Greg Riddle - IR Mark Costa - Chairman & CEO Curt Espeland - EVP and CFO Louis Reavis - Manager, IR.

David Begleiter - Deutsche Bank John Roberts - UBS Aleksey Yefremov - Nomura Instinet Duffy Fisher - Barclays P. J.

Juvekar - Citi Vincent Andrews - Morgan Stanley Kevin McCarthy - Vertical Research Partners Jeff Zekauskas - JPMorgan Bob Koort - Goldman Sachs Frank Mitsch - Wells Fargo Michael Sison - KeyBanc Capital Markets Arun Viswanathan - RBC Capital Markets Dan Rizzo - Jefferies.

Good day, everyone, and welcome to the Eastman Chemical Company Fourth Quarter Full Year 2017 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir..

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

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

Certain factors related to future expectations are or will be detailed in the company's fourth quarter and full year 2017 financial results News Release and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for the third quarter 2017 and the Form 10-K to be filed for 2017.

Second, earnings referenced in this presentation exclude certain non-GAAP and unusual items.

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 fourth quarter of full year of 2017 financial results News Release, which can be found on our website, www.eastman.com in the Investors section.

Projection of future earnings exclude any non-core or unusual items. And with that, I'll turn the call over to Mark..

Good morning, everyone. I'll start on Slide 3. 2017 was a strong year for Eastman as we made great progress in our strategy to transform towards specialty portfolio and create attractive value for our shareholders. I am pleased to report that we met or exceeded the financial targets that we set last January.

On the EPS front we exceeded our goals to the strength of our performance over innovative specialty businesses. The key driver to the success was our continued strong growth, improving product mix, and cost structure leverage.

In 2017 we delivered over 7% volume growth in our two specialty segments combined which is more than double the underlying markets. Strong contributors included many of our premium products such as Triton, Saflex acoustics and heads up display interlayers, Crystex tire additives, tire resins and performance films.

In particular growth in premium products has been a key driver for the advanced materials segment and we’re seeing this trend accelerate for additives and functional products. We achieved the highest rate of new product commercializations form our innovation growth portfolio in our history.

We also benefited from high reliability suppliers as our Chinese competitors faced stronger environmental enforcement. And we completed the construction of two of our new specially plants in Malaysia to support our future growth.

At the same time we took 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. As I said before, we are creating our own growth through innovation and leadership in specialty markets.

Our cash engine generated an impressive $1 billion of free cash flow for the year, about 7% yield which enabled an increasing dividend further deleveraging and an accelerating rate of share repurchases. And we increased our dividend by 10% in 2017, the 8th straight year of increases.

Over that time we have more than doubled our dividend providing an attractive yield to investors. Overall during 2017 we returned approximately $650 million to stockholders through share repurchases and dividends.

These results are clear proof that we are on track and executing our strategy from innovating through our enterprise to managing our cost, to pricing discipline to returning cash to our stockholders. Next on Slide 4, as you know in early October we had an operational incident in the coal gasification areas of our Kingsport site.

First I said it before and I want to say it again, I want to complement the extraordinary professionalism and safety first focus of our operations team. This was a significant event and we're exceptionally proud of the actions of our team. Our recovery team had twice a day, seven days a week for three months solving problems and driving results.

The team came together with the Eastman can-do attitude and demonstrated how Eastman is exceptional at rising to a challenge. Second our response to this incidence is a superb example of how we both delivered superior reliability for our customers and our minimized in the financial - impact the incident on our earnings.

Our teams wire tireless to repair the facility we also implemented alternate processes to maintain operations of downstream derivative facilities of coal gas. We had an absolutely flawless startup which is a testament to our talented engineering and manufacturing teams. And in the end there was a zero impact to our derivative customers.

Third, this impressive timeline to get back up is due to the significant advantages we have in the scale and integration at our Tennessee site which is one of the largest integrated chemical facilities in the U.S.

Our integrated production systems across the four segments enabled us to make complex choices across the site which was essential in avoiding a site wide disruption. Our significant scale enables us to have dedicated experts and large-scale fabrication and engineering resources who rapidly and safely repair the facility.

For example, we rebuilt a five-story pipe bridge with 117 pipes and there were no leaks on start-up. We replaced 100s of valves some of which were over 2000 pounds. We rebuilt in our own big shop a number of new vessels some of which had walls that were three inches big.

Our scale and supply chain procurement also played a critical role in sourcing material and balancing the needs of our customers. This is another example of how we're exceptional in managing the large complex facilities. I’ll let Curt cover the financial implications as he reviews the corporate results next. With that, I'll turn it over to Curt..

Thanks Mark, and good morning everyone. Continuing on Slide 4 let me cover three financial aspects related to the coal gasification incident. First, our net cost resulting from the incident are excluded from fourth quarter and full-year earnings results and the net earnings recovery in 2018 will also be excluded.

Second, thanks to our teams diligent effort resulting in an accelerated timeframe for bringing the site back up, as well as higher insurance recovery resulting from an increase on related capital expenditures, we anticipate the net financial impact of the incident will be between $25 million to $50 million lower than previously anticipated.

In fourth quarter, the net cost of the disruption and to the repair and reconstruction of the site were $112 million. In addition, lost sales attributed to the incident were $40 million in the fourth quarter of 2017 primarily in the chemical intermediate segment.

Finally, the net cash impact of the incident is expected to be approximately $50 million to $70 million mostly impacting free cash flow in 2018. The free cash flow impact on fourth quarter 2017 was minimal as a net costs and capital expenditures related to the incident were offset by drawdown of inventory, an increase in trade payables.

Now moving to our fourth quarter corporate results on Slide 5. We delivered solid earnings for the quarter. The increase in revenue largely reflected strong growth from our high margins specialty businesses along with continued improvement in chemical intermediates more than offsetting a decline in fibers.

Chemical intermediates revenue improved despite the negative impact of lost sales of approximately $40 million attributed to the coal gasification disruption. Operating earnings increased as growth in additives and functional products, advanced materials and chemical intermediates more than offset a decline in fibers. Next on to Slide 6.

Looking at the full year we delivered strong results despite a slow growth world reflecting the strong and robustness of our strategy to transform into a specialty portfolio.

Overall sales revenue increased as strong growth from our high margins specialty businesses along with continued improvement in chemical intermediates more than offset a headwind in fibers.

Our operating results increased as increases in additives and functional products, advanced materials and chemical intermediates more than offset a decline in fibers. And we're growing operating earnings while we continue to invest in growth for both the near-term and long-term.

Our operating margin for the year was over 70% slightly higher than 2016 and our adjusted EBITDA margin was over 23% which remains one of the most attractive in our industry. Earnings per share increased 13% with higher operating earnings contributing almost 8% of the growth.

Moving next to the segment results beginning on Slide 7 and starting with advanced materials which delivered another year of strong growth driven by innovation platforms. Fourth quarter earnings increased year-over-year due to higher sales volume particularly from double-digit growth of high margin innovative products and improved product mix.

Partially offset by higher growth spend and startup costs of the new PVD resin capacity in Malaysia and hurricane related costs. For the year, sales revenue increased due to the improved product mix from higher sales volume of premium products including Triton, co-polyester, Saflex acoustic interlayers, and performance films.

Operating earnings increased for the year primarily driven by higher sales volume, lower unit cost due to higher capacity utilization and improved product mix of premium products partially offset by higher growth spend. Advanced materials strong operating margin was maintained at over 19%.

These results reflect execution of a multiyear strategy to deliver strong earnings growth. Overall solid results for 2017 which continues advanced materials track record of success and reflects a high level of returns given the investments we have made.

Looking to 2018, we expect stronger earnings growth in 2017 as advanced materials execute its strategy for mid-single digit volume growth, mixed improvement and fixed cost leverage. We continue to deliver compelling proof of our ability to drive growth through our innovation and market development.

Now to additives and function products on Slide 8 which had another outstanding quarter. Fourth quarter sales revenue increased 19% due to very strong sales volume for most product lines, a favorable shift in foreign currency exchange rates and higher selling prices. This impressive growth came from multiple sources.

Our improved commercial execution and heat transfer fluids led to a number of wins in solar energy, strong growth in tire additives due to innovation in our tire resins, and superior operational reliability and strong growth in animal nutrition and care chemicals.

We also made good progress in improving our pricing on the strengths of our value proposition to our customers. Operating earnings increased primarily due to higher sales volume, higher selling prices and fixed cost leverage.

For the year sales revenue increased double digits primarily due to 10% higher sales volume which is across most of the segment, as well as higher selling prices. Operating earnings increased 8% primarily due to higher sales volume, fixed cost leverage related to strong volume growth and higher selling prices.

Looking at full year 2018, we expect solid earnings growth. We expect the continued solid growth in tire additives and animal attrition will be partially offset by some headwinds and adhesives and a tough comp for heat transfer fluids due to the timing of solar projects. We will also have higher costs associated with growth investments.

All in, additives and functional products is well positioned to deliver solid earnings growth for the year. Now the chemical intermediates on Slide 9. Fourth quarter sales revenue increased due to higher selling prices attributed to higher raw material costs, and continued improved market conditions.

The increase was partially offset by lower sales volume particularly of acetyl derivative products due to the coal gasification incident. Fourth quarter operating earnings increased slightly primarily due to higher selling prices and lower commodity hedge costs partially offset by lower sales volume and higher raw material and energy costs.

For full-year, operating earnings increased primarily due to higher selling prices, lower commodity hedge costs, lower scheduled maintenance costs, and lower operating costs partially offset by higher raw material and energy costs.

Sales volume was down somewhat with growth in our specialty businesses consuming intermediates that would have been sold to the market resulting in corporate mix upgrade. This is in line with our strategy for chemical intermediates which includes supporting growth in the specialty businesses.

Looking at full year 2018, we expect similar results to 2017. It looks like we are off to a good start here in the first quarter, however we are expecting all of our margins to compress somewhat towards the back half of the year. We also have higher scheduled maintenance cost during the year which we will work to offset with productivity.

Overall chemical intermediates is set up for 2018 earnings to be similar to 2017 which would be good performance. I'll finish up the segment review with fibers on Slide 10. Full-year sales revenue decreased primarily due to lower selling prices particularly for acetate tow attributed to lower industry capacity utilization.

A bright spot for the year was growth and acetate yarn which increased over 10% reflecting early success of our innovation initiatives. Operating earnings for the year declined due to lower selling prices and lower sales volume partially offset by lower operating costs resulting from recent actions.

However, operating earnings improved in the second half of 2017 and were 10% higher than the first half reflecting the actions we've taken to stabilize the business. Looking forward, we expect 2018 earnings to be stable or somewhat higher than earnings in 2017.

We expect total volumes to be stable with somewhat lower prices from competitive activity offset by an aggressive productivity program including raw material costs. We also expect continued growth from our innovation efforts and will tell you more about this great success next week.

One final point, we expect first quarter 2018 to be in line with the fourth quarter of 2017 with an improvement in earnings for the remaining three quarters as the benefits of lower costs flow through inventory. On Slide 11, I will transition to an overview of our cash flow and other financial highlights for 2017.

We did an excellent job of generating cash in 2017 with operating cash flow of over $1.6 billion. Capital expenditures totaled $649 million including approximately $50 million for coal gasification repairs and reconstruction.

Free cash flow for the year was just over $1 billion, the best year of free cash flow in our history and a very attractive free cash flow conversion rate of over 90%, another testament to the quality of our portfolio and the capabilities of Eastman team. And we expect that to continue in 2018 with free cash flow expectation greater than $1.1 billion.

This reflects cash from continued earnings growth, the benefit of tax reform and lower capital expenditures partially offset by the negative cash impact of the operational incident and increases in working capital requirements given our expected growth and rising raw material environment.

For 2018 we expect capital expenditures to moderate to $250 million to $550 million. This reflects the nearing or completion of several large growth projects, as well as an additional $20 million to complete the repairs of the coal gas facility.

In addition, given the expected benefits of tax reform, we are investing an additional $25 million for low-cost to bottlenecks and higher returns small capital projects to meet increasing demand for a variety of our specialties. And we’ll continue to put our free cash flow to work in a balanced and disciplined manner.

We used $350 million over free cash flow to pay down debt consistent with our deleveraging commitment. Additionally, we remain committed to returning cash to our stockholders. Our full-year dividend was $296 million and this included a increase in the fourth quarter of 10%.

And we had $350 million in share repurchases through the year including $75 million in the fourth quarter. The combination of regular increases in our dividend and an increasing level of share repurchases reflect our continued confidence in future earnings and cash flows.

And finally, our pro forma effective tax rate for the year was approximately 20% reflecting the continued benefits of our improvement in business operations and other positive tax attributes. Tax reform also had an impact on our fourth quarter and our outlook for 2018.

In the fourth quarter the company recognized an estimated $421 million tax benefit resulting from recent tax law changes impacting the revaluation of deferred tax liabilities offset by expected transition tax on deferred foreign income and a reduction in the expected benefit of foreign tax credits.

Our normalized effective tax rate is expected to go from 20% to 22% to 18% to 20% in 2018 reflecting the lower US tax rate partially offset by a reduction of foreign tax credits and other deductions. Overall, a strong year for Eastman and a solid foundation from which we'll continue to grow. With that, I'll turn it back to Mark..

Thanks Curt. On Slide 12, I’ll discuss our 2018 outlook. We continue to benefit from the strong growth of high value innovative products with leading positions in attractive niche markets. We're also delivering revenue synergies through launching new products and improvements in the commercial execution capabilities of our acquired businesses.

We’re seeing the benefits of scale and integration, translating this attractive growth in earnings. And our continued aggressive productivity is expected to offset inflation and some of our growth. In addition a modest improvement in our tax rate is expected to contribute to grow.

Finally disciplined allocation of our strong free cash flow contribute to our growth including increasing our share repurchases in 2018 compared to 2017.

To accelerate the momentum in the coming years, we’re also continuing to invest in innovation and product development, and we expect higher scheduled maintenance costs in the year as we have significant turnaround of one of our crackers in Longview Texas, that only happens every five years.

And lastly, we expect some pressure in olefins spreads especially in the second half of the year. Putting this all together consistent with our previous guidance, we expect adjusted EPS growth in 2018 to be between 8% and 12%.

And when you consider the shape of earnings this year, you should expect the first half to be modestly stronger than the second primarily in CI and AFP. We expect at least a 10% increase in our free cash flow which is one of the most compelling in the industry, especially when you consider we're investing in long-term growth at the same time.

Lastly this morning a quick reminder that we will host an Innovation Day in New York on the morning of this coming Tuesday, February 6.

We're incredibly excited to spend the morning with you and talking about how much progress we've made in our innovation strategy and our capabilities across the organization and how its positioned us to continue to deliver strong attractive growth and increasing free cash flow. In particular we’ll share three things with you in this day.

We'll talk quite extensively about our unique innovation, organic growth model that I think is exceptional in this industry and has delivered one of the most robust portfolios for growth that we've ever had and I think outstanding for this industry.

We will also talk about how aggressive portfolio management through years has positioned us to help growth across a range of attractive markets and structurally improved our earnings and cash flows and positioned us to deliver continued growth.

And of course we'll spend some time reviewing how we’re going to be disciplined as that we always have been about deploying our free cash flow for the attractive returns for our shareholders. Through this discussion we'll demonstrate how we've created value in the past and more importantly how we positioned to continue doing it going forward.

I hope you’ll be able to join us. And with that, I’ll turn back to Greg..

Thanks Mark. We’ve got a lot of people on the line this morning and like to get to as many questions as possible. So I'd appreciate it if you limit yourself to one question and one follow-up. And with that Jennifer we are ready for questions..

[Operator Instructions] And we'll go first to David Begleiter with Deutsche Bank..

Very strong quarter in the AFP business on topline basis, another 14% volume mix.

How sustainable is that number in 2018?.

Yes, we’re incredibly proud of the team in AFP. They have just done a phenomenal job through the year of driving growth as all you know we had a bit slow start to the year. And really delivered great acceleration through the year and it was strong volume on a number of fronts.

We had great growth that was delivered in the back half of the year in particular both third and fourth quarter from our solar fills as Curt mentioned. We won a number of projects there and saw that benefit.

We also had tremendous success in driving revenue synergies through the Taminco acquisition, an accelerating growth in animal nutrition and care chemical, delivering a lot of strong volume growth and tires which is a great success story both on the innovation efforts around tire resins and Crystex, as well as PVDs as we demonstrated how reliable we are to our customers compared to some of the competitors that we had faced out of China who've been shut down for environmental reasons.

So strong drivers across the market. I would note that coating was more in line with how our customers' grew in that mix. But as we look at 2018 we are confident to continue strong growth in sort of the mid-single digits areas. So it’s going to moderate a bit from where we were in 2017.

The key things are this year we don't have that many solar fills so that's going to be a tough comp in the back half of the year, but we will see a return of those solar fills in 2019 and 2020. It's just those orders tend to be chunky and when they fall not just within the year but also across years, it’s a great business just chunky.

In addition, we saw some growth really driven by this Chinese environmental enforcement in the AFP as well CI. And what happen there is, we gained a lot of market share in some places we expect to sustain that market share. We don't associate another step up in share this year.

I would note that AFP is advantage when it really becomes a - demonstrating our reliability supply in that front because of how well our assets run how and we maintain them and most of our competitors may have feel on the specialty side are small Asian players who have one line and in this case we’ve shown the value of being aligned with us.

So you have a few things that just not going to repeat and as we mentioned will have some price pressure on the pieces business as we have a competitive add some capacity and we’ve been talking about that for a while.

So overall very much confident of delivering solid growth this year, the rate of growth will be moderate on the volume side as a result of these things..

And Curt just on the cash flow, what’s your working capital expectation for usage this year and how much debt do you expect to paydown in 2018?.

So if you think about cash flow again we’re expecting greater than 1.1 billion embedded in that is a growth - I'd call modest growth in working capital. If you think about our cash conversion cycle, it should be about the same.

I think depend on how you calculate, it's 98, 99 days that will be the same cash conversion cycle in 2018 and just have to kind of input your own thoughts on what you think the rising raw material environment is going to be.

As it relates to the uses of cash flow, you’re going to see that same disciplined capital allocation philosophy you have seen this year. So if you think about greater than $1.1 billion, the increase in dividend is roughly going to be a $325 million use of cash.

You'll probably see us continue deleveraging about the same level maybe little lower and that we did in 2017. And in absence of any bolt-on acquisitions the rest of it will be deployed to share repurchases..

We’ll go next to John Roberts with UBS..

Did you have to purchase all of your silicon hydride during the quarter or were you able to utilize some swaps where you have to return the volumes in the future?.

I’m not going to get in all different mechanics that how we secured the acetic acid but yes we did have to go the marketplace and secure so..

I would say that it was an impressive display of supply chain management where we're normally exporting a modest amount of asset in hydride out of this site because we consume most of what we make for our specialty products vast majority.

Bringing in a phenomenal amount of acetic acid in the site, it was just extraordinary to see that flow shift in less than 30 days..

And it seems like your adjusted results added back the cost of the purchase acetic or asset or in hydride, is that because when you're in normal operations running the gasifier, the net cost of the raw material coal after the coproduct intermediate credit is essentially zero and see it add back the cost of any purchased raw material?.

Well you got to keep them, the reason we added back the cost of the instant because first of all we have pretty good line aside of what the additional costs are.

And what you have typically is the cost of the incident which is basically supported by the insurance process to go through it is actually reflects the additional cost of procuring and moving the additional raw materials into our facilities versus what it would cost for us to have produced..

We'll go next to Aleksey Yefremov with Nomura Instinet..

Could you discuss the start-up costs in relating to 2017 and if there is any benefit from lapsing those costs in 2018?.

Well I think if you look at maybe total cost - Mark talked about some cost headwinds, we call it investments.

And so what you have there is typically between the three manufacturing sites that we’re bringing on stream that will come with about $30 million of its additional fixed cost that we will deal with in 2018 that we will grow into starting at 2018 and going into that 2019 period et cetera.

And just round it out, if you think about that plus we’ll have some additional I’ll call it roughly $20 million of costs associated with turnarounds that we didn't have in 2017, and plus you got some additional growth and innovation spend et cetera.

So now you think about that, we are using productivities to try to maybe cut half of that gross spend in half and combine that with roughly 70 million of inflation we always have deal with this each year. We will have about $100 million cost reduction program.

But in general we’ll have a $30 million to $40 million cost headwind related to growth investments to help or support our long-term growth going into 2018..

As a follow-up, what are your expectations for the benefit of the PDH agreement that are embedded in your guidance and how conservative are those assumptions compared to current spot PDH margins?.

So the expectations or the benefits of that PDH agreement of us obviously moderated with the changes in oil price in olefins market. We still have a benefit but it will be relatively modest..

We'll go next to Duffy Fisher with Barclays..

First question just around tow, you had gone to great lengths to kind of lock in some longer-term contracts. So the price down in the fourth quarter and some price coming down next year.

Did that play out like you thought or is that kind of an incremental negative versus what you thought when you went to those longer-term contracts?.

So as we said we secured about two thirds of our tow volume in long-term agreements. Obviously there was a third that wasn't and we saw some residual competitive pressure in that space, the price down you saw in the fourth quarter it just the nature of the pricing and the agreements we set for the year.

But as you look at 2018, you will see some - sort of more moderate reduction in price associated with some continued competitive conditions throughout the year last year. But as Curt said, those moderate price declines in comparison last year will be more than offset by some of the cost reduction efforts we have to volume being the same.

So in general, we feel good about so where it all nets out to being stable for the year with. I think we have a good chance of drive for some very modest growth when you include the innovation program. So really excited to walk you through all of that next week and show how much progress we’ve made.

On the innovation portfolio, I have been pushing it off with you guys for a while to sort of get into the market and see success and we really have delivered some tremendous success. And can we just share with you..

And then just to go back to the cash flow, you seem much more confident or bullish kind of on the more than 10% growth in free cash flow where your earnings guide or EPS guide is kind of 8 to 12.

But yet, you're going to buy back some shares, so that should be a positive for EPS relative to cash flow, working capital will be a net negative on cash flow wouldn't be for EPS? So where's the increase bullishness coming from on the cash flow side relative to the EPS growth?.

Well, first of all it comes from our underline businesses. I mean, our underlying businesses generate good cash flows and that will continue. And so, cash flows are not always equal exactly 100% for the growth rate. But we are going to see good cash flow growth there. We are expecting some benefits of tax reform.

You've heard me talk about the challenges or headwinds we expected with higher cash taxes in the U.S. and so, that will help moderate that, in fact as we got transition that headwind maybe more '19 than '18. So that helps our cash flows in '18. And again you see good working capital this month.

The other thing I'd remind yourself is our capital expenditures are also down 100 million. So that's also a driver of that confidence in free cash flow..

The other thing I would note on the earnings side of this when it comes to tax is that as, we looked at our guidance we've kept the range 8% to 12%, but where we were leading you guys last fall was we'd be at the low end of that range from what we could obviously with this tax benefit, we’ll now move into the middle of the range on that 8% to 12%..

We'll go next to P. J. Juvekar with Citi..

Mark you guys did a good job in ASP and Advanced Materials in terms of volumes but pricing has been somewhat weak, particularly in AdMat for last several quarters. And that is despite rising raw materials.

So, what does it take to get pricing up there or are your sales people not pushing price to get volumes? Can you just talk about that?.

So, in Advanced Materials as you noted the prices didn't change that much. There is a lot in that mix as well that you have to keep in mind. But the first thing I would note is, compared to CI and AFP the rate of raw material increase in Advanced Materials is actually quite modest.

The PX market is pretty competitive and we didn't see that much increase in PX really, compared to other segments. What we're really focused on in Advanced Materials is driving mix upgrade that's how we've created all this value.

And when we're growing things like trident acoustics and heads of display interlayers and all of the performance films business had pretty attractive high margins, that's how we drive growth and that's how we deliver earnings growth over the last five years in that business.

On the pricing front, we didn’t make good progress actually on pricing relative to PX on the co-polyester side of the business, but the prices were flat due to the annual contracts and interlayers so that mitigated how you're seeing the overall price movement in the segment. And of course, we had some prices come off in a few places.

But I actually feel that we did a great job on that and we have some good momentum and feel good about how we're going to manage price versus rise in '18.

And then you talked about the Chinese competitors having issues. Can you just talk about what products that you're seeing that benefit? And generally, if you can talk about your China operations outside of [Wiltertoe]? Thank you. .

So especially in AFP and CI we have a number of competitors who are based out of China. And in AFP, there are players that we have in products like Crystex, some of the olefin related products where they are typically very small private companies who start up a plant somewhere. And in this case, many of them were not in an industrial park.

So when they start to enforce environmental restrictions they had to shut down because they were in some suburb or some place and that wasn't appropriate. And we really benefit from that, especially in tires but also in some of the olefin related businesses as well. And then as you think about the overall China business, it's a great business.

I mean tow has obviously got its own unique story, but we're well positioned across advanced materials and as of functional products and selling a number of specialties into that market across the whole spectrum from transportation to consumables, consumer durables et cetera. So it's a robust business but a big driver of growth for us. .

We'll go next to Vincent Andrews with Morgan Stanley..

With the lower U.S. tax rate, I guess just a couple of questions around it. Obviously, you're still presumably trying to sell the Longview Cracker. So any update there? Maybe that's helpful to have a lower tax rate now. But also you talked about the $25 million incremental investment.

But as you think about broader capital allocation whether it's organic or for M&A, are you more focused on the U.S.

now with the lower tax rate than you might have been otherwise or how is your calculus changed, if any?.

First you asked a question about the status of the ethylene sale, let me start there and then we'll talk about tax rate and then how we might think about the investment. So first of all on the sale process, divesting the excess ethylene positioned and a potential commodity ethylene derivatives it remains a priority for us.

You've heard that before, but nothing has changed there. While excess ethylene is a source of volatility and not strategic to our future growth, the underlying assets are high-quality that generate significant value. So we're just going to continue with our process. It's an active process with multiple parties seriously engage with us.

And so we are working hard to see if we can get a transaction completed. On the tax rate, just to clarify again, we are expecting a modest impact as part of the effective tax rate. In addition as we transition, that minimizes some of the headwinds we have on taxes. We're going to '18 by a face of more '19.

But then on a cash basis between all the things, there's probably is a $50 million cash benefit for us relative to some of those headwinds we're starting to face. So that allows us to have a little extra cash to put to work..

So as we reflected on the benefits for us, like most companies in the U.S. are doing, we wanted to make sure that we stay true to our strategy. So if we think about how we invest some of these tailwinds - and by the way, overall tax reform I think for this country, for Eastman, is fantastic to improve our competitiveness in the world.

We wanted to really reinvest in our strategy. So we're going to increase our resourcing in the R&D side and the growth resources on the commercial side to accelerate these innovation programs that we have moving in place.

We also saw the opportunity to take some of the cash and reinvest it in debottlenecking some of our plans, improving yields and quality on some of our plans to support us better in the strong growth we're having. So that's how we decided to do it.

We think that's the best way to improve the quality of our employees, so our jobs security and carrier tracks and we also think it's a great way to create some attractive jobs in this country. Chemical sector is a great place to work, our salaries are well above the industrial average and significantly above the service sector.

It's a mix upgrade just like in our strategy if you think about America and what we're doing. So we think tax is great. One of the thing I'd note is, the biggest upside to tax reform I think for all of us is stimulating economic growth in this country and by association around the world.

And if that growth stimulus happens, that would be upside to our forecast..

And just as a follow-up, can you give us a sense of the FX impact that you're expecting for 2018 at current rate?.

Well, we've assumed then the - outlook right now is - the biggest thing is Euro to Dollar relationship. We've assumed a little about a 120 maybe, a little stronger. And that's built into our outlook statement.

I know it's trading a little higher than that, but let's see if that stays there for a period of time before we talk any further upside to our forecast. But if it does, it will have an impact on our outlook. But right now, we're assuming $120 or so..

We'll go next to Kevin McCarthy with Vertical Research Partners..

Mark, in your prepared remarks, I think you indicated that you'd anticipate a greater share repurchases in 2018 versus 2017. Can you put that into context for us versus the $350 million that you did. It looks like, for example, you de-lever by $1.25 billion in the fourth quarter.

Are you happy with the balance sheet where it is now and should we anticipate a meaningful shift in that regard looking ahead?.

First of all, we love our balance sheet. Well, there is still some additional deleveraging that we need to do consistent with our commitment to maintain a solid investment credit rating.

So the deleveraging that we're going to do is going to, again, be similar to or little less than we did in 2016, and that will continue to improve our metrics especially as we also then grow our EBITDA. As it relates to the capital allocation, again, you should always assume our free cash flow is fully deployed.

I know that still - I don't think it's fully appreciated in the industry yet that we will fully deploy our capital, our cash flow. So, yes, in absence of bolt-on acquisitions, we will see an increase in share repurchases. I still like to see an execution of that kind of spread throughout the year.

We tend not to do accelerated programs, but we'll see how the year progresses and whether we change our strategy, but that's how we currently think about it..

And then as a follow-up sticking with the same subject, how would you characterize your M&A pipeline activity has been relatively quiet.

It seems to me over the last year or so, do you see interesting bolt-ons or anything larger of interest looking ahead?.

So, first, you're right. We've been very focused on demonstrating we can deliver organic growth not just from heritage Eastman but also from our acquired businesses. Next week you'll see tremendous innovation and growth stories across our portfolio, and it's amazing how much we've accelerated growth and what we've acquired, not just what we've had.

So that's been our focus, and I think it's important to drive confidence for all of our shareholders that we can get a good return on our investments, both capital and acquisitions. As we look forward, we are aiming for doing bolt-on acquisitions that reinforce and strengthen some of the positions we have in our specialty businesses.

And so we'll look to try and make that happen as balanced approach in capital allocation. I will tell you right now, we don't have anything active, but it is something that we hope to do as we forward from this point forward..

We'll go next to Jeff Zekauskas with JPMorgan..

What was your cash tax rate in 2017? Where do you expect it to be in 2018 and what do you forecast for 2019?.

Well, you see in the cash flow statement, you can see what the impact is on differed taxes. So I think our cash tax rate actually increased slightly in 2017. One of the ways I try to characterize kind of that headwind taxes is we've been benefitted from the NOLs we acquired from Solutia. So that was about $1.5 billion of NOLs.

And we've really enjoyed the benefit of those kind of over the five years tax effect that you can get a rough sense of how much we benefited. And then as that benefit of NOLs rolled off, we were starting to use the foreign tax credits. Now, as we transition to a territorial tax system, we've now lost some of the benefit of those foreign tax credits.

2018 is still a transition year. So we'll see how much we can manage through this. But you will see our cash tax rates to grow modestly in 2018 and a little bit more in 2019, but, Jeff, the bottomline, we don't quantify the exact cash tax rate, but you can see how it's reflected in our free cash flow goals overall..

So what you said is your cash tax rate will arise in 2018, and then rise a little bit in 2019?.

Yes, it will rise a little bit in 2018, and it'll probably rise a little bit more in 2019..

Overall, we're confident of our free cash flow as a company increasing this year and continue to increase as we move forward..

We'll go next to Bob Koort with Goldman Sachs..

You mentioned, and Curt as well, that at the Innovation Day, you're going to give some direction on the things you've been working on and the value it creates.

Just curious, as you look forward in AFP and AM, should we expect to see that manifest as margin lift or primarily volume lift? And then secondly, is it good or bad for Eastman Chemical if there is broad inflation in your feedstock base?.

So on the first question, Bob, we'll extensively cover that topic about how innovations is going to drive growth through a company across AM, AFP as well as starting to help fibers in the portfolio. So that will be our focus. It is a volume driven story more than it is a margin driven story.

We get a great mix uplift that moves our margin up within the segments, especially advanced materials. But when you think about AFP and AM, the margin there are much more attractive than CI. So as we're driving growth there and intentionally not growing CI at the same rate because they're sending intermediates down to the growing specialties.

That's a huge mix upgrade within the portfolio. So you do get margins improving over time, but the real story is volume and mix upgrade in the specialties. So that's sort of where you get on that front.

On the oil question, what we'd say is a steady oil environment and an increase in oil environment is favorable to Eastman, a volatile oil environment is not in general over the long term because when it's spiking up and down its just always hard to manage the pricing.

As we look at the current situation, 2018 what I'd say is you know on methanol so amines and acetyls we see a nice tailwind coming with oil and associated methanol going up. When we think about the olefin side in the short-term there is a supply demand dynamic issue that goes on top of oil.

We have all these crackers and PDH units coming up so we’re expecting some short-term pressure but long-term we feel good about how those spreads with all..

We'll go next to Frank Mitsch with Wells Fargo..

Congrats on getting the coal gas unit up before year end. Curt I wanted to follow up on Slide 12 the near-term headwinds I took down a bunch of numbers I just want to make sure I got this correct and also wanted to learn more about the cost reduction program you referenced.

So the cost of strategic growth investments I believe you said was 30 million to 40 million headwind 2018 versus 2017 was that correct?.

Yes, again that’s mainly the impact of the cost of bringing these new production facilities online.

A good portion of that just the higher depreciation that comes with bringing assets online?.

And then also the higher scheduled maintenance cost I think you referenced 20 million year-over-year net increase is the correct?.

That’s correct. It’s primarily related to a cracker turnaround in second quarter..

In Q2, that’s all in Q2..

Yes, that cracker turnaround is in Q2..

And then I believe you said that there was - and then you also said you have general inflation labor costs et cetera 70 million and lot of this will be offset by $100 million cost reduction program.

Can you go into anymore details on that program?.

Well again we have a great team of people at Eastman know how to manage cost it’s in our DNA. And so this is a group of people who have been working on offsetting inflation every year and we asked them to deliver more than that periodically like we've done in the past. We asked them to deliver more than inflation in 2017.

What we’re asking for that team to do is help offset some of this growth investment as we grow into it, to help us kind of have earnings growth, good earnings growth in 2018 and as those growth investments take off and you get the benefits of it, we’ll continue to offset inflation through the productivity programs..

Frank just to sort of summarize that up first of all the productivity programs and we do this every year. So this is standard to what we do. A lot of it is manufacturing improving yields, quality, debottlenecking, stretching plants, but it’s just great productivity, it’s not that people related this year.

When you think about that and all the cost that Curt has laid out from the growth investments and the higher maintenance costs, the point we’re trying to say is net. We’ll offset inflation to 70 and of this growth spend and maintenance costs, we also have a portion of that but not all of it.

So net-net you've got a fixed cost headwind in the $30 million to $40 million range all in from 2017 to 2018..

We'll go next to Michael Sison with KeyBanc Capital Markets..

In terms of EPS growth for 2017 how much of that do you think was driven by your specialty businesses and I guess by your outlook for the segments in 2018 did the specialty businesses support more of that EPS growth as we head into next year?.

So if you think about it and the way I think about it is the specialty businesses is where the key driver for earnings growth last year and they’re going to be key driver for earnings growth this year. It’s a little bit different story on how you do that.

In 2017 you had a recovery in CI especially the hedge rolling off basically offsetting the headroom we had in fibers. So CI and fibers sort of neutralize each other out and we delivered growth in the specialties, as well as leveraging other elements of our income statement from interest cost to tax rate and share count.

As you look at this year it sort of the same story. We're going to have strong growth in the specialty businesses as we've guided. Fiber actually will be stable to 2017, CI will be stable 2017. And so same story about where the net earnings growth comes from and of course we’re going to keep levering the other elements of the income statement to.

So better interest cost, better tax, better share reduction than last year's so it all comes together in developing a pretty compelling story and equally important increasing free cash flow to a very attractive level..

And then if you think about bolt-on acquisitions, you've done a nice job adding specialty businesses over the last several years.

Are there certain areas within the product lines that you like to reinforce or opportunities to maybe get bigger in certain of the specialty businesses?.

We’re not going to get into specific target areas until we actually deliver the acquisitions Mike but there are definitely attractive parts of advanced materials where we can see value in doing some bolt-on M&A.

We got a great track record already in advanced materials and some bolt-on M&A in the performance films business, and then are few other places beyond that as well that we can look at.

In additives and functional products, the combination of Taminco with Eastman’s capabilities create some opportunities for looking for some bolt-on acquisitions to improve our growth rate. And so it’s a target rich area in that space as well.

So we have a bunch of ideas and things we’re considering and looking forward to using that as another lever but right now we’re focused on delivering our organic growth, focused on managing cost, focused on delivering free cash flow and returning it to shareholders and as we get those done we’ll do it.

I’d also note we have a great track record of being exceptionally disciplined in what we pay for our acquisitions. And that's also why we’ve been a little bit slow because we want make sure we don’t over pay..

We'll go next to Arun Viswanathan with RBC Capital Markets..

Just wanted to confirm the cadence for EPS. Did you say that Q4 would be similar to Q1? Or was that a fibers only comment? And then similarly, for first half, that would be greater than second half, maybe just remind us what the cadence was on EPS? Thanks..

Yes, so what we said is that the first half is going to be mostly stronger than the second half of the year at the corporate level for EPS. And in particular what we see is - we see actually quite a good strong start to the year as we’re going right now so we feel good about the first quarter across the portfolio.

But as you look at the back half of the year, you got some sort one-off headwinds in AFP like the solar fills they’re not repeating this year compared to the back half of last year and some of this pressure and uses and you know as well as the olefin pressure that we expect in the back half of the year.

So that's sort of what moderates the back half a little bit relative to the first half..

And just as a follow-up, just curious on China I mean you've alluded to a lot of capacity having to move to parks or being shutdown. Is there any estimate on how much of their industry that is you know relative to what it was in the past or how is it improved the supply demand environment over there? Thanks..

Yes, on China effect and there is a lot people talking about but it's encouraging to see the Chinese enforce their environment laws and cleanup their impact on the global environment and we appreciate and applaud their efforts.

The impact is shutting down a bunch of particularly private companies that are typically small, typically trying to get into the specialty side of the equation because they are located in the right location. And so most of those guys are under pressure if they’re operating appropriately..

Some may be able to get financing to move to new Chemical Park and if they do and do start-up they’re going to have higher operational costs in those locations than where they were in the past.

So either way we look at it they don't come back obviously that's helpful if they do come back they’re going to have a higher cost structure, but we do expect some to come back. But it’s unclear because the Chinese government is also trying to improve their control on financing and cleaning up bad debt.

So it's not clear exactly how many people we’ll get financing to sort of comeback..

Okay thanks..

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

We'll go next to Laurence Alexander with Jefferies..

It's Dan Rizzo on for Laurence.

So you indicated that the solar fills will kind of have a tough comp and the order patterns will be falling off a bit in 2018 I was wondering if solar have a kind of outsized where they really hit margins they really help margins or is it just something that you kind of work through?.

So in the solar fills side it’s not margin story it’s just a volume story so we had expect some amount volume on solar in the back half of last year. Just thinking of the margins are similar to the segment average, so it’s not a margin story..

And if I could add what we mentioned earlier that the capabilities and our team that manages that business is a great example of the type of capabilities we’re building at Eastman that you’re going to hear a lot more about on Tuesday..

And then forgive me if you already mentioned this but did you talk about potentially repatriating cash just what it contains in the tax code and what that means?.

So when you look about the repatriation that’s really not a material issue for us. We've always been able to move our cash freely. So the impact of the repatriation is really on the mandatory piece that 8% piece that was assumed in our calculation.

So truly not a cash issue for us other than we're having to pay that transitional attacks as we migrate to the new territorial tax system..

So in summary, I just want to say that we’re incredibly proud of our teams working hard everywhere to drive volume, manage cost and deliver an outstanding year of 13% EPS growth and tremendous free cash flow in 2017 demonstrating our ability to grow both of our specialty businesses which is now becoming above 70% of our total earnings.

And we're really excited about Innovation Day next week where we’re going to walk through how we’re going to keep driving that, keep improving these businesses, stabilize and improve fibers and our growth model allows us to sustain this year-over-year. So look forward to seeing you guys on Tuesday morning. Thank you..

Thanks for joining us again this morning. Go ahead Jennifer..

This does conclude today's conference. We thank you for your participation..