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

Frank J. Mitsch - Wells Fargo Securities LLC David I. Begleiter - Deutsche Bank Securities, Inc. Vincent Stephen Andrews - Morgan Stanley & Co. LLC Aleksey Yefremov - Nomura Securities International, Inc. James M. Sheehan - SunTrust Robinson Humphrey, Inc. Michael J. Sison - KeyBanc Capital Markets, Inc. Jeffrey J.

Zekauskas - JPMorgan Securities LLC Laurence Alexander - Jefferies LLC P.J. Juvekar - Citigroup Global Markets, Inc. (Broker) Duffy Fischer - Barclays Capital, Inc. Robert Andrew Koort - Goldman Sachs & Co..

Please standby, we're about to begin. Good day, everyone, and welcome to the Eastman Chemical Company's Second Quarter 2016 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website at www.eastman.com. We'll now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations.

Please go ahead, sir..

Okay. Thanks, Ron, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Curt Espeland, Executive Vice President and CFO; and Louis Reavis, Manager-Investor Relations. Before we begin, I'll cover two items.

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

Certain factors related to future expectations are or will be detailed in the company's second quarter 2016 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2016 and the Form 10-Q to be filed for second quarter 2016.

Second, earnings per share and operating earnings 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 excluded items, are available in the second quarter 2016 financial results news release that could be found on our website, www.eastman.com, in the Investors section.

Projections of future earnings also exclude any non-core, unusual or non-recurring items. With that, I'll turn the call over to Mark..

Good morning, everyone. I'll start on slide three. I'll begin my comments with strategic highlights for the second quarter and first half of 2016. We continued to make solid progress in executing our strategy of becoming a more specialty chemical company.

During the quarter, we continued to upgrade the quality of our product mix by growing high-margin specialty product lines particularly in Advanced Materials and Additives & Functional Products.

In the first half, AM delivered 14% growth over last year on top of 40% growth in 2015 over 2014 and we did it primarily through organic volume and mix and a highly attractive bolt-on acquisition.

As growing innovative, high-value products is a key component of our strategy, I met with several customers in Europe recently to see how our innovations and strategies are proceeding in action and how we're helping our customers win through innovation. In Germany, I met with a leading manufacturer of medical devices for the operating theater.

They've been in search of a polymer that can withstand the new, stronger disinfectants being used in hospitals, which is causing cracking with existing polymers. The company gets a lot of polymers, all of which failed to deliver the needed chemical resistance.

However, Tritan delivered on the challenge by providing the required blend of chemical resistance and durability. This has positioned Tritan as the material of choice in both clear and opaque applications. Next stop for Tritan are applications in safety and protection devices.

Also in Nienburg, Germany, we successfully started up our new Crystex technology. This improves our cost position by better than 20% while also creating the opportunity for more differentiated products like in Crystex.

This new technology pushes the boundaries of thermal stability, dispersion and flow, all important properties of insoluble sulfur, which can help our customers maximize the productivity of their operations.

With the conversion, we are rolling out several new Crystex products with differentiated cost and/or performance and we are working with several customers to get our products to market. Early indications of performance are very positive and we anticipate having business before the end of the year.

The success in Nienburg supports our investment in Kuantan, Malaysia, where we're continuing to deploy this technology and build the largest and lowest cost facility in the world.

And this is just great evidence of us creating value through innovation not only in heritage Eastman but in our acquisitions here, as well as what you've already seen us delivering in interlayers and Performance Films. Finally, we recently launched Aerafin.

It's a family of new adhesive polymers for hygiene and packaging markets leveraging Eastman's olefin technology platform, which expands our offering beyond adhesive resins to adhesive polymers. The need in this market at the consumer level is for low-odor adhesives and Aerafin is recognized as best-in-class on that front.

In addition to low odor, Aerafin provides a more robust offering environment enabling higher line speeds at lower temperatures. I'm incredibly excited and very proud of how we are driving innovation and customer engagement.

As I spend a lot of time out in the market place, it's great to see the evidence of these wins, which gives me great confidence we're on the right track to drive growth through innovation. While we're seeing growth in innovative specialty products, we're also facing increasing macro challenges particularly in Chemical Intermediates.

We're pulling all levers to mitigate the impact of these challenges.

On the cost management front, we remain well on track with our cost reduction efforts to deliver $100 million to the bottom line without sacrificing our long-term growth initiatives and we are making progress with the process we restarted earlier this year to divest our merchant ethylene as well as potentially other commodity olefin product lines.

Our cash engine continues to generate very impressive free cash flow as we are on track to deliver another great year of $900 million enabling a strong dividend, deleveraging and accelerating our share repurchases. Our second quarter earnings overall are disappointing.

We continue to deliver compelling results in Advanced Materials and Additives & Functional Products and I'm confident as we get the challenges for Chemical Intermediates behind us and we stabilize Fibers, Eastman will emerge stronger than ever. Now, I'll turn it over to Curt to discuss the Corporate and segment results..

Thanks, Mark, and good morning, everyone. I know it's been a busy week so I appreciate you joining us this morning. I'll start with our Corporate results on slide five. Overall sales revenue decreased primarily due to lower selling prices particularly in Chemical Intermediates.

Volume was down slightly with a decline in Fibers, mostly offset by an increase in Advanced Materials. Our operating earnings decreased primarily due to declines in Chemical Intermediates and Fibers. Despite the challenges, our operating margin was above 16% and adjusted earnings per share was $1.68 for the quarter.

By no means are we satisfied with the business environment we find ourselves in and the negative impact it is having on our results. Thus, we are taking additional actions to mitigate the challenges we face. And Mark will outline these actions in a few minutes.

Moving next to the segment results, starting with Advanced Materials on slide six, which delivered a great first half of the year.

Second quarter sales revenue was relatively unchanged as higher sales volume of premium products including Saflex acoustic interlayers and Tritan copolyester was offset by lower selling prices, primarily for copolyesters, attributed to lower raw material cost such as paraxylene. One other point on second quarter volumes.

Advanced Materials experienced some destocking in the first quarter of 2015 followed by a restocking in the second quarter of 2015. So, we are very pleased with these results for our second quarter of 2016, especially given the tough comp. Year-over-year operating earnings were relatively unchanged.

Sequentially, operating earnings increased by $24 million or more than 20%, driven by a seasonal increase in sales volume including another quarterly volume record for Tritan copolyester.

And for the first half, operating earnings increased year-over-year by 14% or $30 million, driven by a 5% increase in sales volume, improved product mix, and lower unit cost due to higher capacity utilization.

As a result, first half of 2016 operating margins increased to 19.4%, an approximately 200 basis-point improvement over the first half of 2015. For the back half of the year, underlying business performance should remain strong as Advanced Materials continue to execute its strategy of volume growth, mix improvement, and fixed cost leverage.

To underscore how well this business is executing the strategy, in 2015, Advanced Materials increased earnings by almost 40% and we expect to build on that success this year. Given the results of the first half of 2016 and our strong outlook for the second half, Advanced Materials is positioned to deliver double-digit earnings growth in 2016.

We are delivering compelling proof of our ability to drive growth through innovation even in a difficult macro environment. Now, to Additives & Functional Products on slide seven.

Overall, a solid quarter despite short-term challenges, revenue declined due to lower selling prices attributed to lower raw material costs; 2% volume growth from many attractive end markets, including strong growth for Crystex, for our tire resins, and for animal nutrition products was offset by volume and mix declines in product lines exposed to energy and industrial construction markets.

Operating earnings decreased primarily due to lower selling prices more than offsetting lower raw material costs. And the operating margin remains solid at 21.8%, slightly above the year-ago period. As I look at full year of 2016, we expect to grow volumes and expect our prices to stabilize.

Our commercial teams are doing a great job in managing trade-offs and maintaining margins and customer engagement for innovation and growth.

We will continue to face macroeconomic and competitive challenges, but given the strength of the portfolio businesses in this segment and attractive end markets, Additives & Functional Products remains on track with our previous expectations for full year earnings to be slightly down, which would be a solid result in the current business climate.

Now to Fibers, on slide eight. Second quarter revenue, volume and earnings were slightly below our expectations. Sales revenue decreased primarily due to lower sales volume, particularly for acetate tow, flake and yarn combined with lower selling prices particularly for tow.

The decline in acetate tow sales volume was due to customer inventory destocking in China, consistent with our expectations for volumes to be down to about 10% for the year. The lower acetate flake sales volume was due to timing of shipments to our China acetate tow joint venture. Lower yarn volume was due to trade issues impacting our customers.

Earnings for the second quarter decreased due to lower sales volume. Despite the decline in volume, operating margins were about 31% as our cost reduction efforts offset the decline in prices.

Looking at the full year of 2016, we expect second half earnings to be similar to first half, which is slightly below our previous expectations as we are experiencing some short-term challenges in acetate flake and yarn, which is an incremental headwind.

And I'll add that as we discussed for some time now, in the last earnings call and at investor conferences, price risk exists going into 2017.

Given the current lower capacity utilization in acetate tow and the lack of additional asset rationalizations beyond what we did in the United Kingdom, the risk of competitors chasing share with price does exist, and we have seen our competitors attempt a strategy which has created pricing pressure in our contract discussions for next year.

Frankly, I don't understand the logic of these actions in a flat to declining growth business but yet, here we are.

What I do understand, and what I like about Eastman and our future in this industry, is we have the lowest cost position, from the larger scale of backward integration with the flake matched with our tow position in Tennessee, Korea, and China.

And our customers place significant strategic value on both our asset footprint and our ability to innovate and deliver high-quality, reliable product.

Further, our vertical and horizontal integration creates tremendous value and an innovation capability for cellulosic products in Additives & Functional Products and Advanced Materials, and we have a track record of innovation from this technology platform that is well established over decades.

So I am confident about our long-term position, and I strongly believe this will continue to be a valuable business for Eastman going forward. I'll finish up the segment review of Chemical Intermediates on slide nine.

Sales revenue decreased due to lower selling prices, which were mostly the result of negative impact of lower market prices for propylene, ethylene, and methanol, and continued competitive pressure from weak demand in Asia Pacific.

Operating earnings decreased due to lower selling prices, more than offset lower raw material costs, in addition to higher planned maintenance costs. Looking at the full year of 2016, we expect a number of factors to impact results.

We expect olefin margins to remain under pressure, as the increase in oil prices has not yet translated to improving olefin prices. In particular, bulk ethylene prices have been disappointing, as we have seen U.S. prices remain significantly discounted versus the rest of the world.

We also expect lower methanol prices to continue, putting pressure on market prices for some of our acetyl and amines product lines. And competitive pressures, particularly from competitors in Asia, have intensified, and we expect this will continue through the back half of the year.

Considering the low oil environment, excess global capacity in olefins and methanol, and increased competitive pressures due to slow economic growth, we expect second half-year earnings to be below first half, with sequential improvement for both third and fourth quarters, which should continue into next year.

Lastly, I'll give you a quick update on our process for divesting our merchant ethylene capacity, and potentially certain commodity olefin product lines. We continue our discussions with potential buyers and still expect this process will take the greater part of this year to resolve itself.

As you would expect, we will remain disciplined and patient sellers as we move through the process. On slide 10, I'll 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 approximately $500 million.

We had nominal income tax payments and no contributions to our U.S. pension plans in the quarter. These payments are typically in the second half of the year, and we expect that will be the case in 2016. Capital expenditures totaled $124 million.

We continue to manage the pace of capital spending with the current economic environment while still maintaining our growth investments, and thus have reduced our full-year capital expenditures to be between $600 million and $625 million. Free cash flow for the quarter was a very strong $370 million.

And during the quarter, we reduced net debt by over $300 million, paid our second quarter dividend of $68 million, and repurchased $25 million of our shares.

Also during the quarter, we successfully sold €500 million 1.5% notes due 2023 in a European public debt market, with proceeds used to repay $500 million of our 2.4% notes due in June of 2017, as well as some other borrowings. Our effective tax rate for the second quarter was just over 21%, aided by an expected discrete tax benefit.

We continue to expect our full-year tax rate will be between 24% and 25%, reflecting the continued benefits of our improvement in business operations. And lastly, we remain on track to generate more than $900 million of free cash flow for the year, which is a very strong performance in this current environment.

And with that, I'll turn it back over to Mark..

Thanks, Curt. I'll transition to our outlook on slide 11. Looking at the back half of the year, we expect our innovative specialty businesses will continue to grow strongly, improving product mix, and accelerating our overall earnings growth.

We continue to see the benefits of our vertical and horizontal integration as it enables an advantaged cost position and delivers a capital-efficient earnings growth in our specialties. We will also get a (17:12) benefit from the acquisitions, which are creating value in both cost synergies and accelerating revenue growth.

We remain committed to our aggressive cost reduction targets, and are on track with them. And after reducing debt, we also expect to accelerate share repurchases in the back half of the year. In the near term, we have a number of challenges, particularly impacting Chemical Intermediates, and these have been increasing.

As Curt mentioned, lower olefin margins and lower methanol prices are headwinds. In particular, the most significant change in our expectation was U.S. ethylene prices not tracking up with oil and global ethylene prices.

We're also seeing excess supply pressure, as slow economic growth is not sufficient to absorb the large amount of capacity that's been built in a number of products, especially in China, for Chemical Intermediates. Our most recent outlook was that 2016 adjusted EPS would be down about 5%.

Given the challenges we face, most significantly in Chemical Intermediates and modestly in Fibers, we expect full year 2016 EPS will be down up to 10% compared with 2015.

As you think about the cadence through the rest of the year, we expect earnings in the third quarter will be similar to the second quarter, as sequential growth in operating earnings is offset by an increase in the tax rate for the quarter. Last, I'll add that this outlook assumes current business conditions continue in the back half of the year.

If the conditions improve, that would be upside. Turning next to slide 12. Obviously, our EPS expectations for this year are not where we want them to be, and we're not happy about that. Given that, we are taking significant action to mitigate the impact of the challenges we see in front of us.

We are using all levers to improve results, not just in 2016 but going forward. For me, that begins by maintaining our commitment to innovation and market development and doing everything we can to accelerate growth from these platforms.

We've already realized commercial success for many of these platforms this year and we are on the cusp of even bigger wins, and we're working to deliver these successes as fast as possible. We also remain committed to cost reduction. As I mentioned, we're on target with the cost reductions we implemented earlier this year.

And, as the challenges we face have increased, we will be removing at least another $100 million of cost towards the end of this year to ensure that we deliver attractive earnings growth next year.

While our SG&A and R&D as a percentage of sales is already in the lowest quartile of our peers, we are committed to retaining this new cost reduction target without sacrificing innovation and market development.

We continue to review our portfolio, and this includes the process to divest our merchant ethylene capacity and some other product lines and we'll effectively manage capital allocations through this slow growth environment.

This includes our strong dividend, which we'll increase; reducing debt, and increasing our share repurchases in the second half of 2016 and into 2017. As I look beyond 2016, we are well positioned for growth as these short-term challenges recede and our strong growth drivers continue.

Altogether, I'm confident we will continue to deliver attractive earnings growth in the long term as we transform towards a specialty portfolio. With the combined set of actions we're taking, we expect to be back on track for 8% to 12% EPS growth in 2017. I'll close with our key themes for 2016 on slide 13.

We continue to have a strong portfolio of specialty businesses and through these businesses, we are driving growth, we are innovating and we are improving our earnings mix. We face increasing challenges particularly in Chemical Intermediates and Fibers and responding to this challenging environment with the actions I just outlined.

Our cash flow remains one of the best in our industry, and we are deploying it for a strong dividend, reducing leverage and accelerating repurchases of shares. And lastly, despite near-term temporary challenges, I remain very confident in our strategy and our ability to grow our earnings.

Eastman will emerge from these challenges stronger than ever and we'll continue our journey to achieving our vision of becoming a leading specialty company. With that, I'll turn it over to Greg..

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

Yes, indeed. [Operator Instruction] And we'll take our first question from Mr. Frank Mitsch from Wells Fargo. Please go ahead..

Good morning, gentlemen..

Good morning..

Mark, obviously, a large part of the reduction in 2016 outlook is related to Chemical Intermediates. And obviously, you're in the process of trying to monetize some of the crackers as well as other parts of that portfolio.

Given the fact that you were hitting a rougher patch than expected earlier in the year in the Chem Intermediates business, how is this impacting your outlook on when and what value you can execute a transaction?.

Frank, I'm going to start and let Curt finish. We're obviously pushing as hard as we can in this process. It's a pretty dynamic time with what's going on with a lot of very temporary challenges in olefins, especially ethylene, as part of the package what we're divesting. You've got a lot of stranded ethylene in the market today in the U.S.

When you look at it, ethylene prices here, almost $0.20 a pound lower than the globe. So, it's pretty disconnected. So, we have to make sure that we think about the long-term value of this business and get an appropriate price. We do have engaged buyers who are very seriously considering it but we're working through the steps of it..

Yeah. So, if I could add, again, as we mentioned there have a number of management presentations that have occurred, and there again are active conversations going on. But as you already mentioned, Frank, we recognize it's currently tough economic environment or environment with ethylene margins right now.

So, really in order for this to really progress, our belief, it really requires two strategic parties, buyers or sellers that understand the long-term value of olefins and the value of the quality of assets that we have. So, my sense is everyone is kind of looking at that way but we'll see how it plays out.

In regards to timing it's still a top priority for us. We've got a great team working on it but we'll just have to be disciplined as we go through the process and it will still take a greater part of this year to see how this plays out..

Okay. Terrific. And in terms of the outlook approaching or could be down 10%, what sort of olefin margin are you embedding in that forecast, i.e., are you assuming second quarter levels or are you assuming June levels? Are you assuming July levels? I just want to try and get a baseline there as to what is embedded in that outlook..

Well, Frank, you just summarized the problem of forecasting olefins. You pick a week and you can have a different answer. There's a lot of volatility going on right now. As I mentioned, on the olefin side, we're seeing – especially ethylene but as well as propylene being fairly depressed in the U.S. relative to what's going on outside the U.S.

So, even though oils improved, we haven't really seen a logical improvement of those olefin prices. And that's been a disappointment in the second quarter and we certainly revised our outlook for the rest of the year to reflect the current conditions that have been in the sort of June, early July timeframe when we built our forecast.

I would also note that while the olefin prices haven't gone up much, the propane prices and ethane prices have, especially propane. So, they have tracked up with oil with the significant improvement in global export capacity to get the propane out of the country.

So that's created some compression here that on a long-term basis, I don't think it plays out. I don't think you have ethylene and propylene stranded in the U.S. forever. There is, obviously, not enough derivative capacity to monetize that monomer in the globe, but that will come online like many people have already discussed.

And this disconnect will get closed and we will go back to what it a normal situation where these prices are more closely connected to the globe. And then that would be a material recovery in earnings for us when that happens in the future. So, I think that's, all playing out sort of as we expect. And that's sort of the olefin story.

I would note that there's two other parts of the story when it comes to Chemical Intermediates. Methanol prices are 40% lower than they were a year ago. It's the same kind of story, not only have they tracked down with oil, but there's oversupply in methanol.

And so, we haven't seen methanol prices recover really in the second quarter as you would have expected with the recovery in oil and that's also putting pressure on the earnings in the segment.

When you think about acetic acid, acetic anhydride, competitors in Asia set the price ultimately based on their purchased methanol cost and that's put a lot of price pressure on those products.

Not as significant as olefin for us, but it's still quite material and it's even having a modest impact on Functional means where we have a lot of cost pass-through contracts tied to methanol prices.

And in both acetyls and methanol, we have advantaged coal gasification, as well as disadvantaged fixed price methanol contract, and so you get some compression there. And then there is some additional pressure, of course, with Asian competitors with excess supply. No demand in China to absorb it, so they're dumping those products all over the world.

I would say though Frank that the good news about this is that we're seeing the prices stabilize and we're seeing evidence of this in a couple of different fronts.

One, we just filed an anti-dumping case in plasticizers where we're seeing some pretty extreme behavior from our Korean-based competitors and the Commerce Department has already agreed that we have made the case for economic harm and have launched an investigation into that.

And we're also seeing some other products some of our competitors in China shut down because they're out of the money at the current pricing that they're sort of driving in the marketplace. So, I would say we think it's bottoming and we just need to start seeing some of the situation to improve, and that's all embedded in our guidance.

But, right now, our guidance for the rest of the year is it stays challenging like it is now for this year..

That's helpful. Thank you..

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

Thank you. Good morning. Mark, on acetate tow, your other main competitors, we talked about similar aggressive pricing actions in the industry and competitors chasing volume. If it's not you and it's not them, it's obvious Solvay and maybe DYCELL.

How are number three and four players causing so much problem in this industry?.

Dave, I guess this question might come up and, obviously, there's been a lot of commentary in the industry already with investors about what's going on in the space.

And so, I've spent a lot of time trying to put my thoughts together, and I think there's a number of things that are important to be clear about, both in the market context and what our strategy is. So, let's start with demand. First of all, nothing's changed in our view about tow demand for this year and moving forward.

Outside of China, continues declining, 1% to 2%. We still believe that the primary issue in China this year is inventory destocking of tow where they had way too much inventory in tow and we think that will run its course this year.

There remains some uncertainty about what that will turn into next year because while I think tow destocking will be over, we still don't have clear understanding of what's going on in cigarette demand in China. And so, there's chance of some continued destocking there.

But when you put it all together, our view is tow imports into China next year will be sort of flat to potentially modestly up.

Regarding our specific performance versus our competitors, as you can see through the first half of this year in the data, we are obviously taking a bit more of a hit in volume than our competitors, and we've been clear about that because for 10 years we've been a huge beneficiary of having the largest share of imports in China while China was growing.

And there's always two sides to those positions and when imports drop, we're going to feel more of that than anyone else. But when we look through all that, we still see that we're on track for a 10% decline in tow demand, nothing has changed our view about that at all.

But you got to remember that there's some chunkiness in the buying patterns with all different customers to some degree. And so, there's some chunkiness in buying patterns that will – so, for our second quarter, are probably a little bit light compared to what we expected, but nothing material.

It's also important to remember in our volume numbers that while we're seeing 10% down in tow, there's other things going on like the timing issue in flake, some yarn being off and no longer having acetyl chemical sales to ourselves and the JV we have with Solvay for making flake.

But we are seeing some aggressive actions by all of our competitors going after share. And we mentioned a long time ago, when you get a huge currency change like you do in Japan and Europe, you can think about passing that on the marketplace to chase share and not even feel the margin impact.

And we've seen – as you can see through the data that everyone's reporting that we have some dynamics going on there. And the part of the story for us is some modest share loss this year outside of China but, it's pretty modest at this point. But it's disappointing to see this happen.

We've been talking about the fact that its excess capacity remains in the industry. It's entirely possible that we're going to have people behave in a way where they try and chase the share with price with these margins it's really tempting as you're just living for the short-term and we're seeing some of that.

But, in this context, I think, we've had a very clear strategy of what we're trying to do. And, I just want to sort of make sure we're clear about what we're doing. First, we recognize and accept the challenges that we have in China.

And so when we added capacity with CNTC, which was very low cost tow capacity, we chose to take out an equal amount of capacity in United Kingdom that was relatively high cost for us, balancing our position there, and accepting those changes in market conditions.

We also exited our flake JV with Solvay to reduce our cost, given we no longer need that capacity, given we had shutdown the UK tow situation. So, we've done everything we can to sort of balance our capacity situation and the results of what's going on in China. And we're now down to being the lowest cost supplier in the world in tow.

We have the largest scale asset in flake, it's backward integrated in coal and we have the lowest cost tow assets in Tennessee, Korea, and China that's equally matched to that flake capacity. And we have no further tow assets that we can shut down or it would just leave us long in flake, which doesn't make much sense for us.

Second, we simply have the best cost position in the industry. We have every intention of maintaining our market share outside of China. So, when these competitors are trying to gain share from us, which obviously they have done, it simply results in lower prices, and therefore lower earnings and cash flow for everyone.

Third, we're committed to being the leading supplier to our customers, based on the strength we have and our quality and our reliability, our unique innovation capabilities, and the strength of our asset base to supply our customers.

So as you look at 2016, we do expect earnings are going to be down due to this price pressure as these contract discussions have now started early, and we're seeing this behavior from our competitors. And it's likely we'll be down 10% to 20% before you include the cost actions we just announced.

But it's early, and so we're going to have to see how all these contract discussions play out for the rest of the year and how it nets out. Then we'll keep you updated. When I look beyond 2017, and this is quite important, many of these new contracts are going to be multi-year contracts, providing price and supply stability for our customers.

You would also think that, given how this is all playing out and not really working out very well for anyone, that our competitors are going to have to start looking at their cost positions, like we did, and think about rationalizing high-cost assets that they all certainly have, and we'll just have to see what they choose to do.

I would also note that we're not just sitting around waiting for what's going to happen to tow business. Eastman has been the innovator for 90 years in cellulosics. We've innovated a huge range of new products over the years, and you've seen those great results we've had in AFP and AM.

And so as we saw these things start to develop all the way back in 2014, and we knew that we had to accelerate our innovation efforts for new applications in cellulosics, and we've been doing that as ways to load these assets in new applications.

It's obviously still early when it comes to growth and innovation, but I've been incredibly impressed by our teams and how they've raised to that challenge, and we have a number of great projects going forward here, developing new applications that will help in the long term.

So when I look at the Fibers challenges that we have, and included, I'm still confident we can do 8% to 12% earnings growth next year.

When I consider the company-wide cost actions we're going to take, as well as doing everything we can to reduce cost in Fibers directly, and the growth that I expect in the other three segments relative to this year, as well as our ability to deploy free cash flow..

Very helpful, Mark. Just one more quick question for you and Curt on the buybacks.

What's the trigger to accelerate the buybacks in the back half of the year heading into 2017?.

Well, if you look at the timing of the buybacks plan, also we have good visibility to our free cash flow. We know our free cash flow will be a little stronger second half of the year than the first half. And so, we also then will know we're on track to be able to complete the deleveraging, the total $500 million this year.

And so, we are accelerating our share repurchases, and that acceleration is occurring as we speak..

Thank you very much..

We will take our next question from Vincent Andrews from Morgan Stanley. Please go ahead..

Vince, are you there?.

Ron, go ahead and move on to the next, please..

Okay. You know what, I apologize. He is still in the conference. Go ahead, Mr. Andrews. Your line is open. Please go ahead..

Hello? Hello? Hello?.

Hi there. There you are..

Sorry about that. Sorry. It's Friday. In Chemical Intermediates, you referenced a few products that (37:00) oversupply and sort of exacerbating the pricing issue with the energy cost.

I'm just curious, when you look at those supply and demand balances, as we get into 2017 and into 2018, is there incremental capacity coming in those products, or are we going to see the worst of that S&D balance this year and as demand grows over the next couple of years, things should tighten up a bit.

How is that going to play out?.

Great question. From what we see right now, we think the price pressure is upon us, based on those capacities. I don't think we see any increase in those pressures in any significant way. There is incremental capacity being brought on always in these kind of products.

But unfortunately, the prices are now down to what I think is cash cost for the different relevant Asian players that we face. So, we've sort of reached the bottom, as long as oil stays in the sort of $40 range. Obviously, if oil drops into the $20s, you're going to see additional pressure..

And if oil goes up, we'll get benefits as well..

Yeah. If oil goes up, as many expect, that would be a tailwind for us next year..

Okay. And then, just in general, in terms of where your pricing is now relative to the raws, it was something you brought up at 4Q, and obviously it's been playing out through the year.

Do you think the pricing conversations that you've had with customers in terms of where spreads have gone, I mean, do you think things are relatively balanced now, as we head into the second half?.

I think so. And from what we can see, pricing has stabilized, and that's our view right now, in the back half of the year. The big question is going to be, how do all the moving parts on olefins change? They're bouncing around a lot, even in July. You've seen propane cost be anywhere from $0.52 to $0.43, depending on the day.

So, there's just a lot of volatility there. But, right now, as Frank asked earlier, we're assuming conditions stay pretty challenging like they were in the second quarter, and continue that way for the rest of the year..

Okay. Thanks very much..

If it gets better, we'll do better. But it's really hard to predict right now..

Thanks..

And our next question comes from Aleksey Yefremov from Nomura Securities. Please go ahead..

Good morning. Thank you. In your Advanced Materials, you averaged about 5.5% volume growth in the first half.

Is this about the level that we can expect in the second half? And also, what is sort of organic growth going forward in the segment?.

Advanced Materials is just a phenomenal success story for us last year and this year. And what I love about it is what you just highlighted. It's a volume and mix-driven story. It's not some temporary expansion on price relative to raws. So we feel great about how we're building on last year's tremendous growth this year.

And we do expect volume growth to continue in a similar level in the second half of this year, and we'd expect unit volume growth to continue into next year. But it's really important to highlight, it's not about the absolute volume growth, it's all about the mix.

So, while we're having double-digit growth in really high margin, great innovative products like acoustic interlayers, heads-up display, Tritan, our whole Performance Films business, our core copolyester are growing slower than the average that have lower margins.

And so, you're really getting a great mix improvement in every quarter on top of just good overall solid volume growth..

And if I could add, the margins you're seeing from the businesses are the kind of margins you would expect given the investments being made with this business..

Thank you. And maybe back to Fibers.

How far down this road of price cuts is the industry for committing 2017 contracts? Is there still time, do you think, to sort of – for the industry to pull up and be more rational? Or I guess, in other words, has there been significant volume committed at lower prices for 2017?.

I'd say where we are – the customers were quite smart in sensing that the industry had excess capacity. It's been a great industry for 10 years of consistent earnings growth for us and incremental improvements in margins. Over the last five years, we've been increasing price.

And with the excess capacity, I think customers are smart and they sense an opportunity and they started contract discussions early to see what kind of price improvements they could get. And some people responded and we're defending. And so, I think that that's – that horse has left the barn as far as 2017 goes.

We're going to see prices come down at our large customers. But I do think that positive side of the story is they also put a high value on stability and security supply and are looking for long-term commitments in contracts with suppliers that are committed to being in the industry for the long-term.

And we stand out as the most committed given our integration and scale so that I think it will work well for us as we try to maintain our market share position. And so, these long-term contracts, if this is the way it continues to play out will also provide needed stability for our customers on price and supply.

And, of course, it also helps us provide stability to us, too..

Thank you very much..

And our next question comes from Jim Sheehan from SunTrust Robinson Humphrey..

Good morning.

In the tow business, do you see any opportunities for strategic combinations or joint ventures or would antitrust issues preclude anything like that as being a possibility?.

I think we've looked at it for ourselves of course and given we're the largest merchant supplier in the industry it's unlikely we could do anything. I think in a flat to declining industry, you can make a case for consolidation and get it approved when a couple of other competitors want to come together.

In theory, any combination of the other three competitors is possible, based on our look at it, but it would obviously be a comprehensive process with the antitrust agencies to make sure that there'll be no harm to customers, but I think it's possible.

Whether or not it happens is, obviously, out of our control and we'll have to see what our competitors choose to do..

Great.

And could you comment on how your propane hedges roll off next year? And how you see propane supply/demand? And just generally, how do you see propane factoring into your earnings for 2017?.

So, I'll answer the hedge first. On the hedge, nothing has dramatically changed and our outlook of the impact of the hedge is net of the currency. We said that impacts around $0.60 a share and we think about half of that will still roll off next year. But we'll have to see how propane moves around a little bit.

But generally speaking, we still expect that benefit next year..

I'd note that that hedges and that comment, so that's both propane headwind being rolled off as well as the currency hedge benefits coming off. On the outlook for propane and propylene, I guess, what really matters is the cracking spread relative to propylene and ethylene.

Our view is the market is already reconnecting propane to global values with all the export capacity that's readily available in the U.S. So, I think you're seeing that now with our propane prices improve through the second quarter and even as oil has come off recently, you've seen propane prices follow it down.

So, it just depends on your view on oil and you can get a view of what you think propane is going to do next year. The bigger question is, what I already discussed which is, what our ethylene and propane prices can do to you especially ethylene as they've been stranded and disconnected.

I mean, it's really significant when you think about ethylene in Asia in the mid-$0.40 range, and we're in the mid-to-high $0.20 range in ethylene x 700 million pounds of ethylene that we sell. It's just that product line.

You do the math and whatever you think that delta should be and you can get to some very large earning numbers that it's been a headwind for us relative to what we expected at the beginning of the year..

Thank you..

Our next question comes from Mike Sison from KeyBanc. Please go ahead..

Hi. Good morning, guys. Mark, when you think about your portfolio, I think you've done a nice job moving it in the right direction, but you still have about a-third of it circling quite a bit here.

Does it make sense to look at more acquisitions? And what percent of your portfolio do you think you need to be able to offset these headwinds over time? I mean, is it more like an 80%, 90% of your portfolio of specialty or what do you think you need to do to get more stable?.

Thanks, Mike. Certainly, we're committed to driving our portfolio towards specialty as hard as we possibly can, and you do that through multiple things. We've done, I think, some excellent acquisitions, large ones like Solutia and Taminco and some bolt-ons as well.

And we paid reasonable prices for them and are going to get attractive ROICs relative to weighted average cost of capital. And, frankly, those acquisitions were intentional. We always knew we had challenges in Fibers and olefins at some point in the future.

We intentionally chose not to build crackers and PDH unit because we were convinced five years ago that that industry would overbuild. And we're intentionally diversifying our portfolio with the strength of the cash that we had at the time in olefins and fibers, into a more attractive long-term market where we can innovate.

So, I think that part of the strategy is great and on track. And of course, we've always been a disciplined seller of underperforming businesses. We've sold off $300 billion of revenue from PET, the polyolefins, et cetera, in the past and we're trying to get rid more of it now in this current process, on the bulk ethylene and some other products.

So, we're doing everything in our control. Unfortunately, I've said this before, we're out of the M&A market, as a tool to sort of further diversify our portfolio at this moment in time. I think the valuations are way too high in the market that are being paid right now, 15 times anything. It seems, it's hard to get an ROIC at an acceptable level.

And we still are old-fashioned that way. We still believe in an unlevered return on capital even if that is close to free. And so, we don't think that's value-creating for our shareholders, so we're not going to do that. What we are going to do is focus on innovation and driving innovative growth across our portfolio.

We've been doing it for a long time here at Eastman, and we're showing you excellent proof points about how we're doing it in the acquisitions from interlayers to Crystex, Performance Films, and we're starting to accelerate somewhat great opportunities in Taminco now that we've got under the hood there. So, we're going to do that.

We're going to take out cost as much as we possibly can, but not cut our innovation programs, that's a core choice for us. And as Curt mentioned, we've got one of the best free cash flows in the industry and we'll be repurchasing shares as aggressively as we can, but also maintaining our credit rating..

Great. And then, Advanced Materials has been a bright spot this year. Operating income is up 14% in the first half. You mentioned that it should grow double digits in 2016.

Will you have double-digit growth in the second half of 2016? And if so, what do you think will drive that?.

Yeah. I think we're going to continue to have rate of growth through the rest of the year in its volume and mix. It's just a continuation of the story we've been delivering for a long time..

Great. Thank you..

Our next question comes from Jeff Zekauskas from JPMorgan..

Hi. Good morning..

Good morning..

Can you remind me how much is your pension funding this year? And I would imagine your pension liabilities will grow given the interest rate environment that we're in.

And so, do you have any sort of guesstimate for how your pension funding might change next year or in future years?.

So, Jeff, I'll answer those in reverse order, if you don't mind. First of all, we do anticipate lower discount rates. And so, if you just give a $0.01 for every 25 bps that the discount rate lowers in 2016 that's roughly a $50 million increase in our liability for our pensions. If you expand that globally about $90 million.

And so, if you take current discount rates, there's probably about a 75 bps, 80 bps decline. So, you're looking at maybe a couple of hundred million increase in your pension liability. But it's only July so we'll see what the next five months hold. As it relates to pension funding, we contributed about $100 million last year.

I suspect it will be between $50 million to $75 million this year..

Got it. Great.

And then, for my follow-up, in the Additives & Functional area, can you remind me which product lines are growing in volume and which ones are shrinking?.

Sure, Jeff. So, overall, the segment net had a 2% volume growth for the second quarter. And what we're seeing is very strong growth in tire additives, especially Crystex. Great recovery there and we're doing really well with our customers across the globe there.

And then anti-dumping tariffs on tires are really helping us out as we have a stronger position outside of China and we're benefiting from that shift to the U.S. Coatings are growing with the market consistent with our customers. And as you think about adhesives, it's also – has modest growth.

All that success is being offset to some degree by decline in energy markets, which has been double-digit. We have some products that go downhaul into that space, and industrial construction, which is where fluid is going.

And so, we're obviously seeing a pretty drop in the construction cycle in China when it comes to chemical plants and demand is off there..

Okay. Great. Thank you so much..

And our next question comes from Laurence Alexander from Jefferies..

Good morning. I had two questions. First, just want to connect two of the responses earlier.

The comments around 8% to 10% growth next year, do you need the areas in your Intermediates business to stabilize for that to happen? Or you've seen enough lever and thought you can get to 8% even if the current pressures spill over into next year and the bottoming out process is pushed out?.

Yeah. We're assuming that the world stays similar to the way it is today. So, oil stays in the 40s, economy continues to grow slowly and there is a modest improvement in oil prices next year relative to this year, but not anything material. And with those conditions, we believe Chemical Intermediates can grow earnings over this year.

You have to remember that you got a net $0.30 of share tailwind of the hedge, when you back out currency that's $0.40 of propane hedges coming off and a $0.10 headwind in currency, net $0.30, and a lot of that, that tailwind flows in to Chemical Intermediates, 80% roughly. So, you've got that tailwind.

And you've got what we think is a bottoming out situation right now in pricing and behavior by our competitors. And so, we're not assuming some dramatic recovery next year..

And if I could add, don't forget, we've also announced the additional cost actions because given the challenges of Fibers potentially being down 10% to 20% next year, we don't want to sit idle.

And so, we're taking the additional cost actions plus, we expect good strong free cash flow next year and the ability to deploy that in a balanced way across debt and share repurchases..

And secondly, if and when energy markets recover, what do you see is the lag effect for your business to recover? And is your operating leverage in any way diminished by the cost-out actions you've taken?.

The cost actions certainly don't diminish anything. We are very committed to innovation. The only way we actually deliver long-term growth, long-term margins for our shareholders is innovate. That's true, I think, of any company in this industry, if you don't innovate, your products get commoditized. That's just a fact of life.

So, our cost reductions are not – we have a very bright line where we're not going to cross that. But we are going to push our cost reductions to the limit. And I'd also note, we are already at very low cost. And we already stretched our Functional scale capability tremendously with the large number of acquisitions we've done.

So, we feel good about where we are, but you can always push for more, and that's what we're going to do. When it comes to the overall market dynamics as we go into next year, I think we're set up well to grow our businesses through volume and mix in the specialties, and hold our margins.

And I think, Chemical Intermediates, the situation, we hope is stabilizing, as long as oil doesn't take another big step down..

Thank you..

And our next question comes from P.J. Juvekar of Citigroup..

Yes. Hi. Good morning. Mark, you talked about C2 chain being weak. I have a question on C3 chain. Propylene prices were generally stable in second quarter, around $0.30.

Are the propylene derivatives still falling, or have you seen some stabilization? Can you just talk generally about the C3 chain?.

Yeah. I think the C3 chain, I think we've talked about it to some degree already which is, propylene prices seem to have stabilized right now, but they're not improving as oil improved, as much as propane did. So you've seen some compression in that spread.

And if you look at it year-over-year, obviously, there is tremendous compression in propylene to propane spread versus a year ago in the second quarter, as well as how we view the next couple of quarters. But I think that over time, it will go back to a more normal relationship.

Propylene is a little bit artificially depressed by all the excess supply of PDH out there. But end of the day, propylene price is going to get set out of Asia, particularly probably China, and it's going to either be PDH, methanol, or to olefins or NAFTA, all of them connected to oil.

So, once we get enough derivative capacity out there to turn all this propylene into something, I think you start getting back to some more normal relationships of propylene to propane, with wherever oil turns out to be..

You talked about your portfolio transformation. A lot of investors think the portfolio is a bit too complicated for them to understand. I know you're divesting ethylene. The longer this transformation takes, your multiple is getting impacted in the meantime.

So, can you give us a sense of timing on what you're thinking about this transformation, and when do you think you can sort of feel like you've done it?.

Sure. So, roughly, this year, two-thirds of earnings will come from AM and AFP, which is a dramatic change, if you look at who we are today versus five years ago. So, I think we've made huge progress on altering our portfolio and it was intentional, as I said.

Obviously, we didn't expect the accelerated pressure in Fibers and Chemical Intermediates we're experiencing at the moment, So I thought I had a little more time to sort of grow the specialties relative to those two segments.

But I do think we're doing everything we can, and we're cutting costs aggressively to offset the margin compression we're facing in Fibers and CI as much as we can. And I think oil will recover to some degree at some point, and that will give us a big tailwind relative to some of these businesses.

So I think – this is a really tough year for us, obviously. I'm not happy about it. We're doing everything we can, on every front, to make it as good as possible. But right now, we got to organically grow. We got to divest what we can and returning cash to shareholders.

And I think that is going to be a compelling story, if you look at how we can perform in that context relative to this year going forward and relative to, I think, many of our peers. So, we're on the right track. We just got to keep driving it..

Thank you..

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

Yeah. Good morning, fellows. Three questions on tow, if I could. First is, you talk about being low cost, which I think everybody would grant you.

But bigger question is, how steep do you think the cost curve is, so you guys versus, say, the plant that sits at the 90th percentile of the cost curve, how big is that delta? Second question would be, how much has the low methanol prices changed the cost dynamic for your competitors, and therefore the dynamics in tow? And then the last one is, selling half of your JV back to Solvay, on the surface of it, giving a smaller competitor more capacity doesn't seem logical.

So, could you walk through the logic of doing that deal?.

So, I'll take the first two, Curt will take the last one. So, in regards to the shape of the curve, we are definitely the lowest cost player. And to answer your question, the curve has flattened out a bit, because – while we're based on coal, our competitors are based on natural gas and methanol that drives their cost structure.

And certainly, those prices have come down. So, in this year, it's feeling a little bit sort of flattened out relative to the past. As you look forward, coal's going to probably stay pretty low in the U.S., and natural gas prices are already moving up, and methanol prices will certainly move up with oil as well.

So, I think the curve is actually going to steepen relative to us from this year going forward, is our view of sort of how that cost curve's changed and is going to go back to being steeper as we move forward. I'm not going to get into details of the steepness of the curve.

What I can tell you though is, there's plenty of high-cost assets out there that are discrete standalone assets. And if someone wanted to improve their earnings and their cost position to serve their customers, that's the choice that they have to work through..

On the flake joint venture, as you know, we enjoyed the benefits of that flake joint venture for a number of years, a good partner, a good asset. But given our debottlenecking of our own low-cost flake assets and the shutdown of Workington, we're now balanced. So we didn't need that capacity off that joint venture.

So, really, we agreed to sell our share to that joint venture. I think it's a good outcome for both parties, because we'd be able to match our flake to our tow capacities around the world. It gives them a low-cost flake asset. I assume that gives them some options to think about, but you need to ask them about that..

Great. Thank you, guys..

Ron, let's make the next question the last one, please..

Perfect. And we'll take our last question from Mr. Bob Koort from Goldman Sachs..

Thanks very much. Guys, in the Chemical Intermediates, I mean, pretty jarring results to nearly make no money. I'm just curious if you look across that portfolio, it seems like there's several businesses that should be reasonably good.

So, are there some reasonable loss makers in there at the moment?.

So, Bob, I think we've called that ethylene enough and obviously that one is pretty challenged in the current economic situation. It's also important to keep in mind that while we're certainly not happy about the hedge with low oil that the margins in this business will probably be double if you extract the hedge out of this segment.

So, it's certainly not good and we're not happy about it. But if you look at operating earnings before financing activity, it's quite a bit better. And we'll, by that reason, get better as the hedge rolls off over the next two years. But, certainly, we're under pressure in bulk ethylene.

That's the only sort of one that is sort of in a challenged situation. The others are just much lower margins than what we'd like it to be. And as I said, plasticizers, is an example of the place that's under a lot of pressure hence our antidumping case..

And Bob, if I could....

(01:02:25)..

Yeah..

I'm sorry, Bob, just to remind you. The second quarter results do include roughly $35 million of maintenance cost. So that's a little unusual for the second quarter trend. That's why you'll see sequential improvement in this Chemical Intermediates through the rest of the year..

And I know you guys have a slightly different feedstock slate than, say, your average U.S. cracker which can cause some challenges.

Is there anything unique about your contract structure either in ethylene or across your portfolio that would be different than sort of a typical company?.

No, not really. I mean, again, we have – no unique, (01:02:58) we're just a buyer of propane in the marketplace, same with ethylene. We have a certain slate of product mix in the crackers. There's some flexibility but we have some limitations there.

Longer term, if there's a party interested in our crackers, there's amount of capital you could deploy to make that more ethylene-based, and that's the kind of conversations we're having with the people interested in our excess ethylene position today..

Got it. Thanks very much..

So. I'm just going to make one final comment and let Greg wrap-up. While we're certainly not happy with our performance in the second quarter and revising guidance down for this year, I think that we are extremely happy with our strategy and what we're trying to do.

For a long time, we've known that we should be growing our specialties both innovative ways as well as acquisitions. We're doing that and it has improved the quality of our portfolio and the strength of this company dramatically from where we were five years ago and we're going to continue doing that.

We're also going to do everything we can to reduce cost, offset these short-term challenges, being responsible for delivering value for our shareholders both in short and the long term at the same time. And so, you're going to see us drive executions as hard as we can. You're going to see push results as hard as we can in this very tough environment.

And we feel good about our way to fight our way through this and deliver growth next year..

Okay. Thanks, everyone for joining us this morning. A web replay will be available later this morning and have a great day..

And that will conclude today's conference. Thank you for your participation. You may now disconnect..