Gregory Riddle - VP, IR Mark Costa - Chairman and CEO Curtis Espeland - EVP and CFO Louis Reavis - Manager of IR.

David Begleiter - Deutsche Bank Duffy Fischer - Barclays P.J. Juvekar - Citi Vincent Andrews - Morgan Stanley Aleksey Yefremov - Nomura Securities Frank Mitsch - Wells Fargo Nils Wallin - CLSA James Sheehan - SunTrust John Roberts - UBS Bob Koort - Goldman Sachs Mike Sison - KeyBanc Laurence Alexander - Jefferies Financial Jeff Zekauskas - JPMorgan.

Good day, everyone and welcome to the Eastman Chemical Company Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website at www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir..

Okay. Thank you, Christine, 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 Louis Reavis, Manager of Investor Relations. Before we begin, I'll cover two items.

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

Certain factors related to future expectations are or will be detailed in the company's second quarter 2015 financial results news release, and our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2015 and the Form 10-Q to be filed for second quarter 2015.

Second, earnings per share, operating earnings and EBITDA referenced in this presentation exclude certain non-core costs, charges and gains.

A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including a description of excluded items, are available in the second quarter 2015 financial results news release and in the Appendix to these slides that accompany our remarks this morning, both of which can be found on our website, www.eastman.com in the Investor Section.

Projections of future earnings in the presentation also exclude such items as described in the second quarter financial results news release. With that, I'll turn the call over to Mark..

Good morning, everyone, and thank you for joining us. I’ll start on Slide 3. I’ll begin with the strategic highlights for the quarter and the first half of 2015. We had an outstanding second quarter results, clearly demonstrating the strength of our portfolio specialty products and the benefits of our focus on execution.

Adjusted EPS in the second quarter was a record for any quarter and establishes a new level of earnings for the company and we set a record for the first half within a year as well. When you consider the headwinds we are facing, we have demonstrated the power of our strategy of aggressively transforming our portfolio towards specialties.

The value of innovation driving growth and improving our mix and the benefit of our advantage cost positions. As we discussed in our first quarter call, we expected strong growth in our high value innovative specialty products.

And now you can see that we deliver that strong growth from acoustic interlayers to our display products, to Tritan copolyester and many others. As the volume growth continues in these products, we also improved our product mix contributing to our strong margins.

This shows the strength of our portfolio as we are able to hold under price relative to declining loss and more than offset the propane hedge and currency headwinds.

In addition to strong organic growth, performance for Taminco continues to be solid and on track as the diversity of end markets and the strength of these business models enable us to navigate a difficult business environment.

We also remain very pleased with the progress on the integration and the achievement of synergies and I would add that our bolt-on acquisitions from 2014 are also performing very well. The Commonwealth film business, the aviation turbine oil business and Knowlton which is accelerating innovation in our microfibers business.

Cost management also remains an area of focus for us. We continue to make good progress keeping cost relatively flat with strong productivity gains. SG&A and R&D as a percentage of sales remains in the lower quartile of our peers reflecting our focus on costs, our integration and our scale.

At the same time we’re increasing resources and spending on innovation programs. And the cash engine continues to generate strong cash flow with a record $450 million of free cash flow in the second quarter.

When you look at the first half performance, I want to emphasize that we’re delivering earnings growth through our specialties and our acquisitions. This overall exceptional level of performance is a direct result of the talent, focus, and dedication of Eastman employees around the world who find a way to make a difference everyday.

Now, I'll turn it over to Curt to discuss the corporate and segment results..

Thanks Mark, and good morning everyone. I'll start with our second quarter corporate results on Slide 4. Overall sales revenue increased primarily due to revenue from the businesses we acquired in 2014.

This was partially offset by lower selling prices, which largely reflected lower raw material and energy costs, lower fiber, fiber segment sales volume and foreign exchange rates. Our operating earnings increased primarily due to the strong performance in advanced material segment and earnings from acquired businesses.

Operating earnings also improved as we continue to hold onto value in the quarter reflecting a specialty and special position nature of a significant portion of our product portfolio. These were partially offset by the impact of propane hedges, lower volumes in our fiber segment, and an unfavorable shift in foreign exchange rates.

Our operating margin increased by 100 basis points to 19%. Overall earnings per share increased to a record $2.1 per share a very strong quarter as we continue to deliver earnings growth. Moving next to the segment results, and starting with Additives & Functional Products on slide 5.

Revenue increased due to both sales of acquired Taminco businesses, and higher coatings product sales volume attributed to stronger demand in key end markets such as transportation and building and construction.

This was partially offset by lower coatings and other formulated product selling prices, which reflected lower raw material and energy costs. An unfavorable shift in foreign exchange rates was also a headwind.

Operating earnings increased year-over-year primarily due to earnings from acquired businesses, with the Heritage Eastman businesses about flat.

We continue to expect strong full year earnings growth for this segment due to earnings from acquired businesses with earnings in the Heritage Eastman business relatively flat as solid volume growth offsets the effects of currency and propane hedges.

Next is Adhesives & Plasticizers on Slide 6, sales revenue declined 11% primarily due to lower prices reflecting low raw material costs and an unfavorable shift in foreign exchange rates.

We continue to see a favorable shift in product mix due to stronger volume growth of differentiated hydrogenated hydrocarbon resins in the hygiene and packaging markets and non-solid Plasticizer substitution in North America.

In the first half this volume improvement was offset by limited availability of key raw materials in non-hydrogenated resins and declines in Plasticizer sales outside of the United States. Operating earnings increased in the second quarter as improved spreads for Adhesives was partially offset by currency.

For full year 2015 we expect to continue to improve our product mix with strong growth in hydrogenated hydrocarbon resins and non-solid Plasticizers. We expect this will be partially offset by the impact of currency and the propane hedge. Taken together, we continue to expect Adhesives & Plasticizers will deliver strong earnings growth for the year.

Now to Advanced Materials on Slide 7, which is delivering on all elements of their strategy, volume growth, mix improvement and fixed cost leverage. Sales revenue increased due to higher sales volume and mix improvement across the segment and sales of products of the acquired performance film business.

This strong volume growth was partially offset by lower selling prices primarily for copolyesters due to lower raw material and energy cost and unfavorable exchange rates.

One other point on second quarter volumes, during our first quarter call we said destocking in the early part of the first quarter had subsided by March and that we were seeing momentum heading into the second quarter. We believe restocking in the second quarter was a contributor to the strong volume growth.

Earnings for the quarter were record primarily due to high sales volume and improved product mix especially for Eastman Tritan copolyesters and interlayers for Acoustics properties. Operating earnings also benefited from improved margins reflecting our value proposition, the benefits of fixed cost leverage and earnings from acquired businesses.

These items were partially offset by unfavorable shift of foreign exchange rates. On the full year outlook for Advanced Materials, they delivered an outstanding first half of the year.

We think you should look at the first two quarters together with the first quarter somewhat lower than it otherwise would have been due to destocking and the timing for lower cost flow of goods through the inventory. The second quarter was stronger impart due to restocking and the flow through of lower raw material costs.

For the back half of the year, underlying business performance should remain very solid. We expect to continue to have year-over-year volume growth and mix improvement. However, it is typical for volumes to be seasonally slower in the back half of the year and we expect that again this year.

And raw material and energy cost are expected to increase moderately in the back half of the year. With all that said, Advanced Materials is positioned for very strong earnings growth in 2015, which should give them momentum heading into 2016.

Now Fibers on Slide 8, second quarter revenue volume and earnings were about as expected up slightly compared to the first quarter and down year-over-year. We attribute the decline in revenue in earnings year-over-year to inventory destocking as we previously discussed. Despite the decline in volume, operating margins held at 31%.

On our full year outlook, we continue to expect acetate tow volumes will increase in the second half of the year. Based on orders under books and discussions with our customers, we’re expecting tow volumes will be about 20% higher in the second half of the year compared with the first half.

And we will continue to benefit from the action we took earlier this year to reduce cost by shutting out our U.K. acetate tow plan. Taken together, we’re pretty much on track with our previous guidance albeit maybe slightly lower today than we thought back in April. I’ll finish the segment review with specialty fluids and intermediates on Slide 9.

Sales revenue increased due to sales of products of acquired businesses, partially offset by lower selling prices particularly for olefin-based intermediates. Operating earnings decreased due to earnings from the acquired businesses, been more than offset by the impact of propane hedges.

Looking at the full year, we have a number of factors impacting results. We expect to continue to benefit from volume growth and earnings in acquired businesses.

Sales volume for the Heritage Eastman business is expected to be about flat as solid end market demand is offset by increasing internal uses of intermediates for both Taminco businesses and growth in Heritage Eastman business, as well as lower polymer intermediate volumes.

And we continue to project propylene and ethylene prices to remain low for the back half of the year, negatively impacting olefin margins. We also expect the impact of the propane hedges to be significant for this segment for the balance of the year, as the cost of the hedge flows through inventories.

We therefore expect overall earnings in 2015 to be somewhat lower than 2014 earnings. On Slide 10, our transition to an overview of our cash flow and other financial highlights for second quarter. We continue to do an excellent job of generating cash with second quarter operating cash flow of $591 million.

Net earnings were solid and we continue to be disciplined with working capital. It’s probably also important to note here that we had nominal income tax payments and no contributions to our U.S. pension plans in the quarter. These payments will be more heavily weighted to the second half of 2015.

We generated $450 million of free cash flow for the quarter, capital expenditures totaled $141 million and we’re on track for full year capital expenditures of between $700 million and $725 million. As our underlying capital schedules are also weighted to the second half of the year.

And our second quarter dividend was $60 million and our effective tax rate for the second quarter was just over 27%. We continue to expect our full year tax rate will be between 26% and 27% reflecting the continued benefits of our improvement in business operations and also reflecting our expectations that our friends in D.C.

will sign the tax extenders, including the R&D tax credit and accelerated appreciation into law before the end of the year. Given our outstanding first half, we’re on track for excellent financial performance in 2015. And with that, I’ll turn it back over to Mark..

Thanks Curt. Before I get into our outlook statement, I want to reflect on the progress we’ve made in improving our portfolio. On Slide 11, you’ll see four key financial metrics that demonstrate the strength of our performance over the last five years.

Top left, we've had very steady and improving adjusted EBITDA margins over the last five years which demonstrates both the quality and stability of our portfolio.

Top right, our EPS CAGR had 18% over the last five years is also industry leading and demonstrates the value of our diversified portfolio or our acquisitions and our ability to focus on delivering results.

Bottom left, our free cash flow yield from 2014 was also industry leading and demonstrates a quality of our portfolio and the value of our advantage cost positions derived from our large scale integrated assets.

And bottom right, of the last five years we have generated an industry leading 23% compounded total shareholder return creating outperforming value for those shareholders who have owned us. And the first half of this year continues this trend of strong performance in margins, earnings and cash flow. And that leads to our 2015 outlook on Page 12.

We are off to a great start to the year with our first half results, setting a record for the quarter and for the first half of the year. As I have mentioned this performance is a result of excellent growth by our specialty businesses.

In particular our high growth innovative products are driving mix improvement which contributes to our strong margins. And we also expect demand recovery in tow and our Fibers business. We are also seeing attractive accretion for Taminco in the bolt-on acquisitions. And relentless cost management is also contributing to our strong performance.

We expect the momentum from these factors will continue into the second half of the year. We also expect to face challenges. Global economy continues to be slow, raw material and energy costs are an increasing challenge, current movements in oil and olefin prices are good example and the U.S. dollars continue to strengthen.

In this less than ideal business climate, we remain focused on what we can control which is executing our strategy to deliver results. We’ve done a good job in the first half of the year staying focused and I’m very confident that we will maintain our focus in the back half of the year.

When you net the positive momentum and the challenges together, we expect to hold on to the gains of the first half and we expect second half earnings to be similar to last year.

As a result, we are confident that 2015 will represent the sixth consecutive year of solid earnings growth for Eastman and that as a track record we are going to build on going forward. Turning next to capital allocation on Slide 13. This chart shows our expectations for cash generation from 2015 through 2017.

We had a very strong operating cash in the quarter and we expect this will continue given the quality of our businesses. While we are generating significant operating cash flow, we are also making meaningful investments in organic growth initiatives such as Tritan, Crystex and PVB interlayers.

When you subtract the CapEx from the operating cash, the results in very strong free cash flow that we expect will still be above $900 million for 2015. And we expect that our cash generation will increase in the coming years, so that for the period of 2015 to 2017 we will generate greater than $3 billion of free cash flow.

In a short term, our first priority for this cash will be repaying approximately $1 billion of debt, that finance to Taminco acquisition. Through the first half of this year, net debt declined by $280 million.

By the second half of 2016, we should bring our metrics back inline to an investment grade credit rating to the combination of paying down debt and growing EBITDA. We will continue to fully deploy our balance sheet in a disciplined and balanced manner.

Beyond delevering, we have increased our dividend 4x in the last four years and over this time, the dividend has almost doubled from an already attractive level. And is reasonable for investors to expect that dividend will continue to grow as earnings grow.

As you do the math, you will see that we still have significant free cash flow after delevering the dividend payments. While we are very excited about the value we are creating from our acquisitions, we do not expect to complete any large acquisitions through 2017.

We have been very disciplined in our acquisitions with the focus on generating attractive returns on capital, earnings growth and further enhancing the quality of our cash flow. However, I believe the transaction multiples are getting too high, making it more difficult for our acquisitions to meet our financial return expectations.

More importantly, we are very focused on delivering results from our specialty portfolio as a robust set of growth platforms and successfully integrating and driving results from our recent acquisitions. Therefore you should expect cash will be fully deployed in an increasing dividend and share repurchases.

Of course we will remain open to bolt-on acquisitions if they are very attractive and have a strong fit with our existing businesses. Over the last five years, we've been very disciplined and balanced in our capital allocation decisions as we grow the company and generate optimal returns. That balance and discipline will continue going forward.

I'll close on Slide 14, with how we're doing so far on the key things for 2015, These are the same as we shared in January and you heard us emphasize each throughout this presentation today. We are delivering on what we set out for ourselves in 2015.

Our performance is outstanding in our dynamic business environment on a range to key metrics we are delivering great results. Our EBITDA margins demonstrate that we have a robust portfolio of attractive specialty businesses with limited commodity exposure and advantage cost positions.

We are on track for our sixth consecutive year of solid earnings growth and for free cap would exceed $900 million, something that only a very small percentage of S&P 500 companies have been able to do in the last 10 years.

We continue to make progress, driving growth in our specialties, improving product mix with high growth of our innovative high margin products, and our acquisitions are on track for creating value.

And we maintain our commitment to fully deploy our balance sheet in disciplined and balanced manner, and this discipline the next year means, returning a very strong free cash flow to shareholders. We've got a great strategy, a great portfolio businesses and simply an outstanding group of employees that continue to execute.

I’m very confident in our ability to continue creating value for all of our stakeholders. Thank you for joining us this morning. I look forward to your questions. And with that, I will turn it over to Greg..

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

[Operator Instructions] And we’ll go to David Begleiter with Deutsche Bank..

First on Fibers, your volumes were down little bit more than they were down in Q1, while your competitors showed a little bit slower volume decline.

Why didn't your volume growth decline slow in Q2 versus Q1 at least year-over-year?.

On the Fibers business, volumes played out exactly as we expected from the beginning of the year. So with our customers who have a slightly different mix since our competitors, so you really shouldn’t compare us to them.

We expected this kind of volume through the second quarter and we are very encouraged to see the volume come back by about 20% into the second half of the year versus the first half of the year. So, I think that what we see is exactly on track to what we expected on that recovery and the destocking seems to be abating..

Very good.

And just on Advanced Materials phenomenal quarter, any sense to how much you may have over earned in Q2 versus on normalized run rate given the restock and the lower PX cost?.

First of all Advanced Materials just had a stellar first half of the year and we're incredibly proud of all the innovation effort of employees in that group delivering on a series of investments we've been making for years.

And as we said, in the first half of the year we saw volume be a bit slower than we would have liked in the first quarter and we knew that was destocking as we are debating a lot of prices with our customers, and once we got that result we saw the volume come back. So you do have a bit of destocking, restocking event in that second quarter.

But I really do think as Curt mentioned in the prepared remarks, the first half of the year when you combine it together, is a good way to look at the performance of this business which was just outstanding and it's also important to keep in mind when you look at the volume growth of this business, Curt mentioned in the first quarter call that, we had shifted acetate from Advanced Materials to additives and functional products.

So the volume growth is actually even a bit stronger in the second quarter than in the first half then you see by about two percentage points in Advanced Materials and as you look at AFT about two percentage points less because that’s a fairly low margin product, so that’s really affecting volume more than it is profit.

So when you look at all that it comes together as a great first half of the year.

That product mix and strength of volume growth on a year-over-year basis, we see continuing to the second half of the year but it is very important to keep in mind what Curt said, which is the seasonal business so demand will seasonally come off in the second half of the year versus the first.

So if you look at history over this business and how it has performed first half, second half, I think that's a reasonable expectation here..

Thank you very much..

And our next question comes from Duffy Fischer with Barclays..

Good morning. Another quick question on tow.

Very good margins in the first half given the volume the decline, can you roughly quantify what the overhead absorption was on kind of a down 20% volume number?.

Well, we look at all the moving parts Duffy, so we don't really break out that individual piece, but I would keep in mind that even if there is some fixed costs absorption this business had, we are able to compensate for some of that with the actions we took with our shutdown of our U.K. working team facility.

So as a whole, we've always said this business is doing well and we expect it to continue to have operating margins growing 30%..

Fair enough.

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

For the U.S. to find benefit plans, our expectations will contribute about $100 million, and that will all be in the second half of this year..

Great. Thank you, guys..

And our next question comes from P.J. Juvekar with Citi..

The Ag commentary has been generally quite weak from all the Ag chemical producers, which are euro Taminco's customers.

So, can you just discuss Taminco's Ag outlook?.

Sure, Taminco, had a very good second quarter. We had solid volume growth both in the functional means that go into the row crops, as well as a nice performance in our crop protection business, which goes into the more perishable, fruits, vegetables, and flowers.

As we look at the rest of the year, we expect volume to remain solid in the crop protection business. On the functional means part of that business, we expect the volumes to come off a bit, consistent with industry.

It's very important to keep in mind though that the row crop business, corn and soybean that everyone else is talking about in their earnings release, is only 10% of the revenue of Taminco. So it's not a significant driver of the overall earnings portfolio and its actually done quite well in the first half of the year.

So it's not that significant for us. The great thing about Taminco is like Eastman. We have a very diversified portfolio of end markets from the egg, the food, feed egg, exposure as well as the water treatment, personal care, and other industries. And so, you're not really tied to any one market too much.

And I think that's what's robust about their portfolio, and I think that's robust about Eastman's portfolio, where we don't have any end market more than 15% of our total revenue. And in this sort of volatile economic times that gives a lot of diversity and strength to be consistent in our earnings..

Great. Thank you for that. And then can you discuss the outlook for some of your propylene derivatives like Oxo's. Given your hedges that are in place, how do you see the derivative pricing playing out in the second half? Thank you..

Sure. I think it's always a spectrum of specialties to the commodities, so the specialty side of our olefin derivatives, whether it's [axonal] [ph] and ketones that we sell in Additives & Functional Products or few of the other products that we have. We're going to maintain good price discipline and hold on to a lot of value relative to raws.

Special positions will also have some durability in that, and the commodity is obviously going to follow prices down.

So in general, I think we've done a great job of holding onto values especially in AFP to some of that value to offset the hedge costs and the currency headwinds that that segment has, same thing to some degree in the Plasticizers business. And then obviously SFI's follow propylene down a little bit more quickly given the nature of their products.

They've done a great job actually in holding on to value in the first half of the year, but as we look at the second half of the year, those prices are going to catch up to the propylene and ethylene prices that they are associated with..

We'll move onto our next question please..

And our next question comes from Vincent Andrews with Morgan Stanley..

Thanks, and good morning, everyone. Question here you referenced good coatings volume, and we've seen so far that it's sort of a weak environment for the downstream coatings customers.

So, what do you attribute the strength in your volume to, and was that a restocking or how should we think about it?.

Good morning, Vincent. What we saw is a good sequential improvement from first quarter to second quarter as similar to Advanced Materials, you had some of the sort of destocking events play themselves out in the first quarter.

About your volume growth on a year-over-year basis, when you look at coatings, is very consistent with our downstream customers. So you're seeing 3% to 4% kind of volume growth. Remember that adjustment I just gave you around acetate, we got to take about 2% out of the AFP segment. And then tires was obviously a little bit less than that.

So good solid volume growth but I wouldn't call it strong, this whole coatings season hasn't really played out as anyone hoped..

Okay.

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

Sure, a trend has been going on since 2010 that can expect the Shale gas and the driving of cracker feed slate and refinery feed slate to lighter and lighter feed stocks. Because what we basically do is take C5 and C9 resin oil that is a byproduct of those crackers, and upgrade them into resins.

So as these feed stocks slates have been moving lighter, you have limited availability of those raw materials to turn into tackifying resins.

And we saw demand continue to be strong and grow from packaging through hygiene and some other applications and then you continue to have limited raw material availability and that created the constraint as relatively tight that's given us some pricing power.

We do expect some of that to sort of dissipate a little bit in the non-hydrogen resins refining more raw material availability as we're able to pursue more growth, of course that will also reduce some of the tightness in the marketplace..

-:.

Okay. Thanks very much..

And our next question comes from Aleksey Yefremov with Nomura Securities..

Good morning, thank you.

In your Fibers business, is it fair to say that that margin should improve in the second half because of higher volumes?.

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

So I think that the margins should stay pretty similar..

Thank you.

Now in Advanced Materials, just a bit a longer-term question, where are you in adoption cycle for both new interlayers product and for Tritan how do you expect those volumes to keep growing in 2016?.

We expect very strong growth in those products going into 2016, as well as many other products in Advanced Materials.

So on Tritan, this is our BPA-free plastic that's an alternative polycarbonate for all types of houseware applications and medical applications and there is a very large addressable market in front of us where we have plenty of room to grow and that's why we have done the debottleneck on that asset as well as have another capacity expansion planned.

Interlayers is another great story, we've seen tremendous double-digit growth in the acoustic interlayers which is a very high value product that we sell that requires a cabin in the car or allows you to lightweight the glass in the car to improve the fuel efficiency.

And not only are we seeing good adoption from luxury down into mid-level cars, we're also gaining more square meters per car because people are starting to use acoustics on the windshields and the sunroof, I mean beyond the windshields into the side lamps and into the sunroofs.

So, real estate is increasing, the number of model is increasing, it's just a great story. I would also highlight other things going on in Advanced Materials.

So we have some new display products are going to mobile devices showing tremendous growth and very high margins and performance homes business had a good first half of the year and I expect it to have a very good year, next year as well..

Thank you..

Our next question comes from Frank Mitsch with Wells Fargo..

Good morning guys and congratulations on a record quarter. I was planning on burning up my question to Curt, asking who his friends were in DC, but I'll save that for another time. I want to talk about cash flows over the next couple of years.

You are projecting over $900 million free cash flow this year and according to the chart it looks similar next year, let's call it $2 billion over the next two years.

You're going to spend a billion on debt paydown, you're going to spend $400 million on dividend, you’re talking about maybe $100 million on pension, and based on your commentary regarding M&A and the non-likelihood of that occurring and certainly nothing of a larger order of magnitude, that essentially leaves $0.5 billion on share buybacks for the next two years, am I interpreting that correctly?.

Frank, this is Curt. So first of all on the math, you see that trajectory that has both improved operating earnings and as we look at our Investor Day, back if you recall we also expected our capital expenditures to moderate into 2017 over 2015 and 2016.

As it relates to your math, of what free cash flow remains after we finish deleveraging and paying our dividends, I would say, yes, there is a good healthy nearly $1 billion available in general terms but free cash flow to deploy, and as we've said before, we expect our balance sheet to be fully deployed during this time period..

All right, terrific. Thank you so much. And I just want to get an update in terms of the 2015 headwinds, I believe you said in a not too distant past that you thought the propane hedges were $0.40 to $0.60 of headwinds, FX was $0.25 of headwind and fiber destock was $0.20.

Do you have any update on those three metrics?.

Well let me update you on the first two and fibers I think is generally consistent with our expectation maybe a little worse, but generally speaking pretty close to our expectation. If you think about the impact of producing versus purchasing olefins, we've talked about that last about being roughly around $0.60 a share.

The short answer to that question is, there has not been a material change to that, but I can't resist always remind people what is considered into that $0.60 a share. So recall, we purchase - we produced about 55% of the propylene we need, we purchased the rest and we consume half of the ethylene we produced et cetera. So you know those aspects.

On a cash flow itself, the cash flow hedges were about two-third hedge of this year and just over 50% next year. Cracking spreads are expected to compress in the second half of the year given that continued volatility in olefins that Mark talked about.

In addition just don't forget the hedges that are going to weighted more second half of the year as it flows to the inventory. So we are trying to mitigate this through various operating activities, as well as the advanced feedstock mix where we are now 70% propane.

And then finally again I would think about the concept of cracking spreads is theoretical for us because the vast majority of the olefins are kind of sold through derivative.

So, if I think about the impact, the hedge impact can be a little greater in the third quarter than the fourth quarter through that flow through, but at the same talk in the guides they are still going to try all they can to hold on to pricing. So we’ll see how this plays out.

We continue to see volatility in olefins, but we’ll just have to try to say as nimble as possible as they try to keep that impact to roughly that $0.60 a share. On currency, last we talked about that.

We talked predominantly just specifically the Euro and we said that was going to be roughly $0.30 a share impact that remains the same albeit we are facing a little bit more currency headwinds just from some of the other basket of currencies we deal with. And so for example just in second quarter our currency headwind is $30 million alone.

So the $0.30 per share impact for the year over euro is about the same. We are facing a little bit more headwind just because of the other currencies that have been the value against the dollar..

Specifically the Yen is the one that’s driving to other challenges..

Thank you so much..

Our next question comes from Nils Wallin with CLSA..

Good morning and thanks for taking my question.

On Advanced Materials very impressive incremental margin, would you help us understand all the different elements that went into that, was there a mix obviously your profitability had a great result compared to the revenue growth?.

Sure. So this story is consistent with what we have been talking about this business since 2012. There are three elements. There is volume growth, there is mix, and there is fixed cost leverage. We have made a lot of investments in this business both organically, as well as several of the acquisition sitting in this business.

And as a result, you have a great EBITDA margin in this business when you look pass the DA, it's very high variable margin.

So when you deliver volume and then significantly improve mix because the products are growing at the double digit rate within this segment like Tritan, like acoustic interlayers, parts of the performance films business in North America and China, you have tremendous variable margin that drops the bottom line because of the fixed cost leverage.

So it’s really a win in all three funds showing what this business can do..

Got it.

And then on Fibers, was there any sort of transactional benefits from currency in that business for the quarter?.

Fibers have some exposure to the currency, but its modest relative to the overall profitability of that business..

Got it. Thanks very much..

Our next question comes from James Sheehan with SunTrust..

Thank you.

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

So the tire demand situation is pretty - in our view is probably pretty consistent with global tire companies. North American U.S. tire demand has been quite solid and good growth for us, it’s been offset by challenges in China. There is clearly two things going on in China.

One is their own economy has slowed down that’s reduced the amount of tires, and you have to remember Crystex is highly leveraged to commercial tires. So that is a challenge in China and plus the Chinese are facing significant challenges in exporting products out of China to the U.S.

due to tariffs as well as currency is not helping them when they are trying to go to Europe. So that market is very challenged on that front. That’s been a challenge all year along and so we already embedded in our record earnings in the first half of the year, as well as our outlook. I think that’s going to continue this way.

I think the destocking in China that’s going on should play itself out this year..

And I am not sure if I caught this correct.

But could you just quantify what your spread benefit was in the second quarter in SFI?.

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

It's important to keep in mind when we talk about that $0.60 Curt said something, which is, it is a theoretical spread. It's not actual earnings.

Right, so that is - if we are selling propylene and ethylene into the marketplace and while we do sell some ethylene in marketplace, we don’t sell any propylene or half of the ethylene, we turn that into divertive products, but have their own pricing dynamics and in many cases those prices are not falling as fast as propylene and ethylene.

So the headwind for us is being offset by great work by our frontline teams out there holding on to value in the marketplace..

All right. Thanks a lot..

Our next question comes from John Roberts with UBS..

Good morning.

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

John, the disputes continue. The Westlake, the Texas railroad commission has had a room, but that is being contested by Westlake. Nothing really more to update you there other than what I liked is our legal team and the efforts we have because every time we have faced these challenges our team has own.

But it's just going to take time to work its course..

Okay. And then in the Advanced Materials, and the Adhesives & Plasticizers where you get a lot lower Para xylene cost I imagine, and also in plasticizers probably a lot of aromatics here as well.

Can you hold on to that for an intermediate period of time, will it be multiple quarters before you might have to either respect some products where customers might want lower costs or pass that through?.

Sure John. Advanced Materials the PX has been a nice tailwind, but the vast majority of the earnings were generating Advanced Materials has been through volume and mix.

We certainly are benefiting from a nice Para xylene tailwind on that segment, that's giving us some of the earnings there, as prices are little bit sticky and how they follow PX down but a lot of that will play out through the year. And so I think that there is some of that could be headwind into '16.

But as I look at that segment going into next year, the volume and mix momentum is superior to some of that spread expansion. So we will be able to carry earnings growth into next year. Adhesives & Plasticizers we certainly have seen some benefits also from PX as it gets turned into DMT for making the plasticizers.

But the margin compression of that industry due to aging competition has been pushing prices down pretty quickly with raw materials. So there is no margin expansion in the Adhesives & Plasticizers segment due to plasticizers.

That is just the volume mix upgrade story of selling more North American plasticizers, non-phthalate plasticizers, which is more attractive based on our advantage cost position then selling in Europe and U.S. So that's not really a contributing factor to the margin improvement on A&P..

Thank you..

Our next question comes from Bob Koort with Goldman Sachs..

Thanks, good morning. You guys have mentioned some success in raw materials following quicker than product prices.

I'm just wondering is the flow through of your hedges and lower market prices for some of these raw relative to your product price, do you think that spreads overall for the company improves, declines, what you see happening sequentially into the second half?.

In the second half of the year I think that – when you look at the olefin spread, like I said earlier on SFI side I think the margins are going to compress with propylene pricing coming off and obviously the hedge is fixed. So you can see some compression there and the majority of the propylene hedge goes into SFI.

You’ll see some of that also flow into AFP and to a lesser extent to A&P. So that will certainly be a factor going into the second half of the year. There is a lot of other great things going on in volume and mix and holding onto prices some especially that helps offset some of the headwind, but it’s certainly a factor..

Would you say that there is something, I’m guessing you would, but unique to your own portfolio I mean it’s pretty remarkable if you got absorbed that hedge that you’ve been able to see some margin benefit I guess maybe in some of the other segments.

But I would have expected maybe the market competitors who don't have that hedge issue to be a little bit more aggressive.

So there’s something about the end markets, have been a little bit more disciplined around pricing or is it just your own product mix is unique and you do have a few problem parts where that hedge is really dingy or how should we think about that?.

First of all I think we do have a fairly unique product mix in some places especially our specialties that we make - that are olefin derived are very unique to us where we have very strong market leadership and market positions. And so we're in a good position to fight and hold onto value.

I think we’ve got great teams that have spend a lot of time focusing on how to create value and find value in the marketplace. And it’s also important to keep in mind that, the way we're creating value right now is a little bit different than the average olefin player.

So we're very North American focused in our olefin’s position and so we’re not benefiting at all from the outage driven tightness in Europe that's driving a lot of earnings up. So that sort of not in our numbers and therefore not a headwind when those outages get removed.

And then in North America as you’ve noted, we certainly have spent a lot of time trying to get into more attractive end markets and segments with our olefin’s because we can be given our smaller size in olefin’s be very more - make sure that I think that’s been quite helpful.

But even there, we're not really expanding margins this year, because of the hedges you've noted, which I would certainly prefer to have the earnings and cash without the hedges this year. But it does also help us out when we go into 2016 where we're not going to have as much of - that much of a headwind as we go into 2016, because of the hedge..

Thanks very much..

Our next question comes from Mike Sison with KeyBanc..

Good morning guys, nice quarter. In terms of your outlook for the second half, you did a nice job growing your earnings in the first half, I think you mentioned flattish year-over-year growth in the second half.

So, any particular reason that the second half is going to be more difficult to grow on the second half and maybe point out some areas of concern and maybe some areas of potential upside?.

Sure. On the upside I think we continue to see good year-over-year volume and mix improvement over the second half of last year in the specialty businesses. And we expect that to continue to drive growth. We expect the acquisitions of course to continue to provide attractive earnings accretion and that we're happy about the recovery in volumes in tow.

But as we clearly guided, those positive momentums do get eroded as these propylene prices and ethylene prices create some challenge for us relative to our hedge, as well as currency being a challenge as we go into the second half of the year.

So we netted altogether and you see a little bit of slowdown in the economy effecting volume growth rates been a comparative what we would have – what we experienced in the first half of the year. But I think and to be clear on the economy, that's really a global economy point I want to make. From our point of view China is not that big of a deal.

China is only about 10% of our revenue in total for the company including fibers and it’s important when you're thinking about Eastman that’s not a real driver for how we’re going to move forward. We’re very focused on only specialties in China, we don't sell any commodities there. We’re very focused on consumer durables not infrastructure.

And in a way, two of our biggest products going into China which is fibers and additives into tires which are pretty high margin. We’ve already basically embedded the China economic slowdown in our current earnings for this year.

And so that part isn't really a big driving factor for us, but the overall economy is obviously not growing nearly as fast as we would have liked..

And Mark if I could add, just if I think about some of the volatility we faced, you've seen some volatility just in recent in olefin prices specifically propane and propylene so we're going to have to see how those play out.

The hedge does offset some of that impact, but the hedge in the second half of the year will be about $30 million higher impact than it was in the first half of the year so that's weighing in our results as well..

Okay, great thanks. And then a quick question in Additives & Functional Products. I think you mentioned Heritage Eastman would kind of be flat year-over-year in 2015 versus 2014. If you were able to sort of look at the heritage business on a constant currency basis and less the propane hedges.

What type of growth do you think the inherent businesses are generating?.

Very solid earnings growth, you'd see the number to be quite a bit higher, I’m not going to talk about it from a AFP point of view.

But if you actually look at on a corporate point of view and you exclude both the benefits of a currency hedges and headwinds of the propane hedges, we’d be $0.50 a share higher as a company this year and that really gives you a great demonstration of the quality of our specialty portfolio and the quality of these businesses, and our market positions, we're very niche focused which is a huge advantage in times like this in how we maintain attractive market structures.

And so the business is doing great, before you get to financial hedging and AFP would certainly be better as part of that..

Great. Thank you..

Our next question comes from Laurence Alexander with Jefferies Financial..

Good morning.

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

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

And as I think about 2016, I think that those specialty businesses position us quite well to deliver earnings growth in 2016 over 2015.

So, we'll have a great momentum from those specialty businesses, we’ll continue to have good accretion from the cost synergies flowing in through the acquisitions, and all that gives us some great momentum and a lot of the headwinds that we have this year will neutralize as you go into 2016 and then I think that position us really well to sort of keep earnings going and offset.

I think all chemical companies are benefiting to some degree from prices being sticky to rise and have some spud expansion in earnings this year. I think ours is relatively limited for some of the points I’ve already made in this call.

And so when you net it all together, I think that momentum is what gives us confidence so we can keep growing earnings for a seventh consecutive year into 2016..

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

No, I think our balance sheet leverage we’re guided by our investment grade credit rating and that would continue to be our guiding as we make strategic choices.

What I have to say on cap allocation as Mark talked about, if we’re facing this choppy market and that extra free cash flow that we have towards the back end of the three or time period, is in absence of attractive M&A we’re going to be repurchasing shares and returning cash to shareholders..

Okay. Thank you..

Our next question comes from Jeff Zekauskas with JPMorgan..

Hi, good morning.

There was $145 million cash inflow from other and from first statement what was that?.

Jeff those were couple, there's various miscellaneous items in that line item. One example for example is just our current tax accounts.

Since our payments were nominal, we're basically building a current tax payable in the first half of the year particularly in the second quarter and then not to get elevated in the second half of year most tax payments getting there. Also impacting that is just the timing of crude salaries and the settlement of hedges.

So I think you’ll see that line item that kind of helped us in the second quarter will moderate in reverse to second half of the year..

Okay. And in the quarter, the prices at for the company as a whole was negative six, and I think for the six – was negative seven, and I think for the six months was negative six.

How much did your raw materials fall, like if you had to do a comparable percentage change?.

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

I’m sorry how much in the first?.

$180 million in the first quarter..

Okay, great. Thank you so much..

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

Okay. Thanks, again everyone, for joining us this morning. There will be a Web replay and a replay in downloadable MP3 format available on our website later this morning. Hope you have a great day..

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