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

Vincent Andrews - Morgan Stanley Gavin Trebilcock - Goldman Sachs Eric Petrie - Citi Aleksey Yefremov - Numora Eastman Laurence Alexander - Jefferies Jeff Zekauskas - JPMorgan Frank Mitsch - Wells Fargo Securities John Roberts - UBS David Begleiter - Deutsche Bank Kevin McCarthy - Vertical Research Partners.

Good day, everyone, and welcome to the Eastman Chemical Company Third 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, Silvia, and good morning, everyone, and thanks 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 third quarter 2017 financial results News Release and in our filings with the Securities and Exchange Commission, including the Form 10-Q quarter filed for the second quarter 2017 and the Form 10-Q to be filed for third quarter 2017.

Second, earnings referenced in this presentation exclude certain non-core items. In addition, third quarter and first nine months 2017 earnings per share using adjusted provision for income taxes.

Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including the description of the excluded and adjusted items are available in the third 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 nine months 2017 will be the actual rate for the projected period. 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 executing our strategy with strong third quarter operating results. Our results demonstrate the strength of our specialty portfolio with continued volume growth of premium products in additives and functional products and advanced materials.

As I said many times before, we are creating our own growth through innovation and leadership in specialty markets. For the first nine months we delivered over 7% volume growth in our specialty businesses which is three times the underlying market.

In a few moments, I'll share examples of just a few of the ways we're winning with customers through innovation and our enhanced commercial capabilities. Our key growth metric for new business close continues to improve.

We're tracking higher than our 2% target a closer to $300 million, which is incredibly impressive when you think about it being predominantly in AFP and AM. Capacity expansions for specialty businesses remain on track which will support our continued strong growth moving forward.

In addition to this specialty volume growth, we continue to do a great job implementing price increases to offset higher raw material costs. As a result, our corporate operating margin increased both sequentially and year-over-year.

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 accelerating rate of share repurchases.

During the first nine months of 2017, we returned approximately $500 million to shareholders through share repurchases and dividends. These results are clear proof points that we’re continuing to execute on our strategy for innovating throughout our enterprise, to pricing discipline to returning cash to stockholders. Moving to Slide4.

Hurricane Harvey and Irma had a devastating impact on millions of people including some of our employees in Texas City. I'm very proud of how the Eastman team came together at a personal level to help their fellow employees through voluntary relief efforts, supplies and personal donations.

Our impacted employees have a long road to recovery and the generosity showed will go a long way towards helping them get back on their feet. I’m also proud of our employees for their very hard work to minimize the impact of the hurricanes on our sites and operations in the Gulf region, and most important on our customers.

We took the cautionary measures to protect our assets and thankfully our sites do not sustain significant impact. As the hurricanes have severely disrupted the supply chains across the South, our biggest challenges been working to procure raw materials and getting products to our customers.

Where we were backward integrated to readily available raw materials such as propane, ethane we remain reliable. In the intermediate such as paraxylene and had to rely on others we faced some challenges. Our ability to avoid disruption and supply our customers is a testament to our competitive advantage through scale and vertical integration.

Overall we anticipate the net impact of these events to be relatively neutral. The headwinds in AM from paraxylene challenges and performance films, regional sales in Florida and Texas are largely offset by third quarter tailwinds in our intermediates. On Slide 5 we continue to drive growth from heritage Eastman and from our acquisitions.

Non-revenue synergy story from our Taminco acquisition is our accelerated growth in animal nutrition. We've delivered double-digit growth in this space from three lovers. The combined offer of Eastman and Taminco products in the space is more compelling. We've increased our collective commercial execution capability.

And we're winning due to our superior reliability compared our competitors. Another innovation success that we have that's very encouraging in our coatings business with Tetrashield for can packaging.

The transition away from BPA containing can coatings for food and beverages is accelerating due to combination of new regulations such as Pop 65 in California and evolving consumer demands.

Eastman has leverage technology originally developed for Trident polyesters into the Tetrashield brand of BPA-free metal packaging coatings and recent line for us as our customers, Eastman Solutions provide a superior combination of corrosion production and flexibility, critical to this application.

The products have recently received regulatory approvals and are qualified by our first customers who expect food protected by Tetrashield-based coatings to be on the store shelves in 2018.

Finally, an update regarding our Performance Films platform, we launched some very creative and successful channel strategy in China and North America, which are the two largest markets for performance films. The result is double-digit growth for other dealers and our aftermarket stores.

We're winning on how we take the products to market and our value proposition, which is more compelling than our competitors. This is a great illustration of how we dramatically improved and acquired business and commercial execution and delivered additional growth synergies with another acquisition and common oil.

These are just three examples of how we're winning through product innovation, commercial execution and integrated technology, proof for our ability to drive synergies and organic growth from acquisitions. With that, I'll turn it over to Curt..

Thanks Mark and good morning, everyone. Before I begin I'll mention that all of our segment guidance provided today excludes the financial impact of the recent coal gasification incident as we're still working through the expected impact of the event. With that, I'll start with our third quarter corporate results on Slide 6.

Sales revenue grew as increases in additives and functional products, advanced materials and chemical intermediates more than offset a decline in fibers. We continue to do a nice job of driving volume growth in our more specialty product line and we executed well on the pricing front as we realized further positive pricing momentum in the quarter.

Excluding fibers, third quarter volume growth was 6% while pricing was up 3%. Operating earnings grew as increases in additives and functional product and chemical intermediates more than offset a decline in fibers.

Our operating margin expanded both sequentially and year-over-year as we made good progress offsetting a substantial headwind from higher raw material costs, a very impressive result when you consider the headwinds in fibers.

Overall, earnings per share increased year-over-year by 18% reflecting solid operating earnings, as well as actions we've taken to deliver earnings per share growth. These positive results reflect our continued focus on executing our strategy and taking actions to deliver earnings per share growth and what remains a slow growth environment.

Moving next to segment results and starting with advanced materials on Slide 7. We delivered approximately 5% earnings growth through the first nine months of the year. For the quarter, sales revenue increased due to improved product mix from higher sales volume of premium products, which was somewhat offset by the hurricane and capacity constraints.

Operating earnings were unchanged compared to record earnings achieved in the year ago period. Sequentially our operating margin expanded 100 basis points to approximately 22%. We're pleased with our third quarter 2017 performance especially given the tough year-over-year comp.

Overall, these solid results continue advanced materials track record of success and demonstrate the strength of this business in an environment of volatile raw materials and reflects a higher level of returns given the investments that we have made.

Our full year outlook has not changed and we continue to expect strong business performance as advanced materials execute its strategy of mid-single digit volume growth, mix improvement of fixed cost leverage. We continue to deliver compelling proof of our ability to drive growth through innovation even in an slow growth macro environment.

Now to additives and function products on Slide 8 which had an outstanding quarter. Sales revenue increased 18% primarily due to higher sales volume throughout the segment. For example, this impressive growth came from multiple sources.

Our improved commercial execution and heat transfer fluids led to a number of wins in the solar our energy market and the timing of these orders landed mostly in the third quarter.

There were strong growth in animal nutrition as Mark already discussed, and strong in tire additives due to innovation in our tire resins and superior operational reliability. We also made progress in improving our pricing and the strength of our value proposition to our customers.

Operating earnings increased both year-over-year and sequentially primarily due to higher sales volume. Sequentially we expanded our operating margin 100 basis points to 21%. Looking at full year 2017 we now expect greater than mid-single digit sales volume growth which would be about three or four times end market goal.

These volume growth represents innovation and market development initiatives in this segment including fluid solar projects, tire chemicals and tire resin. And we made great progress in offsetting input cost increases with higher selling prices. All in additives and function products is well positioned to deliver strong earnings growth for the year.

Now to chemical intermediates on Slide 9, sales revenue increased due to higher selling prices but 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 operating costs partially offset by higher raw material and energy cost.

Looking at the full year of 2017, chemical intermediates team continues to do a good job of recovering from a trough in 2016 as we continue to increase prices to offset higher raw material costs, benefit from lower commodity hedge costs, and reduced manufacturing costs which chemical intermediates receives the largest share.

These actions will help to mitigate the anticipated headwind from higher input costs and weakness in ethylene margins during the fourth quarter. Sequentially we expect a decline in earnings due to normal seasonality including lower volumes, higher shut down costs and higher raw material cost.

I’ll finish up the segment review with fibers on Slide 10, sales revenue decreased primarily due to lower selling prices particularly for acetate tow due to lower industry capacity utilization.

Additionally, acetate tow sales volume for the third quarter was flat year-over-year with some anticipated for fourth quarter was realized in the third quarter due to timing of customer shipments. We continue to make great progress in growing our acetate yarn business with double-digit growth in third quarter.

Operating earnings declined due to lower selling prices partially offset by lower operating costs. Internationally, in the quarter we benefited from increased intermediates capacity utilization.

Looking forward we continue to expect that acetate turbine outside of China will be about flat for the full year relative to last year and our earnings for the segment will be down a little more than 25%. As previously discussed this includes an expectation for second half earnings to be stronger than first half.

We are taking all actions within our control to provide stability for this business moving forward and believe we're on track. On Slide 11, I’ll transition to an overview of our cash flow and other financial highlights. We continue to do an excellent job of generating cash with operating cash flow over $1 billion.

Capital expenditures year-to-date totaled $438 million. We now expect our full year capital expenditures to be approximately $600 million slightly higher than our previous projection. I would note that our strong revenue growth in the second half of the year and the operational incident induce several variables that will have an impact on free cash.

Having said that, we're working hard to deliver approximately $1 billion of free cash flow for the year. Looking at the balance sheet, we continue to expect to use $350 million of our free cash flow to reduce debt this year which will mostly occur in the fourth quarter. Additionally we remain committed to returning cash to stockholders.

To the first nine months we returned $498 million to $223 million in dividends and $275 million in share repurchases. Our third quarter effective tax rate was 20%, consistent with our expectation that our full year effective tax rate will also be approximately 20%. As a whole, I am pleased with our earnings and cash flow performance so far this year.

And 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 will deliver mid-single-digit volume growth, which is about three times the 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 launching new products and improvements in the commercial business execution capabilities of our acquired businesses.

We're also benefiting from our specialty position across the entire mix of M&A and we're realizing a lot of benefits from the superior reliability we're providing to our customers, especially as competitors in China are being shutdown with Chinese enforcing environmental law.

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

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

Finally, disciplined capital allocation continues to contribute to growth, including accelerating our share repurchases in 2017 compared to '16.

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

Putting this all together, our expectations for 2017 EPS growth have improved and we are increasing our full year guidance to be solidly at the high end of the 10% to 12% range, excluding the financial impact of the coal gasification incident and we remain committed to over $1 billion of free cash flow, which is one of the most compelling in the industry, especially when you considering we are investing in long-term growth at the same time.

Next on Slide 13, as you know in early October we had an operational incident in the coal gasification area for Kingsport Site. First, I want to complement the extraordinary professionalism and safety first focus of operations team. There were no serious injuries and no impact to the environment.

This was a significant event and we are very proud of the actions of our team. Second our responses is a superb example of how we both delivered superior reliability for our customers and work to minimize the financial impact that this incident had on earnings.

Our terms have worked tirelessly and we've made excellent progress repairing the facility and implementing alternate processes to maintain operations of downstream derivative facilities of coal gasification. We also noted -- we expect the coal gasification area to be operable by the end of the fourth quarter.

This along with our mitigating actions is expected to enable full production of our industrial chemicals and derivatives and we expect normal operations of the coal gasification area to resume in early 2018.

Third, time an impressive timeline to get back up and it's due to the significant advantages we have in scale and integration at our Tennessee site, which is one of the largest integrated chemical facilities in the United States.

For example our integrated production systems across the four segments are enabling complex choices we made across the site, which was essential in avoiding a site wide shutdown at the time of the disruption and running all of the operations after it.

Our significant scale enables us to have dedicated experts and large-scale fabrication and engineering resources to repair the facility rapidly. These resources are also enabling us to bring online backup capacity at the site and from sources around the world.

Our scale and supply chain and procurement is also playing a critical role in servicing material and balancing the needs with customers. We also deeply appreciate the support from skilled colleagues outside of Tennessee and many contractors who are helping accomplish repairs in three months who might take other companies 12 months.

While the company continues to assess the financial impact of this incident, the net impact is expected to reduce operating earnings between $50 million and $100 million with approximately $100 million in costs in the fourth quarter of 2017 partially offset by the insurance recovery expected in the first half of 2018.

Regarding how the financial impact will flow across the segments, our cellulosic stream is complicated in how it's intertwined across the segments and will take us some time to work through the flows across the segments. Directionally we should expect the impact to be greater in fibers in CI than in AFP and AM.

On Slide 14 let me summarize where we are. We have a strong portfolio specialty businesses from which we expect to deliver approximately 70% of our earnings. We are continuing to create our own growth to excelling innovation, improving commercial execution across our businesses and improving our product mix.

We are committed to using every lever we have in this uncertain environment and we're returning a very strong free cash to stockholders. I also want to take another moment to say how proud I am of all the Eastman employees. We are building a long-term innovation driven growth 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 each and every revenue dollar. If those challenges were not enough, our teams are doing a brilliant job of managing through the significant challenges of coal gas incident and hurricanes to keep us on track to deliver compelling top and bottom-line growth.

Also Eastman are committed to delivering both short term earnings growth and building a company that will also deliver growth in the long-term. We’ll talk more about our outlook for 2018 on our fourth quarter call in January.

But I believe it’s important now for you to understand where we're confident about delivering stronger earnings growth and strong free cash in 2018. Last since morning we are announcing that will host an Investor Day in New York, the morning of Tuesday, February 6.

During this day we will discuss how innovation and market development initiatives have contributed to our growth and as we've been investing in these areas will continue to do so. How we generate significant organic growth volume and earning over the last several years and then how we've added to this with attractive acquisitions.

Our integration skills critical in driving the topline growth and superior margins for the company. And then how we expect to continue to add to our EPS growth to allocation of a very strong free cash flow. we will be sending out more detail shortly. I hope you will be a over joyous. And with that, I’ll turn it back to Greg..

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 Silvia, we are ready for questions..

[Operator Instructions] We'll take our first question from the queue. Vincent Andrews from Morgan Stanley. Please go ahead. Your line is now open..

Mark as we look into '18, there is a lot of sentiment out there in a broader investment community at least that - the macro economy is improving and underlying markets had some momentum and then going into '18, I recognize your points about this but you’re growing well in excess of the market.

So I am just wondering as you look across your various segments may be excluding fibers and to lesser extent.

Are you seeing underlying trends improve and do you think - I know you have macro sort of as a headwind in the slide deck but do you think we’re getting to point where maybe it's not going to be headwind anymore?.

Certainly we are proud of how we are creating our growth and growing much faster than the underlying markets and especially in businesses this year and we would certainly expect to do the same next year. As far as improving macro economic conditions, I can’t say we are seeing much of that yet.

Europe I would describe as solid but not exactly exciting growth. Europe is showing some signs of recovery.

Asia is growing a bit faster than the rest of the world and we are seeing some benefits beyond innovation growth which we’ve been very focused on to benefiting from supply disruptions that’s given some additional volume growth especially as the Chinese have enforced environmental law that impacted the competitors that we faced there proving the value of our reliability to our customers, and we're picking up some shares as a result of that.

But I wouldn’t call that macro..

And then just a question in AM, I know you got 3% price in AFP and then price was flat in AM, is there a reason why you would do better on pricing in one of the segments versus the other..

First of all the raw material dynamics are quite different in two different segments and the strategies are also a little bit different. So in AFP you've seen a much bigger increase in raw materials that go into that segment and the pricing has been more aggressive in covering those increases.

So that's part of the dynamic where the raw materials have been more flattish, with just a slight increase in AM. So we feel good about the pricing that we're getting in AFP. We feel that we're making good progress in covering a raw material costs.

We're extremely excited about the volume growth that we saw in that segment in the third quarter building to a strong second half of the year as we had forecasted earlier in the year..

And 180 basis points of margin improvement sequentially there is testament of how we're driving the business forward. In AM we had 100 basis point improvement in margins as we went sequentially from second to third quarters. So we feel good about how we're managing our margins. You have to remember that the interlayer business has annual contracts.

So there is no pricing changes in that business once you set those contracts in place from last fall and so we're getting some price up in the poly business as we would expect with the market and making some other choices and some other businesses. So overall we feel good about it and it's on track..

And now we'll take our next question from the queue Bob Koort from Goldman Sachs. Please go ahead. Your line is now open..

Hi. This is Gavin on for Bob.

Congratulations on the quarter and I was wondering if you could drill down a little deeper on the point for your Chinese production curtailment and if you've any sustainability of that trend? And then for the follow-up can you give us any more color on your expectation for the propane hedged roll out for 2018 can you quantify that?.

So on the Chinese front, the Chinese Government has had environmental laws in the books for a long time and we're very encouraged to see that they're enforcing these laws and improving the quality of operations in China for the benefit of the environment of China and planet as well as creating more level competitive playing field.

And so there is a number of companies that are not in chemical parks who are facing stricter enforcement and they have a choice to either shut down in many cases or move to chemical parks.

So as we're seeing it in a number of companies are being curtailed in production or being totally shut down, some of which will move to chemical park at some point and some may not. There is no way to predict that, but we certainly see there is benefit continuing into 2018 as it's played out so far this year..

Yes. Good morning. This is Curt. On the hedge, let me just cover '17 and we'll talk about '18 impact. Year to date, the benefit of the commodity hedges rolling off is about $90 million year-over-year that was $30 million in the third quarter.

Now keep in mind that benefit is still being offset by a lower commodity -- lower currency hedges not roughly year-to-date $20 million. So propane stays where it is today.

The impact for 2017 over '16 being in that $0.50 to $0.60 set range, but the offsetting impact of lower currency hedges is also little different that's probably now more like $0.15 to $0.20. So the net impact is going to be roughly $0.40 to $0.45 on a year-over-year basis, pretty similar to what we've talked before.

As you go on to 2018, if propane end of the year will stay where they are today, the impact of hedging is no longer going to be a material part of our story. Going into 2018 when you're analyzing our year-over-year operating results..

And now we'll take our next question from the queue P. J. Juvekar from Citi. Please go ahead. Your line is now open..

This is Eric for P.J. And is that materials you talked about strong double-digit growth in performance films, what other volume trends are you seeing in specialty plastics and in interlayers business growth overall growth slowed to 1%..

So we continue to see very strong volume growth in our premium products. So in acoustics and heads up display interlayers, we're also seeing double-digit growth. The trading growth is still solid, but constrained a little bit by capacity constraints. That's why we're building this new Triton expansion is to position ourselves for growth.

And last year was an incredibly strong quarter in Triton for a year-over-year comp. So overall, we see the things have been driving. The mix upgrade and the growth in the segment continuing. We saw some slower growth, some of our tradition co-polyesters, which is of no concern. We see it improving as we go into the fourth quarter.

And we also took an impact on some of our sales and performance films in Florida and Texas with hurricanes and impact and those are two largest states in the U.S. for these out. So overall we feel great feel about the quarter and the improvement in the earnings. And we feel very much on track for stronger via earnings growth in the fourth quarter..

And as follow-up and is AFP draw volumes up strongly 14% is that sustainable going forward or did you see some customers building inventories and then any outliers in terms of product line like coatings or at least the present?.

So we’re very excited about very strong 14% volume growth in the quarter and it really came through a number of factors. First of all, we are seeing good strong volume growth across the segment. I wouldn't call it inventory building at all it just good strong growth. There are a few areas where we had exceptionally high growth.

As Curt mentioned we had a number of our wins in the solar fills so these are in projects you win two to three years ago in the engineering construction phase of the big so we’re concentrating facility. And when they finally brings the facility online you get a big order to fill that plant with the heat transfer fluid.

And we worked hard to call the timing of those fills and we thought it would be spread more between third and fourth quarter and a lot of that really came into the third quarter that's part of the story.

Another part of the story is just great commercial execution in a revenue synergy with Taminco combining our products with their products improving the commercial team there really driving hard for results and seeing very strong growth in our nutrition and I would also mention personal care as well has benefited from those activities.

And the third is tire resins where innovations driving a lot of growth for their customers and this environmental enforcement in China has also benefited us and some share relative to competitors there. So those three were big drivers.

We still expect pretty strong volume growth year-over-year in the fourth quarter as we go to 2018 number of those drivers were moderate that we're driving a lot of the exceptional growth, but we still see a way to deliver mid-single digit volume growth next year as we sort of concentrate and consolidate some of these wins we have this year..

And now we will take our next question from the queue, Aleksey Yefremov from Numora Eastman. Please go ahead. Your line is now open..

Curt, the guidance that you are now currently solidly at the high end of the range at about 12%, does this leave room to exceed that that high end at this appear or EBIT to a fairly optimistic but it could be above the high-end?.

No, we solidly that’s on purpose but we think we’re solidly at the high end of that range for 2017 and that's kind of where we’re expecting and recall that’s before the impact of the operational..

The other thing I’ll notice we’ll do our best now as well as in the fourth quarter call to make sure you understand how we've delivered attractive earnings growth consistent with our guidance pre-event and then with the event caused and so you can really see the strength of what we’re doing that of this sort of one-time event..

I guess as follow up to this, could you help us the build the bridge from third quarter to the fourth quarter what are the biggest areas where things are decelerating in terms of margin or volume and may be some are improving?.

Yes, first of all I want to emphasize that we just raised our guidance. That we're feeling better on the full year basis obviously we had an extraordinary third quarter we still expect a very good fourth quarter.

When we think about third to fourth quarter sequentially there's always normal seasonality where volumes drop off across most of our businesses, that happens every year. So there is that we should all have in your forecast as normal.

As we look at the dynamics across the four segments, we expect earnings growth in three of the four segments and we expect strong earnings growth in AM and AFP with fibers having sort of meaningful drop from third quarter fourth quarter as Curt mentioned in our prepared remarks., the fibers business is a bit chunky in how customers orders can come in sometimes, we also had some exceptional high asset utilization in the third quarter on our asset yields that benefited fibers that won’t repeat in the fourth quarter.

And so when you see that come off that you should really be thinking about fibers on a second half basis for the quality of their earnings of this business, which is going to be better than the first half and a testament to an improvement and stabilization of this business.

So overall I think when you do that math, you can walk through how the quarter comes out, but strong growth year-over-year and volumes for AFP is expected in the first quarter, chemical intermediates will come off as Curt noted in his remarks. But it will still be year-over-year.

Thank you. And now we take our next question from the queue, Laurence Alexander from Jefferies. Please go ahead. Your line is now open..

Its Daniel Rizzo how are you? You mentioned some different new products like Tetrashield and animal nutrition segment doing well and growing at double-digit.

I was just wondering if you could quantify what that means in terms of revenue? Is it very meaningful yet or is it still in the early stages?.

Well Tetrashield is in the early stages. It's a great story of how we take complex technologies, Tritan and Tetrashield are an integration of polyester acetyl and olefin chemistry to create a very unique product and as Trident and it turns out incredible performance in the coatings market relative to what's available out there.

We've talked a lot about automotive where we've already had some wins and momentum but it's still low volumes. The can packaging area is just going commercial as I mentioned.

It has to do -- it have much faster volume growth rate given the pressures for getting BPA coatings out of the cans and we believe our solution with Tetrashield is superior to all the other non-BPA solutions in the market.

So we could actually see some meaningful growth over next couple years but it takes a while to get to that did and build that volume growth..

And these are just components across all the different innovation programs that are contributing to our business clauses and that's why we think we're going to be adding 2% to our company revenue off these innovation programs and I can tell you I am excited about as telling that story on February 5..

And then just in terms of the stuff innovation, I think in the past we've talked about just different uses for fiber and innovation there. I was just wondering if you could provide color on where we are with that program or cost base..

Great progress on that front as well. We're already seeing strong growth in our in our acetate yarn business with double-digit growth this year versus last year. Our latest acetate yarn, Naia, which is an improved version of what we have in the market for a while is getting great interest.

We're getting commercial orders and very excited about building in that space and those are in that businesses have decent margins.

We also are making some great progress in a few other applications that we're very close to getting the commercial orders on and should have them done by Investor Day and we'll tell you more about those applications when we get there. I think we're making great progress on getting the assets.

Now I would note that this is a great example of the strength of our diversity and scale, with the great specialty capability we have in application development and fundamental work we're always doing in cellulosics in AM and AFP, we're able to shift those resources on to this project a couple years ago, few years ago I guess now with the priority to find new applications accelerate growth and it's just amazing to see the progress and a real testament to the strength of having a diverse portfolio..

And now we'll take our next question from the queue Jeff Zekauskas from JPMorgan. Please go ahead. Your line is now open..

I am interested in how you calculate the $50 million to $100 million hit from the coal gasification incident? Is it the case that this is a nonrecurring item from management compensation or is it a recurring item? And so if it's a recurring item, are there reversals of management compensation in the fourth quarter that have to do with your actual earnings being diminished? How much is maintenance cost? Is all of this factored in and are there extra capital costs outside of the $50 million $100 million that you're speaking of?.

Well Jeff there is a variety of questions in there, but let me try to address of that as best I can. First of all when we think about the nature of the operating costs you need to really think about this kind of three areas of impact. First is just higher operating costs being offset by our business interruption insurance.

So we do anticipate higher operating cost which is due to a lower utilization rate higher raw material cost et cetera we will be working with our insurance partner but these costs should be generally covered with our business interruption policy after we meet our $75 million deductible.

The second bucket of cost is the cost to repair and replace the damage property plant equipment which is going to be also will be working with our insurance partner but should be generally covered by our property insurance after a $5 million deductible.

And then finally in the fourth quarter we had to be mindful on the accounting nuances that could be triggered because of this event and some of the impact of utilization rates and reduction of inventories.

And so as an example and I kind of kid myself actually to say this but we might have life of decrement because of this event and that may because we’re not going to charge in the fourth quarter.

So again when we put all these various complexities together from a timing standpoint we’re still analyzing what’s going to get hung up on the balance sheet what close to the income statement et cetera.

But our best estimate right now is that will have roughly $100 million cost impact on the fourth quarter and then that we will see that partially offset with an insurance recovery in 2018.

And when I think about 2018 I know it will probably be a net positive insurance recovery over cost it's as hard to say whether that will be material number or not as we look at it..

Jeff when it comes to impact on compensation you know as management team we will take the hit for these costs it will be included in our calculations.

The thing I would like to focus though and just go back to sort of the story of this event its obviously very serious we take it very seriously and we’re going to learn from it but I am just incredibly proud about how the teams have come together to sort of bring this plant back up and incredibly short time frame and make sure that customers are being protected as best we possible can through all this where we’re going to have a very limited sales impact.

When I talked about complex collaboration across the four segments I just want to share a few examples around sort of what we've been doing.

The truth is that we have to make her incredibly complicated you can imagine the Atlanta air traffic control systems managing all the needs of all the different airlines we’re making in complex our choice is daily and how to balance production and steam and power across 80 operating units that are associated acetyls at our Tennessee site out of the 120 units we have at the site and normal times we are in the site greater than 95% utilization there is just no room for error.

And when you have a massive disruption at the front of the system like a massive storm you need incredible collaboration and unlike the airlines fortunately we’re not canceling flights downstream or progress operations it’s just a true testament of how we run a complex integrated site.

And when we talk about scale and expertise in engineering and construction I want to also highlight a couple examples. At this time we have such scale we can afford to have a state-of-the-art large fabrication facility it’s what we call big shop.

We lost pipe version in this explosion we built on-site and commission the replacement of it has over a mile of pipe in five days which is just incredible we've drones flying in the damaged facility the day after the incident identifying the damage to equipment within two days of the event we were fabricating in the big shop replacement parts.

And we couldn’t even get into the building for another week and a half. So on top of it moving quickly we have over 500 employees and contractors working on repairing facility looks like an anthill over there. And we can only that because the scale of our site with the flex we can do with resources.

We got busloads of mechanics even driving up from Texas pitching and to help on this situation. The other companies just couldn’t this they would have go outside engineering support or other people fabrication shops unless they had our scale.

The bottom line the point of all this is we review the liability as exceptionally important for our customers where we’re someone we can always count on. And in addition of those repairs you know we have backup facilities and hydrate where we bringing those up in record time.

We set new production records on our largest and hydrate side that’s 20% above that historical performance and brought that site from what was already operating at a low level to running 360% faster in two weeks.

So great set of examples I could go on for another hour and I am going to cut myself off, but we do take this seriously we’re not happy about it but I'm really proud of what we've done and it's a real testament to the value scale and integration..

So it sounds like that free cash flow then for the year will be somewhere between $900 million and $1 billion depending on the cost of all of this. It also sounds like that when you start 2018, you're not going to be fully up and running.

That is it will be some penalty in the first quarter I want to know if those are true and can you say what actually happened like what caused the explosion?.

So let me talk about the cash flows Jeff. It's still lot of moving parts.

So it's tough to call the exact timing of cash flow at this point on the operational incident, but for fourth quarter we're assuming to be that it will be somewhat neutral as the cash impact of higher operating cost is being offset by further declines in the inventory beyond what we normally do.

So again while there is these various moving parts, we're working hard to still deliver $1 billion in free cash flow and I think it will be more towards that billion quite honestly Jeff the $900 million you threw out there.

And even if we're going to need to rebuild that inventory in 2018 I'm also confident we're going to grow free cash flow in 2018 given the quality of our portfolio and the discipline of our cash by the Eastman team.

On the first quarter again it's hard to predict the earnings impact again at some cost that will continue in '18 versus the insurance recovery, but when I look at it today, it still will be -- the insurance recovery will exceed the additional operating cost that we still may have lingering in the next year in that first half of year.

So I still see this as a net positive impact on '18 versus the negative impact you're seeing in the fourth quarter..

Two things I want to emphasize on this question Jeff is one, we are done extraordinary efforts in preventing any disruption to customer's downstream of the coal gasification operations.

So with the back-up facilities we have with their sources alternative raw materials we can access around the planet, we brought those assets back up and operating combined with the inventory we had in hand to make sure we're serving all of our customers from the event through the fourth quarter and into next year.

So the sales disruption is going to be primarily related to asset deals which is very small percentage of our revenue inside TI. So that's point one. Point two is we're still in the process of investigating and understanding the incident that caused it and how we make sure it doesn't happen again.

So we're not going to comment about at this point, but you can rest assured that we're doing it..

Thank you. And then we'll take our next question from the queue Frank Mitsch from Wells Fargo Securities. Please go ahead. Your line is now open..

Curt when you mentioned, when you were asked the question about solidly at the high end of the 10% to 12% obviously in my opinion you're not going to use that comment but to me that was a euphemism that you're going to neither exceed that 12%.

Regardless you're going to be down about $50 million to $100 million because of Kingsport, which begs the question Mark, you said during the call that you expect strong EPS growth in 2018 and given the fact that you're going to be negatively impacted by $50 million to $100 million in Q4, which will regard the actual EPS growth in 2017.

What basis were you using that strong EPS growth off of the basis of Kingsport didn't happen and you would be comping strong EPS off of a 12% plus EPS growth or a lower level.

I was just trying to understand that?.

Yes Frank, that goes back to a comment I made a moment ago. We make sure we're really clear about the strength and value we're creating in earnings growth and cash flow this year as well as how we're building on that for next year. So my outlook comments are pre-event.

So like you just noted our guidance suggest around 12% growth this year and our earnings growth being strong is on top of that number. It is not taking the event as a special benefit to get to that number.

So we're still on track as we look at next year and consistent with the outlook we've had in the past, nothing has changed about delivering that 8% to 12% growth in what we've been talking about for the year.

It comes from strong growth in the specialties through continuing to have that mid-single-digit growth rate 2X the underlying markets mix upgrade within it driving a lot of growth. Next year we expect fibers to be stable to this year. So not having that headwind.

Maybe we'll have a little upside in fibers with all the new application growth that we're pursuing. As always we're going to continue to manage cost aggressively and continue to be focused on capital allocation for our shareholders.

So continuing an increasing dividend and share repurchases that should accelerate as we go into next year and so all are good drivers for growth pre-event on top of what we do this year. It will be offset by some higher costs but we have a very large shutdown coming in Texas next year.

We have the growth investments for making we have so many - innovation platforms taking off right now. We’re ramping up resources to support that growth in the customer trials and sales efforts to go with it.

And of course we’re going to have the fixed costs associated with the three large special capacity additions we've done in the PVD, Crystex and Tritan. And then we’re assuming on the macro uncertainties. We’re assuming sort of stable oil and the raw material that go with it stable currency to where we are now.

And we’re assuming GDP sort of growth around this year's level in a bit those are all sort of assumptions and we know there is a lot of uncertainty.

And so that's all sort of before the incident and then we’ll work through the math to make sure it clarity about the impact that we still had on earnings this fourth quarter as well it will have an impact next year..

And Frank just to make that we clarify anything in the marketplace. The impact of the event on operating costs and the recovery of insurance will be included in our published result.

What we’re going to do as you would expect these are going to do we’re going to be as transparent as we can so that you can actually see what the impact of the underlying business is doing despite those costs and insurance recoveries. And you’ll see that growth rate that Mark’s talking about..

I thought you proved a little bit the business in Europe, sales in Europe were up I think 21% year-over-year some of that is going to be currency but can you talk a little bit about the space of business that you're seeing over in that part of the world and how sustainable that might be?.

Yes to be clear I was just commenting of what I think is the macroeconomic conditions Europe we are actually driving a lot of growth in Europe well above the macro and it was that’s the only performance for the region. Most of the solar fills that I talked about occurred in the Middle East.

So that was part of the driver we say Europe, Middle East and Africa is our region so you have to remember it’s all of that.

And so part of the solar fills, part of what is that great commercial execution I talked about Taminco and driving personal care and nutrition growth lot of that occurred in Europe, as well as a lot of the share growth we had in tires was also occurring in Europe.

And we had a mix benefit until favor Europe as well where we had more there and some less still in other places. So all that sort of came together to give you a lot of strength. The macro is fine there and automotive growth has been reasonably good as a tailwind in Europe for us but I wouldn’t say we see a very strong improvement yet..

And now we will take our next question from John Roberts from UBS. Please go ahead. Your line is now open..

I assume you’re keeping the derivative units running in Kingsport by importing acetyl acid into the facility.

Do you pay market price for that or are you able to swap to be able to get that and you’ll return the swaps later on?.

First of all most of our derivatives units are running on silicon hydride. So acid is something we can’t convert into the hydride with some of facilities. So we are bringing a lot of acid into the side to make silicon hydride.

And so we are doing everything we can to sort of keep all downstream derivative unit running which we will be able to do and meet customer needs..

And the cost is going to be what the market will bear, I mean those things we’re having to do with those logistics starts we’re bringing in and that’s all been factored into the estimates I provided..

And I apologize I jumped on a little bit late, but did anyone ask the obligatory question for an update on the Longview monetization strategy?.

John you’re the lucky winner today. So just to give you an update, divesting our excess ethylene position as I said before is still one of the main priorities for us as well as potentially some of our commodity ethylene product lines. Again as we talked before the vast majority of olefins volatility is from this ethylene position.

So we are really working hard to try to get something done. We continue to have a number of engaged parties and we are working diligently to see if we can get a transaction completed. As I also mentioned before we’re exploring different options which could include sales, joint venture or other type of structures.

So this combined with kind of the continued challenging market conditions has made this process take much longer than I would prefer..

And to be clear though, we are committed to getting this ethylene volatility out of the portfolio and so we're going to get this done..

Thank you. So now we'll take our next question from the queue, David Begleiter from Deutsche Bank. Please go ahead. Your line is now..

Mark on your 2018 guidance, when you say strong earnings growth, is that similar to what we did in '17 i.e.

up roughly 10% to 12%?.

It's a little early to get into the specifics on the bridge of '17 to '18 and where we would be in that range, 12% is phenomenal growth this year. Some of it is being driven by some exceptional volume like solar fluid sales for example that what will repeat in that '18 but won't repeat in '19. We have another big slog coming in '19.

So there is certain dynamics on that side. The upper half of the range I don't know if that's likely at this stage from what we know. We'll have to see how it all comes together and we'll give you lot more detail in January, but you have to give us a bit of a break on this one, where we have so much going on right now.

We're spending most of our time making sure we do with the event deliver great results and cash flow in the fourth quarter and position ourselves well for growth next year..

Very good and Curt just on the Q4 free cash to make it $1 billion target you need to have a pretty big Q4, is that just from a release of working capital from the finished goods and do you have enough visibility to say where they’ll come from specifically?.

Sure, again in the fourth quarter, is typically our large cash generating quarter as we do release working capital due to seasonality in the businesses. I also mentioned that the operations incident we actually think it will be cash neutral. We'll actually be reducing inventory that will offset some of the operating costs.

Maybe another way to look at it is may be this is compared to fourth quarter '16 to what we're kind of expecting now. If you look at fourth quarter of '16 we generated $289 million of free cash flow if you adjust for that $150 million of pension. If you also look at our CapEx, it's roughly going to be $600 million.

if you look at that seasonally compared to '16, we're actually expecting $90 million roughly or lower capital expenditures in the fourth quarter of '17.

So when you do that math, all we need to generate free cash flow above last year's fourth quarter, either in working capital or other operating cash flows is about $50 million to achieve that $1 billion cash flow. So that's how I look at it. We do have good visibility.

There is some sensitivities that we're managing through but our goal is to work towards that billion dollars of free cash flow and grow up further 2019..

Let's make the next question the last one please..

Thank you, Sir. So the last question is coming from Kevin McCarthy from Vertical Research Partners. Please go ahead. Your line is now open..

Have you begun to receive propylene from enterprises PDH unit or when would you expect that to happen and given the surge in propylene, is there perhaps a greater benefit than we might've thought earlier this year?.

Kevin, we're not exactly sure when the enterprise will come up and be effective. You would have to ask them. But we certainly are expecting to have that asset supplying us as we go into next year at some point.

The benefits to us are going to be somewhat limited in the current conditions where propane price are at this time point relative to where we were originally..

And then as a follow-up can you comment on your utilization levels in Triton and your plans to expand capacity in 2018 and can we assume for example that the incident at Kingsport has no bearing on that timeline?.

Yes, the incident at Kingsport has no impact on bringing the Trident capacity up online, which we expect to do as we move finish the fourth quarter and the first quarter and the utilization at the moment is very high. We have tremendous growth and interest in that product.

We're trying to support all of our customers and their desire to growth with us and that's why we make such a significant investment in doubling their capacity. So we're feeling good about that business..

Just to wrap up as we close the call out, just want to put in a little bit of a commercial break for Investor Day. We're really excited about the track record we've been building and excited about what we can offer as we go forward in growing the company.

And we think we've actually set up a great track record and we'll share a lot more of this with you as we get to the Investor Day. But if you look at the past three years or back to 2014, we delivered tremendous organic growth and value from our acquisition.

If you back out sort of the macro headwinds of oil currency and fibers, you’d see that would be about $10 a share this year which should be 16% CAGR versus 2010 when we started this transformation, as well as 12% CAGR again 2013. So we’ll share a lot more with how that works.

How you can see the organic growth and the value of the acquisitions in our portfolio, and we are really proud of how we’ve managed our portfolio aggressively well ahead of the current trend divesting about 3.5 billion of revenue, almost half of it when you go back to - so when we did it and adding some great specialty businesses.

And I will work you through how we developed a very compelling organic growth engine that has three components to it around deep market connect, world class technology platforms and application development capability that bodes it together and the role of scale and integration plays and making it all that happen.

So, I think it's going to be an existing day.

We’re really looking forward just working through our details so you can really better understand the growth we’ve delivered in the past and to be clear, I was also - the only reason I bring out this macro adjustment is, so that you're going to understand all these headwinds stabilize going forward our ability to drive growth as we move forward.

But we are looking forward for it. Thank you..

Silvia, that concludes our remarks..

Thank you. So ladies and gentlemen, that will conclude today's Eastman Chemical Company's third quarter 2017 conference call. Thank you for participation. You may now disconnect..