window film business, also showing good growth in China and North America. We're still in the beginning of implementing our growth programs there. So we see a lot of growth coming from that as we go into the future.

So it's really across the board that we see this story, and we have a lot of capacity available in these segments. We don't have to spend much capital, except for Tritan, to continue to grow and leverage that capacity so we get the fixed cost benefit. And the other great thing about this business is the assets are very flexible.

So as we grow the specialty high-end value products, we can shift and make those on the same assets we've been making some of the more core products over the past. So we just get a lot of leverage in this business..

Appreciate that. And then a second question, if I may, for Curt. Propane has been very volatile. It started off the year as a trick. And at the moment, anyway, it looks like a treat, but you've got a lot of hedges in place.

Can you talk about 2015? And what can you tell us about hedge levels and ratios as we think about the economics versus the volatility?.

So as a reminder, the intent of our commodity hedging program, as you indicate, is really to reduce earnings volatility related to input costs, particularly like propane and natural gas. And as I discussed earlier in the year, we kind of changed our hedging philosophy.

Instead of just going out 6 months out, we now go out multiple years to take advantage of forward curves as the year progresses. So specifically on propane, we -- I would characterize, we have hedged a substantial portion of our purchases for the remaining of fourth quarter as well as 2015.

You can imagine, I was taking those position -- our team was taking those positions during the course of this year, which was probably just over $1 as a lot of those forward curves were reflecting at that time.

We use -- do use a combination of swaps and options, and so we still get to enjoy some of the benefit as propane comes down going into next year. But the swaps, obviously, are helping us kind get a predictable cost flow and reduce earnings volatility.

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

Our next question comes from Jeff Zekauskas of JPMorgan..

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

As we look at filter tow volumes next year, we don't expect them to grow. We think that they're going to be stable to modestly down based on the logic that I just laid out, but we still see the earnings being stable.

There's multiple factors, including pricing and raw materials, that go into our view of earnings and how we manage it as well the actions we can take..

Okay. And I guess to follow up on Kevin's question.

If propane stays at $0.90 and you're hedged at $1 or a little bit more than $1, who -- with some offsets, what's the effect on the income statement? Do you take hedging losses? Or how exactly does that ripple through the income segment?.

Yes. Basically, what that does is that, that will just -- you'd still have the purchases -- underlying purchases of those lower raw materials. But as a cash flow hedge, it would offset some of that lower raw material costs. From an earnings standpoint, then that has the same type of effect.

It provides a stable cost position, and we're not going to have volatile earnings that go up and down around that propane. And that has -- that was factored into our analysis that Mark talked about, where the net impact going into next year would be roughly $0.25 per share..

And Jeff, just -- those hedges are just going to follow what propane's used, so it'll show up in the segments that use that material..

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

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

And we'll take our next question from James Sheehan of SunTrust..

A question on the tire market.

What gives you the confidence that we're seeing a real pick-up in the tire demand, is it -- rather than just a seasonal impact? And also, could you give us an update on your development of your rolling resistance product?.

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

When it comes to demand, from what we can see from our customers and what you're going to see in their calls is I think demand is stabilizing, improving overall globally for primary demand in tires. Obviously, we're going to benefit from that.

I think we're still doing a good job of defending our market share in the Crystex business and holding on to that growth as it comes our way. To remind everyone, we always expect to lose a little bit of market share, so we expect to grow through 1/2 the rate of the market.

In a Crystex sense of the world and -- the hard data I have right now is very strong orders in October showing a recovery out of the third quarter. But as I said, I'd like to see several months in a row before we can call a recovery in sort of destocking and softness in tires.

From a growth program point of view, we're seeing great success on our 2 top growth programs. We'll tell you a lot more about that next week at Investor Day. But the hydrocarbon resins that are going in as performance additive to improve wear -- improve traction on the tires is showing a lot of interest across a number of our tire OEMs.

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

And on filter tow, you mentioned the possibility of further inventory adjustments next year.

I'm just wondering, how long can the products actually be stored before the customers actually have to replace it?.

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

Our next question comes from Mike Sison of KeyBanc..

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

Mike, thanks for that question. That's a great set-up for Investor Day.

We've actually spent a considerable amount of time evaluating -- first of all, getting some clear definitions about what is specialty versus commodity and a third category we'll share with you next week and really getting a much clearer understanding of the entire portfolio of Eastman as well as thinking about Taminco and how that all fits and continues to transform our portfolio into being a much more stable variable margin business.

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

And Mark, if I can add because it's a great opportunity to also highlight the pulp [ph] of the value of Taminco. We do expect that to close before the end of the year.

Mark and I have actually had the benefit of going out and meeting the Taminco team and further understanding their businesses, and I think we're very excited about the quality of businesses that they have, the quality and capabilities of the Taminco team. And I think that acquisition will be very complementary to the direction this company is going..

Sounds good. And then real quick on Additives & Functional Products. This is the third year in a row earnings have been sort of flattish here.

What do you think needs to happen to get that business back on the growth trend longer term?.

Well, as you look at AFP, first of all, the revenue growth has been great. So we're seeing strong revenue growth in the coatings areas and some of our other formulary products. Obviously, we had some slow demand in tires, but we may be turning the corner there, as we've discussed. The challenge this year hasn't been revenue, it's been cost-driven.

And a number of those cost factors I think are, to some degree, isolated to this year. So you had the huge propane increase and cost structure increase that impacted several of our businesses, including AFP.

You had some of the planned outages that came in, and then we've had some specific growth investments we're making around our next generation of technology for Crystex that provided a headwind this year that shouldn't continue into next year.

So we see revenue growth continuing into next year, and we see the cost situation improving relative to this year and feel confident about delivering earnings growth next year from AFP..

And we'll move on to our next question from Laurence Alexander of Jefferies..

I guess 2 questions, one in the spirit of counting chickens before they're hatched. Taminco was fairly vocal about having a pretty rich pipeline of fast payback acquisition targets such as the formic acid deal that they did.

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

So on the acquisition front, I'll take that question. I'll give the FX to Curt. On acquisition, I do think they've got a robust portfolio of small bolt-on opportunities to continue building and extending their world leadership position that they have in alkylamines and, like you said, formic acid, which is a nice related product to their market.

And we don't see any reason why we wouldn't continue to pursue those kind of opportunities. Clearly, we're going to be focused on delevering in the next 2 years from some of the debt we take on to buy Taminco.

So we're not going to be doing any other large acquisitions until we've improved our debt metrics, but that doesn't mean we can't do small bolt-ons that have a great fit and create a lot of very quick payback for our shareholders. And so we'll look at those and do those where they make sense..

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

When we look at going into fourth quarter in terms of volatility, there's a slight headwind. But again, mostly, that's mitigated by our currency program. I think as we get into '15, we'll talk more next week. If the euro stays in that $1.25 to $1.30 level, it will continue not to have a material impact on us going into next year..

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

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

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