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Executives

Greg Riddle - Investor Relations

Jim Rogers – CEO

Curt Espeland - Senior Vice President and Chief Financial Officer

[Anena Tesh] - Investor Relations

Analysts

Jason Miner – Deutsche Bank

Jeff Zekauskas – JP Morgan

Kevin McCarthy – Bank of America/Merrill Lynch

P.J. Juvekar – Citigroup

Frank Mitsch – BB&T Capital Markets

Eastman Chemical Company (EMN) Q3 2009 Earnings Call October 23, 2009 8:00 AM ET

Operator

(Operator Instructions) Welcome to the Eastman Chemical Company Third Quarter Earnings Conference Call. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations.

Greg Riddle

On the call with me today are Jim Rogers, President & CEO, Curt Espeland, Senior Vice President and Chief Financial Officer, and Anena Tesh, from Investor Relations Department.

Before we begin I’ll cover three items. First, we posted the slides that accompany our remarks for this mornings call on our website at www.Eastman.com in the Investor section. Second, during this call you will hear certain forward looking statements concerning our plans and expectations for fourth quarter 2009. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are or will be detailed in the company’s third 2009 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2009 and the Form 10-Q to be filed for third quarter 2009.

Lastly, except when otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures, such as sales revenue, operating earnings, and earnings per share that exclude restructuring related and other items. Our reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring related and other items, are available in our third quarter 2009 financial results news release and the tables accompanying that news release.

With that I’ll turn the call over to Jim.

Jim Rogers

I’m going to start out on slide three. By looking at the outlook statements we made on our last call on July an accountability check if you will. In July we told you we expected third quarter EPS would be approximately $1.10 and in September Curt updated our guidance to above $1.10 and we came in at $1.38, above our own expectations off the strength of our CASPI and Fibers Segments.

Next we told you we expected for the full year that our EPS would be slightly above $3.00 and with our fourth quarter guidance you can see we expect to be solidly above $3.00. We told you we expected the cost reduction actions we’ve taken would be evident in our results and they clearly are. We also told you we expected to generate greater then $200 million in free cash flow for the year and on this one we have greatly exceeded our expectations as Curt will discuss.

I can tell you it didn’t feel over conservative when we gave the guidance in July given the poor visibility we all had. If you’re going to miss we missed in the right direction. All I can say is we do our best to call it as best we see it. Obviously it’s been difficult to do so in the current environment.

Moving next to our corporate results starting with sales volume. We were down 4% year over year after excluding contract Ethylene and polymer intermediate sales from third quarter ’08 and sequentially we were up about 5%. As a result, our capacity utilization for the quarter was just over 80%. Customer demand is not quite back to where we were last year but we are making progress.

Next you can see that pricing was down 18% year over year, this is the result of lower raw material and energy costs particularly for propane, parazone and natural gas which were down between 30% and 70%. The decline was greatest in our more commodity businesses such as performance polymers and PCI but we were able to hang on to pricing better in our Fibers, CASPI and specialty plastics segments.

Now for earnings, our operating earnings improved both year over year and sequentially. Our gross margin was about 25% for the third quarter while our operating margin was just under 15%. Earnings and margins benefited from the lower raw material and energy costs that I mentioned. The cost reduction actions that we’ve taken and a more favorable company product mix. Also our EPS of $1.38 included a tax hit of $0.16 which Curt will talk about later. This was a strong quarter for us under difficult conditions and I’d say we were pleasantly surprised by the strength of our specialty products.

Turning next to the segments, beginning with Fibers. Sales volume declined year over year primarily due to acetyl chemicals but earnings remained strong due to higher selling prices and cost reduction actions. Looking to the fourth quarter we expect earnings to be down somewhat compared with the record third quarter levels. This is due to customer buying patterns for acetate tow in China and slightly lower global demand for acetate tow due to the recession.

Now for CASPI on slide six. CASPI was hitting on all cylinders in the third quarter and as a result this was a record quarter. While volume and price were down year over year they were both up sequentially. Product mix also improved sequentially. Operating earnings improved substantially due to a number of factors. First of all their businesses are performing well at the same time across coatings and adhesives, all of them. CASPI also benefited from lower raw material and energy costs and cost reduction actions.

In addition, we are see the benefit of the actions we’ve taken over the last several years to improve this business. Looking forward to fourth quarter we expect operating earnings to be down from the very strong third quarter levels as volumes decline due to seasonality and the raw material and energy costs increase.

PCI is next on slide seven. In July I talked about this business improving in the third quarter versus the second and they delivered. Sequentially volume improved and selling prices increased slightly while year over year sales revenue declined due to lower selling prices which reflected lower raw material and energy costs. Operating earnings improved sequentially due to higher volumes and lower raw material and energy costs. Year over year operating earnings declined primarily due to the lower selling prices.

Looking forward to the fourth quarter, we expect earnings to decline slightly sequentially due to seasonality and higher raw material costs. Lastly on PCI I would point out that they are now positioned to deliver operating earnings in the mid $60s for the full year and this is a lot better then the earnings they had in the ’01-’03 timeframe if you remember that recession despite this recession being more severe. This improved earnings level is a testament to the actions we’ve taken to improve the profitability of this business.

One other note, earlier this month Ron Lindsay and I traveled to Saudi Arabia and we had a chance to meet with the Sipcam team and some our Eastman employees who are working there with them. I can tell you we’re looking forward to the off take of 50,000 net tons of acidic and hydride from this facility which we expect to place into Europe and Asia. We also had the chance to meet with a number of other people while there. We were encouraged that there are a number of potential opportunities and partners for a company like Eastman. A good trip overall.

Specialty Plastics is next up on slide eight. Looking year over year volume declined due to the global recession. Our decline is generally in line we think with what we are seeing for competitive products such as polycarbonate and acrylics. We did see an improvement sequentially in our volumes. Pricing declined year over year due to lower raw material and energy costs particularly for paraxylene.

Despite the drop in volume and price, operating earnings improved due to the lower raw material costs and cost reduction actions. Looking to the fourth quarter we expect seasonality to result in lower volume and as a result expect earnings to be slightly lower sequentially.

Turning next to Performance Polymers on slide nine. Sales revenue declined year over year due to lower selling prices which were largely the result of lower paraxylene prices. Operating results decline to the lower selling prices and continuing operational challenges with our IntegRex-based PET manufacturing facility. Looking forward to the fourth quarter while we have made progress identifying and resolving operational issues with our IntegRex asset we have more work to do.

As a result, we will have a shut down in the fourth quarter to make additional improvements that we expect will get this asset operating like we know it can. During the quarter we’ll also be impacted by the volatility of paraxylene costs which declined by approximately 20% in October from September and as you would expect this has led to domestic customers de-stocking PET in anticipation of lower prices. Its also causing some margin pressure for us as higher cost paraxylene is still in our system is working its way through. As a result, we expect fourth quarter results to be significantly below third quarter.

Slide 10. Now for some comments on our outlook for fourth quarter overall. We expect to continue to benefit from the favorable company product mix we saw in the third quarter as well as the cost reduction actions we’ve taken. However, we’ll face some headwinds from volatile raw material and energy costs and the normal seasonality which we expect will lead to lower volume.

On raw material costs, propane is already up 10% in the month of October and as I mentioned earlier paraxylene was down 20% in October compared to September. Both of these, believe it or not, compress your margin. As I mentioned a minute ago, we are also expect a very challenging, one might even say ugly, fourth quarter for performance polymers and the industry as a whole. The result is that we are expecting our EPS to decline sequentially but to be slightly above the high end of the current range of analyst’s estimates on First Call which is $0.85.

Before I turn it over to Curt its time for me to continue to practice of highlighting one of Eastman’s executives who had an exceptional quarter. Given the results for Specialty Plastics and especially CASPI the choice was easy, Mark Costa. When I reorganized the management team in May I thought that Mark’s monitor consulting background and marketing expertise could add significant value to specialty businesses like CASPI and Specialty Plastics and I haven’t been disappointed.

Mark also leads our marketing and innovation groups, is a key player in our sustainability efforts and has a passion for driving profitable growth in the company. Mark consistently gives the credit to his strong team so he would want me to shine the spotlight on [Dante Rudstrom] our VP GM of Specialty Plastics and [Brad Lick], VP GM of CASPI. Together they have build a strong team where I believe we have the right players in the right positions and you are just beginning to see the results of what they can accomplish. Of course I know what’s going through their minds as they listen to this, what are we going to do for an encore.

With that I’ll turn it over to Curt.

Curt Espeland

While we had strong earnings in the third quarter you can see on slide 12 we also had great cash generation. Our cash from operations was $331 million for the quarter. This starts with strong net earnings, we also benefited from continued reductions in net working capital and we benefited by over $100 million from a combination of a refund of previously paid taxes and lower estimated tax payments. This is related to the change in accounting methodology used for Federal Tax purposes to accelerate the timely deductions for manufacturing repairs that I mentioned on the call in July.

Moving down the cash flow statement, you can see that our capital expenditures were $64 million for the quarter down from $153 million in third quarter 2008. This is consistent with our expected sequential declines in capital expenditures during 2009. After our dividend free cash flow was $235 million for the quarter which is really an outstanding performance. Through nine months our free cash flow now stands at $304 million which is above the $200 million full year 2009 free cash flow objective I previously discussed.

This op performance has been achieved through our focus on cash throughout the company and we, quite simply, underestimated the impact and speed of the actions we have been taking including reductions in working capital.

Turning next to slide 13, reductions in working capital remain a high priority. Back in March, as part of our free cash flow objective, we committed to generate $100 million in cash from working capital. As you can see, we remained very disciplined in the third quarter. At the end of the first half of the year our inventories were at historically low levels. I expected there would be a build in the third quarter but it was less then anticipated. Thus we have, in essence, achieved our goal. Looking at the fourth quarter we expect to maintain the progress we have made on generating cash from working capital.

Moving next to income taxes. The third quarter effective tax rate was 40%. During the quarter we completed the front end engineering and design package for the Beaumont, Texas industrial gasification project. It included higher then expected costs and a later estimated project completion date. While we continue to believe in the long term arbitrage between solid and liquid hydrocarbons there continues to be current legislative and other uncertainties for the project. The result is a $12 million impact when the reversal of previously recognized investment tax credit related to the project. Without the reversal the effective tax rate would have been 33%.

Since I get this question from investors periodically let me tell you there is $230 million of assets on our balance sheet in the form of capitalized engineering costs, purchased land, acquired assets and technology, etc. I also wanted to remind you that we continue to look at this project as an attractive opportunity that is unique to Eastman. However, we need a few things to move in our direction before going forward.

Through nine months our effective tax rate is at 39%. This included the ITC reversal which I just mentioned and a $7 million elimination of domestic manufacturing credits related to the manufacturing repairs change again as discussed in the second quarter. Without these two items the effective tax rate would have been 33%. Looking forward to the fourth quarter we expect our effective tax rate will be approximately 35%.

An update on our cash priorities is next on slide 15. First, as I previously mentioned, we expect to maintain the progress we have made this year and therefore generate $100 million from working capital. Next, on capital expenditures fourth quarter will be below third quarter and more like maintenance capital levels. As a result, capital expenditures will be approximately $320 million for the year. Looking at free cash flow, we expect in the fourth quarter to build on the $300 million of free cash flow we generated so far this year.

On pension contributions, so far in 2009 we have contributed $35 million to our pension plans. In the fourth quarter we are evaluating the benefits of making an additional contribution. If we were to make such contribution it would likely take us above $50 million which was the high end of the range we had previously communicated.

On slide 16 I’ll just take a minute to remind you of the great financial position we are currently in. We have a little less than $1.5 billion of total debt. Our cash on the balance sheet as of the end of the quarter was $668 million and that will likely increase in the fourth quarter. Our net debt stands at $773 million with a net debt to total capital ratio of 32%. We have a committed and un-drawn $700 million revolver substantially available to us well into 2013. We are in a very strong position from a liquidity standpoint and getting stronger as the year goes on.

With our strong balance sheet and potential for cash generation we are very well positioned for growth going forward. We continue to believe that deploying our cash in a value creating way will differentiate us and we are continuing to evaluate all options. There is still a premium on cash in the current environment thus we’ll remain disciplined as we pursue growth initiatives. As we grow we remain committed to maintaining our current investment grade credit rating.

Lastly, I am pleased to invite you to our investor day on Tuesday, November 17, in New York. We’ll update you on our strategy for growth and how we will use our strategic cash to create shareholder value. If you haven’t already done so please go to www.Eastman.com to RSVP.

With that I’ll turn it back over to Greg.

Greg Riddle

That concludes our prepared remarks. Please get the queue ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason Miner – Deutsche Bank

Jason Miner – Deutsche Bank

On some of the savings I wonder how much will full year ’09 earnings benefit from the 5% cut you guys made to salaries? Conversely maybe asked another way, how much would it add back costs if salaries across the board went back to ’08 levels?

Jim Rogers

We just happened to have been looking at that subject. We did take some extraordinary actions this year and I think we did it fairly quickly. I think we did it at the right level. I love our culture that we had the option of doing something like a pay reduction instead of having to let a lot more people go, people who actually contribute value and do meaningful work. It’s my setup to say that. I believe we did the right thing. You don’t have all the one time charges when you do a pay reduction.

There was $200 million of savings there and actually how it feeds into the year and how much of it we go during the year that was more of an annualized number. We would have had most of that in this year. As I look going forward you can’t keep those extraordinary measures forever so I would expect it’s quite likely we will be reversing some of those extraordinary measures including the pay reduction around year end. We’re still waiting to get a little more visibility into the fourth quarter and next year before we make a final decision.

As we look at that and maybe a couple other things that’s probably $40 million on an annual run rate that if you roll it all together that you would expect to put back in place. I would guess there’s another $50 to $60 million and that’s just a ballpark of savings that are tied more to volumes. When the volume comes back you would hire back the contractors, etc. You have to lighten up a little bit on some of the spending constraints because eventually people have got to travel you’ve got to let them spend a little bit of money.

There’s at least a good solid $100 million that sticks to your ribs going forward. The other thing I’d say is we don’t talk a lot about it but we’re trying to continue to be very disciplined so since that reduction in force we had in the spring we’ve allowed attrition to run ahead of hiring almost at a ratio of 10:1 such that by end of year I’d expect we’ll be down another 2% in our headcount which again you’re not paying any severance charges, we’re very conscious of cash but you are reducing your ongoing costs. I guess that wraps up how we’re looking at the cost savings we obtained and what we have to overcome as we move from ’09 to 2010.

Jason Miner – Deutsche Bank

Let’s shift gears into tow. Some have reported some volume drops in cigarettes recently. With some new capacity coming on in Korea I wonder if you could characterize for us the current situation and outlook for utilization rates in the industry for tow.

Jim Rogers

Since it’s our new capacity that’s coming on in Korea I guess we ought to have a handle on this one too. Great industry, certainly not impacted to the extent all the other businesses were by the recession but it was impacted. People did trade down on brands etc. around the world, the tax increases we had which have impacted smoking in particular in the States. Good news there is the States is a fairly small part of the world filter tow market. To come to it, we expect utilization rates next year will be less then the utilization rate were this year.

Jason Miner – Deutsche Bank

Let me shift to Beaumont, I wanted to ask I know we’d spoken about loan guarantees possibly earlier in the year. If Beaumont has slowed down is there still a potential for government loan guarantees to help in that project in the long run you think or do we miss that window?

Jim Rogers

No we have not missed that window. That is still on our agenda and we think we’re still in the right place in line, let’s put it that way, for those. Bigger issue is all the other building blocks that have to come together before you can start thinking about going forward with the gasification project and we’ve listed those in the past in terms of the capital costs where energy prices are, how much government incentives do you get.

We’ve also said that if we go forward we’d like to go forward with a partner, it’s a big project. There are so many things that are not in place today. The mode we’re in right now is to hold those costs down to a minimal amount to keep the option alive as we continue to review how we feel about that project and the chances of it happening any time soon.

Operator

Your next question comes from Jeff Zekauskas – JP Morgan

Jeff Zekauskas – JP Morgan

On your taxes, do your book taxes and your cash taxes more or less match each other with a small delay or is there now a difference in what you’re paying versus what you’re reporting?

Curt Espeland

If you look at 2009 it’s definitely where our current taxes and our deferred taxes have a different view and that’s primarily due to the project we’ve talked about our tax project. As we go back into next year our tax department will still continue to look at all ways to impact cash and minimize tax payments but it will probably be more normalized going forward. We are looking for advantaged ways to impact our cash.

Jeff Zekauskas – JP Morgan

This year what’s the difference in very rough terms between your cash taxes and your book taxes?

Curt Espeland

If you look on the cash flow statement I’d say you’d see that difference right on the deferred tax benefit.

Jeff Zekauskas – JP Morgan

When you think about the cost cutting program at Eastman can you give us an idea of what your level of savings was by the end of the second quarter for this year and what your level of savings now is by the end of the third quarter?

Jim Rogers

I’d have to do some math; I guess you could do that as well. You know when our pay reduction kicked in; I think it was April 1. We did a reduction in force around then so much of it would have been in the second quarter. As I think it through, in fact we were running at lower utilization rate in the second quarter so we probably had pretty much, when you guess most all the cost cutting in place at that time. I’m not sure there was a huge difference between second and third other than we ran at a higher utilization rate in the third quarter and so we may have had to bring a few more contractors back.

Jeff Zekauskas – JP Morgan

Sometimes what Dow Chemical does is gives investors an idea of how much their hydrocarbon costs decreased year over year or sequentially. How much did your hydrocarbon cost decrease sequentially?

Curt Espeland

If you’re talking about raw I’m not sure when you say hydrocarbon per se. I can tell you what our raw material costs.

Jeff Zekauskas – JP Morgan

Raw materials is just great.

Curt Espeland

If you look year over year our raw material costs declined $350 million.

Jeff Zekauskas – JP Morgan

What about sequentially?

Curt Espeland

I think it’s probably increased about $40 million some of that still may be tied up in inventory but it’s about $40 million.

Jim Rogers

The one thing you’ve got to watch for both of us is how does price move with that raw material. That’s the other piece to the equation that I have to focus on. What we try and do is we try and manage the spreads.

Jeff Zekauskas – JP Morgan

How much did prices change sequentially?

Curt Espeland

Sequentially price was up 1%.

Operator

Your next question comes from Kevin McCarthy – Bank of America/Merrill Lynch

Kevin McCarthy – Bank of America/Merrill Lynch

I was wondering if you could comment on the fourth quarter profit outlook in CASPI. Most years you see a seasonal dip there but it’s not always the case. I think you had improvement in 2003 and 2006. As you look at raw material trends and what you see volumetrically what should we expect for that segment in the fourth quarter?

Jim Rogers

Forgive me if I take this opportunity to comment of CASPI. I was waiting for the question. What a great quarter for that business. Let me remember a few things. I will get to your question but I can’t resist thinking about all the stuff that’s been done in that business going all the way back to some of the restructuring and selling off the resonates and monomers businesses quite a while ago to more recent things like getting out of the crude tall oil and our adhesives business. I think about people changes that were made down in the organization more recently getting the right players in the right jobs. It’s like everything was clicking.

We had the raws come off in this third quarter and we know that they’re turning around going back up so that’s one of the things that tells us yes we are definitely coming down from that third quarter high. We know we normally have seasonality, we don’t think this year is going to be any different. We will come off just given the markets they sell into will come off from third to fourth quarters. The point is it’s still going to be a very strong quarter for CASPI and just such a great business. I know you guys looked at it and you’re probably wondering how do I think about that going forward.

The fourth quarter, yes we’re coming off but if I look longer term remember I used to build up how I thought we could set peak earnings higher then the last peak just within our core businesses. I had CASPI be around $200 or back better than $200 and you’re seeing the potential to set a new level of earnings in CASPI. One quarter doesn’t do that, we had a lot of stuff go our way, all the businesses clicked at the same time whether it was in adhesives or coatings, that doesn’t happen very often. Still you can just see the strength of that underlying business and that’s one of the things that I count on when I talk about setting much higher earnings in the future on these core businesses.

Kevin McCarthy – Bank of America/Merrill Lynch

It is nice to quadruple operating profit over two quarter. Well done.

Curt Espeland

Part of that is how weak it was two quarters ago too.

Kevin McCarthy – Bank of America/Merrill Lynch

Those record levels though. Shifting gears, you mentioned you’re excited about acetic and hydride off take from Sipcam. Can you give us some kind of feel for the timing and magnitude of that in terms of financial impact?

Jim Rogers

I’m not sure it will have that great a financial impact. I’m excited just because it gets us out more globally. Its part of the world I think we should have a bigger presence in, in the Middle East. I can tell you they have built one beautiful plant that any North American chemical site would be proud to have. I’ll let them say their exact timing but I think they’re planning on being operational early next year is my guess. They’ll give you the definitive term.

To me it’s just one more way we’re playing off of our acetyl stream just working everything from logistics to cost position and serving the growing market. It wasn’t so much it’s going to have a material impact 50,000 tons of hydride but its more that it’s the right direction that we want to go.

Kevin McCarthy – Bank of America/Merrill Lynch

On the subject of cash deployment obviously things have changed dramatically in terms of the capital markets over the past eight, nine months. You’re at a point now where you’ve generated a lot more cash; your net debt to EBITDA is not very far from one. I was wondering if you might comment on the dividend. It’s been flat for something like 12 years. I realize it’s a Board decision but at what point should we be thinking about resuming increases there?

Jim Rogers

When you say resuming increases I think the last increase was like ’95 or ’96. The way we look at that is we believe in getting a return to our shareholders. It’s a very legitimate use of cash to give it back to shareholders but we’re guided too by our yield in reference to the rest of the industry and we think it’s still quite an attractive yield now. Assuming that we continue to run our businesses well and the price moves up we’ll be looking for ways to get a return to shareholders. I’m not going to say it’ll necessarily be by increasing the dividend.

Operator

Your next question comes from P.J. Juvekar – Citigroup

P.J. Juvekar – Citigroup

As you said, PCA did really well especially compared to the last recession. I was wondering if you can talk a bout the supply/demand of oxo and acetyls now versus back then.

Jim Rogers

I’m not sure how much better the markets are then back then. I know we’re doing business differently. This was such a severe recession I believe I’d be correct if I said there was some capacity that exited the market. I can’t remember if that also happened back in that ’01-’03 timeframe. When I think about the difference I think about things like swap arrangements we’ve done with other producers such that we have product in a right region without all the logistics costs and so do they. I think about in particular a lot of work we did on pricing and deciding what segments of the market we want to play in.

You know for example we have a different acidic asset strategy albeit we’re much smaller player anyway but how we have more of a North American specialty strategy there as compared to other players. It’s a laundry list of things that are more internal to us I think then the marketplace in total but you wouldn’t know that by looking at the other guys and seeing what they’re doing compared to that last recession.

P.J. Juvekar – Citigroup

What are your current operating rates?

Curt Espeland

I think I said we’re just slightly over 80% so say 81%. That’s part of the reason we’re looking at the fourth quarter coming off as we’re expecting that utilization rate to come back down a few points.

P.J. Juvekar – Citigroup

Many institutions are banning the use of single serve PET bottles. On the flip side they’re encouraging the use of plastics like [inaudible]. Can you talk about the shift that’s taking place?

Jim Rogers

I don’t know about banning PET per se. I know there’s polyethylene bans.

P.J. Juvekar – Citigroup

I should say they’re frowning on the use of PET.

Jim Rogers

That is one trend in the plastics world where everyone is looking for greener plastics and I think we’re hitting the timing just right with our Triton product, its just such a great product with a great future. You know its BPA free, it does so many things in terms of having a higher TG you can use it in the dishwasher a lot of other places. We’re winning contracts with some brand names that we think it’s really going to drive growth and we think there’s going to be generations of products, families of products after this initial wave.

That wave, what we call the sustainability wave, we are very conscious of that looking at our portfolio where we can take advantage of that wave. Its not just there, there’s a number of places. You’ll be hearing more about that if we get together here in a few weeks on Investors Day.

Operator

Your next question comes from Frank Mitsch – BB&T Capital Markets

Frank Mitsch – BB&T Capital Markets

Donald DuPont mentioned at their investor day nine times in their conference call, I took the under on you guys, I’m feeling pretty good about that bet right now because you’ve only mentioned it twice so I appreciate that. With the overall results on an operational basis the best since ’05 and given a lackluster market, speculate with me where could your earnings have been if you’ve got back to ’05 type operating rates?

Jim Rogers

That’s the dream at night as go to bed. I think about we did this on 81% utilization rates. Admittedly we had some extraordinary measures in place for costs. Last time we had a pay raise was back in April ’08. There are some extraordinary measures we took which you can’t count on but I’m very pleased with the power of these core businesses to run at this rate. Just to give you an idea, CASPI’s utilization rate isn’t much different then the company overall, its right around there, especially plastics is actually less, Fibers is noticeably more.

One of the benefits you get in these businesses such as Fibers you know the utilization rate I don’t think went up from second to third or not by much is the fact that we’re integrated. As other businesses tick up their volumes and they absorb more costs from the stream every business benefits. I feel very confident when I say that if we get back to those run rates, utilization rates, a strong year that we’re going to have no problem setting peak earnings higher then the last peak.

Frank Mitsch – BB&T Capital Markets

That perfect because of course the biggest peak obviously was jacked up by PET back in the mid 90’s.

Jim Rogers

It wasn’t that big a difference. I think the last peak was $5.73 and I think if I go back to ’95 it was $6 something. You’re seeing the $1.30 something plus $0.16 you’re seeing a pretty decent quarter at 81% run rate. Again admittedly a lot of stuff went our way; raw materials versus price, cost savings, etc.

Frank Mitsch – BB&T Capital Markets

It’s been previously mentioned on the call, your nice cash position and the strong balance sheet. You went out of your way to discuss your trip to Saudi Arabia and talk about possible opportunities and partnerships etc. in that part of the world. What sort of things would you be considering?

Jim Rogers

It’s too early to mention anything specific. I know what you’re driving for and our game plan is to be more global, we want to get more then our fair share of the regional growth that’s happening out there in the developing world. We very much like the idea of advantaged feed stocks you’ve seen that here in Kingsport with what we start with coal, we think we can do that we can have advantaged feed stocks in other parts of the world.

You know we think that our CASPI business and parts of our performance chemicals and intermediates business could be good hunting grounds for add on acquisitions. Just to give you a sense, the idea of advantaged feed stocks, differentiated products I think we can really create some value going with that strategy around the world.

Frank Mitsch – BB&T Capital Markets

When is your next trip?

Jim Rogers

That’s a good question; I’ll probably be making some big tour in the first quarter.

Operator

Your next question comes from Jason Miner – Deutsche Bank

Jason Miner – Deutsche Bank

Back on Fibers for a moment, if the volumes in that business came from lower sales of chemicals I know that you do sell some to competitors, could that suggest that you’re taking any market share there?

Jim Rogers

I wouldn’t read it that way. Some of the sale of chemicals goes to a joint venture we have right here in Kingsport, Premistere. We do sell to a few other players around the world. Frankly I see the market share in Fibers as fairly steady I would guess. That’s probably the way Rick Johnson, who runs that business would characterize it as well.

Jason Miner – Deutsche Bank

If I can revisit my utilization question one last time forgive me. Do you think we can keep global utilization above 90% in Fibers across the industry?

Jim Rogers

I think that is the current thinking for 2010. We’re bringing on a few extra tons there in Korea but the Asian market is still growing even through this period of time. Of course when we bring that Korean facility on we’re going to have some startup costs next year, we’re going to have to do some product qualifying with our major customers so you might not, specific to Eastman, see a lot of the benefit of that Korean facility until 2011. The market is still growing strong in Asia and that’s where we want the capacity.

Operator

Being no further questions in queue, Mr. Riddle I’d like to turn the conference back over to you for any additional or closing remarks.

Greg Riddle

Thanks again everyone for joining this morning. An audio replay of this conference call will be available on our website this afternoon through next Monday, November 2. Have a great day.

Operator

Thank you for your participation. This will conclude today’s conference call.

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Source: Eastman Chemical Company Q3 2009 Earnings Call Transcript
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