Gregory Riddle - Vice President-Investor Relations & Communications Mark Costa - Chairman & Chief Executive Officer Curtis Espeland - Chief Financial Officer & Executive Vice President Louis Reavis - Manager-Investor Relations.

David Begleiter - Deutsche Bank Robert Koort - Goldman Sachs Mike Sison - KeyBanc Frank Mitsch - Wells Fargo Jeff Zekauskas - JPMorgan PJ Juvekar - Citi Kevin McCarthy - Vertical Research Partners Laurence Alexander - Jefferies James Sheehan - SunTrust Robinson Humphrey John Roberts - UBS Vincent Andrews - Morgan Stanley Aleksey Yefremov - Nomura Securities Nils Wallin - CLSA Arun Viswanathan - RBC Capital Markets.

Please standby, we're about to begin. Good day, everyone, and welcome to the Eastman Chemical Company's Third 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..

Thanks, Ron, and good morning, everyone, and thanks 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 third quarter 2016 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2016 and the Form 10-Q to be filed for third 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 third quarter 2016 financial results news release. You can find this on our website at www.eastman.com in the Investor section.

Projection of future earnings also exclude any non-core unusual or nonrecurring items. With that, I will turn the call over to Mark..

Good morning, everyone. I'll start on slide three. I'll begin my comments by reviewing our strategic highlights for the third quarter and the first nine months of 2016. We continued to upgrade the quality of our product mix by growing high-margin specialty product lines, a key component of our winning strategy.

And I have increasing confidence about the breadth and depth of our innovation portfolio which is significantly more compelling today than it was three years ago. One of our recent innovation successes is within our tire resins platform in the Additives and Functional Products segment.

Tire manufacturers face a significant challenge in improving fuel efficiency while maintaining traction safety. Eastman is uniquely qualified to meet this challenge. We are the world leader in resin technology chemistry.

I'm pleased to report that we have gained commercial approval with a major tire producer for two new proprietary products and are in the process of sampling a full range of resins with selected innovation partners.

So far this year the tire resins platform has delivered approximately 20% volume growth over 2015 with margins above the corporate average. This is a great example of revenue synergy from the Solutia acquisition combining a strong market connect and application development capability with our resin technology platform.

Moving next to our capital projects that support our specialty growth. We are leveraging our unique innovation capabilities and investing for long-term growth where it counts. From Tritan to inter-layers to Crystex, we are the world leader in both process technology and product offerings and are winning through our innovation platforms.

We are walking the talk with our investments in growth and specialty products and seeing the results. We are therefore driving hard to complete these capital projects to support our growth.

All three of these projects are on target to finish on or well below budget which demonstrates our competitive advantage through best-in-class engineering, construction and operational capabilities. In a slow growth world, we are creating our own growth and investing capital smartly.

We also are proving that we can drive innovation while managing costs aggressively. We remain well on track with our cost reduction efforts to deliver $100 million to the bottom line in 2016 without sacrificing our investment in long-term growth initiatives. These efforts include implementation of hundreds of projects across our global footprint.

One example is the successful initiative recently completed by our process control team. We were able to utilize a plant loader program associated with our largest cracker in Longview, Texas. The initiative increased feed efficiency saving almost $2 million in cost.

This is a great example of how our significant scale and integration at our two largest sites provide us a unique competitive advantage where we have dedicated experts in a wide range of specialized operational disciplines.

We also leverage these experts across the globe to optimize performance in the smaller manufacturing sites from our acquisitions to our sites we have had for a long time. In addition, we remain on track to execute our second cost-reduction initiative this quarter which we expect will deliver an additional $100 million to the bottom line in 2017.

Productivity is a core capability at Eastman. Over the past five years, we removed almost $700 million in cost to offset inflation and deliver results to the bottom line while maintaining our commitment to quality, reliability and safety.

We are continuing to innovate throughout our enterprise in product development, in how we think about manufacturing, and our approach to productivity across all of our functions. All of these areas will contribute to our strong growth going forward. With that I will turn it over to Curt to discuss corporate and segment results..

Thanks, Mark, and good morning, everyone. I'll start with our third-quarter results on slide four. Overall sales revenue decreased primarily due to lower selling prices and lower fiber sales volumes more than offsetting higher sales volume in all other segments.

Our operating earnings declined as an increase in advanced materials was more than offset by declines in the other segments. Despite the challenging business environment, our operating margin was above 18%. Adjusted earnings per share was $1.86 for the quarter as actions we took led to both operating earnings and taxes coming in better than expected.

Moving next to the segment results and starting with Advanced Materials on slide five which delivered another quarter of impressive growth driven by our innovation platforms. Third quarter sales revenue increased due to double-digit volume growth of premium products.

Eastman Tritan copolyester once again had a record volume quarter as we continued to lead in consumer durables and housewares. Saflex acoustic inter-layers continued their strong growth this year as applications have expanded from the windshield to the side windows and the sunroof as well as expand into more models.

Performance Film volumes were strong this quarter due to an excellent new channel strategy in North America and China. The volume and mix improvement was partially offset by lower selling prices primarily for core copolyesters attributed to lower raw material costs.

Operating earnings were up 22% or $25 million primarily driven by higher sales volume and improved product mix of premium products as well as lower unit costs due to higher capacity utilization. Operating margins for the quarter increased by approximately 350 basis points to over 22%.

As we look ahead to the fourth quarter, we are expecting normal seasonal decline in volume. With that said, we expect Advanced Materials will deliver low double-digit earnings growth for the full year of 2016 and anticipate this business can continue to deliver strong growth again in 2017.

We are delivering compelling proof of our ability to drive growth through innovation even in a difficult macro environment. Now to Additives and Functional Products on slide six. Sales revenue declined primarily due to lower selling prices attributed to lower raw material costs partially offset by higher sales volume.

Operating earnings decreased primarily due to lower selling prices more than offsetting lower raw material costs and higher sales volume. The operating margin remained solid at over 21%. For full-year 2016, we continue to expect higher volumes and expect prices have mostly stabilized.

One other item I thought would be useful as you analyze this segment this year, we have been operating under a new organizational structure for a couple of quarters now which if you recall put some major product moves between Additives and Functional Products and Chemical Intermediates.

As we analyze how resources and costs are flowing, it is coming out a little different than we expected in our historical recast.

As you consider year-over-year comps, about $20 million or more costs are flowing through Additives and Functional Products in 2016 than what was reflected in the $660 million recasted view for them in 2015 while approximately $20 million less is flowing to Chemical Intermediates.

Putting it all together, Additives and Functional Products remains on track with our previous expectations for full-year earnings to be somewhat down which would be a solid result in the current business climate. As pricing stabilizes, we expect solid earnings growth next year through market volume growth and our innovation effort.

Now to Fibers on slide seven. Third quarter revenue, volume and earnings were in line with our expectations. Sales revenue decreased primarily due to lower sales volume and lower selling prices particularly for acetate tow. Lower acetate tow sales volume was primarily due to reduced sales into China.

Operating earnings declined due to lower sales volume. The lower selling prices were offset by recent actions we took to reduce raw material costs and actions to reduce operating costs. As a result, operating margins held at approximately 32%.

Our full year outlook has not changed as we continue to expect second half earnings to be similar to first half which includes tow volumes being down approximately 10% for the year. I'll also mention that we continued contract negotiations through 2017 and anticipate earnings for the segment to be down roughly 20% next year.

We remain confident in our long-term position and strongly believe that Fibers will continue to be a valuable business for Eastman going forward. I will finish up the segment review with Chemical Intermediates on slide eight. Sales revenue decreased due to lower selling prices.

We attributed these lower selling prices to continued competitive pressures due to lower oil prices and weak demand in Asia-Pacific. Operating earnings declined primarily due to lower selling prices more than offsetting lower raw material and energy costs and lower hedge costs.

During the quarter, we saw some modest improvement in the overall business environment impacting chemical intermediates and now expect earnings in the back half of the year to be slightly higher than the first half and we expect this improvement to continue into next year.

Lastly, I will give you a quick update on our process for divesting our excess ethylene capacity and potentially certain commodity olefin product lines.

We continue our discussions with potential partners or parties and now anticipate this process will carry into next year though I will add that executing a transaction in this current environment remains challenging. On slide nine I will transition to an overview of our cash flows, our other financial highlights for the third quarter.

We continue to do an excellent job of generating cash with third-quarter operating cash flow of $450 million. We contributed $50 million to our US pension plans in the quarter. Capital expenditures totaled $141 million.

We continue to manage the pace of capital spending with the current economic environment while maintaining growth investments and continue to expect full-year capital expenditures to be between $600 million and $625 million.

Free cash flow for the quarter was a strong $309 million and during the quarter, we reduced net debt by over $160 million, paid our third-quarter dividend of $68 million and repurchased $75 million of our shares. Through nine months of 2016, we have reduced debt by $400 million and returned almost $325 million to our stockholders.

Our effective tax rate for the quarter was just over 21% as we are benefiting from foreign tax credits and other positive tax attributes. We expect our full-year tax rate will be between 22% and 23% which is better than previous expectations reflecting the continued benefits of our improvement in business operations.

We continue to look for every opportunity to reduce costs including taxes from both an earnings and cash flow standpoint. This quarter was another great example of our tax team finding such opportunities including amending previously filed tax returns.

Lastly, we remain on track to generate more than $900 million of free cash flow for this year which is a very strong performance in the current environment. With that I will turn it back over to Mark..

Thanks, Curt. On page 10, we've talked a lot about the benefits of our portfolio transformation and how that contributes to more consistent earnings growth and strong free cash flow generation. You can see that our portfolio transformation has been a key element to delivering strong earnings for quite some time.

Over the last six years, we have taken decisive actions to improve our portfolio through acquiring attractive specialty businesses and divesting underperforming businesses. We acquired these specialty companies at reasonable valuations with very attractive synergies that we have delivered.

Organically, we have grown our volume and more importantly upgraded our mix. This is both within our heritage businesses and within the acquired businesses through great efforts in our innovation programs and through our commercial excellence. As a result of these efforts, you can see a very different story from who we were before versus today.

We have improved the earnings mix across segments significantly. In 2010, Fibers and Chemical Intermediates were roughly 60% of the corporate earnings. Today that percentage is closer to 30%.

For 2016, we expect that the combination of Advanced Materials and Additives and Functional Products will represent approximately 70% of our earnings and even in this environment, our EPS CAGR will still be roughly 11% from 2010 to 2016. We also dramatically improved our free cash flow, almost tripling it from 2010 to 2016.

With improvements in our core businesses and adding the strong free cash flow generation from our acquisitions has potentially upgraded the quality of our portfolio. And we are still investing capital to deliver long-term growth in our specialty businesses while we generate one of the strongest free cash flows in this industry.

On slide 11, I will discuss our 2016 outlook. We are doing a great job of executing our strategy in a challenging global business environment. Strong growth of high-value innovative products continue as we benefit from leading positions in our attractive niche markets.

We are seeing benefits of scale and integration translating to growth in earnings and we continue to invest in innovation and product development so we can sustain our momentum into the coming years. We are also seeing be benefit of acquisition synergies in both cost and revenue. At the same time, we are achieving our cost reduction goals.

I can't say enough about how our Eastman employees globally who made this possible. As I mentioned earlier, productivity is in the DNA of Eastman and I remain very confident we will achieve our cost reduction targets for 2017. In addition, we are using all lines of the income statement to support our performance this year including lower tax rates.

All of these actions are helping to offset the challenges from low oil, sluggish global GDP growth and the challenges we face in fibers. Putting all of this together, our outlook for adjusted full-year 2016 earnings per share has improved to between $6.70 and $6.80 which I consider to be a solid result given our challenges.

We also continue to expect strong free cash flow this year above $900 million. We are creating value for our stakeholders with our balanced and disciplined allocation of this cash, increasing our dividend, increasing share repurchases and continued delevering. With this momentum in mind I will make a few comments about 2017.

On the last call, I indicated we have confidence that we can get back on track for EPS growth in the 8% to 12% range in 2017 and we continue to be confident. As we look at it, we expect growth and innovation driven mix improvement in Advanced Materials and Functional Products. Cost reduction actions contribute about $0.50 per share.

The net of propane and currency hedges continue to roll off in 2017 to contribute about $0.30 per share. An increase in the level of share repurchases while maintaining a balanced approach with deleveraging. We continue to use all of the lines of the income statement to contribute to EPS growth.

These would more than offset the roughly $0.30 per share headwind from Fibers and the preproduction expenses from our new specialty plants. The combination of these factors would get us to EPS growth in the 8% to 12% range.

I would also note that we don't need the world to get much better to achieve this growth and if things get better, there is upside. We will talk more about the outlook for 2017 in our fourth-quarter call in January.

But I believe it is important now for you to understand why we are confident about delivering strong earnings growth and strong free cash flow in 2017. This has been a tough year and I'm proud of our employees around the world who have maintained focus and positioned us for growth going forward.

I'm confident that 2017 will be a better year for Eastman. Most importantly, I believe that we are building one of the world's leading specialty companies to deliver long-term sustainable growth in a world where you need to create your own growth. With that I will turn it back over to Greg..

Thanks, Mark. We've got a lot of people on the line this morning 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 are ready for questions..

[Operator Instructions] And we'll take our first question from David Begleiter from Deutsche Bank. Please go ahead..

Thank you. Good morning. Mark, thank you for the 2017 outlook, the early read.

On 2017, can you talk a little bit about the free cash flow that 8% to 12% will generate and the uses of that free cash next year as well?.

We will let Curt handle that question. I just want to add before he does that, we are really excited about getting back to this path of earnings growth. We feel great about all the levers in front of us to get there and certainly expect it to improve our cash..

As Mark highlighted earlier and if I could, Eastman has one of the best portfolios I think that can generate cash in the industry and you are seeing that in the results and also you'll see that next year. We do expect higher free cash flows next year as we see operating earnings grow as well as we will see a modest decline in our CapEx.

A couple of factors to think about when I am looking at 2017 cash flow is we will be watching what kind of raw material environment we are facing, if we expect higher raws, as you know that is going to give us some challenges in working capital that we will try to offset.

I also am expecting some higher cash taxes next year as we have now fully utilized the NOLs as part of the Solutia transaction as well as you know there is a phaseout of bonus depreciation for manufacturers like Eastman. So putting it all together though, we are going to generate free cash flow over $900 million.

With the earnings outlook that Mark talked about, I wouldn't be surprised if we see free cash flow approaching $1 billion. The allocation, what you will see is still a balance across the different buckets that we have.

You know our disciplined and balanced approach to capital allocation but what you will see is some more balanced approach to deleveraging and share repurchases with that free cash flow. So if you think about deleveraging was the predominant use of cash flow this last couple of years that will moderate to be more balanced.

And so you will see share repurchase probably in excess of $300 million..

Excellent. And Mark, you have seen some pricing increase announcements in oxos and plasticizers.

Can you comment on the cadence of those price increases and how they could contribute to 2017 earnings growth?.

Sure, David. We are seeing traction in getting price increases in September and into October as the propylene and ethylene markets have strengthened, that has put pressure across the globe and played out as we expected in our second-quarter call.

We saw that our competitors especially the Asians setting price on a lot of these products on a global basis. We are starting to hit their cost positions and as oil strengthened and their raw material cost, who often purchase propylene, ethylene was going up, they would face pressured increased prices and that is what we are seeing.

So it is very encouraging to actually see prices go up for once. It has been a long time. We do expect that momentum to continue as we go through the fourth quarter and carry into next year but obviously that will depend a bit on the raw material environment. So we will have to see where oil and olefin prices go.

But we are happy to see the change in the direction and some traction right now..

Thank you very much..

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

Thank you very much. Good morning..

Morning, Bob..

I was wondering if you could talk, two items real quick, an update on how the Kuantan plants are progressing and when you might see some commissioning of those? And then secondly, can you speak a little bit about the volatility you have seen in Advanced Materials? Obviously you had a very nice showing again this quarter after a bit of a dip the prior.

But what is sort of the path forward and the level of consistency or reduced volatility you might be able to deliver out of the business? Thanks..

We are making great progress on both our Crystex and our PVB plants in Kuantan and driving hard to get those up in the back half of next year. And as I said, they are on track and we are excited.

Customers around our new Crystex product that we are producing off of this new process technology are very excited and we are feeling pressure to get the plant up as quickly as we can to serve this new interest in the better performing product. The growth rates have largely been fantastic so we need to get the plant up to keep our growth.

In regards to Advanced Materials, they are just having a phenomenal year like they had a phenomenal year last year and it is really proof of our strategy we have been talking about for the last five years. We said we we're going to drive growth through innovation and that is what we are doing.

In Tritan, in heads-up display and acoustic inter-layers and our performance films business all delivering double-digit growth and driving not just the sort of overall volume growth but the mix upgrade with all those products growing at such high rates with above segment and above company average margins.

So it is just a good story, it is really very little of it is a raw material tailwind and what is driving the results which gives us confidence that it will sustain going forward. And obviously third quarter was a quarter where everything just ran really well. We had good volume, good mix. The plants run incredibly well.

One of the challenges in these kind of businesses where you are making such a physical product is you have yield and quality issues and we just had a really clean quarter in how we ran the plants..

Terrific, thank you..

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

Hey, guys. Nice quarter. Mark, could you help us out a little bit in terms of looking at Additive and Functional Products. It is sort of sitting in this specialty area in your bar chart so the earnings are going to be slightly down.

Can you kind of parse out, there is a lot of business in there, what is growing? And maybe just kind of highlight the areas that the specialty business there that are showing earnings growth and maybe some of the headwinds, the hedges and stuff that is kind of impacting that?.

Sure. So first of all, this portfolio is a great set of specialty businesses, tremendous additives that add a lot of functionality across our customers in coatings, tires, adhesives and animal nutrition, crop, etc. It is just a great business of unique additives. So we view it as a business that will continue to grow.

As you look at the pricing which I think is the key question and how it has come off, prices have really stabilized since the second quarter so we did a great job of holding onto raw material value at the beginning of last year, started giving some of it back in the third quarter but really started giving it back in the fourth quarter and the first quarter of this year as we decided to share value with our customers.

But those prices have stabilized. Really didn't have much sequential decline in prices at all from second-quarter into the third-quarter this year and we expect the same sort of stability as we go into the fourth quarter. You will see that even on a year-over-year basis, January as you see the trends in the fourth quarter.

So that feels very stable to us an appropriate. We actually expect prices probably to start moving up in the coatings area especially on the olefin related products. The specialties are a little slower on prices on the way down. They are also slower on the way up.

So Chemical Intermediates has already started to move on the pricing front and we expect as we go into next year, those prices on the specialty related products will also start to move up with these current market conditions. That all feels directionally correct to me.

I think the important point is how you sustain these margins and continue to deliver growth over the long-term. It is easy to hold onto prices when raws drop but if you do that too aggressively and not share some of it with your customers you really create a problem with those customers being engaged and working with you on any future renovation.

I think we have struck the right balance here and we are seeing that in the proof of our innovation successes. We are just having tremendous success throughout the AFP portfolio with innovation.

Our Polyester Coatings is doing tremendously well, we talked to you about that in the first-quarter call and we have gone from three to 10 customers aggressively working with us on how to commercialize our product and take it to market. We are seeing great success in the tire resins that I just told you about.

We're seeing great success in the Aerafin olefin products that I told you about in the second quarter call that go with the adhesive resins. We continue to see great traction in our low odor coalescence. So across the portfolio you are seeing a lot of innovation, a lot of traction.

And as I said before, this is a little bit slower in getting started than Advanced Materials but as you look at the next three years, you are going to see all of these innovation programs driving growth and mix improvement here just like what we are doing at Advanced Materials.

What I love is we are proving across the board that we can deliver growth and innovation, we can create our own growth. We are not waiting for the economy to get better and that is the story you are going to see us deliver over the next three years..

Great.

And I know you don't want to be too specific on '17 yet per segment but if Additives and Functional Products grows volume next year, hedges come off, is there any reason why this segment wouldn't participate in showing some good earnings growth next year?.

We expect AFP to show good earnings growth next year as a combination of modest market volume growth. We are not assuming an improving economy next year just to be clear but we do assume there is an economy growing somewhat. So we will get some volume growth, we will get some mix improvement through the innovation.

We will certainly see some benefits of the hedge but remember 80% of the hedge benefit flows to Chemical Intermediates so it is modest here. And of course the broader cost management programs, a certain amount of that benefit is going to flow into this segment..

Great, thank you..

And we'll take our next question from Frank Mitsch from Wells Fargo..

Hey. Good morning, gentlemen. A couple of questions. Curt, just a little bit of a clarification. I think you said that you are planning on doing at least $300 million of share buyback in 2017. Obviously you did $75 million this quarter, Q3.

Should we assume that pace, that same $75 million plus pace in Q4 as well?.

We will look at various uses of our cash in the fourth quarter. If we don't have more attractive uses of that cash, yes, some of that cash will be deployed for share repurchases..

I'll take that as a yes, thank you..

I am just saying, Frank, there is always competing uses of cash in the fourth quarter and we are going to look at all the options but in absence of others attractive options, yes, share repurchases will be one of the leading ideas for our deployment of our cash..

Got you. Just kidding. I have to ask a question, Mark, with respect to fibers and the positioning the portfolio. 2015 very difficult year, '16 very difficult year, '17 you just changed guidance from 10% to 20% down to now down 20%.

As I think about some of the shifting that is going on there, we used to kind of count on annual sort of contracts with your customers there but now we are hearing of multi-year contracts.

So if you guys are structuring multi-year contracts, are we setting the stage where 2018 and 2019 are also going to be more difficult years? Can you talk a little bit about the prospects for that business post another difficult year?.

Sure, Frank. We obviously spend an extensive amount of time talking about what is going on in the fibers business from demand trends to competitive behavior. And I think I provided quite a long soliloquy on this one in the second quarter call. So I will try and be sort of brief on it now.

Bottom line is you've got a situation where demand situations weakened across the globe, specifically the imports in China and that has created pressure on pricing. And what we are seeing right now is that pricing pressure play out into the 2017 timeframe. Our objective is we can just keep the business stable.

That has been our objective from the beginning. We took capacity out in the UK as we added capacity in China and we also exited some flake capacity as well. On the pricing front, we have attempted to be as stable as we can be on the pricing.

Unfortunately we got pushed pretty aggressively on some of our competitors trying to take share from us outside of China. And all we are trying to do is defend our share and keep it stable outside of China. We are not trying to recover lost imports in China by taking share outside of China.

We think the best way to do that is to get multi-year contracts on volume and price in place with many of our large customers which will provide stability actually from '17 into '18 and '19 as we provide security supply to our customers but also provide security demand to us.

So I think that those actions are actually going to put us in the right direction as far as the things we can do to control the outcome in this industry and our performance and we will just have to see how the rest of it plays out..

All right, great. That is helpful. Thank you..

And we'll move to our next question from Jeff Zekauskas from JPMorgan..

Hi. Good morning..

Morning, Jeff..

Hi.

Do you have to take another restructuring charge in the fourth quarter of comparable size in order to accomplish your cost-cutting program next year?.

No. The restructuring charge you saw in the third quarter pretty much covers the restructuring program we have underway..

Okay.

And in terms of taxes, are your cash taxes in books -- how different are your cash taxes and book taxes this year and your expectation for next year? And what do think your fibers volume growth rate is in 2017?.

I will talk about the taxes. Again as you know Jeff, you can see a lot of what is going on with our cash tax rate versus current, just what goes through our deferred tax line in the cash flow statement and so you see that has improved this year.

And again, that is again a lot of great work that occurs with our tax finance and legal teams who are looking for ways to really how do we help reduce costs and how do we help cash flows within this company? And so when I look at that going into next year, I do believe again we won't have the benefits of those NOLs from Solutia that we have enjoyed and in fact as mentioned earlier, we have utilized all the NOLs since the acquisition in 2012 and so that was at an accelerated pace because of that great work, and again the phaseout of bonus depreciation.

So there is a pretty good opportunity for us to continue to look at our cash tax rate but it will be more challenging as we go for the next several years..

On the fibers demand, I will take that one, Jeff. Outside of China, we don't expect any changes in trends where the markets continue to decline 1% to 2% a year which has been true for a long time. Inside China, demand in China is a complicated and opaque question.

Right now we have seen some changes in production rate, cigarette productions, where they've taken it down 6% to 7% which is great because I think they are just destocking primarily with those actions. You have to remember the production rates are not equal to primary consumption rates.

We do expect that they had trouble destocking cigarettes in '15 and '16 -- I'm sorry, '15 and '14. So I think that we are actually encouraged to see them take the actions to finally address that issue like they are already addressing at the tow inventory level as well. So in some ways I think there is progress to put this behind us.

Primary demand is ….

So roughly your volume growth is minus 10 next year?.

No, no, no. That is not what I said. I said this year we are seeing cigarette production being reduced in China and I think that is destocking. As we look at next year, what we hope is they complete their destocking this year and demand at the production level is stable next year versus this year and that is sort of our assumption at this point.

So when you look at next year, I think imports are going to be somewhat stable, they could be a bit off as they finish out some destocking at the cigarette level and we will just have to see how it plays out..

Okay, great. Thanks so much..

And we'll move to our next question from PJ Juvekar from Citi..

Yes, good morning. A question on Crystex. You seem to be doing a good job on innovation but the OEM market -- the other OEM market is slowing, the classic drug market seems to be slowing as well.

So can you talk about demand there and is there any generic competition from China coming in?.

So in auto demand, it sort of impacts us in multiple places. So in Advanced Materials, which is very OEM driven, we are looking at that.

What has been great about our success to date is we are creating a lot of our own earnings growth from mix upgrade in double digit growth in things like acoustics and head-up display as well as a new channel strategy in performance films where we are growing the whole size of the market and our share of it.

So even in a slow automotive growth world, we can still deliver growth, it may not be as high as this year but still deliver growth. So I feel good about where we are there.

And we see tremendous innovation opportunities continuing out there to add more functionality to the windows as we work with our customers and next-generation of acoustics and head-up display as well as other functionality. So it is just a very robust opportunity for growth.

On the Additives and Functional Products side when it comes to coatings and tires, we are more balanced, that is more of a balanced market from refinish or replacement tires than OEM. And so there we are less exposed to sort of OEM trend rates as we are in Advanced Materials.

So I think that again we will have some solid growth there and I'm not really worried about the OEM trend rates being a material issue..

Okay. And then just going to - I think Curt, you mentioned that selling [that end] business has been difficult in this environment. I would imagine that as we get into the second half of '17 and '18 when the new olefin capacity starts up that it will get even more difficult.

Can you give us your thoughts about the timing of the sale?.

The timing of the sale? Sorry, you just were breaking up there..

So if you are looking about the excess ethylene and the commodity olefins, we continue to have a number of parties actively engaged in the process.

As I mentioned, it has continued to be a challenging environment right now to ensure we get fair value for those kind of assets and quite honestly it has been further compounded by having a competing asset coming into the marketplace. So we will just be disciplined on valuation and patient on timing as needed.

And so like I mentioned, this is going to go into next year. I can't give you a good sense of next year other than I would suspect the first half of the year feels about right that we will have better progress on different options that we have. And again, we are not just sitting idle.

We will look at to see if an outright sale is possible but we will continue to evaluate other options or structures and pursue them as appropriate as well..

The one thing you should take from us is we are committed to improving the quality of our portfolio and the stability of our earnings. Before it became a trend we were already divesting a lot of underperforming volatile businesses and have done a lot of portfolio transformation as we noted earlier.

And we will continue to look at every way we can do it that is practical. But at the end of the day, we are going to focus on shareholder value creation and make sure what we do creates value..

Thank you..

And we'll move to our next question from Kevin McCarthy from Vertical Research Partners..

Yes, good morning. Mark, your Advanced Materials operating margins were up 350 basis points year-over-year. It looks like they were up actually a little bit more than that versus the first quarter.

How sustainable is the current level?.

Good morning, Kevin. We feel good about the margins we have in this business. As I said, we were running incredibly well through the third quarter and did this through volume and mix which in general we view as a very sustainable way to grow earnings over the long-term.

It was a clean quarter so there is always some quarters where you are going to have some quality issues and things like that. But I think the margins are sustainable.

I would note that the fourth-quarter always does have seasonal decline in volumes and so those margins are always going to be a little bit lower on the fourth quarter basis versus the third..

And a follow-up I think in your prepared remarks you mentioned Performance Films had a new channel strategy.

I was wondering if you could elaborate on that?.

Sure. One of the great things about this business is it is a consumer products business where we have direct access to consumers and deliver a wide range of products and we have the best products in the industry. But when we picked up Solutia, their strategy on how to go to market and how to even expand the market was not that sophisticated.

So we spent a lot of time rethinking our channel strategies and figured out how to not just go through aftermarket retail shops but develop much more compelling programs through auto dealers in the US which allows us to access an entirely new set of customers that don't show up in an aftermarket tint shop and have been incredibly successful expanding the market and also improving the quality of how we go to market.

The same thing true in China. We were doing quite well aftermarket, not as successful in the auto dealerships and have significantly improved our channel strategy to go through the auto dealerships which is a very important channel in China and we are seeing great success.

And it is not just going to those channels but how we take the products to market, how we are positioning our value proposition versus our competitors in a more compelling way. It has just been a great story of determined improvement of our go-to-market strategy over the last three years..

Great. Thank you very much..

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

Good morning. Just two questions. One on the fibers market.

Can you give a sense for how steep you think the underlying cost curve is? I'm thinking particularly where you see the smallest most marginal producers? And secondly, as you look out over I would say the next three to five years, are there any large chunks of non-operating expense that would affect the free cash flow bridge either maintenance turnarounds or facilities where you need to do another CapEx cycle or pension contributions or anything else that you see like on the three- to five-year horizon?.

So on the cost curve side there is certainly high and low cost assets in the integrated flake and tow components of the Fibers business.

As I have said in the past, we are the lowest cost producer, we are backward integrated in coal, we have the largest scale and we are actually now down to our largest most integrated asset as our only asset here at Tennessee of flake which is matched to our tow capacity here in Tennessee combined with our Korean tow capacity and China.

So we are very happy about our cost position. Our competitors are based on either purchased methanol or in hydride in some cases. So some of these assets are certainly exposed to much higher cost position. They picked up some advantage with lower oil today versus where they were.

As oil goes up, that cost position is going to become less competitive relative to where we are. There are a number of high cost assets out there that can be shut down by competitors if they ever choose to do so to improve their cost position to serve their customers, and are going to have to see what they choose to do.

As the market stabilizes, as we put in stability through these multi-year contracts, it becomes more challenging to figure out how you are going to grow earnings growth and hopefully they will look at those options..

On the operating cash flows and some of the things you mentioned, when I look at two or three areas, first of all on pension, we talked about contributing about $50 million to $75 million of pension this year. That is still what we are anticipating.

Over the next couple of years I'm looking at maybe roughly $75 million of pension contributions over the next couple of years. After that point you kind of have to really look at what discount rates have done and how the returns have come into whether that number needs to increase to $100 million or maybe come down to $50 million.

But that kind of gives you a band to what pension contributions could be like over the next three to five years. On capital, when you've got the kind of assets we have, yes, every three five years, there is going to be turnarounds.

What we do and we have a great team that does it, we try to manage the maintenance spend and capital spend we have each year. Part of it is not only cash flow, part of it is just resources. So yes, we are going to have some capital spend over these years.

But some of the unique items that we have had these last few years like some of the assets that we had to build in Texas as well as the conversions from coal to natural gas, there is a little bit ahead of us yet, most of it is done.

So I would suspect our maintenance capital will be in that $300 million to $350 million range over that five-year time period. Then we will have growth capital on top of it to support all the attractive innovation programs that Mark talked about. So I think those are the main two things you are looking at there..

Thank you..

And we'll move to our next question from James Sheehan from SunTrust Robinson Humphrey..

Good morning.

Could you comment on what you are assuming for currency, any adverse impact from currency in 2017 in your assumptions right now?.

No, right now I would say the currencies we are seeing today is kind of what we anticipate going into the next year..

Great. Some of your coatings customers are experiencing some headwinds now.

Can you comment on what you are seeing in terms of downstream coatings demand and whether you are feeling the same pressures?.

Since January, we have always assumed a very slow economic growth world and we never assumed that the economy was going to improve. So this sort of 1% to 2% volume range is sort of where we have been and what we have assumed and so there is no real change in our forecast.

Based on some of the comments I have seen by a number of customers, it sounds like what they are talking about is they expected stronger growth and now they are sort of moderating back to this slower growth expectation. If that is the case, we are already there in our forecasting and there wouldn't be any challenges for us.

The risk though of course is if they have been planning and assuming higher growth, do they have some destocking issues that they have to address in the fourth quarter? We have no evidence from any of our customers that that is happening yet but that is something we will have to keep an eye on..

Thank you..

And we'll go to our next question from John Roberts from UBS..

Thank you.

How much of a lower tax rate in the quarter was adjustments from prior period tax returns and how much was just geographic mix in the current period?.

So if you look at the tax rate, let me just make one comment. In any particular tax year, you are going to have discrete items such as the one you are asking about specifically.

It was a $60 million benefit from better utilizations of foreign tax credits from the Solutia acquisition that we recognized in the third quarter that was related to amended returns that we were able to put in place. But I would add discrete items can vary each year for a variety of reasons, the results of audits, returns, et cetera.

Again, I'm going to say this twice because they deserve it. We have a great tax, finance and legal team that knows how to manage these as best we can in any given year. It hasn't been asked yet but I know and anticipate it, is a little early for an effective tax rate for 2017 but let me go ahead and throw it out there.

When I look at the things we put in place, there are some permanent improvements that we have seen for the actions that we have taken so I think our effective tax rate for next year will improve and I think it will be more in the 23% to 24% range..

That is good. I didn't have to use up my second question.

Are there non-fiber applications for cellulosic resins that could use up some of the excess polymer capacity to help rebalance the cig tow market or should we think about the use of polymer for fiber as distinct from other applications?.

Excellent question and I'm glad you asked it. There are other applications so as we saw in 2014 that the world was going to start slowing down and tow demand associated with cigarettes, we started up a team to aggressively look at how to develop new market applications around cellulosics.

And we are making tremendous progress on how to reuse these assets into new market applications. Something to keep in mind about Eastman is that we have a 90 year history of innovating when it comes to cellulosics.

We started out with film, then went into yarn, then we went into tow, then we went into plastics for things like tool handles and sunglass frames and then we took cellulosic technology into coating additives, then TVs and now into tires is another new emerging application. We know how to innovate in this space.

We have done a lot more of this innovation than anyone else has ever done in creating new markets. Just like we have done in polyester starting with polyester fiber to PET to a wide range of polyester applications so we know how to do this.

So we are making great progress, we are not going to get into the specific products right now because we are having great success in moving this forward and we are still locking up IP. But these assets can make other products that go into other applications and you will hear a lot more about that next year.

It is what we do and are very good at doing..

Great. Thank you..

And we'll go to our next question from Vincent Andrews, Morgan Stanley..

Thanks and good morning. In the past it has been referenced that perhaps there could be portfolio options, further divestitures not all that different than what you've done over the years.

Any updated thoughts on that?.

Our focus right now has been the excess ethylene and the commodity olefin product lines. We continue to look at the rest of the portfolio to see if there is opportunities that maybe there is a more natural owner.

We do that in due course with our Board and at this point there is nothing that we are talking about specifically but we will continue to evaluate different things in our portfolio. We like the portfolio as a whole so it is really stuff on the margin..

We have been on this journey of optimizing our portfolio for a long time. I mean we have sold off $3.5 billion of revenue underperforming businesses.

We have done acquisitions adding $4.2 billion of revenue specialty businesses and by the way, we paid 9 times EBITDA for those specialty businesses with 7 times EBITDA multiples post synergies to provide attractive synergies as well as reasonable ROICs above cost of capital for our investors.

I feel great about the actions we have taken in improving our portfolio and we are certainly committed to keeping that momentum going but I don't think there is any big large changes that we need to make both on the acquisition side or on significant divestiture side.

But we are going to continue to look at these opportunities like the ethylene as ways to take out pockets of volatility. But our focus and our strategy is about innovation and growth.

We are driving innovation growth, we are managing costs aggressively, we are going to continue to create value in a capital efficient way because we are doing mix upgrades of existing assets in how we drive this innovation. We are going to generate a lot of free cash flow and buy back stock and increase the dividend and improve our balance sheet.

I think it is a compelling story as it is..

Okay. Just a follow-up on capacity utilization levels, you might have mentioned this earlier but I had to hop off for a second. In Advanced Materials, you talked about how part of the margin improvement was being able to run at a higher utilization level.

Is there -- as volume grows into next year is that a benefit that we should continue to see or are you sort of now at a new traunch of profitability at this utilization level?.

I don't think we are going to dramatically improve our profitability from where we are at this stage. But I do think we are going to continue driving double-digit earnings growth going forward as we grow volume, mix and manage costs. But even here, we've got a Tritan expansion going on.

We will have to bring on a new chunk of capacity next year to support this incredible growth we are having with Tritan with the existing products. And I should mention, we also have new products that we are making off of the same chemistry to access even more addressable market than where we are today with Tritan.

So you add new capacity, it add some chunks of cost you've got work your way through..

And Vince, if I could just add, as you add those chunks of capacity, as you transition to that, you will have some start-up cost next year and that will be some challenges for this business but again they will still deliver that double-digit earnings growth despite that and you need that capacity then to grow past 2018 and beyond..

Okay, great. Thanks very much, guys..

And the next question comes from Aleksey Yefremov from Nomura Securities..

Good morning. Thank you.

Could you give us an estimate of a sales opportunity for the new tire products that you talked about today?.

For tire resins, it is a great opportunity. Tire resins has historically have just been used as a processing aid and now we have this whole new addressable market in the tread as a performance additive improving traction in the tire, seeing tremendous adoption and interest across tire companies across the globe.

And we really seem to be the preferred innovation partner because we have the broadest set of chemistry. So we are still trying to understand the full potential of this market and we are not going to complain about the 20% growth rate.

Obviously it is off of a relatively small number but we see it as a significant market that could easily be $100 million to $200 million of additional revenue..

Great, thank you.

And in the tow business, the 20% expected decline in profitability next year, how would you attribute it to volume versus price?.

As I said earlier, we have a strategy defending our share outside of China so we are not expecting it to be a volume driven story outside of China. It is going to be a price driven story.

In the China side of it, there's a lot of conflicting data about what is going on with demand and destocking in China so it is a little hard to know what the imports are going to be next year and so we're just going to have to see. Right now we are assuming a modest decline..

Great, thanks a lot..

And we'll move to our next question from Nils Wallin from CLSA..

Yes. Good morning. Thanks for taking my question. The first one is we haven't heard you guys talk about your deal with Enterprise and their PDH.

Is there going to be any benefit next year as that comes online in terms of your propylene purchases?.

Well, first of all, a good partner and we are looking forward to that capacity online. Yes, what that will ultimately do for those that aren't familiar with that is allow us to where we have been purchasing propylene we will now have additional propylene that is sourced through that propane and will be more sourced with propane than we are today.

We used to talk about that benefit was going to be roughly $30 million a year but where the spreads are today it's much lower than that. But we are still going to like that contract and that relationship long-term..

Got it. And then in Chemical Intermediates obviously there was quite a significant ramp in spot ethylene prices during the quarter, yet there was you mentioned some other competitive pressures.

So was the benefit from the spot ethylene margins going up offset by competitive pressures or are you just not quite as able to capitalize on that spot price ramp?.

No, I think we did a nice job of capturing the ethylene benefits. But you also have to remember propane and ethane costs also went up considerably in the quarter so there wasn't a huge expansion in spreads but it certainly was better than last year and certainly carrying into the fourth quarter in a better shape than last year..

Got it. Thanks very much..

We got time for one more question please..

And the next question comes from Arun Viswanathan from RBC Capital Markets..

Great, thanks for squeezing me in here. Just a couple of quick questions on normalized margins. You have held up margins quite well in both Fibers and AM.

So on AM, do you think that you would still be able to grow margins the next couple of years as you continue to grow volume? And similarly on Fibers, if you stabilize volume, would Fibers margins kind of hold at this level? Thank you..

On AM, the margins are likely to be more stable around these higher levels than further increase. As we mentioned, there is the preproduction expenses starting up new capacity and the focus on volume growth. So I think it will be stable.

When it comes to Fibers, the margins will come off from where we are today with the forecasted drop of earnings of around 20% into next year. It is important to keep in mind the altitude of these margins. This is an exceptionally profitable and attractive business and even some moderating margins here are still incredibly attractive for any business.

So we are going to manage through that and continue to find a way to stabilize it into '18..

Thanks..

Great. 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. Have a great day..

Thank you, everyone..

That will conclude today's conference. We appreciate your participation. You may now disconnect..