Jul 24, 2009
Executives
Greg Riddle -- IR Jim Rogers -- President and CEO Curt Espeland -- SVP and CFO
Analysts
Frank Mitsch -- BB&T Capital Markets P.J. Juvekar -- Citigroup Kevin McCarthy -- Bank of America Jason Miner -- Deutsche Bank Mike Judd -- Greenwich Consultants Brian DeRubio [ph] -- Yield Capital Appreciation Partners
Operator
Good day, everyone and welcome to the Eastman Chemical Company second quarter earnings conference call. Today's conference is being recorded.
This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr.
Greg Riddle of Eastman Chemical Company Investor Relations. Mr.
Riddle, please go ahead, sir.
Greg Riddle
Okay, thank you, Rufus; and good morning everyone and thank you for joining us. On the call with me today are Jim Rogers, President and CEO; Curt Espeland, Senior Vice President and Chief Financial Officer; and, Amelia Nitesh [ph], who is new to our Investor Relations team.
Before we begin, I will cover three items. First, during this call, you will hear certain forward-looking statements concerning our plans and expectations for third quarter and full year 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 second-quarter 2009 financial results news release on our website and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2008 and the Form 10-Q to be filed for second quarter 2009.
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 sales revenue, operating earnings, and earnings per share that exclude restructuring-related items. 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 2009 financial results news release and the tables accompanying the news release.
Lastly, I want to remind you that we have posted slides that accompany our remarks for this morning’s call on our website at www.eastman.com in the Investor section. With that, I will turn it over to Jim.
Jim Rogers
Thanks, Greg; and good morning everyone. I will begin on slide 3.
I'm going to start out this morning looking back at some of the outlook statements we gave you during our first quarter earnings call in April. I would like to do this, kind of look back on each quarterly call, good or bad, so that we hold ourselves accountable for the statements we make.
I have listed a few of the corporate statements here and we will look at the segment statements when we get to their results. On second-quarter EPS, we said we would be near $0.71 a share, and we came at $0.86.
Yes, we were a little above our own expectations and I will talk more about that in a minute. Next, we told you full year 2009 EPS would be between two and three dollars.
Through the first half of 2009, we have earned $1.11 per share and with our EPS outlook for the second half; we remain on track to meet this expectation. We told you the $200 million of cost reduction actions we have taken since December would be evident to you in our results through the first half of 2009.
Our SG&A and R&D are down $38 million and we are seeing the impact of the cost reduction actions in our cost of goods sold as well. And I do not want to steal Curt’s thunder, but we told you we would have positive free cash flow for the year; and through the first half of 2009, our free cash flow was $69 million and we are set up for a very strong second half of cash generation.
Moving next to our corporate numbers. First, on sales volume, while we were down 13% year over year, excluding contract ethylene and polymer intermediate volume, we were up a solid 11% sequentially on the same basis.
The biggest increases sequentially were in CASPI and Specialty Plastics, but volumes were up in all but our fibers segment. This reflects a couple of factors I've mentioned in April, namely, we are end of customer destocking and there is some seasonality to our volumes.
But with capacity utilization averaging about 71% in the second quarter and 74% if you back out the impact of the reconfiguration of our Longview, Texas site, customer demand is still not back to where it was last year. Moving next to earnings.
Sequentially, our operating earnings increased by $77 million and we are down $50 million year-over-year. Margins improved both sequentially and year-over-year, with our gross margin above 20% and our operating margin above 10% in the second quarter, admittedly on a lower revenue base.
The improved earnings and margin sequentially are really due to three factors; the improved volumes that I mentioned; the flow-through of lower cost raw materials and energy during the quarter; and the impact of the cost reduction actions we have taken. The year-over-year revenue and earnings comparisons continue to be difficult, as they are for most companies, due primarily to the global recession.
I will turn next to the segments and begin with fibers on slide five. Volumes for this segment declined both year-over-year and sequentially, but this was not due to acetate tow, but rather due to acetyl chemical volumes being down due to customer buying patterns and acetate yarn volumes being down due to the global recession.
Earnings and margins remain strong. Year-over-year, earnings improved due to higher selling prices and cost reduction actions.
Sequentially, we were able to stay at the very high level we set in the first quarter. Looking forward, we expect third-quarter earnings to be slightly below second quarter, as volumes decrease slightly and then fourth-quarter earnings to be similarly impacted due to customer destocking and the global recession's impact on disposable income.
Moving next to slide six and CASPI. Year-over-year volume was down due to the recession, but despite the volume decline, operating earnings were only down slightly as we were able to restore historic gross profit margins, due to a decline in raw material and energy costs.
Sequentially, operating earnings increased substantially, as volume was up 22% and mix improved as the volumes for the specialties came back with a decline of customer destocking. This is consistent with my comments on CASPI during the call in April.
As a reminder, we think of this business as about two-thirds specialty and one-third commodity on a normalized basis and one thing we have seen in this recession is a structural improvement in the market for our commodities, such as solvents, which is allowing them to hold up better than in past recessions. Looking forward on CASPI, we see the third-quarter a lot like the second, as volumes stay about the same and we don't anticipate much movement in their raw material costs.
And slide seven is PCI. Their year-over-year story is really about lower volumes due to the recession and lower selling prices due to lower raw material and energy costs.
Sequentially, volumes picked up some as destocking is mostly behind them and they were able to restore some margin with raw material and energy costs declining. During the quarter, they also had about $15 million in costs related to the reconfiguration of our Longview, Texas site.
This included the turnaround of our largest cracker, which we normally do every five years. We also completed capital projects and preparation for shutting down our two remaining smaller crackers.
Overall, the results are excellent. This was the biggest project in the history of our Longview, Texas site and we completed it on time and on budget.
Looking forward, we expect our third-quarter operating earnings to be up compared with the second quarter, excluding the costs related to the Longview reconfiguration, but below last year's third quarter, as we continue to make progress on restoring our margins. Moving next to Specialty Plastics on slide eight.
The Specialty Plastics story is very straightforward, it is all about volumes. Year-over-year sales revenue and operating earnings declined as volumes were down due to the global recession.
Sequentially, sales revenue and operating results improved as volumes increased 19%, particularly in Asia and the US. In April, I said our focus with this business was to get it back to the black, and we achieved that.
Looking forward, we expect them to stay in the black in the second half of the year, with third-quarter earnings similar to or slightly higher than the second quarter. Turning next to slide nine.
In April, I said Performance Polymers results would improve significantly in the second quarter, due to higher selling prices, improved volumes, and improved operating factors with our IntegRex. I also said our priority, as with Specialty Plastics, was to get this business back to the black as soon as possible.
Sequentially, pricing and volume were up, leading to operating earnings of $3 million compared with the operating loss in Q1. So we are happy with the improvement we achieved in the quarter.
But looking forward, Performance Polymers faces a number of headwinds. First, the seasonality of demand, which is likely to lead to lower industry volumes in the second half of the year and next, a competitor adding about 10% of industry capacity to the North American market will be there before year-end.
And the IntegRex site is still not running the way we would like it to. We have confidence we can get the performance to a higher level, but we expect to incur some costs in the second half of the year, so we will work on this.
As a result, we expect to have negative operating results in the third and fourth quarters, in short, we are not out of the woods yet. I am on slide 10 now.
And here I am going to give you a quick update on our Beaumont, Texas industrial gasification project. We are making good progress on FEED, the front-end engineering and design and continue to be on track to be finished by the end of the summer.
From what we can see at this point, although costs have come down from where they were last summer, they remain higher than we would like. We continue to look at this as an attractive option for all the reasons we have talked about before.
But given the current environment, it is an option that is still out of the money. As the result, we are reducing the burn rate to a minimal amount, while we continue to work the capital number, the incentives, the financings et cetera.
I will end on slide 11 by taking you through our outlook for the second half of the year. As I'm sure you have heard from other companies by now, the global economy is a little bit better, but we can't see a recovery yet.
Starting back of December last year, we took cost reduction actions necessitated by the current economic environment and these helped to position us to continue to deliver solid results. When we look at the second half of the year, what we can see today indicates that demand should stay near current levels and raw material and energy costs should increase slightly.
Looking at the third-quarter, we think EPS will be approximately $1.10. And really, this isn't much different from second-quarter EPS of $0.86 without the approximately $20 million or $0.20 a share related to the Longview reconfiguration and the higher tax rate, which deducted about $0.10 per share in the quarter.
And Curt will give more details on that in a minute. Given the solid earnings performance in the second quarter and our expectations for continued solid performance in the third, for the full year we now expect EPS to be toward the high end of the $2 to $3 range we previously gave you.
And I think this is pretty good performance in what is a very difficult business climate. Now before I turn it over to Curt, I want to institute a new part of our conference call, where I talk no more than 60 seconds to identify one of our executives, who has had an exceptional quarter.
I want to do this to reinforce the debt we have in this management team. Normally, present company will be excluded, but for this past quarter, the executive I would have to pick is our CFO, Curt Espeland.
I am sure when Curt took over the job a few months ago, none of us were expecting to be in the current economic environment we find ourselves in, but Curt has adapted extremely well. He came into an oversized capital expenditure budget, some difficult hedge positions and a sliding economy.
But Curt quickly realized we had to change the current focus of our organization to managing for cash and has been the leader in that charge. You can see the results of his actions in our numbers.
The win on our tax line is a specific example of what I'm talking about. Of course, he has the luxury of working with some real pros such as, Mary Hall, our Treasurer and Terry Begley, the Head of our Supply Chain, but Curt has rolled up his sleeves and been personally involved in these efforts.
He has helped us transition to the point where our performance is very solid, even in the depths of this current recession. As I look across the table and I know this was a surprise to Curt, so I will give him a second to pick his jaw up off the table and now I will go ahead and turn it over to Curt.
Curt Espeland
Well, thanks, Jim and appreciate those kind words and took one off the eye and everyone focused on cash appreciate the comments. And good morning to everyone.
While most of Jim's comments were focused on earnings performance and outlook, I am going to focus on cash generation. We have a great story to tell, as Jim already mentioned.
In March, we committed to generate positive free cash flow for full-year 2009. This commitment is possible because of the strong focus on cash that is occurring throughout the company.
To a greater extent, the increased focus on cash represents an important cultural shift for Eastman. And I'm very pleased with all, everyone at Eastman has stepped up and responded to the challenge, particularly in this tough economic environment.
And as you can see from the results, we are making good progress. In the second quarter, our $255 million in cash from operations was the best second-quarter cash generation we have had in over five years, bringing our year-to-date operating cash flows to $337 million.
Solid net earnings was a contributor, as was cash from working capital, which I will speak to in a minute. Our capital expenditures decreased to $94 million in the second quarter and we expect to continue to reduce our capital spending in the second half of the year.
And we continue to pay our dividend, which is currently still at a healthy 4% yield. On free cash flow, we generated $129 million during the second quarter, and with $69 million through the first half of the year, we are on track to meet our expectations for positive free cash flow in 2009.
Turning to slide 14, as part of our free cash flow objective, in March, we committed to generate $100 million in cash from working capital. As part of this commitment, our businesses are now be measured on both earnings and operating cash flows.
This helps the business and sales teams to understand the cash applications of choices being made. This is on top of a multidisciplinary team dedicated to managing our working capital targets and taking necessary actions to achieve them.
Our collective efforts have resulted in good progress, both during the second quarter and for the first half of the year. Year-to-date, we have generated $84 million of cash from working capital.
One of the key drivers has been our reduction in inventories, which are down $191 million through the first half of the year. This is a pretty low level for us and in part is due to the timing of the Longview reconfiguration.
As a result, we expect to see some increase in inventories in third-quarter. However, we remain committed to our working capital objective.
We expect with demand in the second half of the year similar to current levels and with the slight increase in raw material and energy costs, to sustain the progress we have made through the first half of the year, and generate $100 million in cash from working capital for the full-year. Another example of our focus on cash is the change we made to accounting methodologies used for federal tax purposes to accelerate the timing of deductions for manufacturing repairs.
In 2008, the IRS re-proposed regulations, indicating a willingness to accept prior case law on the matter of expense versus capitalization of repair-type expenditures. As a result, we filed for a change in methodology late last year and we have received approval from the IRS during the second quarter.
Essentially for tax purposes only, we are recognizing the deductions related to previously-capitalized manufacturing repairs expenditures on an accelerated schedule, so that we can obtain the tax benefit sooner. This will be done with the filing of our 2008 returns.
The change is expected to result in over $100 million of positive operating cash flow impact in the second half of the year, including a refund of previous tax payments in 2008. One consequence of this change from an accounting perspective, was the impact on our effective tax rate.
Since the additional deductions will significantly lower tax taxable income for federal purposes in previous years, it eliminated the $7 million of domestic manufacturing deduction recorded in 2008. This adjustment is reflected in our cap expense for second quarter, negatively impacted EPS by $0.10 per share.
This resulted in the higher effective tax rate for the quarter and will likely result in an effective tax rate for the year around 33%. This is a terrific outcome and I congratulate our finance and engineering professionals that made it happen.
Given our performance for the first half of 2009, and our expectations for second half of the year, we are strengthening the financial objectives we have made for the year. I have already taken you through why we expect to maintain the progress we are making on working capital in the second half of the year.
On capital expenditures, our spending has been weighted to the first half of the year as we continue construction on our Triton co polyester facilities, complete our FEED efforts associated with our industrial gasification project, and recently completed the Longview site reconfiguration. Given our continued discipline with capital, I expect our capital expenditures will be in the $300 million to $325 million range as we approach more maintenance capital levels in the second half of the year.
With these factors in mind, and our earnings outlook for the year, we expect increased free cash flow for the year. We have already generated $69 million of free cash flow in the first half of the year.
I believe we can generate a similar amount of free cash flow in the second half of the year. Add to that the $100 million of expected cash benefit from the tax change and I expect we will generate over $200 million of free cash flow for full-year 2009.
Slide 17 brings me to our financial position. We have a little less than $1.5 billion of total debt on our books.
We have a terrific debt ladder, with nothing due until 2012 and even that is a modest $153 million. Our cash on the balance sheet as of the end of quarter was $450 million and I expect that to increase by the end of the year.
And we have a committed and undrawn $700 million revolver substantially available to us well into 2013. We are in a very strong position from a liquidity standpoint, even stronger than we started the year.
With our strong balance sheet and potential cash generation, we are 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.
These include organic and inorganic options. There is still a premium on cash in the current environment.
Thus, we will remain disciplined as we pursue growth initiatives. And as we grow, we remain committed toward maintaining our current investment-grade credit rating.
With that, I will turn it back over to Greg.
Greg Riddle
Okay, Curt. And that concludes our prepared remarks.
We're ready for questions.
Operator
(Operator instructions) And for our first question, we go to Frank Mitsch with BB&T Capital Markets.
Frank Mitsch -- BB&T Capital Markets
Good morning, gentlemen; and nice results, obviously. Curt, in your free cash flow expectations for the full year, did you factor in the bonus that the fellow who got the 62nd shout out will be receiving on these conference calls into that projection?
Curt Espeland
Cut it out, Frank.
Frank Mitsch -- BB&T Capital Markets
But I did want to ask a pay-related question. Obviously, the aggressive stance that Eastman took in this unprecedented period in terms of cost reductions is paying dividends here in terms of your performance.
Any thoughts on when we are past the crisis and you go back to the old pay methodology?
Jim Rogers
Well, that is a good question. There is probably 10,000 people who care a lot about how I answer that, Frank.
Look, (inaudible) is not out of the woods yet, when I was talking about Performance Polymers, but it is certainly true for our whole economy and for the company itself. You have to have been here and have enjoyed this culture to appreciate the ability for management to be able to adjust on the fly and make significant changes like that, and for the people to just keep doing the job and the professionalism you see, even though we did take a 5% pay cut from the Board all the way down.
What I would like to do, Frank, as I would like for Eastman to always remain competitive in terms of its comp and benefits and salary structure. This was an extraordinary case.
Frankly, I think that with the amount of uncertainty we have, we are not going to look at any changes till we get closer to year end, so I would expect to run at this level for a while. But eventually, yes, the economy comes back, the earnings come back and we will go back to the -- I would envision us going back to the levels we were before we made the pay reduction.
Frank Mitsch -- BB&T Capital Markets
All right. Terrific.
And Jim, thank you for the update on Beaumont. Given the uncertainties on cap and trade and CO2 legislation you highlighted, we really can't expect Eastman to make a cogent decision on this anytime soon, until we get clarity.
So I guess my expectation would be that whatever timeframe had been in place gets pushed back as every day goes by that we have this uncertainty. Am I thinking about that the right way?
Jim Rogers
I think so, Frank. In my comments, I talked about how we are reducing the burn rate, we do have some legislation we would like to see fall in place.
The number for Beaumont, since we sequester most of that CO2, like 90% plus of the CO2 could actually be an upside, but the dust hasn't settled on that, the capital number, like I said, even though we are not done with these, I am pretty sure we are going to think it is too high and so we are going to be working everything from incentives to what is the best we can do on financing, but I am not expecting to talk a lot about Beaumont until we actually have something we think we can pull the trigger on.
Frank Mitsch -- BB&T Capital Markets
All right, great. And lastly, Curt, you talked about the possibility of inorganic options in terms of use of cash.
Which areas do you believe offer attractive possibilities for you as you look out over the next 6 to 12 months?
Curt Espeland
What we have been looking at, Frank, we have seen -- we have been looking at options with mergers and acquisitions in the past, little ongoing in the future. Those areas that are -- really of particular interest of us are those that might leverage our acetyl stream or areas of our acetyl streams or derivatives that we have in our CASPI or Specialty Plastics businesses.
And so you look at both businesses at our core to those businesses or potentially even adjacent to those businesses. That is probably some of the areas that we will be looking for.
Jim Rogers
Hey, Frank, if I could add, we have been somewhat surprised we haven't seen the attractive opportunities that I might have thought we would see at this point in the cycle. So I just want to let everyone know we are going to be very patient.
If we do anything, it will probably be on the smaller size, we like the kind of thing we did with SK, where we got the tow capacity in Korea and like I said, I just tell people we are going to be smart about this and we are going to be patient.
Frank Mitsch -- BB&T Capital Markets
Thank you.
Operator
We go next to P.J. Juvekar with Citi.
P.J. Juvekar -- Citi
Yes, hi, good morning.
Jim Rogers
Good morning.
P.J. Juvekar -- Citi
You know, CASPI performance held up quite well, but PCI hasn't performed that well. I think the end markets are kind of similar, with paints and coatings and all that.
So is there a supply/demand issue in PCI and could that last into 2010?
Jim Rogers
Yes, I'm not sure I caught every word, but you are comparing CASPI and PCI and the supply/demand issue and yes, definitely, that has affected PCI, in particular, in the (inaudible) stream, so that is kind of what has held it down, that is why we talk about being cyclical and why it gets impacted in the recession. On the other hand, look what the performance they turned in, even though they were carrying that load of the turnaround of a major site there in Texas, and as we look forward, this is where we are seeing some improvement come, as I think we will get a little more demand back here.
I guess the way -- the way I think about it and let me just jump to something for you, P.J., because you are talking about CASPI/PCI. You know, we led you to about 10 for the next quarter, we kind of showed you how we got there, we took that $0.86 and we added back the two kind of exceptional things we knew about this quarter.
One of the things we are counting on is for PCI to be up from second to third quarter, and because we are going to have Performance Polymers back down, maybe fibers is going to come off a little bit; CASPI flat to up a little; (inaudible) flat to up a little, but PCI is the one that has got to do some nice improvement second quarter over third quarter. And a lot of that does have to do with supply/demand cost decision et cetera.
P.J. Juvekar – Citigroup
And my second question is about coal gasification. There has been a fundamental change in natural gas supply in the US.
There is a lot of new supply that has been found, gas has gone to 350. Is coal gasification justifiable at these natural gas prices, given that gas is cheap, and it is more environmentally friendly?
Jim Rogers
Well, we have said that we would like higher natural gas prices in order to go forward with the project, but remember, we are looking out over say 20 years and what the prospects are for natural gas. The other thing I will say is that as the winds blow out of Washington, there are other factors in the project that have economic importance, let us put it that way.
So your CO2 stream, and whether or not you get paid for sequestering it or how that gets treated, if we could choose for enhanced oil recovery, it can be fairly significant. Plus I would say all the products that would come out of the gasification project would not necessarily be tied to natural gas.
But you are right. I mean, I believe the arbitrage spread between the solid and liquid hydrocarbons is going to be there over the long run, but right now, gas is way down and so it is just one more reason why we are taking a pause here.
P.J. Juvekar – Citigroup
Thank you.
Operator
And we go next to Kevin McCarthy with Bank of America.
Kevin McCarthy -- Bank of America
Yes, good morning. What is the level of raw material inflation in the back half that you are baking into your $1.10 guidance, Jim?
Jim Rogers
I would say roughly, and surprisingly, I am actually going to give you a direct answer on this. I would say roughly $20 million from second quarter to third quarter, give or take.
So, I am trying to ballpark it for you, that is not an exact number. We will see on the fourth quarter what happens.
Kevin McCarthy -- Bank of America
Is that similar in magnitude to the costs related to the reconfiguration, will you be rolling off?
Jim Rogers
Yes, I hadn’t tied the two together in my mind, I mean a better way to think about it is what is going on with pricing. We are going to get a little pricing from second to third as well and one of the things that -- I would take this opportunity to say is, I am really impressed with the job the folks have done in terms of managing the margins, because you have had the raws move all over the place.
We haven’t always responded well when you have fast moves on raw material costs, but I feel like our margins are pretty much there in almost all our businesses and so it is really a volume issue right now and that is the upside. We are just waiting for the volume.
Kevin McCarthy -- Bank of America
Okay. Next question on CASPI, I thought profit hung in remarkably well there.
You mentioned in your prepared remarks that the solvent portion of CASPI has benefited from some structural improvements relative to the last recession. I wonder if you could elaborate a little bit on that and explain why that might be the case.
Jim Rogers
It is a matter of capacity, some capacity that has exited the market, but we talked about it ahead of time, we didn't really think we would say more than that, other than that you know the solvents do look a little better and in fact, I would say the company as a whole, if you look at such a deep recession and you look at where we are guiding people for the full year, I don’t think anyone would have believed four or five years ago that in a deep recession, we would be talking about approaching $3 a share. So there has been a little improvement there, but I guess I don't want to go there name by name.
Kevin McCarthy -- Bank of America
Okay. And finally, what is the magnitude of the savings associated with lower burn rate on coal gasification?
Jim Rogers
Well, it is -- I'm not sure how noticeable it is going to be to you guys, because we have another line that picks up this cost, but it has other costs in there too. So I think we came down from like 12 to 9 on that line from first to second quarter.
But there are some other good stuff in there beside gasification we are working on that I personally want to see us work on, that is very front end on some different platforms et cetera. So I think a company our size, to have that kind of spend on some upfront R&D, on some stuff that would be meaningful for the company down the road is what we should do.
So don't start modeling in a 0 there. We are going to keep spending on that line.
Curt Espeland
And Jim, if I might add, besides the other line item in our P&L, you are also seeing some of the effect of that, Kevin, as we have tightened up our capital spending outlook for this year. That is another example of how we have reduced the burn rate on gasification.
Kevin McCarthy -- Bank of America
Thank you very much.
Operator
Our next question will go to Jason Miner with Deutsche Bank.
Jason Miner -- Deutsche Bank
Thank you, good morning.
Jim Rogers
Good morning.
Jason Miner -- Deutsche Bank
Just sort of returning to the guidance again, if we -- originally I think we spoke about 75% to 80% utilization could drive us in this $2 to $3 range. We are looking at sort of mid-seventies now it sounds like, but it is still now perhaps headed toward the high-end.
So I wonder if some of the cost reductions had held in or performed, I guess I should say better than you had expected, and if now 80% could drive us above, how should we think about that?
Curt Espeland
I would say that the cost reductions came in pretty much as expected, maybe the discipline we have shown and how quickly people turn the knobs down, I was personally impressed with -- again, it goes back to our culture. On utilization rates, first, let me say I'm hoping the Wenu [ph] guys offer those.
Because I think at one point, it was very valuable, at another point, it starts to become more valuable to our competitors than it does to our investors, so we have got to think through how we talk about utilization rates. But I mentioned we had 74% without the reconfiguration of Longview in the second quarter.
The guidance we are giving is not in anticipation of us reaching to 80%, it is anticipation of things staying in that range of 75% to 80%, but we are not pegging it to the top of the range. So again, yes, I guess the volume comes back for the whole economy, and hopefully there is some upside.
Jason Miner -- Deutsche Bank
Okay, fair enough. Just on prices, it did look like there was some downward acceleration, I am not sure how much of that to read as competitive pressures versus raw materials, half through in some of the segments, but could you just comment on how you think about pricing playing out through the rest of the year?
Jim Rogers
I am pleased that we are kind of getting back to the margins you would expect for the value that our products yield to customers. So, I would say most of the move in pricing has been due to the raws coming down and you can kind of see that in our margins, right?
So if pricing was coming off a lot more than the raws were moving, you would have seen a contraction in our margins. You know, when I just look forward, that is probably one of the unknowns, is what is going to happen in the marketplace as volume comes back and it is up for grabs, how aggressive our competitors are going to be on pricing.
You know, we have some price increases in place right now within PCI for example, there were some price increases that went forward in PET, I think. So we will just have to see.
But that is probably a place I feel the least comfortable talking about is predicting the pricing. I can just tell you that it has been a nice surprise that through this deep a recession, prices have been able to track with raw materials in a way that we could protect our margins.
Jason Miner -- Deutsche Bank
Okay, fair enough. And lastly, on CASPI.
I wonder if you could in anyway break apart what end markets or regions -- to be a little more specific in Specialty Plastics perhaps, if you could take a similar treatment to CASPI and sort of help us understand, and just so I can append a question to my question. Sorry.
How much -- I guess the concern there might be with such an impressive sequential improvement, plus the comment that restocking or destocking is coming to an end, is there any restocking going on there that kind of pulls demand forward? Thanks very much.
Jim Rogers
Yes, you know, that is a good question on the restocking and that is hard for us to see right away. I mean, we told you last time that we could see what was happening to our specialties, that we knew the volumes were down well below what the in-demand was, so we knew guys were destocking and that really hurts your mix.
This is good stuff in CASPI, we talk about two thirds specialty and there is some stuff that is truly special, let us put it that way, that was way down and that has come back. I don't think it was restocking.
I am not sure you can possibly know, I can tell you is Asia or just about all the businesses is kind of leading the drive upward. If I think of it regionally, if I think by markets, honestly I don't think we can point to the transportation or autos and building and construction is anything exceptional.
I think at best we just got the destocking behind us, but still a noticeably lower level. So, no particular market I would point you to, I would point you to Asia and I would just also say the power of our specialties in CASPI, it has been there all along but when you don't have the volume to sell it, you can’t see it.
Well, the destocking was pretty much behind this and now you see what that business really looks like. And as we look forward, we are saying that auto do the same or even a little better the next quarter.
Remember, seasonally for CASPI, they typically do better in the second and third and then they usually come off some in the fourth.
Jason Miner -- Deutsche Bank
Okay, that is very helpful. Thanks a lot.
Operator
We go next to Mike Judd with Greenwich Consultants.
Mike Judd -- Greenwich Consultants
Yes, looking at your balance sheet, I didn't see an inventory number. Do you have that?
Greg Riddle
That will be in the Q, we will file that next week.
Mike Judd -- Greenwich Consultants
Okay, could you maybe just help us understand whether inventories were lower or higher sequentially than the March quarter?
Curt Espeland
Well, you can see that in the tables, Mike, I think that will give you some sense that inventories decreased --
Greg Riddle
You can see it in the cash flow statement.
Curt Espeland
Right.
Mike Judd -- Greenwich Consultants
Perfect. Okay, great.
That is what I wanted to know. And then, I guess, there has been sort of a recurring theme across the chemical industry in terms of the earning supports and you guys certainly fit into some of these categories.
A lot of the earnings (inaudible) their call savings, leads and lags of raw materials, and also some -- there is one of the item, I am trying to remember what it is. But as you guys think about the December quarter, and the issues around, potentially higher oil prices and things like that, what is really driving your customers’ desire to restock?
Yes, I guess that was actually the third issue was restocking issue. So I mean, is this something that looks like it is clearly just sort of a mid-year restocking type of scenario that is seasonally driven or do you think that it really has sustainability from here.
Because I think this is the thing that most people are struggling with is trying to understand whether this is just a typical seasonal bump and then go back down sort of in the December quarter. Any thoughts along those lines would be very helpful.
Thank you.
Jim Rogers
Yes, I can. It is a good question, I don't have a good answer for you.
I can tell you specific to Eastman, there is seasonality and we see it in the number of our businesses and you see it -- like I was just saying, second and third stronger and we always come off in the fourth quarter. You used the word restocking and I haven’t heard our customers telling us that and maybe they wouldn’t, even if they were.
So I can’t point to restocking. I am pretty sure that destocking is over just about everywhere, but I am not very sure that customers are doing any restocking and so as we look forward and obviously by giving you annual guidance and third quarter guidance, we are kind of saying we are pegging a range for the fourth quarter and that will be down from the third quarter.
So we are looking at more traditional seasonal pattern for our business and we are not counting on any big move in restocking and I really don't know that we have seen much of restocking yet.
Mike Judd -- Greenwich Consultants
Okay, and just as a follow-on to that, and maybe this is just a new one here and what you are saying makes a lot of sense. But in terms of the end of destocking, is the issue here really just the inventory levels were just too low or were drawn down too much or what is driving the end of destocking?
Is it being driven by higher energy prices or what is really driving that in your opinion?
Jim Rogers
Again, I think you see it -- let me use the idea of specialties, because that is where we really felt it the most was in the destocking of specialties. If perhaps there is added over something, we are really the only reliable supplier in the world someone can get it from.
They did not just keep six or eight weeks worth of inventory. They would keep three or four months worth of inventory.
When their in-demand goes down noticeably, that three or four months of inventory turns into eight months of inventory. So it wasn't so much that they had to take a different view on the market, it is just there in-demand went down and all of a sudden, they have a lot more inventory of our specialties.
As they finally work that down to where they get back to that comfort range of 3 to 4 months for the lower level, from then on out, they have got to go back to ordering again. So I don't think of it as the restocking back up to the eight months, they never liked the eight months in the first place, but they would be trying to hold the three months.
So that is -- I'm trying to give you a -- I have a specific product in mind that I know about and that would accurately reflect what we saw happening with a particular specialty. The commodities, they don't carry three or four months worth, it is much smaller and that is why we saw the destocking in there sooner.
But this whole issue, you are hitting the right issues, I mean, the whole issue of restocking versus destocking, I have never talked so much about it in my life and it is a real hard one to read.
Mike Judd -- Greenwich Consultants
That is very helpful. Thank you and congratulations on a good quarter.
Jim Rogers
You are welcome.
Operator
For our next question, we go to Brian DeRubio [ph] with Yield Capital Appreciation Partners.
Brian DeRubio -- Yield Capital Appreciation Partners
Good morning, gentlemen.
Jim Rogers
Good morning.
Brian DeRubio -- Yield Capital Appreciation Partners
My question is on Performance Polymers. At one point, you guys were talking about possibility of licensing out the IntegRex technology.
Are those discussions that you are still having at this point of time, A.; and B. have some of the delays you have experienced with IntegRex, has that put off some of those discussions?
Jim Rogers
Yes, I wouldn't tie the two together. We are still in discussions.
I would tie much, much more to the economy and just how tough things are out there for people and for people who would perhaps like to license. So discussions are ongoing.
I hate to commit to a time when we could sign one up. I know there is real value in our technology, I can see it when I look at the numbers and I compare legacy pounds to our ParaStar and IntegRex pounds.
So I know there is value in the technology, it is just the worst of all possible times to be out there talking to someone about building something new and using our technology. The trouble is, with the plant is, not so much technology-driven, I mean it is just a place where we need to get back to operational excellence and for someone like me, who has worn the Eastman label now for 10 years, it hurts to talk about a plant that doesn't run well.
So that is unusual for us, I don't -- that is something we are addressing. I would expect that will change and we will achieve operational excellence there.
But the technology, I know works add value, we have demonstrated the higher capacity run rates. And so, I would expect that we will be able to monetize some value of that technology through licensing, but I can't tell you when.
Brian DeRubio -- Yield Capital Appreciation Partners
Okay, thank you.
Operator
And with that, ladies and gentlemen, we have no further questions on the roster. Therefore Mr.
Riddle, I will turn the conference back over to you for any closing remarks.
Greg Riddle
Okay, thank you again for joining us this morning. An audio replay of this conference call will be available on our website this afternoon through Monday, August 3.
Have a great day, everybody.
Operator
And ladies and gentlemen, this does conclude today's conference. We do appreciate your participation.