Eastman Chemical Company (EMN) — Q4 2018 Earnings Call Transcript

Thank you, Holly, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Curt Espeland, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Before we begin, I’ll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company’s fourth quarter and full year 2018 financial results news release, during this call and in the accompanying slides, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2018 and the Form 10-Q to be filed for full year 2018. Second, earnings referenced in this presentation exclude certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the fourth quarter and full year 2018 financial results news release, which can be found on our website, www.eastman.com in the Investors section. Projections of future earnings exclude any non-core unusual or non-recurring items. With that, I’ll turn the call over to Mark.

Thanks, Greg. Good morning, everyone. I’ll start on Page 3. Despite challenging short-term dynamics in the last few months of 2018, I’m proud of our accomplishments for the full year. We delivered 6% top-line growth driven by strong volume growth in our specialty businesses with contributions from product lines across our portfolio. We made excellent progress converting our top innovation programs into commercial orders with double-digit growth in 2018 and new business revenue from innovation, which I’ll talk more about in a moment. Beyond creating our own growth, we’re positioning ourselves for long-term sustainable growth. We increased our growth investments by $50 million during the year, which includes 10 new plant startups last year, a record for us to support the robust growth in our specialties over the last several years. We’ve talked about our larger expansions of Tritan, PVB, resins and Crystex on prior calls, and we also added smaller incremental capacity for products including ketones and performance films. Our increase in gross spend also includes investments in capabilities to further strengthen our application development capability. While we ramped up our growth programs, we also remained disciplined in our cost management to offset inflation. Our cash engine generated approximately $1.1 billion of free cash flow for the year, about a 10% yield. We pushed that cash to work returning $718 million to stockholders through a combination of share repurchases and an increasing dividend, with 2018 representing the ninth consecutive year we have raised our dividend. In this current environment, we continue to execute on what we can control, namely innovating through our enterprise, managing costs and allocating our strong free cash flow in a disciplined manner. We see strong evidence that these core elements are working, despite the significant macroeconomic challenges we faced in Q4. On Slide 4, a key driver of our success, as I mentioned, is our ability to convert our top innovation programs into commercial orders. I’m pleased to report that we’re seeing exciting progress across the portfolio with $365 million of new business revenue from innovation in 2018, growth that continued to the fourth quarter. Here are just a few examples. In Advanced Materials, we delivered 7% volume growth in Tritan. This was underpinned by continued growth across a diverse set of end markets and double-digit growth in China, despite the headwinds from the trade dispute. In performance films, we once again delivered double-digit volume growth in our two largest markets for window films, North America and China. We also continue to build momentum in paint protection film with the launch of two next-generation products. Also in Advanced Materials, our interlayer business continues to benefit from our innovations in automotive with our products and heads-up display growing at 25% in 2018. At the same time, we are building momentum in architectural with our general programs and the launch of a new structural product called Saflex DG and saw very strong growth, particularly in Europe in the architectural business. In Additives & Functional Products, strong adoption by more than 10 customers of our new generation Crystex Cure Pro, the newest innovation in insoluble sulfur. With this vulcanizing agent, tire manufacturers can improve productivity, achieve better operational control and realize cost savings. In Care Chemicals, we achieved a 12% volume growth in our water treatment business over 2017, as municipalities around the world adopt global water treatment standards, especially in China. Finally, in Fibers, we continue to accelerate our growth in textiles with 30% growth led by our new product line called Naia. These and many other examples of new business revenue growth from innovation give me confidence that we can be resilient even in an uncertain business environment. In 2019, we expect to deliver another double-digit increase in new business revenue closures from innovation and are on track to generate approximately $500 million of new business revenue from innovation in 2020. With that, I’ll turn it over to Curt.

Thanks, Mark, and good morning, everyone. Thanks for spending some time with us today. I’m going to start off with a few comments on our full year 2018 performance on Slide 5. Given the current business environment, it’s important to remember that through nine months, we were delivering strong results consistent with our long-term strategies discussed last year at our Innovation Day. Through the first nine months, our revenue was up 8%, our EBIT was up 6% and our earnings per share was up 13%. We were delivering these results despite $240 million of higher raw material and distribution cost, historically low spot ethylene prices and higher costs resulting from increased growth investments and the industrial gas supplier disruptions in Texas. Key to this performance was volume growth and mix improvement in our specialty products, successful price improvements relative to raws through the third quarter, strong cash generation, and a weaker U.S. dollar. As the third quarter ended, the business environment became more challenging as all of you know. We felt this in our fourth quarter through inventory destocking that was beyond normal seasonality and we attribute this mainly to the U.S.-China trade issues; we also saw some additional destocking in other markets, given the rapid drop in oil prices and related raw materials. On the destocking, we believe that the amount occurring above normal seasonality is largely in China, where we mostly sell specialty products, which therefore drives a negative earnings mix shift. Given the large drop in Brent beginning in October, we had a harder time raising our prices, but still had $90 million of higher raw material and distribution costs year-over-year due to the third quarter flowing through our inventories. The result is that our fourth quarter results were more challenged than we were expecting, especially as the quarter progressed. With that said, given what we know today, we expect the issues we faced in the fourth quarter will get progressively better in 2019. We’re already seeing evidence of improving order patterns sequentially into the first quarter. Now on Slide 6, I’ll start segment results with Advanced Materials, which showed strong volume growth and mixed growth in our premium specialty products through the first nine months of 2018, offset by some short-term dynamics in the fourth quarter. Looking at the full year, sales revenue increased 7%, primarily due to higher sales volume and improved mix across the segment. Full-year EBIT increased due to higher sales volume and improved product mix, partially offset by higher raw material costs, particularly for paraxylene in the last four months of the year and growth investments of approximately $25 million for the full year. In the fourth quarter, sales revenue decreased mostly due to customer inventory destocking in specialty plastics as a result of economic uncertainty created by the U.S.-China trade dispute. EBIT decreased due to lower sales volume and higher raw material costs, partially offset by improved product mix, which was less than normal due to customer inventory destocking in China. Despite volume declining at the segment level in the fourth quarter, Advanced Materials grew volume and mix in performance films and advanced interlayers in both the auto and architectural markets. In auto, both interlayers and performance films grew faster than the global auto market due to their breadth of innovation products. In the architecture market, which now represents just under 50% of the interlayer sales, we are seeing strong growth particularly in Europe as we benefit from trends towards more windows in commercial architecture trends we are well positioned to serve. Looking ahead to the full year of 2019, we expect strong growth. While orders in January have improved sequentially, we expect some inventory destocking to persist in the first quarter, impacting our specialty plastics business. We also expect higher costs in paraxylene to flow through inventory, temporarily impacting margins in the first quarter. We will not face the same step-up in growth costs as a headwind coming into 2019. As those issues moderate, we expect Advanced Materials to return to robust growth in the final three quarters of the year. Putting it all together, we anticipate Advanced Materials EBIT growth to be at the high end of the 7% to 10% provided at the Innovation Day range for 2019.

Turning now to slide 7, into Additives & Functional Products. For the full year, sales for Additives & Functional Products revenue increased 9%, primarily due to higher sales volume, higher selling prices and a favorable shift in foreign currency exchange rates. Higher sales volume was attributed to strong volume growth in Care Chemicals, coatings additives, animal nutrition, and tire additives. Full-year EBIT increased due to higher sales volume and a favorable shift in foreign currency exchange rates, partially offset by increased growth investments of approximately $20 million. For the fourth quarter, sales revenue was flat as higher selling prices were offset by an unfavorable shift in foreign currency exchange rates. EBIT declined as higher prices were more than offset by higher raw material, energy, and distribution costs. The decline in EBIT in the fourth quarter, which offset strong earnings growth through the first nine months of the year, was due to a few factors that played out simultaneously. First, destocking in coatings and tires within China and Europe weighed on product mix, as these products have higher margins relative to the segment average. Second, competitive dynamics in adhesives continued to limit upside in pricing, while higher oil-based raw material costs flowed through our inventory from the third quarter and third, higher growth investments and the impact of lower capacity utilization. Looking ahead to 2019, we expect higher raw material costs to continue to work their way through inventory in the first quarter. While we see a pickup in orders, we still expect some destocking in tires and coatings to continue in the first quarter. For the balance of the year, we expect to return to growth as raw materials become a tailwind, destocking plays out and we don’t expect the same cost headwinds as last year. All in all, we anticipate Additives & Functional Products to grow EBIT at the low end of the 5% to 7% range provided at Innovation Day.

Next to slide eight in Chemical Intermediates, which overcame numerous challenges in 2018. For the full year, sales revenue increased as higher selling prices across the segment were partially offset by lower sales volume due to the actions we took to mitigate historically low spot ethylene prices. Full-year EBIT declined as an improvement in spread in our derivatives was more than offset by headwinds from merchant ethylene. In the fourth quarter, sales revenue increased mostly due to increased selling prices, partially offset by lower sales volume attributed to merchant ethylene. EBIT declined due to higher raw material, energy, and distribution costs partially offset by higher selling prices. Volatile raw materials had an impact in the quarter as higher costs were still flowing through inventory, while market prices for raw materials dropped rapidly creating a short-term disconnect between costs and pricing. For the full year, we expect a couple of headwinds will not repeat in 2019. First, we’ve largely mitigated the merchant ethylene headwind with the completion of our RGP project. And second, we do not expect to have large industrial gas supplier outages repeat in 2019. The lack of these headwinds, netted with some expected softening in acetyls and in some olefin derivative products in 2019, leads us to expect 2019 Chemical Intermediates EBIT to be similar to 2018. Finishing up with the segment reviews on Slide 9 with Fibers. Looking at the full year, sales revenue increased due to higher sales volume, primarily due to continued growth in the textiles innovation products and non-woven products previously reported in other. Textiles volume growth was 30% in 2018. The sustained volume growth of these products is a great story, demonstrating how these product lines are contributing to stability in the segment. EBIT decline is lower acetate tow selling prices were partially offset by higher textile innovation product volumes. Tow volumes were relatively flat for the year. In the fourth quarter, sales revenue increased due to continued strong volume growth in textiles innovation products and higher sales volumes primarily to non-woven innovation products, previously reported in other. EBIT declined due to lower capacity utilization related to year-end inventory destocking in the quarter. Now a few comments on 2019. First, we have a fairly good line of sight into customer order patterns in this business. We are also not qualified to ship tow into China from our tow plant in Korea mitigating some of the impact we discussed last quarter associated with shipping tow into China from the U.S. We expect stability in 2019 as we continue to stabilize tow and benefit from strong textiles volume growth that builds throughout the year, which offsets the gradual decline in the tow market. But different from past years, the first quarter is expected to be the lowest quarter for tow due to customer buying patterns, partially attributed to rebuilding in imports into China and few other customers. All in, we expect EBIT to be about the same in 2019 compared with 2018. On Slide 10, I’ll transition to some corporate financial highlights. Cash from operating activities was over $1.5 billion and free cash flow came in close to target, adding approximately $1.1 billion. We continue to demonstrate our ability to convert earnings into cash and manage our working capital. The Eastman team knows the value of converting earnings into cash, especially our BA, credit and cash management teams. As a result, our free cash flow conversion was over 92% in 2018. We returned $718 million to stockholders in 2018 through share repurchases and dividends. I’m proud to say that we’ve increased our dividend for the ninth consecutive year. Our full year 2018 effective tax rate improved to 16% from our previous outlook, as we’ve gained better clarity on the impact from the Tax Reform Act. Looking into 2019, I expect our effective tax rate to be between 16% and 17%, and we’ll work hard to have that toward the bottom end of that range. I expect our free cash flow to be greater than $1.1 billion in 2019. We’ll remain disciplined with our use of cash across the various buckets. I expect a growing dividend, debt repayment, but to a lesser extent than 2018. Share repurchases will occur in the absence of bolt-on acquisitions. I remind you, we should always expect that we’ll fully deploy our cash. Finally, don’t miss the modeling slide in the appendix of this slide deck to further help you in your analysis. With that, I’ll turn it back over to Mark.

Thanks, Curt. On Slide 11, I’ll discuss our outlook for 2019. We have a number of growth drivers as we enter the year. As I mentioned earlier, we were doing a great job of driving new business revenue, leveraging our innovation-driven growth model. Results in our specialties growing faster than our end markets, and we expect new business revenue from innovation will increase to greater than $400 million this year. We’re also taking a more aggressive approach to cost management to hold manufacturing costs flat, offsetting not just inflation but also the annualized effect of growth investments this year in a much higher shutdown schedule. This is different than 2018 relative to 2017, when we had a roughly $125 million headwind comprised of growth investments, industrial gas outages, and the ethylene headwind, which we have now neutralized to the RGP investment. In 2019, we’re also managing a few headwinds. As we’ve mentioned, we expect global growth to be slower this year, due to China trade issues and the European economy slowing down with Brexit and other concerns. On the U.S. trade dispute, we are not expecting it to worsen or improve from the current situation in our guidance. We are projecting the dollar-euro exchange rates to remain about where they are through the end of the year and this will be about a net $25 million headwind; about half of it in the first quarter. We’re expecting pension expenses to also be about a $25 million headwind for the year. On spreads, we expect higher raw material costs to continue flowing through until about the end of the first quarter. After that, we expect to benefit from the flow through of lower raw material costs. So, putting all of this together, we expect that EPS will grow between 6% and 10% for the year. Given what we know today, growth would likely be toward the bottom end of this range. Our long-term EPS growth projection is in the range of 8% to 12%. The difference between the midpoint of our long-term range and the range I just gave you for 2019 is primarily due to the lower expected earnings in the first quarter, due to raw material flow through and the destocking playing out, and the substantial currency headwind we face. One other comment on the first quarter is that, although, we are expecting EPS to be down year-over-year, we expect strong improvement sequentially and indicated that the headwinds are lessening. Lastly, I would add that there’s obviously some uncertainty around all of these assumptions that we’ve made for the year. We’ll know more as we progress through the first quarter. Finally, let me bring everything together. On Slide 12, what you see is our innovation-driven growth model, which we first discussed with you at the Innovation Day last February and I’ve referenced a number of times this morning. This model is central to our winning strategy and given the progress we’ve made, we’re confident we’re on track. The headwinds we face in the fourth quarter and that we see right now looking forward is transitory, and even in this uncertain global business environment, we’re poised to deliver resilient results with solid EPS growth and strong cash flow generation. As you look past the first quarter, we will be back on track for our long-term EPS guidance range of 8% to 12%. Given the progress we’ve made and the commitment I see from the Eastman employees around the world, I’m more confident than ever in our future today, and I look forward to creating a lot of value for shareholders both in earnings growth and cash flow. With that, I’ll turn it back over to Greg.

All right, thanks, Mark. As usual, we’d like to get to as many questions as possible this morning, so I ask that you limit yourself to one question and one follow-up. With that, Holly, we are ready for questions.

Thank you. Good morning. Mark, just in the guidance, you know honestly, on the lower end of the range bias, what are the range of outcomes that could actually result in either guidance being at the very top end or the very low end of the guidance range?

Sure. Good morning, David. There’s obviously a lot of uncertainty right now, especially on whether or not the trade dispute gets resolved and what happens in the European economy. The real wild cards here are the macroeconomics. From what we can control, I have a lot of confidence in the innovation we’re delivering, our ability to grow faster than the markets we’ve already shown, even through the fourth quarter, where we have innovation in the interlayers, performance films, for example, we grew positively both in volume and mix in a relative to a down market. So we feel the growth engines are intact, but there’s just macroeconomic uncertainty. If the trade war gets completely resolved that’s going to be upside for us. If Europe doesn’t have the headwinds, people are concerned about upside for us relative to our forecasts. If the reverse happens, that’s where the downside occurs.

And Mark just in Advanced Materials, the 2% decline as volume in that segment. Can you talk about what volume was tracking until destocking in the world slowed? Was it more of a normalized number, perhaps October and early November?

Yes. So the demand pattern there is important to separate things out. Performance films and interlayers had a really good fourth quarter. So they continue to deliver good volume and mix growth. The auto business, even though it was challenged especially in China, we still delivered growth, and the architectural market also very strong, where our interlayers go into a lot of laminate glass, especially in Europe, growing much faster than the underlying market because buildings are moving to a lot more glass on the facade. The real challenge was in specialty plastics, principally in China. Our specialty plastics business is principally products we sell that are made into consumer durables that are then sent back to the U.S. and Europe. Those customers were worried about where the trade war was headed; they started aggressively destocking. That impacted mix significantly for us on a regional and product basis.

Very helpful. Thank you.

Hey, good morning folks and thanks for the color on the outlook. I just want to get a little more granular in terms of your expectation. Since you have such a large business over in Asia and in China that impacts the three of your four segments, what are you baking in, in terms of an expectation post-Chinese New Year, in terms of volumes coming back? Are you expecting any kind of normal bounce back, higher bounce back, lower bounce back? What is embedded in your estimates?

Well, I think that you have to break it down into a couple of different components. On the destocking side, it’s playing out fairly well, and we have line of sight that it will be completed by the end of the first quarter in specialty plastics. The primary demand question really is about the Chinese consumers. My personal opinion is if the trade war doesn’t escalate further, and things are viewed as more stable, we will expect some modest demand recovery. If the trade war gets settled, we could see more material restocking event than what we have in our forecast.

All right, that’s very helpful. A question and a follow-up for Curt. You did a nice job in reducing debt throughout 2018, I guess partly at the expense of buybacks being slow during the fourth quarter. How should we think about Eastman buybacks in 2019?

Well, Frank. First of all, as you think about the free cash flow greater than $1.1 billion, we’re going to be funding that attractive dividend that we have seen increase again this past year. On the deleveraging side, we believe that deleveraging can moderate some compared to last year. I always throw people out there right now, assume roughly $250 million for debt repayment, but we’ll modify that during the course of the year, based on how EBITDA grows. When you look at all those factors, then the remaining amount of that cash flow should be for share repurchases. What you saw in 2018, you could see a similar effect in 2019, where we did a fair bit of our share repurchases in the first half of the year again this year.

Terrific, very helpful. Thank you.

Thank you and then good morning, everyone. In adhesive resins, the impacts of the new capacity were pronounced in the fourth quarter, given everything else that was going on. But where are we in that process and what type of impact have you baked in for 2019?

Good morning, Vincent. So adhesive capacity that came online didn’t become effective until the back half of this year, and the impact it had on pricing was holding our prices relatively flat. So you had raws going up quite a bit with oil through the third quarter, and that flowed through slowly in the fourth quarter. As we move into the first quarter, we expect prices to start coming off a bit, but we also expect raw material flow through to help offset some of that. But it’s going to be a challenging year in 2019. Part of the challenges we have to overcome for Additives & Functional Products has plenty of growth ahead. Despite the spread compression we’ve been clear this sort of compression was coming and we’re working our way through it and feel optimistic about this business long-term.

Okay. And just as a follow-up. This might be the year that the excess ethylene capacity is monetized?

I would say on excess ethylene, we’ve dealt that through the RGP option. The RGP option can be adjusted back to normal operations if the markets improve. Until that happens, we are not doing much more with the sale of excess ethylene until the market improves.

Vincent, the value of it right now doesn’t make sense. In addition to the RGP, which eliminates all the downside risk of the ethylene to propane volatility, we believe the market situation will improve in ethylene in 2020.

Thanks very much. Can you talk about the propylene complex in 2019? Using polymer grade prices, they have come down from say $0.60 to $0.40, and you sell a lot of propylene derivatives. What might be the year-over-year economic effect of that change for you in 2019? And how does it work in Eastman?

Well, how I answer that question is really what we’re assuming on olefin spreads. Right now, we’re expecting that propylene-propane spread to be above the same in 2019 compared to 2018. We expect ethylene-propane to improve a little bit but still be challenged relative to what we consider normal.

While the propylene prices are off, remember the propane prices are also down quite a bit. The spreads are holding fairly well, and we do expect some pricing to come off in the propylene derivatives and acetyls.

And for my follow-up, is the raw materials that went up in the fourth quarter, I take it that was ethane, propane, and paraxylene, and ethane and propane have obviously come off and paraxylene has come off. Is that why you believe that you’ll begin to have relief in the second quarter as you work your through that?

Yes. You described it well, Jeff. Oil-related items spiked in the third quarter, and those have started to come down in the fourth quarter. We couldn’t turn them over quickly enough because of the destocking in our normal seasonality. Those will work their course through the first quarter. As those come up, you’ll see the benefits in the second quarter.

The only thing I’d add to that was benzene was incredibly high in the third quarter and has come down dramatically. It’s not just the flow through of the high-cost raw materials. We can’t buy that much of the cheaper raw materials, so it slows your turnover rate.

Okay, great. Thank you so much.

Thank you. At the end of the presentation, it says you’re assuming Brent crude will be stable at current levels. Could you just talk about what you mean by current level?

To answer the first part of the question, we are assuming close to what the curve is, low 60s moving up to mid-60s through the year embedded in our forecast. Stability is better than volatility when it comes to oil and raw material costs. If it stays stable in the 60 range, we feel good about our forecast. If it pops to 85, we will have to chase those raw materials up.

It seemed like you had really strong performance in Saflex in the quarter. Was that in spite of inventory destocking in your channel supply correction?

The business was really pretty stable. It wasn’t much of a destocking event there. Our strong growth in innovation products with heads-up display and acoustics are driving growth. The overall square meters could be down a little bit with the auto market, but the volume mix situation is quite strong. I think that trend continues as we go to the first quarter, same in performance films.

Thank you.

Yes, good morning. Curt, I was wondering if you could provide some color as to what you are assuming for two things, working capital and cash taxes in formulating the free cash flow guidance for 2019?

So yes, we expect strong cash flow. Working capital should improve compared to 2018 because we’re not anticipating the same impact of higher raw materials. We will have some growth in working capital for our growth programs, but overall the value should improve during the year. There will be a step up in cash taxes as we move back into more normal cash tax payments with headwinds of about $50 million to $75 million higher cash tax payments.

That’s helpful. Thank you. And regarding the new textile products, how big is that business? And would you expect the growth profile to remain in the 30% range?

Yes. We’ve had tremendous success in this business, which is about 16% of our revenue in the Fibers business. Our textile innovation products have sustained growth and expect that strong momentum to continue throughout the year.

Good morning. One end-market question and one high-level question. On the end-markets, could you give a little bit of a take on what you are seeing in commercial construction trends?

From a commercial activity point of view, Europe has been pretty strong. There is a nice backlog of commercial buildings going up and a lot more glass on them, driving strong growth in Europe. In North America, we see commercial construction relatively good. China remains a little wildcard, as we don’t sell interlayers into that market. We expect some stability in demand.

Understood. Thank you.

Hey, guys. Good morning. Just wanted to understand, maybe you can just give us your commentary on some of the end-markets, automotive has seen quite a bit of destocking, especially in China. How does that affect your business and what are you seeing in paints and coatings?

Overall, the transportation sector has been relatively strong, but slowed down especially in China in the fourth quarter. Despite that, we were able to deliver strong volume and mix growth through the end of the year. In coatings and tires, we’re more tied to the actual underlying market trends, where we saw the impact of destocking in China and Europe in the fourth quarter. However, our exposure is quite different when it comes to OEM versus aftermarket.

All right. Thanks. And as a follow-up, you had mentioned that AFP could be at the lower end of, say, 5% to 7%, and AM would be at the upper end of 7% to 9% EBIT growth for the full year. That implies a sharp snap back in Q2 through Q4. Can you give us your confidence level on that?

When we spent time debating this, it’s hard to predict macroeconomics. We’re planning on slow growth, not as robust as the first half of last year. We feel good about inventory destocking coming to an end. Coatings and tires are more exposed to the Chinese consumer; that’s a little less clear. We see destocking coming to an end, and assume demand will recover.

Okay. Thanks.

Yes. Thank you and good morning. Mark, you talked about tire products and destocking there. So on Crystex, you had some smaller players shut down in China last year due to environmental reasons. But now with the auto industry slowing down, where do we stand on Crystex inventories?

Crystex wasn’t a big contributor to the margin decline in Additives & Functional Products. Most of the headwind was due to high raw material costs flowing through relative to pricing. We feel great about Crystex going forward; we’ve had waves of competitive activity in this market, and we’re focusing on innovation.

Great. Thank you. And on the RGP project, can you quantify the benefit in 2019?

I’m not going to give you a specific number just on the improved ethylene. That’s embedded in our overall guidance. We expect fewer merchant ethylene sales, which reduces pressure felt in 2018. I’ll let Greg provide some details.

We produced about 1.4 billion pounds, 1.5 billion pounds of ethylene. About half of that we sell into the market. With the RGP investment, we will be producing about 80% less ethylene that we would normally sell into the market.

It’s also a great volatility reducer, because PGP to RGP is very stable. It also mitigates volatility as well.

Yes. Good morning, folks. I just want to understand better when your customers destocked in Q4, did you guys get the inverse of that and that you had to eat some inventory?

Yes, we had difficulty adjusting our operations to fully overcome the destocking in our own production rates. To size it, maybe just look at the difference between our targeted free cash flow and what we achieved. That will give you some sense of what that inventory effect was.

Okay, great. And regarding your ability to ship tow into China from Korea, is that meaningful?

It’s meaningful for us to maintain stability, as we are mitigating headwinds associated with shipping tow into China from the U.S.

Holly, let’s make the next question the last one please.

Hey. Good morning, everyone. I was a little surprised at the quarter-over-quarter decline in Chemical Intermediates, just given that the propane cracking margins seemed like they should have improved for you. Could you just walk through the main moving parts here?

First, we weren’t selling ethylene in the quarter and have some unobserved fixed costs as a result. Secondly, you have prices coming off with the raw material environment, but still at a slow flow through of costs. Those drove earnings lower year-over-year.

Don’t forget we were not able to turn our inventory over. We still have that higher-valued inventory sitting in our manufacturing sites, a good portion of that attributable to Chemical Intermediates. Inventory plays a role in earnings in the fourth quarter.

Yes. Even Chemical Intermediates are seasonally lower in volume sequentially from the third quarter to fourth quarter.

Great. Thank you.

To wrap up, we recognize Q4 was tough and the first quarter is not what we wanted to be. However, looking at the future of this company and all the investments we’ve made, that innovation-driven growth model gives us the ability to push through this environment, continue to create value and find ways to grow.

Thank you all for joining us this morning. Have a great day.