Eastman Chemical's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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Eastman Chemical (NYSE:EMN)

Q3 2011 Earnings Call

October 28, 2011 8:00 am ET

Executives

James P. Rogers - Chairman and Chief Executive Officer

Gregory A. Riddle - Director of Investor Relations

Curtis E. Espeland - Chief Financial Officer and Senior Vice President

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Thomas McGannon

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Duffy Fischer - Barclays Capital, Research Division

Lee Bressler

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Manav Gupta - Goldman Sachs Group Inc., Research Division

Paul Leming - Ticonderoga Securities LLC, Research Division

Nils-Bertil Wallin - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Operator

Good day, everyone, and welcome to the Eastman Chemical Company Third Quarter 2011 Earnings Conference Call. Today's conference is being recorded. This call is being broadcast live on Eastman's website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Gregory A. Riddle

Okay. Thank you, Tricia, and good morning, everyone, and thanks for joining us. On the call with me today are Jim Rogers, Chairman and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; and Fernando Subijana, our new Manager of Investor Relations.

Before we begin, I'll cover 3 items. First, during this call, you will hear certain forward-looking statements concerning our plans and expectations for fourth quarter 2011 and full year 2012. 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 quarter 2011 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for the second quarter 2011 and the Form 10-Q to be filed for third quarter 2011.

Second, except where otherwise indicated, all financial measures referenced in the call and in the slides accompanying the call will be non-GAAP financial measures, including earnings per share and operating earnings that exclude asset impairments or restructuring charges and gains. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, including a description of the restructuring related items are available in our second quarter 2011 financial results news release and the tables accompanying the news release.

Third, earlier this month, we completed a two-for-one stock split. All per share amounts in this presentation have been adjusted for the split.

Lastly, we have posted the slides that accompany our remarks for this morning's call on our website at www.investors.eastman.com in the Presentations & Events (sic) [Events & Presentation] section. With that, I'll turn the call over to Jim.

James P. Rogers

Thanks, Greg, and good morning, everyone. Thanks for joining us. I'm on Slide 3 and as is my normal practice, I'll begin with a review of our 2011 outlook statements that we made back in July. For third quarter, we said we expected to be above third quarter 2010 EPS of $1.11 and we delivered with EPS of $1.19.

For the year, we said we expected to be slightly above $4.62 and our current full year guidance is about the same, and I'll talk more about that in a few minutes. We said we expected free cash flow for the year to be approximately $200 million and we made some decisions that may bring us a little below that number, but still very healthy, and Curt will take you through the details on that.

And lastly, we said we would continue to be disciplined in how we put cash to work and we have been. During the quarter, stockholders received almost $150 million through the combination of dividends and share repurchases. We completed 3 acquisitions in the quarter, Sterling Chemicals, Scandiflex and Dynaloy. And we expect Sterling and Scandiflex to be slightly accretive to earnings this year, accretive above our cost of capital next year and both support growth in non-phthalate plasticizers, and Scandiflex gives us a manufacturing presence in Brazil. And Dynaloy will support our growth efforts for electronic materials within CASPI. And we remain on schedule for a number of capacity additions throughout the company. So I think Eastman is well-positioned with solid core businesses and a strong balance sheet to demonstrate the resilience of our earnings and what is definitely an uncertain economic environment.

Turning to Slide 4 and our corporate results for the quarter. Revenue increased by 20% primarily driven by higher selling prices. Volume was flat and this reflects some softening of demand in a few markets, as well as inventory destocking due to significant volatility in raw material cost and also likely some cash flow management. Operating earnings were down slightly year-over-year and there are number of factors. In third quarter 2011, we had $11 million in cost from the earlier unplanned outage of one of our crackers in Texas, and this has been backed up and running since early August. And we recognized $8 million from an acetyl technology license with Chang Chun Petrochemical. You may remember, we also had $12 million in revenue on earnings from this license in the first quarter of 2010.

Looking back at third quarter 2010, we were helped by $22 million from the partial recovery of an insurance settlement related to a power outage at our Texas facility. So with these factors considered, the year-over-year is actually positive as higher selling prices more than offsets substantially higher raw material and energy cost, and earnings per share of $1.19 are a record third quarter for us.

Moving next to the segments starting with CASPI on Slide 5. Sales revenue increased year-over-year, primarily reflecting higher selling prices in response to higher raw material and energy costs. For example, propane costs were up about 40% year-over-year in the third quarter. Operating earnings declined, but the story is similar to the corporate story. Third quarter 2011 op earnings included $3 million of costs from the unplanned cracker outage, and third quarter 2010 operating earnings included $9 million from the partial insurance settlement. Outside of these 2 factors, selling prices more than offset higher raw material and energy cost.

Looking at the fourth quarter, we anticipate a normal seasonal decline in volume. Some of this is destocking, which is normal in the fourth quarter. Some is caution, given the economic uncertainty. But at this point, for CASPI, we don't see anything more than that, and we expect raw material and energy costs to remain volatile. As a result, we're bringing down their full year outlook slightly from over $350 million of op earnings to approximately $340 million, which would still be an annual record.

Next up is Fibers on Slide 6, and their earnings strength continues. Revenue was up 11% year-over-year. There was a favorable shift in product mix as we have now filled out the Korea acetate tow capacity expansion and are benefiting from additional tow sales in Asia Pacific. And selling prices were up to offset higher raw material and energy costs, particularly for wood pulp. Operating earnings were up slightly due to the higher tow volume in Asia. For the full year, Fibers remains on track for operating earnings of approximately $340 million, which would be an annual record for them and it would be their eighth in a row.

PCI is next on Slide 7, and they had an excellent quarter in a very challenging environment. Revenue increased 39% year-over-year due to higher selling prices and a favorable shift in product mix. The selling prices were in response to higher raw material and energy costs. The favorable shift in product mix was due to increased plasticizers sales, $8 million of revenue from the acetyl license and $15 million of revenue from the acquired Sterling Chemicals business.

Operating earnings increased year-over-year and consistent with the corporate and CASPI story. There were a number of items included in the results. Third quarter 2011 operating earnings included $8 million of cost from the unplanned outage of one of our crackers and $8 million from an acetyl technology license offsetting each other. Third quarter 2010 operating earnings, though, included $12 million from the partial settlement of an insurance claim. Outside of these factors, operating earnings increased year-over-year, primarily due to higher selling prices more than offsetting higher raw material and energy cost. Sequentially, although we were able to mostly hold selling prices as raw materials and energy cost declined, operating earnings were lower due to seasonally lower sales volume.

We are expecting normal seasonally lower volumes -- I'm sorry, this is looking forward into the fourth quarter. We're going to have some challenges, including normally seasonally lower volumes. In addition, U.S. propylene prices have dropped significantly. We believe there are a number of factors driving this. The market-built propylene inventories in the third quarter in preparation for several turnarounds during the fourth quarter and came into the quarter with higher inventories. At the same time, overall demand was slowing because propylene derivatives became expensive relative to the rest of the world, due to the high U.S. propylene prices and therefore, exports were curtailed. And there's also likely been inventory destocking due to the expected drop in propylene prices.

We think the market is over correcting from the high September prices because a lot of what is happening is due to seasonal factors, and because additional turnarounds of refineries in crackers are expected in the remainder of the quarter. In long term, we remain confident that the propane-propylene spread will be an advantage for Eastman.

Despite the fourth quarter challenges, we still expect that PCI operating earnings for the year will be approximately $300 million, which would be an annual record.

Specialty Plastics is on Slide 8. Revenue was up 4% as higher selling prices more than offset lower sales volume. The higher selling prices were primarily in response to higher paraxylene cost, and paraxylene prices were up more than 60% year-over-year in the quarter. The lower sales volume was due to a few factors. First, we've seen some slowing in the packaging and consumer durable goods markets in North America and then the LCD market in Asia. Second, we believe there was some destocking in the quarter and expectation of lower paraxylene prices. And third, because paraxylene cost have gone up as much as they have and therefore, copolyester prices have increased, we've seen some switching by customers to competing materials that haven't had the same raw material pressure. As a result, operating earnings were flat year-over-year and down slightly sequentially.

Looking forward, we expect volume to decline seasonally in the fourth quarter. In addition, we will have additional costs related to planned capacity additions. These are for Tritan resin, copolyester monomer and cellulose triacetate. Despite the challenging environment, we continue to expect Specialty Plastics operating earnings will approach $120 million.

A review of our regional performance is on Slide 9. We continue to have year-over-year revenue growth in all regions. In the quarter, the revenue growth was driven by higher selling prices, which increased primarily due to higher raw material and energy cost. The revenue split in the quarter was 54% in the U.S. and Canada, 46% in the rest of the world. This split is about the same on a year-to-date basis. Operating earnings both for the quarter and year-to-date were the reverse, with 53% of our earnings in Asia, Europe and Latin America combined, and 47% in the U.S. and Canada. The bottom line is that we are continuing to benefit from the geographic diversity of our revenue and earnings.

Turning next to our guidance for fourth quarter and full year 2011. We expect normal seasonality in volumes, including destocking in the fourth quarter, but we have yet to see signs of softness in our fourth quarter volumes beyond normal seasonality, although our visibility has declined in certain of our businesses as customers orders -- as customers order more frequently and in smaller quantity. We expect raw material and energy cost to continue to be volatile. We're expecting propylene to continue to be under pressure in the quarter. We also expect propane prices to potentially increase from current levels as it gets colder outside. And we are expecting paraxylene to remain near current levels, perhaps declining even a little as we get closer to the end of the year.

As I mentioned previously, we do have planned maintenance in the fourth quarter and there's more than we normally have. All 3 of our streams have turnarounds in their manufacturing assets. In the acetyl stream, coal gasification has a major maintenance turnaround that occurs once every 3 to 4 years. Polymers has start-up cost, as we prepare capacity additions to come online in the first half of 2012, and we have a number of turnarounds in our olefins stream.

We are also continuing to invest in growth, and this includes increased cost on what we report as other related to our planned acetylated wood launch in Spring of 2012. Taken together, we expect fourth quarter 2011 EPS will be above fourth quarter 2010, and our full year 2011 earnings will be approximately $4.62, about consistent with our full year guidance from July.

And normally, I do a CEO spotlight where I talk about an individual or something that I want to highlight, but I expect that there would be some interest if I turn that CEO spotlight on the propane-propylene spread, and how changes in the spread are impacting our results. So in an effort for transparency, we put together Slide 11 which provide some additional detail on how our earnings have been impacted over the last 5 years, including 2011. You can see in the table at the bottom of the slide, the annual average propane to propylene spread based on data from CMAI. And the higher the number, the more beneficial the spread is to Eastman, since in the U.S., we make 2/3 of our propylene using mainly propane as the primary feedstock, and we purchase the remaining 1/3 of our propylene needs. The blue bars are corporate full year operating earnings. We haven't included a number for 2011 yet, of course, because the year isn't complete. And the green bars indicate our best estimate of operating earnings impact from producing versus purchasing propylene and ethylene. I'd add that the estimated impact in 2011 also includes the benefit from restarting one of the crackers in December of 2010. And what you see is that we expect a little less than 15% of our earnings in 2011 are the result of producing versus purchasing olefins, and that the average impact has been about 10% a year.

In 2009, as you can see, it was actually negative. But you'd probably agree with me that, that wasn't necessarily a typical year. The impact of producing versus purchasing olefins is not linear to the spread you are seeing for a few reasons, and this is a kind of stuff that's hard for you to see on the outside, so that's why we wanted to get this slide in front of you. First, keep in mind that the impact is for both propylene and ethylene. Second, the impact reflects both the capacity utilization of the crackers and the fact that we have both added and idled crackers over the last 5 years. Third, our businesses have been working hard to reduce the volatility. This includes long-term agreements with key customers. And lastly, some of our derivative pricing reflects propane cost rather than propylene. So some contracts price off of propane instead of propylene.

With that said, the benefit of producing versus purchasing olefins will continue to be a contributor to our earnings performance, but by no means, is it the only or even primary driver of our earnings. We have a number of very strong businesses that are growing that have no exposure to the spread. Think of Specialty Plastics, Fibers, the resins product line in CASPI and the acetyl products in the PCI as examples. As I've said before, if what you are primarily interested in is exposure to low cost olefins in the Gulf, there are other companies with significantly more exposure than Eastman that would be a better play for you.

I'll conclude this morning with some general comments about 2012. We certainly don't have clear visibility into 2012 at this point, but we do know we have some strong tailwinds and that we are confronting a number of potential headwinds. On the potential headwinds, these are really outside of Eastman's control. First, the uncertain economic environment, and although we don't see signs of recession, we are watching order patterns closely. Second, volatility of raw materials and energy cost to become normal for us, and we continue to work our way -- on ways to lessen the impact. And giving the low level of interest rates, we expect to have higher pension expense in 2012.

For tailwinds, these are more specific to Eastman. We have a strong core of businesses that we expect will deliver resilient earnings despite the uncertain environment. We made a number of changes to our portfolio over the past 10 years. And today, we have a core of businesses in which we are very confident. We have capacity additions throughout the company that come online next year and they are in areas where Eastman has an advantage, be it in Tritan copolyester or Regalite hydrogenated hydrocarbon resins. We will also have a full year benefit from the Sterling Chemicals and Scandiflex acquisitions which we completed in August, and we continue to have a strong balance sheet. And as we have done throughout 2011, we will allocate capital towards earnings growth and we'll use all lines of the income statement to grow EPS. If it turns out that 2012 is just a slow growth environment and there are no other shocks of the global economy, I believe Eastman is well-positioned to continue to grow EPS from this year.

And with that, I'll turn it over to Curt

Curtis E. Espeland

Okay. Thanks, Jim, and good morning, everyone. I'll begin on Slide 14. We generated solid cash flow in the third quarter at over $200 million. Net earnings continue to be strong. We did make a tax payment of $28 million for the gain on the PET divestiture and expect to make another $27 million payment in the fourth quarter, for a total $110 million for the year. In addition, we built inventories in the third quarter in preparation for plan manufacturing maintenance in the fourth quarter that Jim just mentioned.

Our free cash flow in the third quarter was $80 million and through 9 months, free cash is negative $77 million. We are on track for a strong free cash flow in the fourth quarter resulting in an expected free cash flow for the year of between $175 million and $200 million. This has changed from our last guidance, primarily due to the increase in capital expenditures likely to be around $475 million for the year, as growth projects are progressing well some infact ahead of schedule. We still expect strong cash generation in the fourth quarter, due to normal seasonal patterns and working capital and as we work those inventories back down. We ended the quarter with about $650 million of cash on our balance sheet and we continue to have a healthy level of debt capacity available to pursue targeted growth projects, all within the parameters of a strong investment-grade credit rating.

On Slide 15, you can see how we've been allocating capital year-to-date in 2011. And this is very consistent with how we've told you, we would be allocating our capital: a mixture of supporting growth and returning cash to stockholders. We talked about the capital expenditures and acquisitions already this morning. Combined, they represent about 50% of the capital that we put to work so far in 2011. In these acquisitions, the capital expenditures will support our earnings growth in 2012 and beyond.

We have also been consistently returning cash to stockholders. We raised our dividend in August of this year and back in December of last year, and we have a yield of over 2.5% today. We're recognizing that the dividend is a board decision. Stockholders should continue to expect as our earnings grow, so will our dividend. And we continue to repurchase shares. In the third quarter, we repurchased $115 million. And through 9 months, we repurchased almost $300 million. Our share count is now down over 5 million shares since the beginning of 2010. Combined through the dividends and share repurchase, we've returned almost $400 million to stockholders so far this year.

We also made $100 million pension contribution in the first quarter, with a discount rate as low as it's getting. We will probably look at making another pension contribution sometime over the next several quarters. Sitting here today, I would expect such a contribution to be similar to the confirmation we made earlier part of this year.

I continue to believe that disciplined allocation of capital is how we can differentiate ourselves, and you should expect us to continue to allocate capital in a disciplined way with a bias towards earnings growth.

And as a good example of that earnings growth, I'll end this morning with a few comments on our Sterlings acquisition. We closed the transaction in August a few weeks after our second quarter call. Our primary reason for acquiring Sterling was their plasticizer manufacturing assets. They had previously supplied ortho-phthalate-based plasticizers but their underlying contract had been terminated and the asset idled. We are now in the process of converting this asset so that it can produce our Eastman 168 non-ortho-phthalate plasticizer. The conversion will take place in 2 phases to match anticipated growth, with the first phase online in the first half of 2012 and the second phase brought online when warranted.

Given the strong demand for these products, we expect the whole phases of the expansions will be filled out in 2014. The underlying market for non-phthalate plasticizer is estimated to be growing about 7% annually in North America and Europe. Key end markets, as you can see on the slide, are building and construction, packaging and health and wellness. When this asset is fully filled up [ph], our projected sales revenue should be greater than $200 million, with operating margins better than those for the overall PCI segment.

We purchased earlier for about $100 million in cash. It is on track to be slightly accretive to the 2011 earnings per share, excluding transaction costs and charges. We paid about 4x posts synergy 2012 EBITDA and we expect will be accretive above cost of capital in 2012 and significantly more accretive than that as those plasticizer assets fill-up [ph] going into 2014. As a reminder, when we say accretive above cost to capital, we mean that we expect earnings from the acquired businesses will be above the cost of going to the capital markets to fund the transaction.

These are the kinds of acquisitions we continue to look for. I will say the M&A environment has slowed down some somewhat, over the last couple of months given the economics and other uncertainties. But we continue to have a number of opportunities in our pipeline that we are considering. With that, I'll turn it back over to Greg.

Gregory A. Riddle

Okay, thanks, Curt and this concludes our prepared remarks. Tricia, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Jim, could you quantify the impact of the propane-propylene spread for us this in Q2 and what your expectation is for Q4?

James P. Rogers

Yes, let me do it this way because there's obviously been a little written about it, a little talk about it. So far, year-to-date it's probably worth about $130 million to us, so that green bar you see on 2011 and realize this is an approximation because we haven't gone through the year is close to the $140 million, so we would expect the fourth quarter is going to be $10 million. And obviously the biggest quarter of the year for us was probably the second quarter.

David L. Begleiter - Deutsche Bank AG, Research Division

And just on the turnaround cost in Q4, can you quantify those costs and what they were a year ago?

James P. Rogers

Well, just on a comparison quarter-over-quarter, I think it's about another $10 million.

Curtis E. Espeland

Yes. Well, Dave, the way to think about it is on a sequential basis it's about $15 million higher, $10 million of that just primarily related to that acetyl coal gasification plant turnaround that Jim mentioned on a year-over-year basis, so I think it's about $10 million.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, Jim, if paraxylene prices stay where they are, what's the impact on Specialty Plastics as a structural profitability here?

James P. Rogers

Right. Well, it's not just one part. I mean, you've got the other raw materials as well. So as we look at it, we think paraxylene could be high for as much as 1 or 2 more years then probably falls back in the lightness [ph] as more capacity comes on. So you've already seen some of the pain from having a higher raw than your competitors have. There easily could be more pain on the other hand, most of what you're seeing on Specialty Plastics is, I would say, at least as we think about it in normal seasonal decline, as well as above average destocking. The switching from our products to other products, I think it had to be a pretty big gap in price for that to finally happen because of functionality and how well our products work. They just do a better job. But at one point, at a tipping point, people will flip over. Some of them will if they can. So the higher end applications where we moved a lot of the products due in the past 2 or 3 years were Specialty Plastics. And a big part of the reason why you're seeing such a different level of performance out of them, those I don't worry about. But when you get down to applications that need less functionality, that's where you're exposed. But I would also think that that's not a long-term issue. The other thing I'd say things like Tritan, I think, are going to continue to be very strong.

Operator

We'll move on to P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

I wanted to get your view on the propane market. Some of the midstream companies are building capacity to export more propylene from the Gulf Coast, so you could be competing with them with the exports. How do you see that playing out?

James P. Rogers

Yes. I mean, I don't know if anyone's been real good at guessing this. Frankly, I was surprised propane didn't come off more in the summer and it didn't really. On the other hand, maybe it's going to smooth out and and not quite as seasonal as it's been. I don't expect propane to come sharply offer anything like that because I think the trend that you talk about is real. On the other hand, on the propylene side, if we look out and try and make our best estimates, we're probably in, our humble opinion, bottoming here in the fourth quarter, maybe carrying it over into the first quarter and then I think, expectations are propylene will probably start picking up again early next year. But we'll see. I mean, we never would have guessed the second quarter had this kind of spread it did, and we think this is a bit of an overreaction here at year end in the propane-propylene spread.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And the second [indiscernible] you got the $8 million in licenses -- license fees. As your licenses build-out this new plans, how do you see the supply/demand in acetyl playing out?

James P. Rogers

Well, I mean, we look at it little differently than some of the other big acetyl players. We're more of a big and high-drive player, very much big presence in North America, and the asset isn't quite as important to us. So on several levels, I'm not really concerned for Eastman in terms of overcapacity in the asset yields. I think our markets in the niches we play in are very strong. Just in terms of licensing, I look back and I think we said, we probably had the licensing. Well, we've had licensing income in every year but big enough to call out was what, Greg?

Curtis E. Espeland

4 in the last 7 years.

James P. Rogers

Yes, 4 out of the last 7 years. So I think there is definitely demand that continue selling these licenses, and we're working on things now. But they'll always come in. The longer term, you probably should expect those like every other year.

Operator

We'll take our next question from Nils Wallin from CLSA.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

Question on wood pulp cost. I saw that they -- there are some increase in the quarter and typically I thought you bought these on annual contracts. And so given that pulp prices are already coming down in the fourth quarter and could come down double digits next year, how do you think that will affect your overall profitability in Fibers?

James P. Rogers

Well, first, please go and talk to our wood pulp suppliers and tell them that's exactly what we should all expect. Look, it is an annual negotiation. We do, by the way, have a little bit of business under contract that adjust based on raw materials during the year. But overall, the market is still an annual kind of market. I try not to talk too much about spread in the of Fibers business over raw materials, we compete on so many other things in terms of service, and keeping our customers' plants running. So frankly, if raw materials come off, I would expect we would not get as much pricing as we thought. All I can say is year in and year out, Fiber seems to have very good margin, very consistent profitability and I'm proud the fact they've been able to grow for 8 years in a row.

Nils-Bertil Wallin - Credit Agricole Securities (USA) Inc., Research Division

All right. Then on the copolyester. Obviously, you highlighted the -- some shifts there and people shifting out because of the high paraxylene cost. Could you give us a sense of how permanent those shifts are and how quickly they move back and forth, certainly if there's requalifications that are needed. And I would assume this is more of a commodity end of the business because it -- this one used to think copolyester fit in a position between cost and property.

Curtis E. Espeland

Yes, it's a good question and I don't want to pretend like I can analyze every piece of what's moving. I can tell you, you can compete on price at that lower end of the market, not something we're always trying to make sure we're on top of, are we making the right call? Price versus volume. These special applications, the higher-end things where people just really need our product. We think we've been very disciplined and very responsible in our pricing and we haven't seen much shifting or moving there. On the lower commodity end, we will review, again, how we want to handle pricing. Do I think I can get that business back with price? Absolutely, because we have a better product, and the issue is, is it the smart and right thing to do. Longer term, I have every confidence that our copolyester product line has good growth characteristics. And it's funny, we had -- it's almost like we spoiled the market with some strong performance earlier in the year but this third quarter for Specialty Plastics is still a fantastic quarter.

Operator

We'll take our next question from Manav Gupta with Goldman Sachs.

Manav Gupta - Goldman Sachs Group Inc., Research Division

I had a few questions. On the Fibers front, how is the demand holding up? I mean, you're seeing inventory destocking in plastics, but are you seeing robust demand in Fibers?

James P. Rogers

Demand in Fibers?

Manav Gupta - Goldman Sachs Group Inc., Research Division

Yes.

James P. Rogers

Yes, I think it has held up. I mean, the business is going stronger. Greg, it looks like he wants to say something. Go ahead, Greg, what is it?

Gregory A. Riddle

No. I mean, acetate tow demand is doing just fine within Fibers. Maybe there'll be some seasonality and destocking as you go into the fourth quarter. If you think about acetate yarn, we have seen some -- a little bit of softness there, and that's probably more indicative of what's happening with textiles generally in the market.

James P. Rogers

And if I could, I mean just on the acetate yarn, So it's not a super big deal for us, but it's probably a good indicator for you in terms of consumers around the world and that has softened up, the demand.

Manav Gupta - Goldman Sachs Group Inc., Research Division

Okay. And on the second thought, I mean, as propylene prices rose, there were some demand destruction and again, product substitution. Now that they have bottomed out, do you think propylene derivatives will gain back some of the markets they had lost to other plastics and in the process there will be an equilibrium reached where propylene prices move up and help you guys?

James P. Rogers

Yes, absolutely. I mean, guys, there's still a cycle out there for different products and things that are commodities still move back and forth. There's a little bit of friction on the supply side where people don't move their refineries around every month. But when you have these big swings, people overreact. And they overreact not only on the supply side but also on the demand side. So, yes, we see it coming back our way from what we're experiencing here in the fourth quarter.

Manav Gupta - Goldman Sachs Group Inc., Research Division

And lastly, one more. Paraxylene prices were primarily higher because of unplanned outages and a whole bunch of outages in Asia and Middle East, which are now subsiding. So do you see that market coming in quickly and paraxylene prices collapsing in near term, or will it take more time?

James P. Rogers

Yes, I wish, but that's not what my guys are telling me. They're saying that they could -- I don't know if they stay quite this high. They are coming down. But collapse I haven't heard anyone said so I would think para will come off -- be coming off by year and. But long term, we probably got 1 year or 2 before you get the additional capacity online, assuming that demand stays the way it is for the polyester fabrics. And we also try and pay attention to cotton. Again, that's a hard one to call. But I would think, Curt or Greg, isn't that what we're saying? We think paras probably going to be coming off by year end?

Curtis E. Espeland

Right, slightly off.

James P. Rogers

Yes.

Manav Gupta - Goldman Sachs Group Inc., Research Division

And when can we expect the 2012 guidance, guys?

James P. Rogers

Well, we'll do it more than likely on the next conference call. The one thing I threw out there is -- I've said, jeez, for the 2.5 years or so I've been CEO. We're working on year-over-year earnings growth. And so we're right now thinking about what makes '14 better than '13.

What do you put in place? You got to have a long lead time on some of the things we do in terms of building things. So the one thing I take quite a bit of comfort in, I don't know how you all should look at it, but you look at our balance sheet, you look at the cash. Our, debt capacity. I mean, unless we have a severe recession or real downturn, we ought to be able to put cash to work, drive our core businesses, such that we have higher earnings next year than this year

Operator

We'll take our next question from Duffy Fischer with Barclays Capital.

Duffy Fischer - Barclays Capital, Research Division

Wanted to just go to that Slide 11. So the bars you showed, the earnings impact from the spread. Is that the true economic impact to Eastman, so like when we think about you maybe bringing back online that fourth propane cracker in Texas, these are the kind of numbers that you would look at against the capital cost to get your return?

James P. Rogers

Yes, this is the spread just from making versus buying propylene and ethylene. So that cracker coming back online. If you look at that $70 million in 2010 to $140 million in 2011, maybe $30 million of that improvement is probably new crackers coming back online, just to give you a ballpark.

Duffy Fischer - Barclays Capital, Research Division

Okay, perfect. And then if we jump into oxo alcohols a little bit, can you talk about what you're seeing in that end market in profitability trends there?

James P. Rogers

It's getting more competitive. You're talking like butanol and 2-EH et cetera?

Duffy Fischer - Barclays Capital, Research Division

Yes, 2-EH in particular, yes.

James P. Rogers

Yes, that's getting more competitive. Obviously, we're also a big user of 2-EH because we use that for our plasticizer business and other products. But I guess, I can't give you any more color than that, Greg, have you heard -- I haven't heard the guys overly complain about that. The one thing I'll say is in things like solvents and CASPI and some of the more commodity end products, I do see people getting more competitive out there. I do see him chasing some volume. I don't -- I wouldn't call it lack of discipline, but they're certainly less discipline out there in the marketplace on the lower end commodities stuff, than there has been.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then just the last one, where do you sit now kind of with capacity utilization and tow, particularly in the Asia region. Do we have enough capacity to continue to grow the next couple of years or do we need to put some capital in, in the next couple of years?

James P. Rogers

Well, we do have enough capacity to grow and of course, we are putting some capital in. Maybe I'll just turn it over to Curt.

Curtis E. Espeland

Right. I mean, we feel good about our premium [ph] facility that is performing well. We do have some capacity here back in Kingsport still, and then we're doing that joint venture with our customer CNTC, China National Tobacco Corporation, that will be online in 2013. We are reporting capital work to grow.

Duffy Fischer - Barclays Capital, Research Division

Okay. But we're not constrained at least until the CNTC stuff comes on?

James P. Rogers

No, we're not.

Operator

We'll take our next question from Jeff Zekauskas with JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

In your release, you said that the PCI business was hurt by an olefin cracking unit outage by about $8 million, and CASPI by an olefin packing outage by about $3 million. So how does that work? Are there particular crackers assigned to the particular units or is it ratably by feedstock?

James P. Rogers

Yes, Jeff. It's the same cracker and it's the issue we had in the second quarter, and it's just the fact that CASPI -- it does not just affect PCI because CASPI sells derivatives from propylene as well, obviously. And so we're just giving you kind of the ratio and it's allocated by pounds used.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

So the ratio looks like one is of 3 11 and the other is 8 11. So it looks like 75% of the cracker output goes to PCI and 25% to CASPI. Is that the conclusion that one should draw?

Curtis E. Espeland

No, I think that's probably little -- it really depends on the derivative pull at that time. I think in the past, what we've talked about is more of a 60-40 kind of sharing of that.

James P. Rogers

Or 2/3, 1/3 and it can bounce around.

Curtis E. Espeland

It can bounce around.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And then lastly, the propylene inventories these days are really high. It's like do you think that, that can really be worked down over a 3 or a 6-month period, or do you think it will take longer than that?

James P. Rogers

Yes. I don't know. I agree with you that they are quite high. I know that there was destocking. In fact just on the sense of destocking.

if I think about it, the time I've seen the most destocking was the end of '08. This is probably the second highest that I've heard people talk about destocking at least since I've been here in '99. So I think there's been -- now this is just me, but I think there's been considerable destocking across a number of lines. And certainly with people expecting lower propylene, if it was in your tank, you use that first before you went out and bought it. So yes, there's ton of inventory out there. I don't know how long it'll take to eat through, but just in terms of the flip on the spread, we're thinking probably as you're coming out of the first quarter, you're starting to head north again.

Operator

We'll take our next question from Kevin McCarthy with Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

You have a fairly sizable turnaround of your coal gasification unit at Kingsport. Can you talk a little bit about the expected financial impact of it, duration of the outage and how the impact would be spread among your segments?

James P. Rogers

The outage of the coal gasification is roughly 3 weeks. In fact, they're almost coming out of it as we speak so -- we're doing very well against the planned turnaround. The financial impact is roughly what we described, it's that $10 million, and it's spread across all of our businesses and asset yield. So it's not going to be predominantly in one particular business.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. Then, Jim, you talked about the $154 million of bolt-on acquisitions that you've done year-to-date. I guess, in recent weeks, Eastman has been connected with a more sizable potential deal by the European press. Curt, I thought you made a comment that the M&A market had slowed down some. So I'm trying to read these tea leaves and kind of ascertain what your appetite might be -- appetite or lack thereof for more significant acquisitions in this climate?

James P. Rogers

We're not going to comment on anything specific. But let me say this, I mean, we do have a strong balance sheet, we have a nice cash position, I think, in general valuations have come off despite yesterday or things move back up fairly substantially. What I want people to hear is this, we've been prudent, you can see we've been, I would say even conservative, cautious whatever words you want to use. But if we see the right transaction, we're ready to pull the trigger and do it. My confidence is up that we know how to integrate an acquisition, we know how to get one done. I can tell you if we do one, number one, you're going to see it as a smart financial transaction. So you, our shareholders will see it as a smart financial transaction. By that, I mean, you'll understand the returns above our cost of capital and you'll be able to see the accretion to our earnings. You'll also see a tie-in to our businesses. There should be synergy if we're going to do something certainly anything bigger than some of the smaller things we've done. There should be some good synergy, it should have a play to sustainability or to emerging markets. So we've got a checklist of things that we think would makes sense. The reason we're still sitting on a lot of cash is we're not just going to jump at anything. So it has to be the kind of transaction where the world will look at it and say, "Ah, I understand why Eastman is the highest and best owner of that asset."

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. That's helpful. And final question, if I may. Curt, can you give as a preliminary notion of how large the pension expense headwind might be for Eastman in 2012?

Curtis E. Espeland

As you know, Kevin, that's kind of hard to nail down right now because there's moving parts between now and the end of the year. And it all depends if the last business day of the year is a risk-on or risk-off trade on higher returns. But it is a headwind. The headwind we faced coming in to 2011 is around $10 million. I'd say it's going to be sitting here today I know it's going to be a little over that.

Operator

We'll take our next question from Frank Mitsch with Wells Fargo Securities.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

For what it's worth, there's a certain Michigan-based company that is very bullish on the outlook for oxo, so hopefully that spreads to Tennessee as well. Jim, I was -- I wanted to try and size the raw material impact year-over-year for you guys. It looks like pricing helped you buy about $240 million. What was the impact -- negative impact of raw materials?

James P. Rogers

Let me just give you some round numbers if I can, Frank. So raw materials and energy were probably over $200 million. Selling price and exchange was a little more than what you said. But then -- and so my spread over raws and energy year-over-year was still positive, as well as -- I had some positive from volume. But distribution costs were up, so it depends on where you want to put that. But distribution costs were up, and my other charges were up from like the outage of the cracker, how we took the hit there. So overall, we did a good job on pricing in terms of the movement in raws, energy and distribution rate, and we picked up just a tad on volumes.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Okay, great. And I appreciate the Slide 11. And I'm just curious with the pricing coming off on the propylene side, at what point do you think your derivative prices will be reflecting that? How should we think about that?

James P. Rogers

Well, you've already seen some in this quarter. We already -- in some places, you already started to move down. You always try and be sticky, you're trying to be stickier moving down than moving up. But it's that trade off, Frank, I'd almost have to go product line by product line in terms of your product attributes when you get to derivatives versus others, and what you got to do to be competitive on price. Just looking back on how the quarter closed, I'd say, we obviously traded a little volume to hold on to margins. But, we always have the ability to switch that the other way, if we need to.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Yes, I guess, the difficult thing is you are heading into a weak volume quarter. So the stickiness is not going to benefit you as much as perhaps it would in another quarter.

James P. Rogers

Yes, that's correct. And Frank, that's why we put in the guidance that we did. That's our expectation that it is going to be a lower volume because not only you got the seasonal, but I think you still got more inventory destocking to go not just for us but across the industry.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right, great. And I guess, along those lines, you did mention that the visibility has declined in some of your businesses. Care to be a bit more specific?

James P. Rogers

Now, let me...

Curtis E. Espeland

I'd characterize it. Frank, we're -- in some of those businesses, we used to say 3 to 8 week, it's probably more towards 3.

Operator

We'll take our next question from Paul Leming with Ticonderoga Securities.

Paul Leming - Ticonderoga Securities LLC, Research Division

I was on and off the call, so if you talked about this during your comments and I missed it, I apologize. Could you discuss what you think capital spending is going to be for 2012? And as you're looking at all the variability in the world today, do you think the risks to that CapEx number are more to the upside or the downside?

Curtis E. Espeland

When you look at our capital expenditures, we're formulating those plans right now. We tend to give that as part of our overall guidance at the next call because you have to come in line with what's the economic environment you're anticipating, what your free cash flow goals and how those tie into it. But what we'll be doing is we'll develop our plans with a mild growth environment. We'll be also looking at what Jim talked about our -- all purpose of growing earnings in '13, growing earnings in '14. So we'll make -- bring all those factors together and make an assessment where our capital plans will be. And then we'll also have a case if we have a tough economic environment then we can adjust that capital back down. But we're looking at a capital that's still looking at how we grow our earnings '12, '13, '14 and beyond. But we'll give you more specifics in the next call.

Operator

We'll take our next question from Thomas McGannon with Whetstone Capital.

Thomas McGannon

Could you maybe offer a comment, I don't know what comment needs to be made, but perhaps just a comment on the joint venture between Mitsubishi Rayon and Daiso and the acetate tow business. Is that going to impact your competitive market at all?

James P. Rogers

Well, not that I've heard about. I mean, when I think about who we compete with and our group of customers -- it's a small group on both ends, so we have some long established relationships. You can see that, for example, with CNTC that we're doing a joint venture there where we're going to have 45% equity interest. And I've been around this industry now for about 12 years, so I'm not a lifer in it like many people. But I like the seat at the table that Eastman has. I like the relationship we have with the multinationals, I like the relationship we have with China National Tobacco specifically and I like where our assets are that we have a producing asset in Europe, we're producing asset in Asia and then, of course, we have the big asset in Kingsport. So I'm not really too worried about competitor moves when it comes to the Fibers business.

Operator

And we'll take our next question from Lee Bressler with Cobalt Capital Management.

Lee Bressler

I wanted to ask you 2 questions, really. And one, what environment would you see growth next year? What sort of demand environment would you need to see in order for there to be growth in your business next year?

Curtis E. Espeland

I think we just have talk to -- in the core business, I think it just have to be non-recessionary. In other words, I need positive GDP. Recession, I think, is tough. But I also think that one of the advantages I have is the balance sheet I have. So if I was out there as a single B right now, I'd be pretty much stuck with whatever I had today. But it's a nice BBB. I feel like I got some flexibility to continue to drive earnings through acquisitions, share buybacks, et cetera.

Lee Bressler

Do you think that would be an environment in which propylene prices would come back up or it would they stay flat to current levels?

Curtis E. Espeland

Well, I think right now, the reason -- one of the reasons we think propylene prices have to come back up on the chemical side is because it's even cheaper than just putting it into the gasoline pool. So that does seem like there's an imbalance there that's just not going to last. So obviously, the stronger the demand, the faster you work through some of those inventories that one of the other callers was talking about. I never want to predict that I can call a turn or a high or low in a marketplace. But you can kind of see when things overshoot like they did in the second quarter of this year, and that's what fourth quarter, first quarter of -- fourth quarter of this year, first quarter feels like on the flip side.

Lee Bressler

And my other question is, based on the current propylene price deck, do you expect that you would see growth in your numbers in 2012?

James P. Rogers

That is part of the reason for showing you the chart is that when I look at the change in earnings from '10 to '11. The propylene spread, the increased there only explains about 1/4 of the increase. If you figure just adding a cracker was another piece of the increase, and then another half of that, $70 million or so, I'm sorry, of the increase from $8.91 to what we think we are going to do this year. Another half of that is just completely outside of the spread. It's a growth in our other businesses, plus I think about the capacity we're bringing online in some of the places where we believe we need it. So yes, I don't think we're going to get hung up just on that spread. I think we can grow our business around it.

Operator

That will conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Greg Riddle for any additional or closing remarks.

Gregory A. Riddle

Okay, thanks, again, for joining us, everyone. A web replay of this conference call, a replay and downloadable MP3 format and the accompanying slides for the conference call will be available on our website at 11 a.m. this morning. So thanks again. Have a great day.

Operator

Again, ladies and gentlemen, thank you for your participation. This will conclude today's conference call.

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