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

David I. Begleiter - Deutsche Bank Securities, Inc. Aleksey Yefremov - Nomura Securities International, Inc. John E. Roberts - UBS Securities LLC Frank J. Mitsch - Wells Fargo Securities LLC Arun S. Viswanathan - RBC Capital Markets LLC Michael J. Sison - KeyBanc Capital Markets, Inc. Jeffrey J.

Zekauskas - JPMorgan Securities LLC Robert Andrew Koort - Goldman Sachs & Co. Laurence Alexander - Jefferies LLC Nils-Bertil Wallin - CLSA Americas LLC Eric B. Petrie - Citigroup Global Markets, Inc. (Broker) Vincent Stephen Andrews - Morgan Stanley & Co. LLC Duffy Fischer - Barclays Capital, Inc..

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

Okay. Thank you, Nikki, 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-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 third quarter 2015 financial results news release, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2015 and the Form 10-Q to be filed for third quarter 2015.

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

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

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

Advanced Materials, Adhesives & Plasticizers, and Additives & Functional Products lead our earnings growth this quarter and for the year. We are seeing some great innovation driven growth across the portfolio.

For example, in window interlayers within Advanced Materials we are delivering very strong volume growth and we expect to set a record in overall volume with significant mix improvement. As our premium acoustic and heads-up display products, volumes grow more than 20% year-over-year.

With acoustics, we continue to see strong macro trends to reduce noise in the cabin and overall weight leading to greater penetration to a wide range of auto models. In Advanced Materials, our recently launched displays product use for polarizer film in high-end mobile devices is delivering very strong earnings growth this year.

This great innovation enables dramatically improved optical properties when viewing mobile devices at an angle and contributes to thinner devices by enabling more than a 50% reduction in film thickness.

In Additives & Functional Products, we are realizing a compelling synergy as Solutia's market connect in tires has enabled double-digit growth in our tackifying resins as a performance additive for traction eco-efficient tires.

We are becoming the preferred innovative partner in the industry given Eastman has the most diverse set of technology platforms and deep application development capability relative to its competitors. What I like about all of these examples is that we're delivering earnings growth through volume and mix upgrade in a tough environment.

In addition, our acquisitions continue to deliver in this challenging environment. We're on track for $0.50 accretion. Taminco results remained solid due to the diversity of its portfolio and strong market positions.

We just completed our SAP cutover in nine months with no customer disruptions, which is a great accomplishment and lets us ramp up our efforts on some of the cost and operational synergies.

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

We are also doing outstanding job on the cost management, keeping cost relatively flat with strong productivity gains. And within this, we continue to shift our resource mix towards our growth programs.

Our strong performance was able to offset some increasing headwinds in declining olefin prices and a strengthening dollar, particularly in some emerging markets. And we continue to deliver strong free cash flow, $208 million in the third quarter and over $600 million through nine months.

And we continue to expect free cash flow of $900 million for the year. None of this would be possible without the strong commitment of the talented Eastman employees throughout the world. Together, all this puts us on track for a sixth consecutive year of earnings growth. Now I'll turn over to Curt to talk about corporate and segment results..

Volume and mix improvement especially in Advanced Materials and our value-based pricing relative to raw materials reflecting the specialty and special position nature of a significant portion of our product portfolio. These were partially offset by propane hedges and the unfavorable shift in foreign currency exchange rates.

Our operating margin increased by 100 basis points to almost 19%. Earnings per share was $1.84 for the quarter, primarily reflecting higher operating earnings.

Year-over-year, earnings per share declined slightly as higher operating earnings was offset by higher interest expense and also other charges of $13 million, primarily reflecting volatile emerging market currencies negatively impacting our foreign denominated balance sheet transactions in the quarter.

On a year-over-year basis, these other charges were about a $0.09 headwind for the quarter and we do not expect this kind of magnitude in the fourth quarter. Overall, a strong quarter with particularly solid results in our specialty businesses. Moving next to the segment results and starting with Additives & Functional Products on slide five.

Revenue increased due to the sales of acquired Taminco businesses. This was partially offset by lower coatings and other formulated products selling prices which reflected lower raw material and energy costs. An unfavorable shift in foreign exchange rates was also a headwind.

Operating earnings increased year-over-year primarily due to earnings from the acquired businesses offset by lower propane hedges. We continue to expect strong full year earnings growth for this segment due to earnings from acquired businesses.

We expect earnings in the heritage Eastman businesses will be similar to the previous year as solid volume growth continues to offset the effects of propane hedges and currency. Next is Adhesives & Plasticizers on slide nine. I'm sorry, slide six.

Sales revenue declined 12%, primarily due to lower selling prices, reflecting low raw material and energy costs and an unfavorable shift in foreign currency exchange rates. We continue to see a favorable shift in product mix due to strong volume growth, particularly for our non-phthalate plasticizers due to substitution in North America.

This was offset by a decrease in non-hydrogenated resin volume due to operational constraints. Operating earnings increased in the third quarter as improved spread for both Adhesives & Plasticizers was partially offset by currency and propane hedges.

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

Now to Advanced Materials on slide seven, which continues to deliver on the elements on the strategy, volume growth, mix improvement and fixed cost leverage. Sales revenue increased primarily due to sales of products of the acquired performance films business. Higher sales volumes, as well as mix improvement especially for inner layers.

This strong volume growth was partially offset by currency and lower selling prices primary for copolyesters due to lower raw material and energy costs.

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

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

With all that said, Advanced Materials is positioned for very strong earnings growth in 2015, which should give them momentum heading into 2016. Now to Fibers on slide 8. Revenue declined 8% mainly due t o lower volume, primarily driven by acetyl chemical volume.

Lower acetyl chemical volume was due to decreased sales to the acetate flake joint venture in Kingsport. While acetyl volume was down slightly year-over-year, it was up about 20% sequentially and is on track to be about 20% higher in the second half of 2015 compared to the first half.

This total increase reflects both slowing inventory destocking and customer buying patterns. Operating earnings were about as expected down year-over-year due to the lower volume, but up sequentially as total volume increased to slightly below the previous year's level. Operating margin was at 32%.

On our full year outlook, we continue to expect second half earnings will be better than the first half, with increased total volumes, but full year earnings will be somewhat below what we expected in July primarily due to the lower acetyl chemical volumes. I'll finish the segment review with Specialty Fluids & Intermediates on slide nine.

Sales revenue decreased as lower selling prices particularly for olefin-based intermediates and lower chemical and other intermediates sales volumes more than offset sales of products of the acquired business.

Operating earnings decreased primarily due to the propane hedges and lower volumes in chemical and other intermediates more than offsetting earnings from the acquired business. Looking at the full year, we now expect a number of factors impacting results. We expect to continue from the benefit from volume growth and earnings from acquired businesses.

Sales for the heritage Eastman businesses is expected to be above flat as solid end market demand is offset by increasing internal use of intermediates for both the Taminco business and the growth in heritage Eastman businesses as well as lower polymer intermediates volumes.

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

From a corporate perspective, we now expect the year-over-year headwind of producing versus purchasing olefins including the propane hedge to increase to about $0.80 per share for the full year versus our previous expectation of $0.60.

The increase in the negative impact will be predominantly reflected in Specialty Fluids & Intermediates in the fourth quarter. We will offset some of this headwind with pricing actions for our derivatives but not all of it. As a result, we expect Specialty Fluids & Intermediates earnings in 2015 will be lower than 2014 earnings.

On slide 10, I'll transition to an overview of our cash and other financial highlights for the quarter. We continue to do an excellent job of generating cash with our third quarter operating cash flow of $368 million. Net earnings were solid and we continue to be disciplined with working capital. We contributed $90 million to our U.S.

pension plans in the quarter and expect to contribute an additional $10 million in the fourth quarter. Capital expenditures totaled $160 million and we anticipate full year capital expenditures to be around $675 million as our underlying capital schedules are weighted to the second half of the year.

We generated $208 million of free cash flow for the quarter, and we continue to expect our full year 2015 free cash flow will be around $900 million. Our third quarter dividend was $60 million, reflecting a yield of 2%, and our effective tax rate for the third quarter was just over 27%.

We continue to expect our full year tax rate will be between 26% and 27%, reflecting the continued benefits of improvement in our business operations, as well as reflecting our expectation that Congress will sign the tax extenders, including the R&D tax credit, into law before the end of the year.

If these tax extenders are not passed, this would be about a $0.10 per share headwind to our fourth quarter earnings per share expectations. Given our strong first nine months, we are on track for an excellent financial performance in 2015. And so with that, I'll turn it back over to Mark..

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

Portfolio transformation has been a key element to delivering strong earnings growth for quite some time, on both organic growth as well as through aggressive actions to change our portfolio.

We divested roughly $3.5 billion of revenue with EBITDA margins below 10%, we've acquired over $4 billion of EBITDA margins greater than 25%, significantly upgrading the quality of our portfolio and our end market exposure. Organically, we've also grown our volume and most importantly, upgraded our mix.

This is our both within our heritage businesses, and within the acquired businesses through great efforts in innovation programs and commercial excellence, to focus our growth in the most attractive products, markets and geographies. As a result of these efforts, you can see that a very different story has emerged from five years ago.

We've strengthened the company; we're also growing the overall earnings by 70%. So when you look at 2010, you can see corporate earnings were about $1 billion and Fibers and SFI was around 50%, just over 50% of where our earnings came from. And a significant story has evolved and changed as you look at the trailing 12 months of our earnings.

Not only is it 70% higher, it is significantly higher quality. So the AAA segments, Advanced Materials, Additives & Functional Products and Adhesives & Plasticizers, grew 115%, dramatically increasing growth and quality of earnings for shareholders and presenting a much more sustainable mix in how we're going to deliver earnings growth.

And obviously now, Fibers and SFI being a smaller percentage of that total.

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

So that portfolio, I think, is really demonstrating and creating a lot of value for us this year and showing how we can continue creating value for shareholders going forward. And I think that's a good transition to our full year 2015 outlook on slide 12. We've had a strong first nine months of the year with record EPS and cash flow.

Our specialty businesses are leading the way with growth in innovative product lines resulting in improved mix and overall doing a great job of holding on to value. We've also done a great job remaining disciplined in cost management.

And as I mentioned previously, our specialty acquisitions are delivering for us this year and we expect they will contribute meaningfully to our growth going forward. Of course, challenges remain and in some places they are intensifying.

Most notably, olefin prices, which started to move against us in the third quarter, and we expect this challenge will continue into the fourth quarter. We expect ethylene prices will recover in the early part of next year given the high industry cracker shutdown schedule planned for the spring.

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

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

I'll close on slide 13 with how we are doing so far in the key themes for 2015. These are the same that we shared with you in January, and we've emphasized each throughout the presentation today. We'll continue to make great progress in transformation towards the specialty portfolio.

We are driving growth in our specialty businesses based on our world-class technology platforms that enable us to have strong leadership positions in an attractive set of niche markets. We're accelerating earnings growth by improving our product mix with high growth of innovative high-margin products.

We're achieving attractive earnings accretion from high-quality specialty acquisitions and creating value by adding attractive end markets and products to our portfolio. And we're generating industry-leading free cash flow based on our attractive market positions and advantaged cost positions.

We remain committed to fully deploying our strong balance sheet in a disciplined and balanced manner. Our first priority for capital allocation is completing our repayment of approximately $1 billion of debt associated with the Taminco acquisition and we are on track.

Investors should continue to expect an increasing dividend which we have done for the last four years, providing a greater than S&P 500 average yield. And after delevering, we will repurchase shares in the back half of next year.

Of course, we remain open to bolt-on acquisitions if they are very attractive and have a strong fit with our existing businesses. Our performance through the nine months is outstanding despite the challenging business environment.

We are confident in our six consecutive years of earnings growth and on track for $900 million of free cash flow providing roughly an 8% yield. We've got a great strategy, a great portfolio of businesses and simply outstanding group of employees who continue to execute. I'm very confident in our ability to create value for all of our stakeholders.

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

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

And our first question will come from David Begleiter with Deutsche Bank..

Thank you. Good morning.

Mark, I know it's early, but looking to 2016, can you grow earnings next year? And if so, what are the key drivers, headwinds as well as tailwinds, do you think?.

Sure, Dave. I would have never guessed that question coming from you. So, happy to talk about it. First, and to keep it simple, we're confident we can grow earnings in 2016 relative to 2015. We have several tailwinds that I think are important.

The most important by far is that continued growth in our specialty segments, the AAA segments, I think, are all well-positioned to deliver earnings growth. And the key drivers of it will be the volume and mix that they have, continuing to leverage the acquisitions that they've done as well to deliver that growth.

The second will be a net tailwind from the hedges coming off, so you've got the propane hedge coming off. you also have some of the currency hedge coming off, the net that provides that provides a tailwind.

I think it's reasonable to expect that olefin prices next year relative to this year are likely to be higher especially given how low they've gone in the back half of this year with sort of supply gluts in ethylene and propylene. So that will certainly be helpful.

Of course, there are the synergies that we have around the acquisitions, the cost synergies and even some commercial synergies. And I would note that we're also planning on aggressively managing our costs across the entire company.

We've done a great job in productivity this year and we're going to ramp up our efforts for more aggressive actions next year to improve our cost position in the marketplace. And lastly, there's the strength of our free cash flow.

So we'll create value for shareholders in paying down our debt and then getting access to that free cash with repurchased shares. So you add all those together and it's a nice set of tailwinds. There is one headwind I think that applies to every chemical company that has raw materials derived from oil.

So we've been benefiting this year as raw material prices have dropped pretty rapidly, and we've held on the prices in a number of our businesses expanding our margins. And of course, as you go through the year, you give some of that back with price and so that's great this year. Obviously, if raws are flat next year that becomes a bit of a headwind.

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

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

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

No. Very helpful. Thank you.

And just on acetate tow destocking, Mark, where are we in that process?.

So we're quite encouraged and happy to see demand come back exactly as we expected from the beginning of the year in tow, 20% improvement sequentially into the third quarter was great. And we expect volumes to continue to be solid into the fourth quarter. So I think that when you look outside of China, destocking, I think, has run its course.

And when you look inside China, I think that you've got some risk of destocking continuing into next year. They certainly have made progress in destocking from what we can see in the wholesale inventories. But it's a little hard to know if they've gone all the way to achieving their objective.

But I think that overall, what I would say is that expects sort of flat demand for us next year. So outside China, you have destocking ending, but the normal macro declines of cigarette consumption, netting against each other.

Inside of China, you've got some expected growth in cigarette production as the Chinese National Tobacco Company continues to drive to meet its tax revenue growth targets.

You've got some filter lengthening that's going on still, and you've got this question around destocking and chance of it being some, but maybe not as much as this year, offset by the Daiso joint venture which started up in the middle of next year, obviously continuing into next year.

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

Thank you very much..

And the next question will come from Aleksey Yefremov with Nomura..

Good morning. Thank you. Just a follow-up on Fibers, Mark.

Do you think you can earnings in Fibers if demand is flat next year?.

We've been saying this all year. I would expect earnings from Fibers to be stable, but I'm not going to call it as growth or down. I think it's going to be relatively stable. There's a lot of moving parts. We're in the beginning of our contract discussions with all of our customers on volume and price. And so we'll comment more about that next year.

But I think it's stable which, back to the 2016 earnings question, it's stable. It's not a headwind against the growth in the AAA segments..

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

Yeah. As you look at the AAA segment, I think each segment has a different story. And it's important to start by thinking about it from a stream point of view. So cellulosics, which drives a lot of earnings obviously in Fibers, but also in Advanced Materials and Additives & Functional Products. There's been no spread expansion.

That business, based on value, our raw materials or coal, that's not a spread expansion story, so that's quite stable. And then you've got sort of olefin versus paraxylene as the other components within those AAA segments.

And on the olefin side, while both olefin prices and ethane and propane have dropped, given our propane hedge, we haven't had a lot of margin expansion in olefins, anywhere in the portfolio when you look at it on a four-year basis. And so I don't think you've got a huge margin expansion problem in olefins.

So, you're then down to paraxylene and I think you've got some tailwind in Advanced Materials associated with paraxylene for our co-polyesters and that certainly been helpful.

But I'd put that in the order, the third place of how we've driven earnings growth in Advanced Materials this year, volume and mix being the number one driver, the acquisition being number two and then that being number three. So it will certainly mitigate how we can grow earnings next year, but I still think we'll grow earnings.

And then Adhesives & Plasticizers, the one place where we probably also have some margin expansion especially in adhesives where the industry has been really tight, and we've seen great margins in that business. And we expect those margins to come off a little bit as we go into next year.

We also expect that to be balanced against volume growth in adhesives as we've been able to get more access to raw materials and address some operational limitations that we had this year. And so that margin coming off versus volume growth will net against each other. It's a little hard to call how that will play out.

But overall, we look at the AAA segments and see earnings growth coming from those three segments delivering growth for shareholders next year..

Great. Thank you very much..

The next question comes from John Roberts, UBS..

Morning..

Good morning, John..

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

Well, I think right now, we'll continue to evaluate kind of where we think propane is going as well as just what is the pricing of our propylene derivatives and ethylene derivatives. Our hedging for this year, next year are virtually down. So there won't be any more hedging done at this point.

Beyond that we'll continue to evaluate as the market dictates..

Okay.

So it sounds like you'll be opportunistic in fact rather than having some sort of programmatic strategy?.

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

Okay. And then Indorama recently acquired an idled ethylene Gulf Coast cracker for restart.

Any opportunities for your idled assets especially given the drop in propane?.

Well, if you're talking about our – we have one cracker that's been idle and that has always been an asset we're always looking at ways to maybe create value. But predominantly, at this point, our focus has been on our derivatives.

When you look at our crackers itself, I don't see bringing that cracker up at this point, unless there's another party that feels they can use that excess ethylene that comes from that. What we're continuing to look for is just how do we deal with our excess ethylene, still some good options out there, some things we have to work through as you know.

But our focus is just how do we potentially get rid of that excess ethylene from our portfolio..

Okay. Thank you..

And the next question comes from Frank Mitsch, Wells Fargo..

Hey. Good morning. And nice job with the specialties this quarter gentlemen..

Thank you.

How are you?.

I'm doing fine. Hey. Mark, quick question.

I know you're Northern California based or from 49ers or Raiders?.

Raiders. Grew up on the Raiders..

All right. Awesome. We'll set-up a bet later on today for Sunday's game. In the discussion regarding Advanced Materials, you talked a lot about the acoustic interlayers and the fact that that's been growing, I guess, 20% was the comment made.

I'm just curious as to where we are in the spectrum of types of cars that the special product is going in, and how much more penetration we might have? So how much longer can we expect to see double-digit type growth out of that? What's the penetration like there?.

Sure, Frank. The acoustic interlayers are just a fantastic product and it was greater than 20% volume growth this year, it's just been tremendous.

And we really started with luxury cars, and we're just in the process of moving into the mid-tier cars with the acoustics and the windshield which both quiets the cabin and now they're doing trade-offs between do I acquire the cabin or do I take glass out to hit better fuel efficiency. So it's opening up a wide range of choices.

But I think that we're going to see – we're still just in the beginning of penetrating the overall market. And I also see growth beyond just the windshield. So we're seeing people start moving to laminated glass on the side windows as well, for both safety reasons as well as acoustic reasons. So we're getting more real estate per car, more cars.

We have several years ahead of us in growth from a penetration point of view, and we have a next-generation acoustic product that significantly improves performance over this one that's going to give us a whole another leg of innovation and growth on top of it. So a lot of room to grow there.

And I'd also note that heads-up display has got a huge potential market in front of us relative to its current penetration. We're seeing a lot of growth there as people are trying to work on better mobility and safety for information provision to drivers in the car.

So I think – and we're making significant improvements not just with the current product, but a whole another next-generation product to allow a much bigger screen, much better clarity in the windshields. So this area is just on fire with innovation. It's an exciting space for us..

All right. Terrific. I'll wait on buying a new car so I can get all these neat little things. Curt, when you talked about the $0.80 negative headwind on SFI for the balance of the year due to the decline in olefins and hedges, I guess you were expecting that to be a negative $0.60 at the end of Q2, now you're expecting it to be a negative $0.80.

How much of that $0.20 delta was realized in Q3 versus Q4?.

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

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

Can you clarify that?.

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

All right. Very helpful. Thank you..

The next question comes from Arun Viswanathan, RBC Capital Markets..

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

So Taminco is definitely on track with our expectations except for currency. So as we look at the overall business, we certainly did feel like everyone else, some pressure on the row crop-related ag part of Taminco's business. It's important to remember that row crops are only about 10% of Taminco's business or just over 1% of Eastman's revenue.

So it's not a significant factor for us, but certainly, we're tracking with what you're reading in the press of the big ag companies on row crops, and that being off a bit.

That has been offset largely by a strong performance in our crop protection business where we sell a great set of fungicides and soil fumigants and other products into perishable products that have done well this year, and aren't caught up in this oversupply of corn and soybeans.

So that part is sort of hanging in there together on a net basis; obviously, the oil and gas business didn't grow as much as we expected upstream, but we've actually seen good downstream growth offsetting some of that where we sell products into cleaning up the gas. And then, water treatment and personal care doing quite well.

So overall, I think the revenue side of the equation is hanging in relatively well. They're doing a very good job of managing their cost like all of Eastman and providing good earnings accretion for the shareholders, synergies coming in as we expected.

But we did take a hit on currency that certainly wasn't in our plans when I looked at this acquisition 12 months ago..

Okay. Great. And then I don't know if you talked about this, but on the propane hedge, is there any way you can help us quantify like the year-on-year change that you expect and now that your programs are complete for 2016 versus 2015? I mean, you have like a $0.40 to $0.60 hit this year, probably at the higher end of that.

Obviously, it's likely to be less next year given the comps but how do you see it playing out?.

So, Arun, first – this is Curt, and by the way, welcome to our call. I appreciate you coming..

Thank you..

Let me just clarify two things. First of all, as it relates to our expectations, there's about an $0.80 headwind now for 2015. And that changes – not because of the hedges, it's predominantly because of selling prices with ethylene. But if you think about our hedge, we're about two-thirds hedged in 2015 and we've said that'll just be about 50% in 2016.

So that'll give you some magnitude of the shift that will occur, that will have a tailwind for us as it relates to lower propane hedge costs..

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

Thanks..

Well, certainly, the Texas integrated site that produces the ethylene and propylene, and we translate that into all of our specialties that we sell out of that site, is a permanent member of the company and one that we're focused on keeping.

As we've said since the summer of 2013, we've been looking to sell our small crackers that produce the excess ethylene, which is the real volatility you're seeing today in earnings, started in third quarter, and you're going to see more of it in the fourth quarter.

We've wanted to get rid of that since 2013, but our sales process got disrupted by Westlake. So we're still focused on doing that, but the big cracker at the site produces all the hydrogen and steam for the site that runs all of our specialty businesses.

You have to run that at an extremely high reliability rate because we are making products where, in some cases, we're the only manufacturer in the world in the specialties and so controlling and maintaining that integrated site is essential for our specialty business. And so we're going to continue to focus on doing that.

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

But we're going to always get out of every bit of commodity we can. We've been doing it for the last seven years in the $3.5 billion of revenue we sold off. So, I think we're doing all we can. We'll continue looking for those opportunities..

Great. Thanks..

The next question comes from Mike Sison with KeyBanc..

Hey. Good morning, guys. Nice quarter..

Hi..

Mark, when you think about – you talked about the headwinds this year from Fibers and Specialty Fluids becoming bigger. Clearly, it's the specialty business is doing better.

So if you total it up, how much better are the specialty businesses coming in this year than you thought at the beginning of the year? And is there a way for you to maybe just help us understand the growth that they're generating in total for you this year to offset some of those bigger headwinds?.

Sure, Mike. I'll try that at a high level.

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

So I'd say they're certainly ahead of our expectations. And I think Fibers came out more or less where we expected this year, so that's not been a surprise. And I do think it will stabilize out as we go into next year.

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

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

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

Yeah. It's not going to be – I'd love to be able to tell you it was going to be that great. But it's not going to be that strong when you look at the AAA segment on a 2014 to 2015 basis, principally because one factor is not there which is the acquisitions have added a lot of earning from 2014 to 2015.

In addition, I mentioned that some of the spread expansion that every chemical company in this industry has this year associated with oil on prices versus raws is not really expected next year as I'm thinking of raws being sort of flattish with oil being flattish into next year.

And if that's the case, you'll focus on the volume and mix component of delivering earnings growth. So it will certainly be a moderated growth in 2016 versus 2015, but still growth and I think that's going to show up as very good performance as we all get into next year..

Great. Thank you..

The next question comes from Jeff Zekauskas with JPMorgan..

Hi. Thanks very much. Good morning..

Morning, Jeff..

How do you calculate your hedge cost? That is, is it simply the difference between the price you've paid because you've hedged versus the price of propane that you would have bought in the market or is it more complicated than that?.

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

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

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

So, Jeff, for example, in ethylene prices, we started the quarter out when we were still in the sort of $0.34 range in the third quarter. We saw spot dropped all the way down to $0.18 at one point. We're in the sort of low-to-mid-20%s now. So ethylene has just come off tremendously and the propylene has come off as well.

So this is purely a ethylene/propylene related issue, especially ethylene relative to what we had originally expected..

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

Yeah, it's important to keep in mind, when we put out that $0.60 to $0.80 change, that $0.20 is not what we're going to actually feel, right? We're taking pricing actions to mitigate some of that pressure as we did already in the third quarter and we'll continue to try and do in the fourth quarter.

But it's certainly more pressure than we expected three months ago..

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

Okay. Let me try and clarify, Jeff. When we talk about cracking spread headwind, it is not a hedge comment. It is an overall cracking spread comment.

So we're looking at the cracking spreads that we have, ethylene and propylene prices minus the cost to produce those products of ethane and propane and the hedge all rolled in was a $0.60 headwind relative to 2014 when we started the year..

Okay. All right..

And so, when you go to where we are today, nothing has changed on the hedge. But what has changed is ethylene and propylene prices for the cracking spread calculation have come down significantly from where we were three months ago and creating some compression.

But it's important to keep in mind that we don't sell propylene in the marketplace, we sell derivatives. So each product, the specialty products, obviously, we're going to do a better job on holding on the value versus some of the commodities in SFI as propylene comes down, same story with ethylene, which is predominantly sitting in SFI..

So – I mean if you weren't hedged, would your spreads have contracted as well? Because propylene has come down really, really fast and so I would imagine that propylene derivative prices would have come down at a slower rate.

That is, is squeeze the function of your hedge or it's the function of the relationship between propylene and its derivatives?.

It's both. If you think about – ignore the hedge for a second. Cracking spreads have compressed this year versus last year, right? And on top of that, we have an additional cost headwind associated with the propane hedge. So both of those contribute to the 14% to 15% cracking spread calculation. But you're right.

In the specialty businesses like Additives & Functional Products, we've done a great job of holding on the value and price relative to how propylene prices have dropped, but even there you start giving it back over time.

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

Okay. And then just two more quickly..

Jeff, how about one more quickly, please?.

Okay. Then we'll try one more quickly.

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

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

Okay. Great. Thank you so much..

The next question comes from Bob Koort, Goldman Sachs..

Thank you. Good morning..

Hey, Bob..

Curt, I think you said something about next year it's going to be more about volume unless maybe about some spreads to drive earnings. I guess I was just hoping you could give us some sense of what you expect overall in volumes? It seems like this year – and the globe has grown some, but the volumes haven't been very powerful.

Would you expect there to be improvement next year? Obviously, the specialty side doing well, but do you think the broad portfolio can get GDP-type volume growth next year? And why would you not think so?.

Yeah. I think that we'll certainly see volume growth in the AAA specialty businesses consistent with GDP and then levered up by some of our innovative high margin products growing much faster than GDP.

So I think that when you look at Advanced Materials, the end markets that we're serving there from consumer durables to transportation and medical, all those markets are, I think, expected to grow well next year and we feel good about growth next year over this year. Additives & Functional Products, same thing.

I think coatings will continue to grow and there's probably upside in residential housing in North America when you look at the housing start rates. So that should be relatively good.

Tires has been a really tough year this year where we've been sort of flat in volume as China has come off with a lot of destocking and slowdown in their economic situation, and that's been offset fortunately by North America and Europe.

But again, tire volumes sort of flattish this year globally for Crystex and PPDs and then of course strong tire resin growth on top of that, giving us overall growth. And I would actually expect tire growth in China to be better, and the rest of globe continue growing.

So, again, feel good about growth in tires next year because I think some of the destocking will be done in China. And then Adhesives & Plasticizers, great underlying market trends in hygiene and packaging for the adhesives as well as the non-phthalate conversions in North America driving a lot of volume growth. So over that, I think it's all good.

As I mentioned already, we expect volume and earnings to be relatively flattish in Fibers. And then SFI is just the engine that makes everything else run.

So those kgs are a little deceptive because if we do shutdowns more in one year versus another, for example, all of that volume variance for the total company shows up in SFI as we have just – the run rates of what we can sell, that's left over in SFI after we've done all the specialty growth for those intermediates..

Okay. That's helpful. And could you tell me what would you root for from an energy or oil price standpoint? Do you like what's optimal? A little inflation? a little deflation? Flat? In terms of how you respond to the market and what it does to your cost structure? And maybe your customer behavior? Thanks..

Yeah. I think that like probably most chemical companies, we all favor a steadily increasing raw material environment and a steadily increasing growth environment. So oil going up on a steady basis is probably the best scenario you can hope for.

The worst thing for chemical companies is extreme volatility where the price of oil and raw is flying up and down..

Thanks very much.

Can we have the next question, please?.

The next question comes from Laurence Alexander, Jefferies..

Good morning. Just a quick one.

If the ag market stabilized and oil extraction industries return to sort of a mid-cycle level, what would your operating leverage to that be?.

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

Do you have a sense for how much you're under earning in those businesses currently?.

Well, as I said, in ag I don't think we're really under earning because while we took a hit on volume coming off a bit in corn and soybean crops, we benefited from crop protection having a good seasonal year. So I don't think there was a overall big hit this year for us compared to some of the ag-focused companies.

But I think there'll be modest improvement for us. So I'm not going to call out this specific earnings gain..

Okay. Thank you..

Next question comes from Nils Wallin, CLSA Brokerage..

Good morning. And thanks for taking my question. First one on Advanced Materials. If acoustics is growing greater than 20%, it's something like 30% or 40% of the business, that would imply a higher volume growth year-on-year in Advanced Materials, but I think you came at around 5%.

So is there something that's actually declining in volume or is it just the Tritan in the other performance films or just not growing as fast as acoustics?.

Yeah. So acoustics is a great product, but it's only part of overall Advanced Materials which is a very big segment. So what we love about the overall Advanced Materials business is it's having a great year across a wide range of specialty products.

But some of the bigger volume products like copolyesters have a certain amount of limitation on how much they're going to grow that factors into that weighted average number that you're looking at. And I'd also note that we had some offsets in performance films in emerging markets. So you're selling films that go on to cars that are being sold.

And so places like Brazil, Southeast Asia and even, to some extent, China have not been great for us for some of the performance films. And so that's not been growing as much in some of those isolated markets. I would note that performance films is growing incredibly well in North America and in some of our distribution channels in China.

But overall, it nets out that way..

Understood. Thanks. And then I believe in one of the questions or in your commentary, you said that there had been no spread benefit in cellulosics and you called out coal.

But my understanding, correct me if I'm wrong, I believe specialty pulp did come down in price, so did your tow prices follow that or am I incorrect about the raw materials on the acetate tow?.

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

All right. Thank you. And just one last, one if I may....

Nils, I'm sorry, but we've got....

No problem. Okay..

people in the queue..

Okay..

We'll go to the next. Thank you..

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

Yes. Hi. Good morning. This is Eric Petrie standing in for P.J. Your Adhesives & Plasticizers margins have increased nicely over the last couple of years at 24%, and I think that compares against the range of 17% to 20% that you gave at your Investor Day in 2013.

So is this expansion more or less a function of lower raw materials or are we setting a new range going forward?.

It's a mix of everything. So when you – two stories in Adhesives & Plasticizers. On the Adhesives side, the industry has been tight, giving us pricing power. And obviously, we've enjoyed that and improved our margins from that. But it's also important to note that we're also upgrading the mix within that volume that you don't quite see.

So we're selling – having nice growth in our differentiated hydrogenated resins that are going into packaging and diapers and other products like that that are going quite well.

And we've had a bit of a decline in volume in our non-hydrogenated resins, which are a lower margin that have been restricted because of raw material availability and some operational issues. So net, you've had a mix upgrade and some margin expansion in that story.

On the Plasticizers side, you've had great volume growth offset by margin compression as the Asian competitors have been trying to sell their non-phthalate plasticizers in Europe and North America with the lower oil price and, of course, we're shale gas-based in those products, so we've been feeling some compression there.

So as you look at next year, which I think is the key to this question, is you'll see some margins come off in Adhesives because there is some more raw materials being made available that cause it to be tight.

But we'll have more volume growth next year than this year in Adhesives, offsetting that to some degree, and we'll see how that plays out as we get into January. And then on the Plasticizers side, we should have good volume growth again next year and hope that the spreads stabilize, and that should be a source of earnings growth.

So, overall, I think that the margin percentage will come down, but we'll still be in a good position to deliver good earnings out of this segment..

Great.

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

Yeah. Taking it in reverse order. We have plenty of capacity to grow in non-phthalate plasticizers and there's plenty of opportunity in this market to continue to grow. We're just beginning the full conversion of this market to non-phthalate, so we have several years to run..

Could we have the next question please?.

The next question comes from Vincent Andrews, Morgan Stanley..

Thanks very much. I'll keep it to one question. Your foreign exchange rate impact year-to-date is minus 3%.

Can you just remind us of what type of FX hedges you had on this year? And how much of them extend into next year, so we can think about that?.

Sure. If I could break it down, if you think about the economic exposure we have with currency, we're predominantly long in euro. And we've talked about that being roughly a $0.30 per share headwind, 2015 over 2014. That has benefited, about a 50% hedge (57:42) a little bit in 2016 the amount of hedge we have in place there.

But we'll still have a nice hedge to help mitigate some of that exposure. And then on top of it, we have some other foreign currencies we have exposure to on a smaller scale, like the yen and others. And so if I think about this year, that's probably another $0.10 per share headwind.

And so when I look at currency for the full year, about 40% headwind mitigated partially because of the euro hedge and we'll have a good euro hedge going into next year still, but just to a smaller degree..

And just the euro hedge for next year, it's a smaller percentage but at the same rate as 2015?.

Yes..

Okay. Thanks very much..

We'll make the next question the last one please..

And the final question comes from Duffy Fischer, Barclays Capital..

Yes. Good morning, fellows. A question back on interlayers. One of your big competitors was sold a little over a year ago.

Is there any chance that that transition is part of the benefit that you're seeing today and may end up kind of being a little bit transitory then?.

We certainly saw that the industry consolidated with Kuraray buying DuPont's business. But I wouldn't say that we are seeing growth this year because of that consolidation. I think that everyone's out there trying to compete as best as they possibly can.

We're just enjoying a lot of growth because of our products and our value proposition to our customers..

Okay. And then just last one, on the outlook, you're running about $0.20 ahead year-to-date on EPS. So if you took the very low end, you could say Q4 could be down $0.20 year-on-year and still kind of make that up for the year.

Can you just talk a little bit more about how we should think about Q4 relative to that?.

Sure. So when you think about Q4, I would expect year-over-year earnings growth in the AAA segments, the specialty businesses are all focused in and positioned to deliver year-over-year earnings growth.

And then obviously with Fibers, if volumes stay similar to the third quarter into the fourth quarter, that's going to be a little bit less than the volume we had in tow last year, so you're going to have a bit of an earnings headwind there.

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

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

Great. Thanks, guys..

So I just want to make a quick summary's comment and we'll wrap it up. So overall, we feel great. We've been working on this strategy for a long time to deliver and change our portfolio to being more specialty-oriented.

You can now see how the power of that strategy is working and delivering growth through the specialty AAA segments, working hard to keep the Fibers business stable, and believe we can do that.

And that, I think, is a compelling story of how we can continue to deliver our seventh consecutive earnings growth next year, with great margins, great free cash flow that gives additional upside to shareholders beyond the earnings growth and how we delever as well as repurchase shares next year.

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

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

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