Greg Riddle - VP, IR and Communications Mark Costa - Chairman and CEO Curt Espeland - EVP and CFO.

Kevin McCarthy - Vertical Research Partners David Begleiter - Deutsche Bank P. J.

Juvekar - Citi Vincent Andrews - Morgan Stanley Frank Mitsch - Wells Fargo Securities Jeff Zekauskas - JPMorgan Arun Vishwanathan - RBC Capital Markets Aleksey Yefremov - Numora and Securities Jim Sheehan - SunTrust Robinson Humphrey Laurence Alexander - Jefferies John Roberts - UBS Mike Sison - KeyBanc Robert Koort - Goldman Sachs Matthew Fisher - Barclays.

Good day, everyone, and welcome to the Eastman Chemical Company Second 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 of Eastman Chemical Company, Investor Relations. Please go ahead, sir..

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

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

Certain factors related to future expectations are or will be detailed in the company's second quarter 2017 financial results news release and in our filings with the Securities and Exchange Commission, including the Form 10-K quarter filed for the first quarter 2017 and the Form 10-Q to be filed for second quarter 2017.

Second, our second quarter and first six months 2017 earnings per share referenced in this presentation using adjusted provision for income taxes and certain prior period earnings also exclude certain non-core items.

Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including the description of the adjusted items are available in the second 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. And with that, I'll turn the call over to Mark..

Good morning, everyone. I'll start on slide 3. We continue to make great progress in execution our strategy with second quarter operating results that were consistent with our expectations.

The results demonstrate the strength of our specialty portfolio with continued volume growth of premium products and advanced materials and additives and functional products. As I said many times before, we are creating our own growth through innovation and leadership in specialty markets.

We’re seeing excellent progress in converting our top innovation programs into commercial orders across AM and AFP. In the first half, we delivered 7% volume growth in our specialty businesses, which is 2 to 3 times the underlying market.

In a few moments, I'll share examples of just a few of the ways we winning the customers through innovation and our enhanced commercial capabilities. In addition to this specialty volume growth, we have done a great job implementing price increases to offset higher raw material costs especially in the intermediates.

And we will see more of the benefits of these actions as we move into the second half of the year. From the cost management front, we continue to make great progress further improving our low-cost position, which is already within the lowest cost quartality industry.

These actions enable us to invest some of our savings to accelerate our growth programs and improve our cost structure going forward.

Our cash engine continues to generate impressive free cash flow as we remain on track to deliver approximately $1 billion of free cash flow in 2017, enabling an increasing dividend, deleveraging and an accelerating rate of share repurchases.

During the first half of 2017, we returned approximately $325 million to shareholders through share repurchases and dividends. These results demonstrate that we continue to execute on what we can control. From the innovating through our enterprise, to pricing discipline, to returning cash to our stakeholders.

Moving on to slide 4, we continue to upgrade the quality of our product mix by increasing revenue of high margins specialty products through innovation and market development. These initiatives are accelerating as more customers validate our innovative differentiated products which is driving today and into the future.

One of our recent innovation success is our main launch of TREVA a proprietary engineered bioplastic in advanced materials based on our cellulosics which meets the improved and sustainability profile and performance needs of brands, fabricators, molders and other companies across the value chain.

Our innovative engineered bioplastic which leverage our nearly hundred years of cellulosic expertise. A superior in chemical resistance, dimensional stability and has excellent flow, all while being source from sustainably managed for us. Our customer treats it as the first genuine engineered biopolymer ever introduced in the marketplace.

And we can provide this polymer in scale today which most alternatives cannot offer. This is a great example of what we can accomplish when we focus on creating our own growth. I'm extremely proud of the innovation team who brought this breakthrough from development an idea to launch in a record time of less than two years.

Another innovation in market development success is our Saflex heads up display interlayer within Advanced materials. We've long been a leader in the attractive market that has been growing our head sales by about 35% through the first six months of 2017 versus last year.

Looking forward, we are launching our next generation head up display product this year, which will improve image clarity, for taller for driver positions and windshields with complex curvatures which is becoming a bigger and bigger trend in the market.

Through our experience in working jointly with glass manufacturers and OEMs we know how to enable best in class head optics as well as ensure a smooth launch of each head vehicle program.

This success is a great example of the value of integration across technology platforms as it requires the integration of acquired PVD technology with our heritage plasticizer technology and optical expertise on specialty plastics. Finally, an update regarding our tire resins platform for additives and functional products.

With new fuel economy standards coming in 2020, tire manufacturers are needing higher performing additives to maintain performance and safety standards.

We are uniquely qualify to meet this need and have actually commercialized the new family proprietary resins for a leading global tire manufacturer and are sampling a full range of resins with selected innovation partners. Lastly tire resins already delivered double digit volume growth over 2015.

We expect that to accelerate for approximately 20% growth this year with margins above corporate average. This is on a great example of revenue synergy from an acquired company which brought a strong market connect and application development capability combined with our unique resin technology platform.

Impera tire resins, Saflex HUD and TREVA are just three of the success stories that are part of our larger innovation of market development portfolio. On slide 5 is a higher-level look of our impressive innovation and market development portfolio.

Our success in building this impressive innovation portfolio over the last five years is based on the integration of three critical capabilities that our competitors do not have. World class technology platforms where we are by far the R&D leaders as well as having a far superior manufacturing scale and reliability.

Advantage application development capability be a true development partner with our customers. We’re also realizing compelling benefits from the significant investment which has been critical to all of our market application launches. And a deep market connect which is enabled by strong market share leadership and long history of customers.

These three capabilities are required to embrace market complexity and convert it into value which is the only way you win long-term in a specialty business where you produce molecules. And this page provides the others how this program is working across the company.

We’re seeing compelling customer validation of these innovative differentiated and often patented products which enables strong growth into the future. In 2016, we delivered innovation and market development adding greater than 2% to our corporate revenue and we’re on track to exceed that commitment in 2017.

With the great success we’re having, we are raising the growth rate to greater than 2% from our previous 1 to 2% commitment on innovation and market development. On slide 6, Eastman’s competitive advantage is also based on a very unique capability relative to specialty competitors.

Our vertical and horizontal integration is a critical advantage to our success in an increasingly competitive world. It’s much more than just a substantial cost advantage. It enables innovation, reliability, operational excellence and dampens earnings volatility.

Our greatest success stories innovation over decades have come from integration across technology streams. Our most differentiated cellulose specialties include an integration of asset yields and propylene derivatives. TREVA is another example of the integration of our polyester stream with asset yields and olefin platforms.

And we are extending this technology into Tetrashield which is a recently introduced protective coating resin to help AFP accelerate their growth. There are many other examples on the previous slide about integrations, the key enabler renovation in market development portfolio.

For liability and security supply and specialties is essential to our customers, especially for our mini-proprietary products. Integration back to readily available raw materials and the operational expertise enabled by large integrated sites allows to have an outstanding reliability record as we have not had a force measuring over 20 years.

Of course, we have a significant scale and cost advantage from keeping large integrated sites running full that cascade throughout the streams into multiple product lines. This benefits our margins and allows us to be competitive and support our growth programs.

We’re also adept at developing higher value products and leveraging our existing asset base to make them. For example, Tritan is made from a former PET asset and the heads-up display is made of the same assets as standard interlayers at much higher margins. And integration can help to diminish earnings volatility at the corporate level.

Second quarter was an example of this as chemical remediate industry help to offset the timing of recovery of raw materials in the specialties. Although we value integration, this does not mean that we won't make the right portfolio choices. Our history of divesting approximately $3.5 billion of revenue since 2004 attest to that.

And we remain very committed to working to divest at a minimum or excess definitely or potentially its derivatives. With that said, we see our integration as a source of value and a key enabler of innovation and cost reductions today and into the future. With that, I'll turn it over to Curt. .

Alright, thanks Mark. I'll start with our second quarter corporate results on slide 7. Sales revenue grew as increases in additives and functional products, Advanced Materials and chemical intermediates more than offset the decline in fibers. We did a nice job of driving volume growth in our more specialty product lines.

And we are able to raise prices in our chemical intermediate segments to offset higher raw material and energy costs. For the company, selling prices continue to improve sequentially and for the quarter we're up more than 3% year-over-year.

Operating earnings grew as increases in Advanced Materials and chemical intermediates are more than offset and declines in other areas, more than offset I should say. Our operating margin expanded both sequentially and year-over-year as we made good progress offsetting a material headwind from higher raw material cost.

Overall, earnings per share increased year-over-year by 18% reflecting solid operating earnings and other actions taken to deliver earnings per share growth.

These positive results reflect our continued focus on managing the things we can control and taking actions to deliver earnings per share growth and what remains an uncertain global business environment. Moving next to the segment results with Advanced Materials on slide 8, which delivered a strong first half of the year.

For the quarter, sales revenue increased due to higher sales volume across the segment including premium products listed here on this slide. Operating earnings increased primarily due to higher sales volume and fixed cost leverage partially offset by higher raw material and energy cost.

Despite the headwind from higher raw material costs, Advanced Materials expanded its operating margin both sequentially and year-over-year. Sequentially, we delivered a 13% increase in earnings driven by volume growth, mixed improvement and fixed cost leverage.

This marks another strong six months for Advanced Materials as first half operating earnings increased 8% or $18 million driven by a 6% increase in sales volume and lower unit cost due to higher capacity utilization.

As a result, first half 2017 operating margin increased to 20% and at approximately 60 basis points improvement over the first half of '16 which demonstrates the strength of this business in an environment of increasing raw materials and reflects the level of returns this business deserves given the investments we are making.

Overall solid results, which continues Advanced Materials' track record of success. For the back half of the year, underlying business performance should remain strong as Advanced Materials continues to execute its strategy of mid-single digit volume growth, mixed improvement and fixed cost leverage.

We are delivering compelling proof of our ability to drive growth through innovation even at slow growth macro environment. Now to additives in functional products on slide 9 where results were in line with our expectations. Sales revenue increased year-over-year due to higher sales volume and higher selling prices for most product lines.

Operating earnings declined as higher raw material and energy cost more than offset the impact of higher sales volume and higher selling prices. Sequentially operating earnings increased 5% as sales volume increased 5% due to seasonality and selling prices increased as we continue to work to offset higher input cost.

Looking at full year 2017, we continue to expect mid-single digit sales volume growth which will be about double end-market growth. This volume growth reflects innovation and market development initiatives in this segment including tire resins as well as acquired businesses such as fluids, solar projects in tire chemicals.

And as we’ve indicated previously, strong volume growth in some of these acquired businesses are operating margins below the second half. We also expect to continue to work to offset input cost increases with higher selling prices and therefore expect our operating margin in the second half of the year to be above first half.

All-in additivities and functional products remains well positioned to deliver solid earnings growth for the year. Now the chemical intermediates on slide 10. Sales revenue increased due to higher selling prices attributed to higher raw material prices and continued improvement in competitive conditions.

Operating earnings increased primarily due to higher selling prices, lower commodity hedge levels and lower scheduled maintenance cost partially offset by higher raw material and energy cost.

Looking at full year 2017, we continue to do a nice job of recovering from a trough 2016 as we increase prices to offset higher raw material and energy costs and benefit from both lower commodity hedge cost and our cost reduction program which chemical intermediates receives the largest share.

These actions will help to mitigate the anticipated headwind from weakness and ethylene prices during the back half of the year. Lastly, I’ll give you a quick update on our process for divesting our excess ethylene capacity and potentially certain commodity product lines.

We continue to work with a variety of interested parties and remain hopeful we can find a mutually agreeable transaction. Given the current environment, these negotiations are taking a little longer than expected. I’ll finish up the segment review of fibers on slide 11 where results were in line with our expectations.

Sales revenue decreased primarily due to lower selling prices particularly for acetate tow attributed to lower industry capacity utilization rates. Additionally, acetate tow sales for the second quarter was down 4% year-over-year more than offset by higher sales volume by acetate flake and acetate chemicals due to timing of customer shipments.

Operating earnings declined due to lower selling prices partially offset by lower operating costs resulting from recent cost reduction actions.

Looking forward, we expect earnings to modestly improve sequentially in the third quarter with further sequential improvement again in the fourth quarter as we realized we gained share lost early in the year which we discussed back in our April earnings call.

Our full year view includes an expectation that acetate tow volume outside of China will be about flat for the full year relative to last year. We are taking all actions within our control to provide stability for this business moving forward and expect fibers will continue to be a valuable business for Eastman.

On slide 12, I’ll transition to an overview of cash flow and other financial highlights for the second quarter. We continue to do an excellent job of generating cash with first six months operating cash flow of over $480 million. Capital expenditures for this first half of 2017 totaled $279 million.

We continue to expect our full year capital expenditures will be approximately $575 million. I remain 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 in debt this year which will occur in the second half for the year.

Additionally, we remain committed to returning cash to our stockholders. Through the first six months we return $324 million through $140 million in dividends and $175 million in share repurchases. Our effective tax rate for the second quarter was 19%.

We expect our full year tax rate to be approximately 20% which is on the low end of the 20% to 22% previously guided, reflecting the continued benefits of an improved business operations and the impacts of expected tax effect [ph]. As a whole, I'm pleased with the earnings and cash flow performance to the start of the year.

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

Thanks Curt. On slide 13, I'll discuss our outlook for 2017. We continue to benefit from our specialty businesses which we expect to deliver mid-single digit volume growth for the year, which is two to three times a growth rate of the underlying markets.

To deliver this we are leveraging innovation and market development initiatives to drive growth in attractive end markets. And we're delivering revenue synergies through improvements and the commercial execution capabilities of our acquired businesses.

We've also taken actions to reduce cost in a disciplined way which has allowed us to strategically invest in long-term growth and further improve our cost structure. And we are benefitting from a reduction in the commodity hedge costs.

We've improved the quality of our balance sheet reducing interest cost, and we've made further progress on optimizing our business structures or our effective tax rate this year is expected to be slightly lower than last year.

Finally, disciplined capital allocations continue to contribute to growth including accelerating our share repurchases in 2017, compared with '16.

All of these actions are helping to offset challenges we continue to face including uncertain global GDP, more than normal volatility in raw material prices in ethylene and the other challenges we face in fibers.

Putting all this together, on an operational level, we expect strong performance in line with previous expectations we outlined in January in our April calls. Our expectation for 2017 EPS growth has improved to 10% to 12%, which will be an excellent result in this business environment.

And we remain committed to our $1 billion of free cash flow target, which is one of the most compelling in the industry. On slide 12, let me summarize where we are.

We have a strong portfolio of specialty businesses, we expect to deliver approximately 70% of our earnings from these high-quality specialty businesses, we continue to carry our own growth through accelerating innovation and improving commercial excellence across our businesses and improving our product mix.

We're committed to using every lever we have in this uncertain environment where we are returning a very strong free cash flow to stockholders. I also want to take a moment to say how proud I am of all of the Eastman employees. In building a long-term innovation driven company is extremely hard to cut cost aggressively at the same time.

I deeply appreciate how everyone is driving for cost improvements and fighting for every revenue dollar across the company. And at the same time, I'm extremely proud of how our growth teams are staying focused on driving for commercial orders across all of our innovation programs.

All of us at Eastman are committed to delivering both short term earnings growth and building a business that can also deliver long-term earnings growth. I look forward discussing our strategy to both short and long-term growth at Investor Day either late this year or early next year. Thanks for joining us this morning.

And look forward to your questions. With that I'll turn it back to Greg. .

Alright, thanks Mark. And as usual we have a lot of people on the line this morning. We like to get to as many questions as possible. So please limit yourself to one question and one follow up. With that Anthony, we are ready for questions. .

Thank you. Today's question-and-answer session will be conducted electronically. [Operator Instructions]. Our first question comes from Kevin McCarthy with Vertical Research Partners. .

Yes, good morning Mark. Wonder if you could bring us up to speed on where you stand in your specialty chemical businesses with regard to the gap between raw material cost inflation and selling prices, where are you most confident that you've closed that gap and where do you have the most work still ahead please..

Sure, and good morning Kevin. We’re feeling great about how we’re managing our overall portfolio. Our story is obviously about very strong volume growth and mix upgrade across the businesses and we’re seeing that.

Obviously, there was a pretty big spike up in raw material prices in the first quarter and many of them come off and I think we’re making good progress on improving prices in AM and AFP where it actually matters. On the AM side, we continue to see strong earnings growth for the year.

it is predominantly driven by volume and mix but we’re also getting prices up in the polyester where we saw some raw material headwinds. You have to remember though in AM the contracts for the interlayer business are annual fixed contract so you know those prices are fixed for the year based on the nature of that business. So that’s really about ’18.

On the AFP side, as you saw we already made good progress in getting our prices up and I’d like to highlight that not only our price is up, we also delivered outstanding volume growth at the same time.

So, I feel good that you know we’re able to do both and we’re continuing to raise prices to offset some material in the headwinds in that business as we go into the third quarter.

And so, in general we feel good about recovering the raws that are in AFP and feel good about the guidance we’ve given around the overall earnings growth for both businesses being strong in AM and solid in AFP on a full year basis..

This is a follow up Mark, you know you ticked up your contribution or expected contribution through 2018 from your innovation efforts.

What changed there?.

It’s just you know seeing tremendous engagement from customers and excitement by them around our top 10 innovation programs. You know we have this list that we’re very focused on that our platforms allow us to grow in multiple applications in markets.

And it's just amazing to see, the top 10 programs we have today are still the same 10 that we had three years ago and for those who move growth portfolio it's amazing that all tenants are alive and kicking and driving forward. Normally, you have some sort of dial on the way.

So that’s incredibly encouraging and in the last six months and what we see in the next six months, you know eight of those 10 are going commercial with commercial orders coming in. So, you just see growth happening all over the place in AM, and AFP and even these initiatives we’ve kicked off to help build the fiber assets.

In the tow business, we’re seeing great traction and success in orders in a few places aren’t those new innovation efforts to leverage those assets. And TREVA is one of those examples we’re seeing great growth in [indiscernible] which is a new acetate yarn we launched and there is a bunch of other things we’re not yet ready to talk about.

But it's just exciting to see the growth across all three of these segments and so we have a lot higher confidence that we’re going to be more and more innovation driven in our topline. .

Our next question comes from David Begleiter with Deutsche Bank..

Good morning. Mark just in advanced materials, volumes were up 3% in Q2 versus plus 10 in Q1.

Was that just a matter of Q1 maybe pulling in some volumes from Q2 and is the forceps number better look at that business versus the 10 and 3?.

Certainly, first half is a better way to look at that business David. There is a certain chunky nature to sort of how the tracking business in particular performs.

As I mentioned in the first quarter call, we saw a tremendous number of new business closes around Tritan applications last fall that led to orders that were quite high to fill the shelves for all these new products. So that would drive up the volume, obviously once it fills the shelves, demand drops off a bit.

And there is just some of that cyclicality you see in the consumer durable business as you get wins. That was the part of the story David. Part of it is a bit of a pre-buy I think, as people expect your prices to go up in the polyesters.

They were pulling headwind volume so we saw some of that, that doesn't give us any concern about the rest of the year. And then we've seen auto OEMs obviously slowdown a little bit in growth rates, and so that's slowdown and they hurt [ph] our business a little bit.

But none of that when you combine it together, together it gives us any concerns about the full year number. And you have to remember even on the auto side, we have a lot of ways to grow even in a flat market.

We have these double-digit growth rates and acoustics and heads up display interlayers, that's our huge earnings mix upgrade inside that OEM market. And we're also gaining a lot of real estate beyond the windshield in the side windows and the sunroofs allow us growth above OEM build rates. So, we're feeling good about the business. .

Very good.

And Curt, just on the euro and FX, what's the impact of the euro in second half guidance versus what you are expecting back in April?.

Well again, as you look at the euro, its improved of late, that is obviously favorable to Eastman, you saw the second quarter is roughly a $1.10 first quarter $1.03. So, what it's doing for us is going to be a slight favorable if this continues. And that's some better than their overall guidance. .

Our next question comes from P. J. Juvekar with Citi..

So, one of your competitors is merging its total assets with another player.

Were you involved in any such discussions or are you proactively doing anything about your business?.

Well this is Curt, we believe we are the lowest cost assets in this industry and with the actions we've taken over the last years, we're balanced on flake and tows. So, we've taken the actions we feel we need to take PJ. It's not our practice to comment on what else someone is doing with their assets or their transactions.

But right now, focus is on taking the actions we can within our control to stabilize this business in 2018 and beyond. .

Yes, I would say that we feel great about the actions we have taken. We do see the business stabilizing this year. As we've discussed in the past we've got two thirds of our volume in a multiyear agreement. As Curt mentioned, we've taken a lot of actions to reduce and align and our asset footprint with the market and the cost competitive.

And in fact, we're the only company that's actually rationalizing the assets since 2013 when this all started. And as I just mentioned, we're making tremendous progress in our new applications to fill these assets into new markets.

So, I feel really good about focusing on what we're controlling and how we're stabilizing this business and we'll just have to see what other people choose to do with theirs..

Okay. And then one more question on [indiscernible]. Pricing has been an issue for last six quarters. I see our Tritan bottles everywhere, that is good news, you're getting the volume.

Why aren’t you able to get pricing? Or is that related to raw materials?.

So, in Advanced Materials, I think that's what you said right about Tritan P.J.? You just froze up in the beginning. So, what we're seeing in that chain is great pricing discipline. We have done quite low in our pricing for Advanced Materials if you go back to '14 through now in how we've managed that business.

And the other thing to keep in mind is the increases in [indiscernible] have been pretty moderated in that part of the world compared to what you saw happen in AFP and CI. The real huge spikes in raw material numbers was really more in that side of the world than it was in the polyester chain. .

Our next question comes from Vincent Andrews with Morgan Stanley..

Thanks, good morning everyone. Can I just ask on the free cash flow in the quarter and year-to-date, it looks like there has been a bit of a working capital bill that presumably is going to reverse in the second half of the year but can you just sort of help us understand what’s happened and what’s going to happen to get to the billing dollars..

Yes, so as we talked early in the year, our working capital requirements are seasonally higher in the first half of the year particularly in the first quarter. If you just take the first half of this year versus last year, you know our working capital requirements were 300 million this year versus less than $200 million last year.

So, part of that’s again, our history as traditionally working capital requirements are released in the second half of the year, just keep in mind last year our seasonal increases in working capital kind of were helped by lower input costs.

So, if you take than $300 million first half of the year impact of our operating cash flows you help a good portion of that reverses in the second half of the year. On top of that, our CapEx requirements are different between the two years because of some these large projects that we have underway.

So, our capital expenditures are kind of peaking right now and will be lower about $100 million second half of this year compared to last year. So, when you put that altogether, we feel very good about our ability to generate the $1 billion of free cash flow..

Okay. And then if I could just ask a follow-up.

There are $0.50 of cost reductions plan for the full year, can you give us a sense of how far along you are in those year-to-date and what's left for the balance of the year?.

So, I’ll tell it this way, our cost actions are on track to deliver that $100 million of cost reductions, as a reminder this includes labor side optimization energy efficiency et cetera.

So, because of that roughly 75% of the reductions are kind of in that manufacturing supply chain area and because of that CI feels a good portion of it that I mentioned before. And so, we feel very good about that.

Mark did mention that as part of our innovation program, we’re making investments in market development, commercial and the tech service capabilities. In addition, we’re using some of these cost savings to make some structural changes in our cost structures that will benefit kind of 2018 and beyond.

And then lastly as you would expect as we respond to business structures as well as look at tax reform, we’re having to spend some money working on our taxes. Roughly you see that, that’s beneficial to our overall effective tax rate. So, we’re using some of that cash I’m sorry those savings to make these investments.

To give you a sense of the amount, the best way to look at it is if you look our other segment, you’ll see that our run rate for the first half and ’17 is little higher than last year.

What I would actually assume is that first half of run rate for ’17 will continue the second half of ’17 and I’ll give you a kind of shaping of that other segment and how much of the investments we’re making..

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

Good morning gentlemen. Mark, you mentioned that you’re planning on having an investor day later this year or early next year.

Is the timing of that contingent upon that announcement relative to the 10 [ph] intermediates and the cracker divestiture sale what have you?.

No Frank it's not contingent on that. I mean as Curt said, we’re driving very hard and very committed to sort of doing what we can to exit that excess [ph] position, maybe some of the derivatives. But that’s an independent process from running our company.

We just think that’s the right time as all this innovation is coming together is we’re improving how we can grow much faster than market, create our own growth, manage at the same time.

I think it's just a compelling story but we’d like to have a little more time in sort of proving that all out to set up the proper investment story because I think we are really on track to build the leading sort of innovation driven specialty company here. And I'm quite excited about telling that story, but do at the right time. .

And if I can add, it's also just a function of finding the right date and the right venue. .

Got you. Clearly, I mean 7% volume growth in the specialties is impressive. But coming back to the cracker sale, you did indicate that you're planning on a mid-year announcement, that negations are taking longer than anticipated.

Is this a potential 2018 event?.

Well Frank, unfortunately I've got couple of dates also in the past that haven't worked out. So, as I anticipated and again I have to share, I'm a little disappointed we haven't made the progress we have been hoping for.

But again, we start multiple parties involved in the process, negotiations are just taking longer given some of the current market conditions. And you guys can see what these current market conditions are like. But we remain committed to improving our portfolio this is a potential transaction that remains a priority for us.

And I'll give you an additional update when I have something more concrete to say. .

Fair enough I appreciate that. Just lastly, staying on CI, you've mentioned lower hedge cost helping out Q2.

How should we think about, order of magnitude in Q2 and for the second half of the year benefit from that?.

Well, you'll see as you look at 10 quarter the benefit of the hedges rolling off is about $45 million. And in the second quarter chemical and intermediates gets a good portion of that. That hedge rolls off will continue in the third and fourth quarters again predominantly in the CI. We've talked about before as being roughly $0.50 a share.

The other thing I think is important to remind you on CI is we've embedded in our guidance that ethylene prices will be lower in the second half of the year versus the first half. But [ph] our guidance is that prices will improve from third quarter to fourth quarter.

I'd also remind you that when you look at our business in ethylene, that excess ethylene you should look at spot rather than contract prices, as a proxy for merchant ethylene selling prices.

So as a whole, when I look at this business, CI's doing a better job holding on to derivative margins, probably better than I expected the first part of this year. But that has been more than offset right now by ethylene margin compression in the second half of the year.

So, when I look at trends for CI, I would expect some sequential decline in third quarter to these lower ethylene prices and seasonal demand for means in the egg sector. But still favorable year-over-year. That trend will be similar going in the fourth quarter, but we will no longer have this favorable year-over-year comp in the fourth quarter. .

Our next question comes from Jeff Zekauskas with JPMorgan. .

Thanks very much. My recollection is that you have three major capacity expansions Crystex polyvinyl butyral and Tritan.

What's the timing of those three expansions, that is when do they actually come online?.

The PVD expansion and the Crystex expansion is expected to be mechanically complete in the second half of this year a little bit towards the later end of the year. And the Tritan expansion is expected to be mechanically complete at the beginning of next year. So probably in the late first quarter is what we're targeting for that..

Okay. So, you '18 events really okay. .

Yes, I agree with that Jeff. .

Yeah. So that the price of propane is moving up. That is maybe at average $0.62 a gallon in the second quarter and now we're up at maybe 73. And in the second quarter you guys did a nice job of having your price increases more than offset your raw material cost inflation.

Is the trend positive or negative given the movement of propane now?.

It’s a good question. I mean obviously there is a lot of volatility around some of these raw materials. So, it can be up today and a week from now could be back down to 58. You know that’s just the nature of the world we live in.

We feel good about our ability to manage prices relative to our rules specially in CI and we’re also as I said making good progress in the AFP business both in the second quarter and as we go into the third.

So, we feel fine about that, obviously you know extremity is always a problem but we don’t see this as a major issue for us relative to our sort of 10 to 12% guidance.

I would like to compliment the CI team, has just done a phenomenally good job on commercial excellence in managing pricing in the first and second quarter and they’re on track, already in the third quarter to do the same thing.

So driven margin performance has actually been much better than we’ve expected and that’s helping manage some of these issues. So overall, we’ll just have to see how it plays out. I would also note that there are no places of raw materials are coming off in a meaningful way. So that’s a benefit into the numbers as well especially in AFP. .

Our next question comes from Arun Vishwanathan with RBC Capital Markets. .

Great, thanks good morning. I just wanted to go back to your guidance a little bit. Looks like the midpoint of your guidance now implies about 11% earnings growth for the year. And I think previously you had stated that the second half is going to be stronger and stronger than the first half.

Is that still your feeling and if not why not? And then just curious about your thoughts for ongoing long-term EPS growth. I mean is the target kind of double digits for '18 as well. Thanks..

So, you know first of all we feel great about how we delivered the first half of the year and certainly the first half came in a bit better than we expected, some of that was through an improved tax rate which is great for both earnings and cash.

And as curt guided, you know we continue to sort of deliver that 20% rate and always working hard to make it better.

Most importantly we see this strong growth in a solid earnings growth in AFP and especially while we’re delivering a lot of volume and managing a pretty volatile raw material environment and I think that’s great proof about the quality of these businesses that leave this to have good confidence for the back half for the year.

But also emphasize that fiber is sequentially improving into 3Q over 2Q and 4Q over 3Q. You know source of improvement as well as what’s even more important to us right now is stabilizing this business and so all of that is actually quite positive as you know.

But the chemical to Media testament certainty to clearly ethylene prices aren’t where we expected. No one expected the current situation if you look at how people are forecasting ethylene in the first half of the year. And so, we’ve got to deal with that as well as just comment on propane.

So, when you put it all together, we feel the 10 to 12% is very balanced in our outlook and we do the math, that implies that the second half of the year is maybe just slightly lower than the first half of the year to because we pulled a bit of earnings forward in the first half. So, I’d say we’re very balanced is the word I’d use.

But we feel good about the range and our ability to deliver in this range with all these moving parts. Yes, on long-term, to answer that question. Look, we're building a growth engine showing we can grow faster than the market because we create our own growth through commercial excellence, through innovation.

There is no reason that's going to stop, let them continue to drive in '18, and we expect the fibers to stabilize their own headwind there. Chemical remediates always has a certain amount of uncertainty to it. But overall, we feel we are in position to deliver strong attractive growth in '18 over '17..

And once we lock it on our investor day, we'll have more to provide you on that topic. .

Sure, and then just as a follow up. Maybe just give us your thoughts on propylene spreads and how that affects your own product pricing? Do you expect to continue to be able to achieve some price increases if propylene prices kind of stabilize or go lower? Thanks. .

Yeah, on that front, the Propylene spreads are doing a lot better than the ethylene spreads as you can do your own math. And so, we do also -- we're not buying -- we buy about 40% of our propylene needs, so that’s relevant, we are producing the other part on it in the propylene.

And those costs are still being worked off as we continue to drive for price increases in places especially in AFP. So, I would say with that we are having good progress on that. So again, I think we're in good shape to manage the price versus the raws game in the specialty. .

Our next question comes from Aleksey Yefremov with Numora and Securities. .

Good morning. Thank you. In chemical intermediaries, it appears that also chemicals market and plasticizers' markets were fairly tight in the first half.

Given potential changes in the supply in the second half and next year, do you think this level of margins is sustainable?.

No, we're expecting prices to come off a little bit in those businesses that's embedded in our outlook for the second half of the year. To your point there is some supplies that's come on and there has been some supply disruptions in the first half of the year that compound that situation.

So that's all embedded in our forecast, but the margins are even with that included are recovered in a pretty attractive way and we feel good about how that turns into next year.

I'd also add that, while that's all going on we have seen real benefit from our antidumping case against the Korean plasticizer producers, where it's been ruled in our favor where duties put in place and so that's shifted to trade flows on that business pretty dramatically in favor to us here in North America which is where we concentrate our plasticizer business.

A broader note, I'd also mentioned that applies to CI and even more so in AFP is another upside we're seeing that's helping both drive some volume growth as well as improve the competitive situation is dynamic in China. We're seeing the Chinese strictly enforce environmental regulation for the first time in the last sort of 6 to 12 months.

And it's really been pretty dramatic in its impact. We have a lot of small competitors in AFP and saw big ones in CI out of China.

And they are being shutdown left and right by this enforcement, sometimes temporary, sometimes permanent where they have to take their plant and move it from some suburb or field to proper chemical parts and that's a pretty significant new thing for us.

And it's great because it's impacted a bunch of these competitors especially in AFP where most of our competitors are these small little plants, mom and pop shops that don't really have much capability, but it can cause trouble.

And they are under a lot of pressure and even when they move to these chemical parts if they can afford to do so, you know the cost operate there specially to clean up the waste water that they produce is going to be a lot higher. So, the cost structure is going to go up. So that helps CI and it's also starting to help AFP. .

Great, thank you Mark. And I guess second question of AFP margins, what would be the normalized margin level after you’re done fully offsetting the raw material inflation. It’s just based on the 7% of volume growth I would think. Your margin should be higher than 2016 baseline.

Is it fair to assume that you’ll end up somewhere about joint 2016?.

So, I think that as we look at it, the current margins will sequentially improve a bit as we work the price versus raw material equation. It also important to keep in mind that there is a wide spread of spreads with these products in this business.

And a lot of the volume growth that we had this year, the stronger part of our volume growth has been from some of our acquired companies and we’ve seen tremendous volume growth in our animal nutrition chemical cares fluids business.

We’ve done made a lot of investments from grubber commercial capabilities there and how we’re going to market and we’re really seeing a return on that investment, revenue synergy if you will from those acquisitions. But those segments of within AFP just naturally have lower spreads per KG than the segment average.

So, it’s not margin compression, it’s just a bit of a mix shift. I want to emphasize that the high value stuff is still growing with the market. So, we’re not having any volume growth in coating or high value tire additives et cetera.

Those are all growing fine and a little bit above market actually but these others are growing a lot faster and so you’re just changing the weighted average spread a bit. So, you’ve got that going on, that’s going to cause the net margin to be a little bit lower but it's not actually margin compression.

Of course, we continue to improve prices, benefit from a little bit of trailing off raws in the second half of the year and that will help on the margin front. And then in the innovation programs as you think about this going into ’18 and’19 those are all above segment and company average margins.

And so that will start driving mix in the other direction as we go into those into ’18 and ’19 just like we do an Advance Materials. So overall it feels good but the average margin is going to be a bit lower than the last couple of years as a result of that. But we still feel good as its been around that sort of 20% maybe just a little bit below. .

And Alex if I could just add, if this business delivers mid-single digit volume growth and operating margins of 20%, I’m going to be pretty happy seeing it both..

The key to remember is our stories about driving volume growth and sustainable margins over time through innovation, I think we’re doing great on that..

Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey. .

Thank you. Could you give us some more color on your ease of resins business, how are volumes doing there and what’s your pricing outlook in the second half.

Should it be higher or lower?.

Sure. We discussed this in the last quarter call and nothing has changed from those comments which is I know market growth rate is actually quite strong, we’ve sort of upgraded our review about underlying market growth in hygiene and user packaging which is the biggest drivers of our demand. You know it’s now sort of growing at 5 to 7% which is great.

Its caused the market to be tight, especially in '15 and '16 as there was limited supply and has led this business to having some attractive margins.

We have acknowledged and mentioned this before that you know those margins are coming off this year because there has been some added supply in C5s and we've seen some of those prices come off in this space as a result. And then at the backend of this year, one of our competitors on hydrogenise side is going to be bringing on a new plant in Asia.

And that will also put some pressure on margins there too. So, not a concern long-term, the margins here are quite attractive above segment average and we're happy about how this business is performing. The margins will obviously be pressured by some of this.

But what's more exciting for us is we're actually seeing a new trend of innovation in this business that we haven't seen in a while. And that gives us a way to have a lot of growth and margin upgrade as we go into '18, '19 and '20. There is a strong need for some new resins and we're launching new resins right now that are low order.

And also, don't cause some product safety concerns around some food packaging issues in how we present some things leaking out. And so dramatic improvement in resin performance that could be proprietary.

And in addition to that, we're seeing great engagement in our launched [indiscernible] and polymers this is what you match with the resin to make adhesive that is better performed and proprietary to us than what's available in the marketplace as a APO. So, we're seeing a lot of growth there, all this will be better margins so we're feeling good. .

Great. And then you talked about your new product for tires and tire resins. So obviously a lot of your demand profile there is driven by the new fuel efficiency standards. But you also talked about how you see the underlying tire demand developing in both truck and passenger tiers. .

So, demand overall, I mean globally you get a better look at demand just by looking at tire companies for PCR and Truck. And we're growing at the market and then in some places better than the market.

As I said where we had some competitive disruptions by environmental enforcement in China, this is one of those places where we are seeing that benefit in both ingredients in a material away and to some extent as well as in us inside our Sulphur Crystex products. And so, we're growing faster than the markets and that's quite helpful.

But overall, we see the demand is solid and continuing to grow, but the underlying market is pretty modest. .

Our next question comes from Laurence Alexander with Jefferies. .

I have three quick ones. just on the tax raise, what do you see as a likely range for 2018 to 2020? For the cellulosics portfolio given the trends that you seeing in fibers now, do you think cellulosics as a product chain will be back in the growth mode at the end of the decade.

And then lastly can you characterize demand trends that you're seeing in your business in China, like how faster volumes are growing there?.

Sure, I'll start with the tax rate. Right now, I think discussing the effective tax rate beyond 2017 is a little premature given all the discussions that are going on right now in DC.

Again, as Mark mentioned, we're going to continue to pursue however opportunity to optimize our business and tax structure for earnings and cash flows for the remainder of the year and going forward.

And I'm also very confident that we have a great tax finance and legal team that know how to navigate whatever changes and actions are inactive that come at us. But let me just talk about tax rate more as we get more into holistic discussion of '18 and beyond..

Well in terms of China, and Asia in general, what I would say is I don't think that the underlying market growth rates are materially improving, they're still pretty modest. But we are growing quite well in Asia for a few reasons.

One is the macro trends that we've talked about for long time around product safety as well as the emerging middle-income class is driving a lot of demand especially in China where people are looking for higher quality products in our specialties are key to enabling those higher quality products we’re seeing better than market growth as a result of that trend.

We’re also benefitting from the Chinese consumers very focused on product safety, our Tritan products, our made-in-America products are viewed as higher quality, more reliable and safer and we’re seeing better than market growth as a result of that trend as well.

In addition to that, I mentioned some of this environmental enforcement is helping us out where not just local customers but more importantly our multi-national customers who operate around the world including China.

You know security supply is very important to them and they want to make sure that we’re going to get specialty products that are essential to enabling the production of their products and not inhibit their ability to produce. So that’s helping drive people to us on that front. So, a lot of different things going on well.

When you look at our revenue growth in Asia Pacific, it's quite good especially when you include the headwind of fibers and it's also important to keep a mix set in mind that the majority of what we do in specialty is almost all of it is specialties, right. So that growth is high quality mix..

And one more trend that I should mention as I alluded with the question Kevin had and we’ll see if this trend continues is the weakening of the dollar which helps our specialties as they compete across the globe. So, if that continues the trend, that will be favorable to Eastman.

For the second half of the year we assume that this would-be kind of roughly [114, 115] as an example. .

Our next question comes from John Roberts with UBS. .

Thank you.

In you comment on divesting excess ethylene, you added and potentially derivatives, do you have significant ethylene only derivatives or if you divested derivatives here it would reduce your purchases of propylene?.

No, when we look at potential commodity derivatives, those are typically where we add, there is limited value add. Those are predominantly ethylene based derivatives. Propylene and propylene derivates, we added tremendous amount of value add and that will still be strategic for us. .

And four years ago, if PDH existed we would have built build PDH units because our whole strategy in our specialties and AM and AFP and even some of the new things we’re working on for fibers often include a propylene derivative in the cellulosics as well as the polyesters.

But the ethylene is just, in our business a byproduct of what we’re trying to get which is propylene opposite of what most people do in this business. .

Our next question comes from Mike Sison with KeyBanc. .

Hey guys. You know on slide 5 a nice job showing the different areas that are growing by new products and market development, when you think about bolt-on acquisitions Mark and you want to maybe bolster some of these areas.

Any particular opportunities do you see out there?.

We’re always interested in bolt-on M&A. I think we’ve demonstrated a fantastic and impressive acquisition track record both large and small in integrating and creating value from acquisitions. So, we certainly see bolt-on M&A as an avenue for growth. To be clear we’re not working at large M&A.

But on the bolt-on side we’re looking I’d say the pipeline is in development, we're been so focused on the innovation programs and delivering organic growth and making sure we’re doing everything best possible there, haven’t wanted to get distracted but we are certain to build that pipeline now.

So, you know hopefully we’ll be adding to our growth by very accretive bolt-on M&A as we go into ’18 and 19. But there is nothing imminent. .

Right and quick follow-up. Sounds like your specialty business is getting good momentum here as you get into the second half of the year. How much of the earnings growth do you think in the second half will be driven by the specialty the businesses given volume trends are still pretty good and you're going to catch up on raw materials. .

Well, I think you can pretty much sense that that we're seeing the growth in our specialty businesses given the trajectories, the sequential declines in our chemical and intermediates business, some modest improvement in fiber sequentially. So that our earnings growth that we'll looking for is coming from those specialties.

But just keep in mind, fourth quarter tends to have a seasonal impact in our specialty so you got to just factor those things altogether. But I agree with your comments I really liked the momentum that we're seeing in the specialty businesses. .

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

I appreciate 5 and 6 [ph] and the insertion of your breadth and vertical integration. I guess what I'm wondering is I've seen a recent study that says from a share performance, be it specialty, be it commodity but won't be something in between.

And I would guess you'd say you're not really in between but maybe your valuation levels and some other metrics suggest the market thinks you are.

So, I'm just curious, strategically what can you do, do you buy more specialties, do you maybe change your reporting structure to isolate your best businesses or STUs better? Do you get more aggressive on the portfolio adjustments as you stay maybe go beyond just ethylene maybe some derivatives? Or do you think it's just simply getting back to attractive double-digit range growth that gets people to say.

How do you think strategically and holistically as a company of maybe breaking out of this sort of valuation funk that you've been in for so long. .

And I think that it's when we sell and think about making sure that everything we're doing in our strategy is focused on value creation for our shareholders.

As I said, I actually think we've got a very unique capability as a specialty company, not just in the things I talked about in world-class technology and AD capability and market connect which other specialty companies pursue as well.

But I actually think the integration is a unique advantage in delivering sustainable long-term growth and very unique products that our competitors can't do. Meaning when you think about integration of our technology across streams allows us to build and develop products that our competitors can't do because they don't have that breadth.

The scale allows us to have dedication and expertise in different technical areas and operational disciplines that specialty company frankly can't have and a specialty company typically has much small size. They don't have experts on anything they can't afford it.

This large scale gives us the ability to drive cost productivity and product development in a way that these small companies can't do. And an increasing competitive environment where you're under pressure for short and long-term earnings, people are managing cost pretty aggressively and so are we.

But we've got these advantages that we don't have to give up because of our scale, smaller companies probably are. And that's going to really start creating challenging I think for them relative to us innovation So, I think integration is going to the winner and then we're the only specialty company that's actually got it.

Only two companies out there that does have the scale and integration with [indiscernible], but our capital deployment is focused on the specialty side. So, I think that this actually will pull us apart and help us differentiate by delivering consistent results. In the end, any company's valuation is connected to delivering consistent results.

That's how you actually get specialty multiples, specialty just code for a highly reliable profitable business. And I think that's what we're building. Obviously, we're committed to minimizing volatility in our stock as much as we possibly can, that's why we're trying to get rid of the excess ethylene.

There's a lot of valuations driven right now by extremely aggressive cost and CapEx cutting and buying back stock in some of our peers and as well as lots of speculation about who is going to breakup, combine and everything else.

And it creates a context of looking at what we can do to also create value and we’re doing everything that we can but I actually think the way we win is delivering consistent earnings results year-over-year..

And Bob what I would add on top of that, what you see over time is the amount of earnings coming from a vast materials and head of functional products will continue to be a larger percentage of the revenue and earnings of the company and as we continue to make progress with those innovation, that’s going to drive that to where we can actually potentially even see fibers turn back to a growth story.

So, let’s see if we can execute, and deliver on those and if we do I think we’ll be rewarded in the marketplace..

So, could I distill that in suggesting if we saw under that cover in the eastern five-year plan, there is a higher growth rate and a dampened amplitude of earnings, volatility?.

Absolutely. You’re going to see the three segments overtime grow including fibers because with all the new application development capability we’ve got the specialist becoming greater than 80% of the earnings of the total company.

You know chemical remediates trying to do everything we can to always dampen volatility, exit everything we can that is not necessary for the specialties. But it drives a lot of cost advantage, a lot of [Technical Difficulty] growth and enablement of a lot of product development as we sort of mix all these different technology streams together.

One of the things that our customers love about is, is how we bring so many different products to them, not just one product and that diverse technology set of platforms allows us to be more relevant to many of our customers than some of our competitors..

And it’s a set of businesses and programs are delivered; billion dollars of free cash flow a year. .

And our last question comes from Matthew Fisher with Barclays..

First question just around tow, when you capture back some of that market share in the back half for this year that you talked about relative to maybe four or five years ago, is your market share back to where it was above or below where it was, excluding China let’s say. .

Yes, if we leave China out of it, our plan is as we’ve said keep volumes flat, hold our share and obviously that means its slightly declined year-over-year with the overall market but that’s our plan outside of China.

And you know as I mentioned in the last call, China demand is down to sort of 10% of the revenue of this business or 1% of the revenue of the company. So, the uncertainty of imports next year on that side is less relevant. So overall, we feel good about how demand is going to be stabilizing in this business as we go forward from this year into next.

And then we’ve got all these innovation programs allows to grow volume into these new applications and leverage the existing assets..

Okay, great.

And then could you just give us an update on your large uptick agreement from the PDH unit, where that stands kind of what the economic impacts of that will be when it rolls through and then do you get made whole on any of the delays that were associated with that?.

Yes, so I think enterprise have said that the PH unit is expected to come online later this year. When it does will essentially be integrated back to propane with our propylene needs. So currently we produce about 55% of the propylene that we need and 40% to 45% comes from the market.

In terms of the financial impact several years ago we indicated that maybe there was a $30 million benefit from that unit coming online for us. Obviously, the world has changed a little bit in the years that have gone past. And therefore, the benefit won't be as much as we'd expected. But we'll still be happy when unit comes online. .

Great. thank you. .

Okay. And thank you again everyone for joining us this morning. We'll have web replay available around 11 am. And we thank you for your time. .

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