Gregory A. Riddle - Eastman Chemical Co. Mark J. Costa - Eastman Chemical Co. Curtis E. Espeland - Eastman Chemical Co..

David I. Begleiter - Deutsche Bank Securities, Inc. Aleksey Yefremov - Nomura Instinet Robert Andrew Koort - Goldman Sachs & Co. Vincent Stephen Andrews - Morgan Stanley & Co. LLC James Sheehan - SunTrust Robinson Humphrey, Inc. Jeffrey J. Zekauskas - JPMorgan Securities LLC Kevin W. McCarthy - Vertical Research Partners, LLC. Frank J.

Mitsch - Wells Fargo Securities LLC P.J. Juvekar - Citigroup Global Markets, Inc. John Roberts - UBS Securities LLC Michael J. Sison - KeyBanc Capital Markets, Inc. Daniel Rizzo - Jefferies LLC Arun Viswanathan - RBC Capital Markets LLC.

Please standby, we're about to begin. Good day, everyone, and welcome to the Eastman Chemical Company First Quarter 2017 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle from Eastman Chemical Company, Investor Relations.

Please go ahead, sir..

All right. 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 first quarter 2017 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2016 and the Form 10-Q to be filed for first quarter of 2017.

Second, earnings per share and operating earnings referenced in this presentation exclude the effect of non-core items. In addition, the adjusted first quarter 2017 earnings per share is calculated within adjusted tax rate that is forecasted for the full year.

A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures, including the description of the adjusted items are available in the first quarter 2017 financial results news release, which can be found on our website, www.eastman.com in the Investors section.

Projection of future earnings also exclude any non-core, unusual, or non-recurring items and assume that the adjusted tax rate for first quarter 2017 will be the actual tax rate for the projected periods. With that, I'll turn the call over to Mark..

Good day, everyone. I'll start on slide 3. We're off to a great start to the year with first quarter results that were consistent with our expectations. Our results demonstrate the strength of our specialty portfolio with strong volume growth in Advanced Materials and Additives & Functional Products.

We continue to upgrade the quality of our product mix by growing high margins, specialty product lines, through innovation and market development, a key component of our winning strategy to transform towards the specialty portfolio. As I said before, we are creating our own growth, through innovation, leadership and specialty markets.

We are seeing excellent progress in converting our top innovation programs into commercial orders across AM and AFP, and are on track to exceed our business close target of $200 million. In a few moments, I'll share examples of just a few of the ways we're winning with customers through innovation.

Moving next to the cost management front, we remain well on track with our corporate cost reduction efforts, without sacrificing our long-term growth initiatives.

Our cash flow in the quarter was consistent with our expectations and we remain on track to deliver approximately $1 billion of free cash flow in 2017, enabling an increasing dividend, continued deleveraging and accelerating the rate of our share repurchases.

Beyond these great results, we've also been the recipient of numerous awards over the past several months, which highlight many of the qualities of our stakeholders, who come to expect from Eastman.

We were named one of the World's Most Ethical Company for the fourth consecutive year by Ethisphere for outstanding corporate ethics and corporate responsibility, characteristics highly valued by our employees, our shareholders, our communities and our customers.

We also earned the 2017 Military Friendly Employer designation by Victory Media, which recognizes exceptional hiring programs for transitioning service members, veterans and spouses.

Finally, we were recognized by the EPA as ENERGY STAR Partner of the Year, becoming the only chemical company who received this recognition consecutively for six years, a win for both the environment and our cost structure.

Our first quarter result and the continued recognition we are receiving are a direct result of the great work being done by Eastman employees around the world. And I want to thank them for their outstanding contributions.

These results also demonstrate that we can execute on the things we can control from cost reductions to returning cash to our stockholders, to innovating throughout our enterprise.

Moving on to slide 4, this year marks the 10th anniversary of the launch of our Tritan copolyester, which has been a tremendous success over the past decade, and continues to have significant growth potential moving forward.

Hundreds of Eastman team members were integral to the success of Tritan, and we're honored by the American Chemistry Society with the Heroes of Chemistry Award. You can see on the slide the spectrum of brands and consumer medical products that use Tritan, which has now established as the material of choice in the markets we serve.

Tritan is currently used by hundreds of brand names globally, and there are over 25,000 products sold on Amazon today with Tritan in them. Since, Tritan debuted in 2007, it has grown to what is approaching $300 million of annual revenue, the fastest adoption of any polymer in this space.

Even with the tremendous success to-date, we still have only penetrated small portion of the total addressable market, particularly as we're still early in the adoption in Europe and Asia. And we're introducing a broader range of products and seen convincing early growth in new markets such as medical.

To support this growth, we are currently in the process of doubling our Tritan capacity in Kingsport. Tritan is indicative of the innovation of market development capabilities that Eastman has established over many years. And we expect Tritan will be an important contributor to our growth and success going forward.

On slide 5, we continue to upgrade the quality of our product mix by increasing revenue high margin specialty products through innovation and market development. These initiatives are accelerating as more customers validate our innovative differentiated products, which is driving growth today and into the future.

One innovation success is within our paint protection films platform in the Advanced Materials segment. As we leverage the emerging middle income class trend, we are seeing a growing demand for materials that meet consumers' needs for protecting their cars from damage caused by rocks, salt, insects, and other road debris.

Eastman is a global leader in paint protection films that deliver high-glass virtually invisible shield with self-healing properties that consumers love. We recently launched our latest generation of paint protection film and have seen an overwhelming positive response from the market.

This is a great example of synergy from the Commonwealth acquisition, combining leading edge paint protection technology with our strong market connect and application development capability. Our paint protection films is on track to deliver over 20% revenue growth this year with margins above the corporate average.

Another innovation success is the commercial launch of our Enhanz feed additive in the Additives & Functional Products segment. As poultry farms move away from the use of antibiotics, there is a growing need to optimize food to feed conversion yield. Eastman Enhanz feed additive reduces feed cost, while improving feed utilization efficiency.

We realized double-digit volume growth in the first quarter and expect strong volume growth on a full year basis. I am excited to see the latest innovation in our animal nutrition portfolio coming to market. This success also shows how our growth portfolio has broaden through our Taminco acquisition.

Next, I'll provide an update regarding our next-generation Crystex initiative. This new technology improves our cost position by better than 20%, while also creating a new product slate with improved performance attributes.

Performance benefits of this new technology help our customers maximize the productivity of their operations, enable us to leap ahead of our competition. We have now validated the value proposition of our next generation Crystex through multiple customer engagements.

This success supports our investment in Kuantan, Malaysia, where we continues to deploy this technology, and build the world's largest and lowest cost insoluble sulfur facility in the world. We committed to innovation and market development adding 1% to 2% on a compounded basis to drive corporate revenue growth.

We met that commitment last year, and you can see with these examples, we are on track to exceed that commitment in 2017. With that, I'll turn it over to Curt..

Thanks, Mark, and good morning, everyone. I'll start with our first quarter corporate results on slide 6. Sales revenue grew, as increases in Additives & Functional Products, Advanced Materials and Chemical Intermediates more than offset a decline in Fibers. We did a nice job of driving the volume growth in our more specialty product lines.

If you exclude, for example, Fibers, our volume growth was over 6% for the quarter. And we were able to raise prices in our Chemical Intermediates segment to offset high raw material and energy costs. As a company, selling prices for the quarter were flat year-over-year and sequentially increased over 1%.

Operating earnings declined slightly as strong performance in Advanced Materials and Chemical Intermediates was more than offset by a decline in Fibers. Overall, earnings per share increased year-over-year by 7%, reflecting solid operating earnings, and a benefit of other actions taken to deliver growth.

These positive results reflected – reflect our continued focus on controlling the things we can control and taking actions to deliver earnings per share growth in what remains an uncertain global business environment.

Moving next to the segment results and starting with Advanced Materials on slide 7, which delivered another impressive quarter driven by our innovation platforms.

Sales revenue increased due to strong sales volume growth and improved product mix of premium products, including double-digit volume gains in Eastman Tritan copolyester, and Saflex acoustic interlayers.

Earnings increased primarily due to strong sales volume growth, improved product mix of premium products and fixed cost leverage, partially offset by higher raw material energy costs and slightly lower selling prices.

The operating margin in the quarter increased more than 70 basis points year-over-year to 19%, demonstrating the strength of this business in an environment of increasing raw materials and unfavorable currency. Overall, outstanding first quarter results, which continues Advanced Materials track record of success.

Looking at the full year, we continue to expect strong results for Advanced Materials as we make further progress in our strategy for this business of driving volume growth, mix improvement and fixed cost leverage. Now to Additives & Functional Products on slide 8.

Revenue increased due to sales volume across the segment, driven by innovation and market development initiatives, partially offset by slightly lower selling prices and unfavorable currency.

The lower selling prices reflect the continued impact of lower raw material prices from last year as selling prices in this segment generally lag changes in raw material prices by about three months to six months. Sequentially, from fourth quarter to first quarter, prices increased slightly.

Operating earnings increased slightly as higher sales volume was mostly offset by higher raw material and energy costs, lower selling prices and unfavorable currency.

Looking at full year 2017, we continue to expect mid-single digit sales volume growth, which would be about double-end market growth, reflecting innovation and market development initiatives such as fluid solar projects, higher resins and Aerafin polymers or adhesives.

We also expect to increase sequentially in second quarter and have already achieved increases in many products. However, we still need to manage through the spike in raw materials that occurred in the first quarter with higher costs still needing to flow through the inventory.

All-in, Additives & Functional Products remains well positioned to deliver solid results for the year. Now the Chemical Intermediates on slide 9. Sales revenue in the first quarter increased primarily due to higher selling prices. The higher selling prices were attributed to higher raw material costs and improved competitive conditions.

Operating earnings increased primarily due to higher selling prices that are keeping up with increase in raw material costs and the benefits of lower commodity hedge costs.

Looking at the full-year 2017, we're doing a good job of recovering from a tough 2016 as we increase prices to offset higher raw material and energy costs, benefit from lower commodity hedge costs and reduced corporate costs, of which Chemical Intermediates receives the largest share.

I'll finish the segment review with Fibers on slide 10, where results 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 prices were primarily due to lower industry capacity utilization rates.

Lower acetate tow volume was a result of reduced sales in China and customer share shifts. Regarding China, two items worth mentioning, first quarter of 2016 tow imports were at still 2015 import levels and we still expect reduced import levels for 2017 that we discussed back in January.

Outside of China, we were impacted by lost share at a few customers that we have now regained with others. This will result in lower tow volume in the first half of this year, as we will not see the full benefit of regaining lost share until the second half.

Operating earnings for the quarter declined year-over-year due to lower sales volume and lower selling prices, partially offset by lower operating costs, resulting from recent actions.

Looking forward, we continue to anticipate earnings for this segment to be down approximately 25% for the year, this includes an expectation that acetate tow volume outside of China will be about flat for the full year.

Probably also worth mentioning that with these steps less than 10% of the segment revenue will be impacted by total imports into China. We are taking all actions within our control to provide stability for this business moving forward, and strongly believe that Fibers will continue to be a valuable business for Eastman.

On slide 11, our transition to an overview of our cash flow and other financial highlights for first quarter. First quarter operating cash flow was $52 million, in line with our normal seasonality of cash flow generation.

Capital expenditures for the quarter totaled $133 million and we continue to expect our full-year capital expenditures will be approximately $575 million for the year. I remain very confident in our ability to generate approximately $1 billion of free cash flow for the year.

Looking at the balance sheet, we continue to expect a $350 million reduction in debt this year. Additionally, we remain committed to returning cash to the stockholders. In the first quarter, we returned $150 million through our first quarter dividend of $75 million and $75 million in share repurchases.

Our effective tax rate for the first quarter was 21%, we now expect our full-year tax rate to be between 20% and 22%, reflecting the continued benefits of an improved business operations and resulting impact on expected tax events.

Sitting here today, it feels 21% for the year, which would be in line with last year, and is reflected in our results for the first quarter. As a whole, I'm pleased with earnings and cash flow performance to start the year and look forward to the remainder of the year. With that, I'll turn it back over to Mark..

Thanks, Curt. On slide 12, I'll discuss our outlook for 2017. We continue to benefit from our specialty businesses, which we expect would deliver mid-single digit volume growth for the rest of the year, which will be about double the growth rate of the underlying markets.

To deliver this, we're leveraging the investments we have made in our innovation and market development initiatives to drive growth in attractive end markets, which are being positively impacted by very attractive and disruptive macro trends.

We've also taken actions to aggressively reduce costs and we are benefiting from a reduction in commodity hedge costs. We've improved the quality of our balance sheet, reducing our interest costs, and we've also been able to neutralize an expected tax headwind, so that our effective tax rate this year will be similar to last year.

Finally, disciplined capital allocation continues to contribute to growth, including accelerating our share repurchases in 2017 compared to 2016.

All of these actions are helping us to offset challenges we continue to face, including uncertain global GDP growth, a stronger dollar, more than normal raw material and energy price volatility and the challenges we face in Fibers.

Putting all this together, on an operational level, our performance remains in line with our previous expectations we outlined in January, and with the tax rate no longer expected to be a headwind, we expect EPS growth to improve to the top half of our previously communicated 8% to 12% range.

On slide 13, we have summary slide that we've shown you before and is even more applicable today. We have a strong portfolio of specialty businesses. We expect to deliver approximately 70% of our earnings from these high-quality specialty businesses, a true testament to the quality and transformation of our portfolio.

We are continuing to create our own growth through accelerating our innovation and improving our product mix. We are committing using every lever we have in this uncertain environment, and we're returning our free – very strong free cash flow to our stockholders. We're on track to return approximately $650 million to our shareholders this year.

I remain confident that 2017 will be a strong year for Eastman with increasing earnings and record free cash flow. More importantly, I believe that we are building one of the world's leading specialty companies to deliver long-term sustainable growth. Thanks for joining us this morning and I look forward to your questions..

All right, thanks, Mark. We've got a lot of people on the line this morning and we'd like to get to as many questions as possible, so please limit yourself to one question and one follow up. With that, Ron, we are ready for questions..

And thank you. And we'll take our first question from David Begleiter with Deutsche Bank..

Thank you. Good morning..

Good morning..

Good morning, David..

Mark, just on the guidance, now that we're in the top half of the range, is the entire raise due to the lower tax rate, any change to the segments at all versus what you were thinking about back in late January?.

David, thanks for the question and we're really excited about being on track to deliver such attractive earnings growth for our shareholders and principally doing it through operating earnings, as we've sort of neutralized that tax headwind.

As you noted, we are looking at all the businesses and continue to see very strong earnings growth for our specialty businesses, both the AM and AFP, love the volume growth that we saw in the first quarter and expect continued volume growth, let's say volumes coming in a little bit better than expected, which has been fantastic, especially in these high-quality businesses.

Fibers is exactly in line with expectations, no surprises or changes there, but we've also seen raw materials sort of spike up a little bit more than we expected and we're making great progress in improving prices, but we've got to catch up to those raws.

So, when I net it all together, the operational outlook of everything feels pretty similar to where we were with a few sort of slight differences there and volume being better, raws being a little higher, but we feel great about that performance and think it's extremely attractive for us in this industry and these market conditions.

So, as you look at the guidance we gave, we banked the tax rate improvement in our guidance to the upper half of the range, but it's three months into the year. There is a lot of uncertainty about how the economy and these raws will play out. So, we'll just have to see how it goes from here..

And David, this is Curt. If I could also add, when we think about the shaping of the earnings for the year that has been pretty consistent with what we were thinking about in January. We've been talking about pricing catching up to higher raw materials, and we've talked about Fibers volumes increase in the back half of this year.

The impact of lower hedge costs as they flow through the last three quarters of the year, as well as kind of our growth programs gained momentum through the year.

So, the other thing that I think has been consistent net-net as we kind of expect our earnings to be evenly split between the first half and second half of the year, it's maybe a little bit more weighted towards the second half of the year as we compare it to last year, but similar to Mark, I am very pleased with the business performance that remains on track, delivering the earnings growth we talked about and then the removal of the tax headwind..

Very good.

And just lastly, Curt and Mark, given the decline in propylene prices, can you discuss the impact on how that will affect your ability to get some price increases through in those downstream propylene derivative product lines?.

Sure. First, I am very happy with how we've managed pricing in the first quarter where we had the ability to make price changes.

As we've said, especially we had a lot of quarterly pricing or in some cases annual pricing, but Chemical Intermediates just did a fantastic job of raising prices and keeping up with raws in the first quarter and then of course we benefited with the heads rolling off.

As we go into the second quarter, it's important to keep in mind that even with the recent drop in propylene prices for one month, the propylene prices, the propane prices, the natural gas prices, the methanol prices are all exceptionally higher than they were a year-ago for Q2 and they were much-much higher in Q1.

And we still have those costs flowing through our inventory from Q1 even in Chemical Intermediates, it's a 1 to 3 flow-through where specialties are 3 to 6. So we see absolutely no reason to be reducing prices in the second quarter. I am very happy that we've got prices up in AFP and in Advanced Materials, most of that's quarterly priced.

So that should be pretty solid through the quarter. And even in Chemical Intermediates, I think the competitors as well as us have much higher costs and we're still in the process of trying to recover those. And so I don't see any reason that prices should come off.

Of course, competitive dynamics can dictate other outcomes, but we expect that we've increased the prices in order to keep increasing prices as we go into the third quarter..

Thank you very much..

And we'll take our next question from Aleksey Yefremov with Nomura..

Good morning, thank you.

If we turn to Chemical Intermediates, how sustainable is this level of performance for the rest of the year? And also could you address whether there are any changes in underlying supply demand in addition to pricing versus raw material spreads?.

Well, I think that for the last question, there is obviously a lot of volatility in some of these raw material prices, where they've moved up a lot and some have come of a little bit lately, all of them which are still substantially higher than last year.

So I think the pricing dynamics remain in place, where we – we're in the business of increasing prices, which is refreshing compared to the last two years, and I think healthy for the industry. So I think that, that will continue.

You have to keep in mind for Chemical Intermediates, you've got the hedge starting to be a sequential headwind from first quarter to second quarter. But the hedge cost obviously is less than last year, but it's still a sequential headwind. So that will have an impact on CI earnings.

But overall, I think the industry is pretty tight, and when it comes to lot of these market dynamics that are going on right now, some of it is supply driven, and so we'll have to see how that resolves itself and impacts market dynamics, as we move to the back half of the year..

And, Mark, if I just could clarify the lower hedge cost will be a benefit for CI somewhat partially in the first quarter and will be a benefit the rest of the year..

Great. Thank you very much..

And we'll go to the next question from Robert Koort with Goldman Sachs..

Thank you, good morning. I was wondering, in AM, if you guys could help maybe size the Tritan business, how big is that increase to the East base? And then, can you give us any granularity on individual product line, growth rates within that impressive 10%, were there any of that were meaningfully more or less than the 10%? Thanks..

Thanks, Bob. So, I'm talking about Advanced Materials. It's just a great story of innovation and success that we've been building for many years now and it's great to see us deliver earnings growth this year in the first quarter on top of 20% compounded growth in the last four years.

And doing it in a way where we've done it through volume/mix and improved actually margins in an increasing raw material environment with currency headwinds, I mean it's just a great demonstration of a business delivering organic growth. And as you said, a big driver is Tritan, a huge success story especially in the first quarter.

We had a lot of great wins last year and a number of customers filling their shelves with our polymer into their products, that drove very high growth in Tritan in the first quarter and we expect a very good strong growth for the rest of the year and maybe not quite as high as 1Q, but still very attractive.

Same thing with the acoustics and heads-up display interlayers, you've got double-digit volume growth, as we're growing in the windshields and moving to the side lamps and sunroofs of the car, so we're getting more real estate per car, getting into new models, and just seeing tremendous growth and we still have a lot of room for growth there.

We're probably in the third inning of penetration in the automotive market. We've actually seeing good recovery in architectural in Europe, in particular, which is very attractive for us on the interlayers business. So, rocking and rolling there with double-digit growth. Performance films, same story.

We launched some very creative and successful channel strategies in China and North America, which are two largest markets for performance films. These are the tinted window films on cars.

And seeing tremendous growth through the auto channel, the auto dealers in addition to the aftermarket stores, and now, really seeing tremendous success in this paint protection film. We had the best film that's been in the market when we bought Commonwealth, and now we've developed a new product that is even better and getting tremendous success.

So we really have innovation basically everywhere, across this portfolio and what's great is most of these are proprietary products where you only have one competitor in some of them, and the customers really see us as an essential part of their success, and what they are offering to the market, and we have great relationships in all of them..

And, Bob, it's just really exciting to celebrate the 10 year anniversary of Tritan. And as I mentioned earlier in the call, that has moved to a $300 million business over that timeframe. And with the expansions that we're adding, we can nearly double that revenue over that future..

I think we're really establishing that we've got one of the best product and market development capabilities in the industry proving it through this business and you're going to start seeing the same proof in Additives & Functional Products as we move through this year and the next..

Great. Thanks, guys..

We will take our next question from Vincent Andrews with Morgan Stanley..

Thank you and good morning, everyone.

Curt, if I can just ask you on your balance sheet targets, if you can remind us broadly what you're trying to get back to from a debt leverage perspective, and I guess one of the things I'm thinking about is just, if you – let's assume this year it goes according to plan and next year you're able to put up similar growth.

And do you think you would do the same amount of debt pay down next year or do you think you'd maybe have more flexibility?.

Well, it depends. So, if you think about just our goals for 2017, we talked about that $1 billion of free cash flow, and $300 million goes with that nice dividend that we have in the industry, $300 million. And so the rest is going to be split between share repurchases and debt deleveraging.

And so if you combine that with kind of our EBITDA growth that we expect this year, we're getting closing the gap between where to start the year and kind of that targeted 2.5 times debt to EBITDA kind of in shortcut fashion.

And so when it gets into 2018, we'll look at how much deleveraging we further have to complete depending on our EBITDA growth we expect for that time and we'll kind of gauge our capital allocation as we get closer to the end of the year..

Okay.

And just as a follow up, Williams has now sold its cracker, any update on where you are in your process and does what they printed change your view on what you want to do or any broad update would be helpful?.

No, the other competing asset within marketplace, so we weren't quite sure it was really impacting our process, but nonetheless, it's good to see that transaction get done. And I think we're the only cracker facility that's out there for availability right now.

As it relates to the status of that, I feel that we're continuing to make good progress with a number of parties actively engaged with us. Again, as I mentioned before, the variety of options are from an outright sale, partnership, joint venture or whatever the case may be.

But we continue to have interest given the quality and reliability of our assets and you've heard me say it and I'll say it again, we're going to be a patient seller, but we're making good progress and I'm still hopeful that we have something to talk about by mid-year..

Okay. Thank you very much..

And we'll take the next question from Jim Sheehan with SunTrust Robinson Humphrey..

Morning. I was wondering if you could give us an update on your adhesive resin business, how is pricing going in that business and what do you see as the outlook there given some capacity additions coming later in the year..

Thanks. Adhesives has been a fantastic business for us. It's had tremendous earnings growth and quite attractive margins the last couple of years. And as we've said in past calls, a lot of that is – due to tight market conditions. These are great attractive end markets that can have a lot of growth.

And the growth rates are improving, we used to think about as 4% to 5% growth and it's now up to 5% to 7%, where you see such tremendous growth in hygiene products, in hot-melt adhesive packaging. So, we're very encouraged by what we see in the market. But as you noted, there is capacity coming online.

We're feeling some of that pressure this year in our C5 resins with some capacity and the prices have come off a bit. And there is more capacity coming online on our hydrogenated resin at the end of this year, into next year, and we'll feel some price pressure from that.

But as you look at the margins and the ROIC of this business, it's just fantastic.

When you think about specialty businesses, they're great attractive businesses, attractive margins, ability to grow faster than the market, but there is still always going to be some amount of cyclicality in any individual product when a competitor brings some capacity online whether it's an impact on volume or margins as you cycle through.

But what I love about AFP as well as Advanced Materials is, it's a robust portfolio, diverse set of end-markets, diverse set of products and that diversity gives you strength as you sort of absorb those sort of trends that happen naturally in any of these businesses..

Terrific.

And then in terms of some of the volume improvements you've seen, how much of that do you think is attributable to underlying demand improvement versus maybe some restocking or some pre-buying ahead of price increases?.

Yeah. What I love about our growth story in the first quarter is, it's innovation-driven. We have attractive markets and they're delivering good growth and they're nice diverse set of markets that are relatively stable, whether it's transportation, B&C, consumables, personal care, ag and animal nutrition.

And even in the large markets like transportation, B&C, high portion of that is pretty stable, because it's re-finish replacement tires type business. And then on top of that, we're layering in our innovation growth that will continue through the year, allowing us to grow faster than the underlying markets.

There was some additional demand in the first quarter. As I mentioned, Tritan had a huge number of wins and there were some high levels of orders to help some of our customers load the shelves with our Tritan in their products.

And there was some additional seasonal demand in AFP, strong de-icing year, strong crop protection – I'm sorry, not year, but quarter. And strong crop protection demand as well in the quarter. So there is a little bit of seasonal dynamics. Regarding pre-buying, I don't think there has been that much.

There may have been a little bit in tires, but we don't see a lot of that at this stage..

Thank you..

And we'll take the next question from Jeff Zekauskas with JPMorgan..

Thanks very much. Can you talk about the effects of the new PDH unit enterprise will bring on stream for Eastman.

That is – you're going to buy some propylene at cost plus, does this increase the amount of propylene derivatives that you wish to sell by any material amount or is it just a substitute of getting propylene from one source than getting it from another source? And in your Tritan expansion, by what percentage are you increasing overall Tritan capacity through your expansion this year?.

Hey, Jeff. Curt. Good morning. So if you think about the effects of the PDH unit, that is – what you described in the latter point – that is just taking a shift in sourcing of some of that propylene.

So we're buying some of the propylene in the market today and with the PDH unit that we'll participate in that will be the source of that propylene and become more of a propane-based source of propylene for us from a cost standpoint. So it doesn't really impact our derivatives and what we're able to sell into the marketplace.

On Tritan itself, the expansion that we're in the process of completing and look forward to coming forward, that increases our capacity about 80%..

80%? Okay. And then for my follow-up, this year you have an expansion in Tritan and Crystex, I think in PVB. If you total up the cost of all of those expansions as part of your capital expenditures this year, roughly how much would it be? And I imagine that you expect to complete all of these three expansions in the second half.

Is that correct?.

So if you look at our capital expenditures, you think of our maintenance capital in that $300 million to $350 million range. The rest of it is the growth capital and a good portion of that growth capital will be spent on the projects you just defined.

Most of those projects, as you can see our CapEx is pretty – higher in the first quarter than it was last year. So you can see....

Sure..

...we're really working hard on those capital projects. I know the Crystex facility is going to be mechanically to complete later this year. Tritan, this year, may be carrying it to next year..

One thing I'd add is what I love about our story is not only just delivering great earnings growth through the specialty businesses, but we're generating $1 billion of free cash flow and that includes spending material amount of CapEx on specialty projects to enable long-term growth not just trying to deliver short-term growth.

So it's just a compelling story that we can have one of the strongest free cash flows in this industry and still invest in long-term growth so we can keep this going as we move forward beyond this year and into the future..

So, your CapEx should come down a lot next year?.

Well, let's talk about that as we get towards the end of the year in our capital allocation. When you have an innovation program like Eastman, yes, some of these projects are going to – to be completed and come down, but then you'll also have to assume we have additional growth projects that are in the hopper.

So, it's logical to assume that's coming – going to come down, but at the same token, give us the right to bring forward other growth capital projects as we get towards the end of the year..

Okay. Great. Thank you..

We'll take the next question from Kevin McCarthy with Vertical Research Partners..

Yes. Good morning. Thank you. To follow-up on your expansion plans, Mark, as you look at the three that you have on the table now, how would you characterize the returns on these projects either in absolute or relative terms.

And with regard to Tritan specifically, to what extent can you leverage the existing copolyester asset infrastructure there and, likewise, leverage the TMCD monomer for your Tetrashield product ambitions?.

Thanks, Kevin. Great question. And we're excited about all these growth investments we're making and delivering against them. With returns on capital, we expect to deliver 12% to 15% ROIC in most of our large-scale capital investments like these and certainly have done that in the past and we expect to continue that going forward.

And relative to our cost of capital these days, that's an extremely attractive return for shareholders.

When it comes to sort of Tritan, you brought up a great point about not just Tritan but actually our interlayers business as well as our cellulosic stream is, we are masters at upgrading value on an integrated asset base and core technology stream where we're the best in the world of developing new applications from these streams.

So, you need to think about it with Tritan, we started out with PET assets. We've upgraded those into copolyester assets that was a great success story for many years and still growing quite well. And now, we're upgrading those same assets, so same PET assets are being repurposed into Tritan.

And now, then monomer capacity to make the TMCD to make Tritan is obviously new capital, but you're leveraging this huge infrastructure base in our Chemical Intermediates to make all the intermediates to go into this copolyesters as well as the actual polymer assets themselves and constantly upgrading, and that gives you a great ROIC because you're not having to rebuild or create new ground-up capacity all the time.

It's the same story in interlayers, where we make a standard interlayer for decades and now we're making acoustics and heads-up display interlayer on the same asset at substantially higher margins and that's why we keep emphasizing the mix upgrade. It's not just the variable margins are higher, but the leverage on the existing assets is tremendous.

And then a great example is, not only are we – we've been doing this in Tritan for copolyesters, we're now porting it into polyester coatings and that's a pretty tough business if you're just selling standard polyester coatings, but, like Tritan, we can upgrade substantially what we can offer to the market with our Tetrashield products at much higher margins, and seeing great success there in both automotive.

We've gone from one interested customer a year ago to 10 engaged with us now around the world interested in our products, as well as seeing great success for Tetrashield as a BPA-free can coating to replace epoxy with better performance in what's being offered in the market today by the first-generation of polyesters out there.

So it's, again, leveraged assets, leverage acceleration filling out those assets as we bring the coating market on as well as thermoplastic product extensions..

So just to follow up and clarify, Mark, it sounds like all three of the expansions will be clustered within that range of 12% to 15% that you mentioned and Tritan wouldn't necessarily be meaningfully higher than that given your ability to leverage?.

Kevin, what I would say is that, our target is 12% to 15%, some projects particularly, maybe like the Tritan, could be higher than that..

All right. Thank you very much..

And our next question comes from Frank Mitsch with Wells Fargo..

Hey. Good morning, gentlemen..

Good morning, Frank..

Hey, I really like the picture of the chick on slide 5. So kudos to whoever put your slides together. Immediately put me in a – it immediately put me in a nice mood..

..

It was excellent. Hey, look, you're starting the year on a run rate of negative $0.70 a share on the Fibers side and yet you're guiding to negative $0.40 for the year and you're saying that things are playing out as expected.

I just, I guess, I want to follow up on your confidence level there and do you have contracts in place, are there orders already on the books that give you the confidence that we are going to see that pickup in the latter part of this year?.

So, the answer to your answer, Frank – this is Curt – the answer is, yes. We have a good portion of our business under long-term agreements.

What we've talked about is we're kind of going through this transition of some of our customer mix and so that's why we understand what's happening in our volumes in this business, where we're going to see volumes improve the second half of the year versus the first half.

And because of those customer relationships and the confidence we have in managing through the transition is the outlook we have for Fibers..

And, Frank, looking beyond just the sort of share shift dynamics and what's going on this year, we really feel like we're making great progress in stabilizing this business. And when you think about all the actions that we've taken, I think it's certainly going to get more stable.

We've obviously done a lot to sort of reduce our capacity, shutting the U.K. asset down, exiting the flake joint venture.

Two-thirds of our volume now in the long-term agreements that allow us to provide stability for our customers and ourselves, continue to make progress on how we take costs out across the company, but as well as specifically in this business and we still have more opportunities to improve through productivity there.

And then you think about our innovation efforts, that will start kicking into gear this year and be more meaningful next year, finding new applications in other markets, outside of cigarettes. And I'm really impressed with the progress that team has made and the success we're having there.

So you put all that together and I think we've got a good situation to stabilize this business. One other thing to keep in perspective is, China tow now is closely becoming irrelevant to the overall story.

When you think about, it only – it being less than 10% of our revenue this year and Fibers being around 10% of our total revenue, we're now got something that's 1% of our corporate revenue and that we're talking about as far as future import uncertainty when it comes to China.

So we're not happy about where we are and how earnings have dropped associated with that business. But as you think about it going forward, that just adds another element of stability, because there is just less risk there..

All right. Got you, got you. One can hope that the change in ownership structure of the industry might also help.

And can you provide an update on your $100 million productivity program in 2017 and where you were in Q1 and the expectations as we go through the year?.

Sure. Well, Mark mentioned our aggressive cost actions are on track to deliver about $100 million of cost reduction year-over-year. As a reminder, Frank, these are actions that include labor, site optimization, energy efficiency, et cetera.

So given the nature of that, I would say roughly 75% of our cost reductions are going to be kind of in that manufacture and supply chain cost area and with its large manufacturing base, Chemical Intermediates gets a good portion of those cost reductions in their results. And so, you saw some of those benefits in the first quarter.

Sometimes when things are going through inventory, it's always hard to predict exactly what was in first quarter versus the rest of the year, but the simplest way I'd look at the $100 million of cost reductions, good line of sight, we're implementing as we speak and all these are generally spread throughout the year evenly..

Evenly. Thank you so much..

And we'll go to the next question, comes from P.J. Juvekar with Citi..

Yes. Hi, good morning..

Good morning..

Couple of questions on the Taminco business. I know you have a methanol contract that runs through 2019. But with methanol price volatility what was the impact on Taminco's amines business; and then ag chemicals particularly herbicides and pesticides have been somewhat under pressure.

Is that impacting Taminco as well?.

So Taminco has been a great acquisition, really done incredibly well. As you noted methanol obviously came off with oil dropping from $150 and that created some pressure on our earnings in 2015 and 2016, but most of the contraction in Taminco are cost pass-through tied to market methanol.

And as you noted we have an advantaged methanol position for a part of our cost structures. So as oil has gone up that's been helping that business improve this year versus last. So that's all sort of on track as you would expect.

On the growth side, a lot of the business that they are in is quite stable personal care, animal nutrition, even our crop protection business in the additives & functional products business is perishable products.

These are high value typically green product, green vegetables or flowers whatever so there is not as much demand cyclicality as you hear about in sort of corn and soy bean. So the only place we've been caught in these sort of crop demand cycle is in some of our functional amines over in Chemical Intermediates.

And obviously our demand was off with the industry where we are starting to see some recovery there this year, but there is still a lot of room for growth and recovery there, that we're looking forward to realizing as we move forward from this year into the next..

Thank you. And you mentioned – I looked through the tow line and what's going on there.

Do you think there is room for more consolidation after the Blackstone-Solvay deal, or is it just a case of trying to see who checks capacity down next?.

Well, I think that, what I'm proud of is, we've been very responsible managing our cost structure and taking out capacity to be better aligned in serving our customers doing what we can do in the last couple of years with the UK tow shutdown and our exit of flake JV.

We're down to our last flake asset, and the tow that goes with it and we have the lowest cost position with our integration back to coal and our largest – larger scale in the industry. So, we've done what we can do.

Regards the industry consolidation, I don't think, we play a direct role in that, I think it's really up to what the other three players choose to do, and it's better to ask them what they think is going to happen..

Okay. And also you mentioned repurposing some capacity, when we do we begin to see effects of that? Thank you..

Sorry, could you repeat that question, you got garbled..

He is asking about repurposing capacity for tow?.

Oh, sure. P.J., I think that we have the best innovation capability hands down when it comes to taking a technology stream, and taking it into a wide range of new applications. We've been doing it for 90 years. We've done it in polyester, we've done in cellulosics, we've done it in a narrow part of olefins, we know how to do this.

We've created all these different products for the industry. So we didn't stop suddenly and run out of ideas. When the two assets are running really tight, there wasn't a lot of need to do it.

But as we saw things start to get a little bit softer in 2014, we formed the best people we had across the company in market development, and product development, and they just had tremendous success in developing a range of new applications.

We're not going to talk about them specifically at this point because we are still in the middle of getting them in the market, and getting all the IP finalized on some of these opportunities, but we'll be telling you more about it as we go through the year, but – and the margins aren't going to be as good as tow just to be clear.

There are some that are low margins, some that are pretty attractive margins, but it's all against zero at the moment with the excess capacity we have. So it's all good earnings growth going forward..

All right. Thank you..

And our next question comes from John Roberts with UBS..

Thanks. I'll actually give up my first question. Give kudos to Frank Mitsch, I can't wait to read the transcript. As my follow-up, could you remind us of the range of transactions that you're entertaining at Longview? At the low end, I think it's just the idle capacity.

What's the high end of the scope that you're considering?.

Well, what we've talked about is the scope of our assets that were available is excess ethylene that's the baseline, because we don't feel that we're potentially the most natural owner of that excess ethylene position.

And what we've talked about on top of it is – we are willing to talk to different parties about some of the more commodity olefins for those crackers. We have not sized that John, and that's because it varies by party. But the baseline is definitely at least the excess ethylene..

Okay. Thank you..

We'll go to the next question from Mike Sison with KeyBanc..

Hey, guys. Nice start to the year. In terms of ASP, volume growth continues to be very good.

When do you think you turn the corner and generate some EBIT growth, I know raw materials are kind of squeezing in near-term, but does that show up in 2Q, and 3Q and 4Q?.

Yeah. So, we're happy about the growth we've seen in the volume side and we expect good volume growth as we go forward. When it comes to the pricing side of equation, we were successful in getting price increases implemented in many products across the olefins, cellulosics, and amines products.

As already noted, prices are coming off of a little bit in adhesives and we're seeing prices come off a little bit in Crystex, which has been a natural dynamic for some time. So, we net it all together, we'll see prices go up in the second quarter.

We are still intending to continue increasing prices beyond the second quarter as well, as these raw materials flow through.

But I think it's more of a back half dynamic than a front half, when you start seeing the earnings growth on a year-over-year basis, because the raw materials spike was pretty big and the first quarter flows through pretty slowly especially. So, we've still got to work our way through that in the second quarter..

Got it.

And then just shifting gears, a lot of the growth that you're seeing in the specialty businesses, you found them with the acquisitions, any change and maybe looking for some bolt-ons to add to your specialty portfolio?.

Yeah. We're always looking for how to build the quality of our current businesses and so the bolt-ons are always an opportunity in addition to the organic growth that we are doing. And so that's always a consideration that we have when we look at how to best deploy our free cash flow, but I'll tell you right now we don't have anything active.

But I certainly hope, we find some attractive acquisitions I think we've demonstrated that we have a very impressive track record of doing great acquisitions, and doing them in ways that we don't overpay for them.

I like the fact that we haven't paid over 10 times for anything, 9 times for our two largest acquisitions and synergies, giving us EBITDA multiples below 7. I think that's a good return for investors; but more importantly by far, we've done an excellent job of integrating these acquisitions into our company without losing any key talent.

And more importantly beyond that is, we are now demonstrating that we can not only innovate in our core heritage Eastman technologies, but we can deliver innovation through our acquisitions and grow them equally well. And you're seeing that evidence right now with a strong growth in our interlayers business and acoustics and heads-up display.

You see the next generation Crystex technology being launched next generation paint performance film. So really a great story about how we create value through acquisitions..

Great. Thank you..

And going to our next question, it comes from Laurence Alexander from Jefferies..

Good morning. This is Dan Rizzo on for Laurence.

How are you?.

Hey, Dan..

Good morning..

You mentioned before that you thought with olefins pricing being relatively remaining up through the third quarter, I was just wondering what your thoughts are with pricing towards the end of the year and into 2018, if you're expecting some easing with your outlook and what's your overall assumptions?.

Well, maybe, I don't want to get into the business of trying to forecast the pricing of the different olefins. Maybe the better way that I could address your question is, kind of how we're looking at cracking spreads, maybe a better way to approach it.

And so when you're looking over our cracking spreads, they are a little better year-over-year in the first quarter than we probably were anticipating back in January.

And we're still thinking for the rest of this year, there is going to be some ebbs and flows, but generally speaking we're assuming spreads will remain the same roughly for the remainder of the year as they were last year..

Okay.

And then your comments about the shift in acetate tow and the reduction in Chinese influence, does that possibly suggest that the end – towards the end of this year we are hitting the trough in the decline for that business or is 2018 perhaps another more modest leg lower?.

No, I don't think, there is any reason for us to think 2018 is another modest leg lower. Obviously, it's not completely up to us and how the market dynamics play out, but from a demand point of view, we see stability.

As I said, we're down to – China tow import business being a very small percentage of fibers and a rounding area in the corporate story. So, it's not as big of an issue as it was two years to three years ago, but we'll have to see.

I mean, I think that we've done everything we can do, I'm very encouraged by what we see in the industry, I mean we're encouraged by how we're going to fill these assets with new applications. So, we're planning on stability in 2018 relative to 2017..

Thank you very much..

And we'll take the next question from Arun Viswanathan with RBC Capital Markets..

And let's just make the next question the last one please..

Great. Thanks. Just curious, maybe you can just touch a little bit on China, as a region, what you're seeing, what you're gaining from your customers there across a couple of different businesses and then similarly with the automotives? Thanks..

Asia's been great, China including that – in that statement which is the largest market for us. We've seen great growth in our specialty businesses both advanced materials and additives & functional products, saw growth in automotive as well as building construction and consumer durables are all showing great growth.

In fact, it's impressive when you look at our quarterly revenue growth in Asia being 3.5% over last year in the first quarter, when you consider the drop we had in fibers revenue in Asia. So I think it tells you that the growth in Asia is quite a bit stronger than what you are seeing in the specialties, when you do the net math on that..

And just as a follow-up, you had experienced some competitive pressure in a couple of different markets, mainly adhesives and plasticizers as it relates to raws in the past, have you seen any of that or do you think that the market's still irrational now? Thanks?.

The plasticizer market has certainly become a lot better, partly it's propylene cost and oil prices being higher raising the cost structures of our competitors. In addition, the anti-dumping duties that we pursued against South Korea for some imports coming in and that suit being validated in the preliminary findings in the U.S.

has led to a pretty material drop in – already a pretty material drop in the imports coming in from that country, allowing us both volume growth and price improvement in that market, we feel really good about that. And I think I've already covered the adhesives conversation, Arun with the prices coming off a bit there..

Great. Thanks..

Great. Thanks again everyone for joining us this morning. A web replay, a replay in downloadable mp3 format will be available on our website later this morning. Have a great day..

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