Eastman Chemical Company (EMN)

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Eastman Chemical Company (EMN)

Q3 2010 Earnings Call Transcript

October 29, 2010 8:00 am ET

Executives

Greg Riddle – Director, IR

Jim Rogers – Chairman, President & CEO

Curt Espeland – SVP & CFO

Analysts

David Begleiter – Deutsche Bank

Kevin McCarthy – Bank of America-Merrill Lynch

Edlain Rodriguez – Gleacher & Company

Jeff Zekauskas – JP Morgan

Louisa Herman – Goldman Sachs

PJ Juvekar – Citi

Andy Cash – UBS

Frank Mitsch – BB&T Capital Markets

Gregg Goodnight – UBS

Presentation

Operator

Good day, everyone, and welcome to the Eastman Chemical Company third quarter 2010 earnings conference call. Today’s conference is being recorded. This call is being broadcast live on the Eastman’s Web site, www.eastman.com.

We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Greg Riddle

Thank you, Artavia. Good morning, everyone, and thank you for joining us. On the call with me today are Jim Rogers, President and CEO, and Curt Espeland, Senior Vice President and Chief Financial Officer. Before we begin, I’ll cover three items.

First, during this call you will hear certain forward-looking statements concerning our plans and expectations for fourth quarter and full year 2010. 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 2010 financial results news release on our Web site and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2010 and the Form 10-Q to be filed for third quarter 2010.

Second, 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 operating earnings, earnings per share and cash flows from operations that exclude restructuring charges.

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 third quarter 2010 financial results news release and the tables accompanying the news release.

Lastly, we have posted the slides that accompany our remarks for this morning’s call on our Web site, at www.investors.eastman.com, and you’ll find them in the Presentations and Events section.

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

Jim Rogers

Thank you, Greg, and good morning, everyone. We know it’s a busy week for you, so thanks for choosing to join us. As is our normal practice, I’ll begin on Slide 3 and I’ll begin with a review of the outlook statements we made on the call on July.

Back in July, we told you we expected third quarter EPS would be between $1.65 and $1.75, but then at an Investor Conference in September I updated this guidance to a range of $2.20 to $2.30. There were a few reasons for the increase.

First, prices remained solid, mainly due to higher industry capacity utilization rates for some of our key products. Second, the seasonal decline in volume occurred later in the quarter than we expected, really not beginning until September, and we received partial settlement of an insurance claim worth $0.19 per share in the quarter related to the outage at our Longview, Texas facility earlier in the year.

Next, for full year 2010 EPS, we told you we expected to be between $6.20 and $6.40. I updated this guidance as well in September, saying we would approach $7 of EPS and now we expect to be above $7 for the year.

On free cash flow, we told you we would be between $200 million and $300 million for the year, and now we expect to be over $300 million, even after $135 million pension contribution.

Back in April we told you we would review our strategic actions for the Performance Polymers business, and now you’ve have seen our announcement earlier this week of a definitive agreement with DAK Americas to divest the PET business.

Moving next to Slide #4 and a review of our third quarter results, which were simply outstanding, if I can say that. Revenue was up 29%. Volume was up 18% year-over-year, largely due to improved end use demand in packaging, durable goods and other markets. While volume was up 2% sequentially, we did see a seasonal decline, but later in the quarter than we expected.

Pricing was solid. Operating earnings of $280 million were a quarterly record. The result is our second consecutive quarterly record for earnings per share. Of course, this includes a $0.19 a share from the partial insurance recovery. However, even without the partial insurance recovery in the third quarter, our EPS would still be a record.

While we are very pleased with our strong results both in the quarter and through nine months, we continue to be focused on increasing our EPS in 2011 compared to 2010. Even with a very high bar, we continue to set for ourselves here in 2010.

Turning now to the segments starting with Fibers on Slide #5, Fibers continues to demonstrate the strength of their business, as a result of solid operational performance and reliability, a very competitive cost position through coal gasification and long-standing deep customer relationships.

Both sales revenue and operating earnings were quarterly records and they set a record for acetate tow volume in the quarter as well. Acetate yarn demand is strong and we are operating at very high capacity utilization rates there.

Operating margins for the quarter and first nine months were 30% and looking at the full year, we now expect Fibers to report operating earnings of approximately $325 million, which would establish a record above their $300 million they reported in ‘09 and would be the sixth record year out of the last seven years.

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