Eastman Chemical Company (EMN) — Q1 2019 Earnings Call Transcript

Okay. Thank you Kim, 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 first quarter 2019 financial results news release, also during this call and in the accompanying slides, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for 2018 and the Form 10-Q to be filed for first quarter 2019. Second, earnings referenced in this presentation excludes certain non-core and unusual items. In addition, historic quarterly earnings use an adjusted tax rate, using the forecasted tax rate for the full year that excludes the provision for income taxes for the same 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 first quarter 2019 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, and good morning everyone. I'll start on page 3. In the first quarter of 2019, we had a number of accomplishments we can be proud of and a number of challenges to take on. Before we get into the financial results of the quarter, I'd like to pause and take a moment to discuss some of the important highlights from the quarter. First, after a challenging fourth quarter, we delivered a 28% sequential improvement in our earnings, and we expect this momentum to continue into the second quarter. We also received an ENERGY STAR Partner of the Year award for the eighth consecutive year, demonstrating our commitment to operate our facilities responsibly and efficiently. Eastman is always searching for ways to leverage our world-class operations and macro trends like sustainability, and I'm proud of the investments we're making in methanolysis and the carbon renewal technology, which provides serious solutions to enable the circular economy. In this environment, we continue to see strong customer engagement with our innovation programs and delivered an 8% increase in new business revenue closes from our innovative products. As always, we also continue to aggressively execute on cost management, running a highly productive organization and we have increased our cost reduction actions given the short-term macroeconomic challenges. Consistent with our strategy to pursue bolt-on acquisitions in our specialty businesses, we completed the acquisition of Marlotherm heat-transfer fluids from Sasol, opening up their product offerings in new regions and we'll continue to pursue bolt-on M&A where it makes sense. Core to how we win is our ethics and integrity and we appreciate the recognition as one of the World's Most Ethical Companies by Ethisphere for the sixth consecutive time. And finally, these awards and the focus of our strategy comes back to our owners, where we consistently return cash to our shareholders. We returned $212 million to shareholders in the first quarter of 2019, an 18% increase over the first quarter of 2018. On slide 4, we continue to execute our innovation-driven growth model to create superior value. Today, I'd like to highlight two specialty product lines: one is, Advanced Materials and another is Additives & Functional Products, both in a challenging end market transportation. Although, we've seen weakness in global transportation markets over the past two quarters, especially in Asia. I'm very excited to report that our team continues to deliver strong growth in our premium innovative products. One example, fueling this growth is Saflex heads-up display, where we are delivering double-digit growth, including an impressive 20% growth in Europe. We're well positioned to create growth in an even challenging transportation market for a number of reasons. Our world-class PVB technology platform enables us to continue to introduce new products to meet the evolving needs of the marketplace. We are deeply engaged both with our customers, and equally important across the entire value chain, including the premium auto OEM brands and projected manufacturers. And our application development capabilities enable us to tune our products for the unique challenges associated with each model, including standards for optical clarity and the complexity of the design. The end result is our products sold at a premium price growing at multiples of the underlying market, to meet this reinforces the value of our innovation-driven growth model. Another innovation in transportation is where we're winning with customers in our next-generation Crystex product, which is essential in a challenging tires market. It is produced at our new facility in Kuantan, Malaysia, which is now fully operational, and we're seeing accelerated adoption of our new and innovative product Crystex Cure Pro. Tire makers who win in their markets are under constant pressure to improve tire performance, as well as operational efficiency. Working closely with our customers to better understand these challenges drove us to develop a superior product, and we're getting validation from customers that they're seeing significant benefit in line speed improvements, scrap reduction and energy savings. As a testament to the tire additives team's relentless engagement with the market, we're now working with more than half of the top 30 tire makers in the world on our next-generation Crystex and have nine new plant trials in progress in the first quarter. Finally, we're proud that Crystex Cure Pro is recognized as a finalist in the 2019 Tire Technology International Awards for Innovation and Excellence. And we're the only innovation honored that was not created by a tire company. While the tire markets will be challenging for us this year given our legacy products, Cure Pro is already demonstrating that we can extend our differentiated position as we move forward in filling out this new plant. These are just two of many great examples we have that demonstrate how our specialties are delivering today and our innovation and market connections position us to continue to win in the future. With that, I'll turn it over to Curt.

Thanks, Mark and good morning everyone. It's always a pleasure to spend this hour together. I'll begin with a review of our corporate results on slide 5. Although challenges from the fourth quarter persisted into the first, we increased EBIT by 28% sequentially with growth in three of our four segments. Driving this improvement was a seasonal increase in volume, improved product mix and higher spreads. On a year-over-year basis, sales revenue and earnings decreased mostly due to lower volume. We managed our controllable cost down significantly in the quarter. These actions will more than offset a stronger dollar and costs in which we have less discretion such as higher pension costs netting out to greater than a $30 million headwind year-over-year. Looking across to our end markets, we experienced volume softness, particularly in transportation, consumables and consumer durables, especially in Asia and Europe. Global economic uncertainty persisted throughout the first quarter, which contributed to the softness and particular higher-margin specialty businesses such as tire additives, adhesives and specialty plastics were most impacted by the challenges in these end markets. The primary driver continues to be the U.S.-China trade war's impact on demand in China and its associated impact on Europe which is highly dependent on exports to Asia. Looking at the cadence through the quarter. January was about as expected, but after Chinese New Year demand was sluggish and did not pick up as we had hoped. Destocking was evident throughout the quarter and a substantial contributor to our volume decline. That said March was a strong month and April orders gave us confidence we'll continue the trend upwards into the second quarter and we're seeing signs of destocking coming to an end across many of our end markets. Moving now to our segment reviews and beginning with Advanced Materials on slide 6. Both sales revenue and EBIT increased sequentially with EBIT up $30 million or 42%. Higher sales volume and improved product mix drove the sequential improvement in first quarter. On a year-over-year basis sales revenue decreased primarily due to lower specialty plastics sales volume and an unfavorable shift in foreign currency exchange rates. Lower volume in specialty plastics was due to continued customer inventory destocking particularly consumer durables related to the uncertainty caused by the U.S.-China trade dispute. As a highlight for the quarter, performance films and advanced interlayers volume and mix were relatively unchanged despite declining vehicle build rates globally. Growth in high-margin innovation products such as paint protection film heads-up display interlayers and architectural interlayers is offsetting declines in the underlying auto market. EBIT declined year-over-year primarily due to lower sales volume and unfavorable exchange rates and we're also still working off our high-cost inventory from last year. Looking forward, we expect strong sequential improvement for revenue and EBIT in the second quarter due to a few factors. Tritan destocking coming to an end with primary demand intact, continued mix upgrade due to products like paint protection films and premium interlayer products, typical seasonality and improvement in the flow of the lower raw material costs in our inventory. Taking these factors together we expect EBIT in the segment will be similar to the second quarter of 2018. Looking at the full year given the positive trends in the business we continue to expect Advanced Materials will grow EBIT between 7% and 10% relative to 2019. Moving now to slide 7. Additives & Functional Products also had strong sequential improvement with EBIT up $27 million or 22%. The sequential improvement was due to improved product mix and increased spreads. Sales revenue decreased year-over-year particularly for adhesives resins due to continued competitive pressures and for tire additives products attributed to trade-related pressures. In tire additives in particular, trade-related uncertainty has had a significant impact on Chinese tire production during the time when overall Chinese economic demand is going down. Chinese tire producers have adjusted accordingly by destocking their inventories. As a result, tire additive competitors have excess capacity in China, which has caused some short-term competitive dynamics in our legacy products. We have confidence that dynamics will improve as we continue to see great adoption of our next-generation Crystex Cure Pro in the marketplace. For adhesives, we face competitive pressure from new competitor capacity as we have discussed in prior calls. Revenues were also negatively impacted by a stronger dollar. Lower selling prices year-over-year were largely attributed to Care Chemicals due to cost pass-through contracts producing stable earnings. Looking at EBIT, the year-over-year decrease was primarily due to lower sales volume and an unfavorable shift in foreign currency exchange rates. To a lesser extent, excluding the Care Chemicals cost pass-through contracts prices were relatively flat sequentially, with higher costs raw material flow through creating some pressure on spreads year-over-year. Looking at the second quarter, we expect sequential improvement in both revenue and EBIT, due to seasonally stronger volume, an increase in spreads as lower cost raw materials continue to flow through inventory, but earnings will not get back to last year's levels, due to volume still recovering and unfavorable currency, and we expect spreads to be similar to last year. As we move to the second half of the year, we expect demand to improve for coatings, adhesives and tire additives assuming the trade dispute with China is resolved. There may also be some upside as China appears to be stepping up the environmental enforcement actions. For the full year, we expect 2019 EBIT to be similar to, or slightly better than 2018. Now the slide 8 and Chemical Intermediates, which delivered a strong improvement in sequential earnings. On a year-over-year basis sales revenue decreased, primarily due to lower sales volume, mostly because of the refinery-grade propylene project reducing bulk ethylene sales as planned. Remember in the first quarter of 2018, we were still selling ethylene at attractive prices due to market conditions. Lower raw material prices in a few products also led to reduced pricing in the segment. EBIT decreased primarily due to lower sales volume and lower selling prices declining slightly more than raw material cost for our few olefin products particularly glycols. Looking at the second quarter, while we don't have the headwinds of the industrial gas supplier outages market conditions have changed from a year ago. The benefit of not having supplier outages from last year is being offset by a sequential decline in spreads and acetyls and some continued pressure in glycols. Similarly, in the full year, we expect to benefit from the lack of some of the 2018 headwinds and 2019 to be offset by weakening market conditions, especially impacting spreads in acetyls and glycols leading us to expect EBIT in 2019 to be similar to 2018. Finishing up the segment reviews of Fibers on slide 9. Sales revenue decreased year-over-year, primarily due to lower acetate tow sales volume attributed to China trade-related issues and other customer volume patterns as well as lower acetate tow selling prices. EBIT decreased primarily due to lower acetate tow sales volume, somewhat offset by growth in textiles and lower raw material costs. This is consistent with the guidance we gave you on our fourth quarter call that first quarter EBIT will be the lowest quarter for the year. For the full year, we expect acetate tow volume declines consistent with the underlying market plus the impact of the headwinds from China trade issues from the first half of the year offset by growth in textile market and cost-reduction actions. Therefore, we continue to expect Fibers' EBIT to be about the same as 2018. On slide 10, I'll transition to some corporate financial highlights. In the first quarter, we did a nice job managing our cash flows and remain on track to deliver greater than $1.1 billion of free cash flow in 2019. Priorities for use of this cash will remain balanced between deleveraging, funding an increasing dividend and in the absence of bolt-on M&A we will use the remainder of our cash for share repurchases. I'll add that you should always assume that we fully deploy our cash. We've returned $212 million to stockholders in the first quarter through share repurchases and dividends and we remain committed to an investment-grade credit rating and we'll delever as needed to maintain our solid balance sheet likely in the $250 million to $300 million range. Our effective tax rate in the first quarter was roughly 16.5% consistent with our full year expectation of between 16% to 17%. With that, I'll turn it back over to Mark.

Thanks, Curt. On slide 11, I'll provide an update on our 2019 outlook. Our earnings challenge in the first half of the year is predominantly a volume challenge for our high-value specialties and the slow growth world especially in Asia and Europe, compounded by the destocking. Spreads in the specialties in the second quarter improving and are expected to be similar to last year's level. The volume challenge, we see is primarily trade related and to a lesser extent, due to slowdown in the global transportation market. That said, we are encouraged by the improvement in our orders through March into April and believe most of the destocking is behind us. And as the 16th largest exporter by volume in the U.S. with Exxon as the only chemical company above us, we're probably more exposed to trade disruptions that we've seen for the last two quarters. The stronger U.S. dollar is having a negative impact which is a challenge given our U.S. manufacturing footprint. We've assumed that on average the dollar-euro exchange rate will be around $1.14 for the year. And we expect the impact of the first half to be around $30 million with AFP and AM most impacted, and with limited impact in the second half. You recall from our fourth quarter call that we discussed that slow flow through of high-cost raw materials from last year would impact our earnings in the first quarter, which it did. Given this lower-than-expected volume in the first part of this year, this impact was greater than we expected. So the benefits of the lower cost raw materials will now be more of a second half impact. Lastly, we're expecting higher pension costs for the year and this is approximately $30 million split relatively evenly between the quarters. Putting this together, we're expecting second quarter EBIT to increase between 15% and 20%, compared to the first quarter. Moving next to the second half of the year. We're assuming that the U.S.-China trade dispute is settled at some point in the second quarter, removing uncertainty that is impacting the Chinese economy. We're also expecting improving global demand and we are starting to see it already with strong demand in March and April compared with January and February. I will describe April at more normal levels, plus innovation is creating our own growth. As demand improves, our asset utilization levels will pick up and that should result in lower cost raw materials and conversion costs flowing through. And roughly $30 million first half year-over-year headwind from the stronger dollar is expected to be much lower in the second half of the year. Then we have the additional $40 million of cost actions we're taking. Moving on to the full year. Obviously, we have to offset a substantial earnings decline in the first half. It's also important to remember that we have an easy comp in Q4. With all of the growth drivers in the second half that I have mentioned, we have confidence that we can deliver low single-digit EBIT growth for the year. And then with returning cash to shareholders and share repurchases and lower interest expense, we expect our EPS can grow at the low end of the 6% to 10% range that we provided in the fourth quarter call. As Curt mentioned earlier, we continue to see a pathway to free cash flow for greater than $1.1 billion. I often get asked what makes me confident in Eastman's future. And here is the bottom line from me. Big picture, we continue to focus on what we can control and are winning with customers because of our innovation-driven growth model. And at the same time, we're aggressively reducing our cost to accelerate top line growth to the bottom line. Nothing happens without the dedication and drive of the people of Eastman throughout the world who face our challenges and opportunities head on, and every day they find ways to overcome them and are determined to win. And that's why I'm confident we're going to win today and far into the future. With that I'll turn it back to Greg.

Okay. Thanks Mark. We've got a lot of people on the line this morning and we'd like to get to as many questions as possible. So as always, I ask you to please limit yourself to one question and one follow-up. With that Kim, we are ready for questions.

Thank you. Good morning. On your full year guidance, it looks like you lowered segment guidance in one segment AFP, but maintained in the other three. You maintained a full year guidance. Can you talk about that dynamic? And why you didn't take the opportunity now to trim the full year guide given the challenging macro?

Thanks Dave. And your observation around the guidance is sort of directionally correct. Obviously in the first quarter, our earnings came in a little bit lower than we expected, and we have that adjustment in the second quarter. And that's why you saw us take the aggressive cost actions that we announced in late March. So while we have these challenges, we stepped up our cost reductions to take another $40 million out relative to the plans we had at the beginning of the year. That sort of balances that equation out, allows us to stay on track for our guidance. And we also feel very encouraged by the improvement in volume we saw in March and the continued improvement in the volume that we're seeing as we go into April and getting our mix back. One of the bigger challenges we've had here is the mix of our high-value products and that gives us confidence. We're on the right track for the rest of the year.

And Mark, on these additional cost actions, how permanent are these actions? And where are they coming from?

So David, as we started the year as a reminder, we already took aggressive cost actions to kind of help offset higher turnaround costs and other anticipated challenges at that time. So as Mark mentioned, as we started the year, we decided to take additional actions which are primarily headcount, contractors and discretionary spend. So the additional actions are expected to contribute $40 million to our 2019 results. So I'd call those pretty permanent kind of reductions and again predominantly in the second half of the year. So these factors plus the additional expected improvements in 2019, should provide us good momentum going into 2020.

I'd also note that about three quarters of those cost reductions are going to manufacturing and they'll go into our COGS and then they will have to flow out. So that's why they're going to be very back-end loaded and this is where the benefits show up.

Thank you very much.

Thanks very much. What was the magnitude of the cash restructuring charge that you took in the first quarter?

So you saw the restructuring charge, I believe it was about $28 million. That's a good portion of that is the anticipated severance of our restructuring programs. There will be a little bit more in the second quarter and maybe a small tail in the second half of the year, but a good portion of that is that $28 million of severance charge accruals that we took in the first quarter. That will be the cash impact. Now not all that cash flows out this year, it could go over a 12-month time period too, so some of these severance accruals get paid out over a 12-month period.

For my follow-up, your prices in Advanced Materials for the quarter increased by 1%. However, you experienced negative volumes at a mid-single-digit level. If you compare this to Celanese's earnings, their engineered materials saw a 7% price increase with a similar volume decline. When looking at your businesses in relation to theirs, do you find them comparable? Do you feel at a disadvantage in raising prices, or was there a missed opportunity for a more aggressive approach that you plan to adopt in the future? Can you evaluate and compare these differences?

Sure, good morning. First of all, Celanese's business and our business are fundamentally different, so it doesn’t make sense to draw many comparisons. They primarily focus on compounding with a different set of polymers and applications. I am focused on our business, which has been very successful, delivering strong earnings growth for the past six years, and this year will mark the seventh. The main drivers of this growth are improvements in volume and mix, as we sell high-growth, high-value, high-margin products like Tritan and heads-up display interlayers, performance films, etc., which outperform the segment average. We continue to enhance our weighted average mix growth, which is at the core of our strategy. Pricing is an important aspect of managing our product spreads relative to raw materials, and we aim to keep it stable to maintain strong long-term relationships with our customers, particularly for innovation. In our specialty plastics business, prices are up about 3%, though we experienced some price declines in advanced interlayers for high-value products, as we discussed at Innovation Day. High-value products in the early stages of adoption tend to have elevated costs, but as we achieve scale and growth, we share those benefits with customers through price reductions. This is common in the automotive sector where these products are utilized. Despite modest price declines, our volume mix growth remains strong at double-digit levels, allowing earnings to rise. When building a business centered on innovation, it’s essential to maintain trustworthy relationships with our long-term customers, like those in the glass and tire coating markets. Managing pricing versus raw materials without being greedy is crucial. Raising prices aggressively in a declining raw material environment can create tension with customers, making them less inclined to innovate with us and more likely to seek alternative suppliers. While this approach can work temporarily in specialty businesses, it often leads to volume loss within a year as customers look for other options. We believe we maintain a healthy, balanced relationship with our customers, who understand our goals. We keep our spread steady while driving volume and mix growth centered around innovation.

Okay, great. Thank you so much.

Thank you. This is Regina filling in for Bob. You're highlighting some sequential earnings improvements through the year and the 4Q to 1Q improvement was notable. But when you fast-forward to 4Q 2019 what kind of year-over-year growth is possible, given the easier comp?

That's a great question and it's crucial to consider as we discuss our guidance for the second half of the year. With macroeconomic growth and innovation in our high-value specialties driving our own growth, we expect that 2019 will be significantly better, particularly with an easier comparison for the fourth quarter. If we can reach the levels we saw in 2017 for Q4, that would help us address the $80 million shortfall from the first half. Additionally, we anticipate both volume and mix growth in the third and fourth quarters to exceed 2017 levels, providing a positive influence for the latter part of the year. Furthermore, we expect cost efficiencies to contribute positively as we move into the fourth quarter, leading to a strong performance compared to previous periods.

And what I might add on top of it, I'll remind you the roughly $30 million of impact of foreign currency you're expecting in the first half of the year goes away to a greater extent in the second half of the year, so we don't have that headwind to overcome anymore in both third and fourth quarters.

Right. When you consider all of that along with the cost reductions, the gap in the first half is basically being filled. You just need to have confidence in a reasonable growth in volume mix and some favorable raw material trends, and you can reach our guidance.

Okay. Thank you. And are you seeing any signs that the specialty plastics destocking has ended? Any indication on volume changes for that for quarter-over-quarter and maybe also year-over-year for 2Q?

Yes. We have already observed this. January and especially February were challenging. The destocking that occurred in the fourth quarter continued significantly into those first two months. It's important to note that most of what we sell into China from specialty plastics is used in products primarily exported back to the U.S. and, to a lesser extent, Europe. When the trade war issues arose, many of those producers lost confidence in their ability to export back to the U.S. due to fears about tariffs potentially increasing to 25%. This uncertainty also affected their operations in the fourth quarter of last year and created doubt about what might happen on March 1. However, as conditions began to stabilize and it seemed like a resolution was approaching, businesses started to resume operations, leading to a notable recovery in Tritan orders, especially in March, which was a strong month, and those orders have remained steady heading into April. We feel optimistic about the destocking situation for specialty plastics. Additionally, with raw materials finally starting to flow in favorably during the second quarter, this sets up a strong sequential improvement in the second quarter compared to the first.

Thanks.

Thanks, and good morning, everyone. Just kind of maybe a little bit of a follow-up on the last one. As it relates to trade and the settlement of the trade dispute, what's your sort of sense from talking to customers about how activity or behavior or buying patterns will improve? It sounds like there's already been some improvement sort of as people sense that a resolution is within sight. So how much of an incremental step up would you anticipate right away post settlement? Or is this something that's going to take a few months or a quarter before we sort of have a real sense of how much of a snap back there's going to be?

Vincent, a great question, and it's obviously a pretty difficult one to forecast since we're dependent on President Trump settling a trade dispute with President Xi and the timing of that is unknown or and the details of it are unknown. But based on everything we've seen, which is the same stuff you've seen, it seems like they're making good progress, and the odds of escalation now are going down. And I'd say that's very well covered here in the press in the U.S. But from what we can tell in China, they're pretty quiet. They're being very careful about declaring any kind of victory or possible victory with their inside their country because they just don't know what's going to happen with President Trump. So there's still a lot of caution and uncertainty in China today. But I'd say the destocking is mostly playing out and behind us, so you've got the removal of that headwind. And primary demand is still out there including exports to some degree, but we really haven't seen any restocking yet. That could be material at some point, and we're not banking on much of that in our forecast, so that would be upside. So what we need is a trade settlement to sort of get settled, not escalate and the Chinese government to send the all-clear signal to their companies and their consumers that things are going to get back to normal. You've also got them dumping a ton of stimulus into their economy, which is also of course helping improve things right now. We can see some of that benefit. So when we put that all together, we feel like it is stabilizing. News is getting out that things are going to be okay in China, but we're not really seeing a dramatic recovery yet. But we're a lot better off than where we were in January and February.

Okay. Regarding the competitive activity in adhesive resins, has it been affected more by trade issues or by weak demand? Is this something we might soon see a turnaround on after a resolution?

So far on adhesives, the global market growth rates for adhesives remain very strong, particularly in consumables hygiene applications. Overall, the situation is quite positive. Demand in China has been slightly weaker, especially in more discretionary applications, which has created some pressure in the marketplace. However, the challenges in adhesives are primarily supply-driven rather than demand-driven. We previously noted the introduction of new capacity in the Asian market, and the recent slowdown in growth doesn't help the situation. On a positive note, the business is supported by strong underlying market growth rates that are not highly discretionary. Products like diapers are essential, and we are optimistic about managing the added capacity. Furthermore, we are introducing innovations this year that align with a significant sustainability trend. The market is moving toward low or no VOC products, and we have launched a best-in-class product for applications considering environmental sensitivity. This is expected to perform well, with the rollout planned for the latter half of the year, providing another growth avenue for the business. Additionally, the trend towards low-odor materials is driving growth in resin sales, allowing us to utilize the increased capacity effectively.

Okay. Thanks very much, guys.

We expect second half to be better.

Yes, hi. Good morning.

Good morning, PJ.

I'm looking at ethylene prices. Ethylene prices have collapsed. They're down to what $0.13. And I know you don't sell as much ethylene now, which are RGP project. But then looking at propylene, it's also down with propylene inventories close to six million barrels. So I guess my question is if one or more complex remains weak, are you able to get pricing on your derivative products?

Yeah. Good question. So on the ethylene side as you just mentioned, we had a considerable headwind in ethylene last year, and the RGP investment we made this year, which is up and running incredibly well and actually performing better than we expected is taking us a long way in reducing the ethylene we sell this year in the merchant market and that helps mitigate a lot of that headwind giving us a year-over-year benefit. So that's been great. When it comes to derivatives, you're right to point out that propylene and ethylene don't define the price of a derivative. It's just an indicator of the underlying market conditions. And in a lot of places, prices are holding up well in our derivatives from propylene and ethylene but there are a few places where Curt called out that we do see some price pressure in particular glycols MPG, MEG and glycol ether, places where we're seeing some price pressure creating some spread compression. So that's factored into our guidance. And to some degree that's what offsets the benefits we've created through RGP and not having the industrial gas outages from last year those net out those benefits to keep the segment stable this year.

Okay. And then you added a lot of new capacity in products like Tritan, Crystex and PVB. So if I look at all of them together in aggregate, what ballpark EBITDA do you expect in 2019 from that?

PJ, we don't breakout the EBITDA growth just from distinct projects. What they are really driving is the underlying growth in the markets we serve that we've been providing in our guidance. So like Advanced Materials where we're talking about earlier, again that business is looking to grow EBIT, 7% to 10% EBITDA would be reciprocal to that other than the factors a little different. So overall those projects are typically greater than cost of capital returns, driving good returns and they will be one of the factors that long-term contribute to our EBITDA growth as a percentage.

I mean, what I'd add is that the fact that we did all those plants is because our volume growth has been so strong from 2015 through 2017. We were running out of capacity on all those products last summer and they started up just in time. And, obviously, we didn't predict a trade war impacting demand in the short term. But as those markets come back through this short-term disruption on the macro, the fixed cost leverage of all that's going to be very attractive when that volume from those high-value products come in and as we work through the back half of this year-end and even more so in 2020.

Great. Thank you.

Hey good morning, it's Matt Skowronski on Aleksey this morning. On the last call you gave out a Brent crude prediction for the year. It seems to change since then. Can you just tell us how this changes your outlook?

It doesn't significantly affect our outlook. We're currently in the $70 range, having been at $74 previously. It's essential to remember that while oil is an indicator of raw material price movements, it's not the sole one. Last year, oil prices increased considerably, particularly in the third quarter, and the spreads above oil also rose sharply. For instance, the normal spreads above naphtha for paraxylene are typically around $300 a ton, but historically, we saw them exceed $700 in the third quarter last year and now they're back to about $500. Despite the rise in oil prices, we anticipate that the $500 level will gradually normalize due to increased capacity in PX coming in the second half of this year. It's important to understand that these are indicators, but there are many other factors at play in these markets. Even with oil prices slightly higher than we expected, we do not foresee a substantial rise in prices for the raw materials we purchase. Where price increases do occur, we will adjust our own prices accordingly. We have shown that we are disciplined in managing prices and were able to counter all raw material cost increases through price adjustments in the third quarter last year. Looking ahead, we expect to return to the second-quarter spreads of last year by the second quarter of this year, and that should provide momentum as we move into the latter part of the year. We are prepared to manage this situation effectively.

Thanks for that. And then in Fibers, on the last call you noted that it will be the weakest quarter, which it was. How did trends look so far in April? And can you give an outlook on pricing for the remainder of the year?

Sure. As Curt mentioned, we expect volumes for the year to be slightly lower due to the overall market decline. This is influenced by customer buying patterns which have historically fluctuated quite a bit. For instance, Q1 saw a notably low customer buying pattern outside of China. In China, a trade-related issue halted purchases of our U.S.-made products, necessitating a shift to our Korean facility for imports into the U.S. We currently have orders from the Korean facility, but we are still in the qualification process with some customer plants there. However, we believe we will return to the volume levels we need compared to last year. It might be uneven as it unfolds, but the second quarter is expected to see significantly better volumes than the first quarter. Regarding prices, they were somewhat lower in the first quarter compared to the rest of the year due to price declines we implemented last year not taking effect until April 1. Therefore, there will be a sharper drop in Q1 than anticipated for the remainder of the year. Overall, prices for the full year won't decrease much.

Thank you.

Thank you.

Hey Good morning, folks I’d appreciate some of the colors so far. Curt you were talking about the use of that $1.1 billion plus free cash flow that bolt-on are part of that equation. How is that market looking to you right now? How should we think about the probabilities or the possibilities of Eastman doing more than just Marlotherm?

Yeah. I would say our bolt-on acquisition pipeline is active. There are several opportunities we're looking at. As always it's got to make sure you do the right diligence pay a fair price? And hopefully don't find bigger spreads. I'd say right now it's possible. You might see one or two more small acquisitions during the course of the year, but we'll see how those play out.

And just for definitional purposes, less than $100 million is sort of a ballpark?

Yeah. I would say less than $100 million in that ballpark yes in aggregate.

All right, all right, terrific. And Mark, you did a nice job talking about how March came back in terms of volumes and certainly you're seeing that through the month of April as well. So I'm wondering if you can give some granularity by region on what you're seeing there. And what the expectation is for the second quarter?

Sure. Good morning, Frank. The biggest impact across all regions regarding value was in China. It's important to remember that different regions have distinct margin profiles. When you examine our specialty businesses, two-thirds of their revenue comes from outside the U.S. In China, we primarily sell specialty products rather than commodities, and the variable margins there are significantly higher than the U.S. average, which includes many commodity items with very limited exports. Consequently, the volume mix impact was felt in China, where we also observed significant destocking, particularly in areas like Tritan tires, some adhesives, and coatings. By March, we noticed a strong recovery in Tritan and in some of our highest value specialty coatings. Tires are still in the process of recovery. Thus, China has shown a notable rebound towards the end of the quarter, and that trend seems to be continuing into April. In Europe, the situation is somewhat different. Europe's economy is still heavily influenced by the trade issues with China. When China reduces imports, the impact is felt more in Germany than in the U.S. due to Germany's dependence on exports, which is causing their economy to slow down. We are observing a recovery in demand there, but it's more of a lagging recovery, which is why AFP is facing more challenges in regaining its earnings compared to AM, which is more directly affected by the impact from China. Meanwhile, the U.S. market has remained stable and is progressing well.

Terrific, thanks, Mark.

Hi everyone. Regarding Advanced Materials, they may still be facing some challenges in achieving growth in the second half of the year. I calculated that the operating EBIT growth needs to be around 30%. You pointed out several factors, such as lower raw materials, volume, and possibly reduced foreign exchange impact. Can you help clarify whether these factors are balanced in terms of recovery for the second half, or am I overlooking other variables that might contribute to growth?

Volume mix is a primary driver. We no longer have the currency headwind we experienced in the first half of the year, eliminating a $15 million obstacle. This situation, which impacted AM in the first half, will not repeat in the latter half. Additionally, there is a positive flow from raw materials as prices for PX decrease from very high levels last year. However, the most significant factor is volume mix. We expect volume mix to grow in the latter half of this year compared to the first half, indicating it will be considerably better than 2017. Considering the decline in earnings in the fourth quarter of 2018 due to volume and mix, along with increased raw material costs, we anticipate filling that gap and then adding more through additional volume and mix, especially since products like heads-up display interlayers and performance films are experiencing double-digit growth. When we analyze all of this data, it supports our revenue guidance.

I would like to make two additional comments. First, consider the electric vehicle comparison between the fourth quarter of 2017 and the fourth quarter of 2018; we anticipate growth beyond what was observed in the fourth quarter of 2017, which serves as a solid foundation. Secondly, this applies not only to Advanced Materials but to the entire company, highlighting the advantage of lower raw material costs. For instance, in the first quarter, the benefit from reduced raw material costs was approximately $10 million, which represents just a small portion of the overall impact. Most of this benefit came from commodities, while there still remained challenges in specialty materials. As we see raw material costs continue to decline in the second quarter and into the second half of the year, we expect improved EBIT driven by these lower costs, alongside growth from utilization and volume/mix improvements.

Got it.

Yes. I also want to emphasize asset utilization is a big deal guys. So when you have to slow the plants like we did last year in the fourth quarter to adjust the demand situation and even run them a little bit slow in the first quarter, your asset utilization, your fixed cost per kg goes up in a meaningful way. So as volume picks up that starts to accelerate how all the cost cuts we're doing can flow into a lower cost per kg and benefit earnings in the back half of the year.

Okay, great. I have a quick follow-up. You've dedicated a lot of time over the years to shifting your portfolio towards more specialty areas. Looking at the fourth and first quarter results for those specialty businesses, I'm still a bit surprised that earnings were affected so significantly. Considering the performance you anticipate, I understand these are much higher-margin businesses, but what key point do you want us to take away in terms of demonstrating that your portfolio is indeed more specialized than it was?

The growth in the specialties has been a remarkable success story. Looking back from 2014 to now, we have completed a series of acquisitions and achieved significant growth through innovation. We have increased EBITDA from these two segments by over $500 million since 2014, and over $600 million on a constant-currency basis. This reflects a strong performance in earnings growth over the past five years, driven by our growth model and innovation that maintain our margins and promote volume and mix upgrades. From a long-term perspective, I believe this narrative remains unchanged. Our portfolio has substantial exposure to consumer discretionary spending, particularly in transportation and consumer durables, which constitutes about 45% of total revenue. Therefore, when there’s a correction in demand in these areas, as we observed in the fourth quarter, second quarter, and into the first quarter, it impacts us significantly due to the high variable margin associated with it. However, we have already started to see demand rebound in March and April. As the economy improves, the value we have built over the last five years through volume and mix growth will return dramatically. Our portfolio's sensitivity to consumer discretionary spending is well-known, but on a positive note, we are also seeing strong profitability in China, which I believe will continue to be a promising growth market moving forward.

Mike, one key point to consider regarding the long-term benefits that Mark discussed is the effect of the supply chain on short-term performance. Disruptions, such as trade wars, can negatively impact our operations, as seen in the fourth and first quarters. However, we can expect those levels to normalize eventually, and there may be a recovery when the supply chains stabilize. It's important to remember that short-term performance has been affected by these supply chain issues and market dynamics.

Got it. Thank you.

Hi guys. It's Dan Rizzo on for Laurence. How are you?

Good morning.

Good morning.

I just really just have one question, the softness in auto and tire has been well documented. Can you just tell us what you're seeing in your construction and ag end markets?

The agricultural market is currently experiencing a slowdown due to wet weather in the first quarter, and we have noticed some effects in CI. However, we are seeing signs of recovery in these markets as expected, which gives us confidence for the agricultural market overall this year. Additionally, we are observing some innovative growth with a few of our customers, contributing to our own growth. In the construction market, stability has been the theme. From the perspective of architectural interlayers, things have been favorable. Most of our sales in this area are in Europe, where laminated glass production is strong, showing significant growth through 2018 and continuing into 2019, as evidenced by our back orders. In North America, the architectural market remains steady, though we've seen a slight decline in China and Europe, which we hope will recover. It is also worth noting that environmental enforcement has its benefits. Due to a recent unfortunate incident in China, some of our competitors have faced shutdowns due to environmental inspections, providing us with a modest advantage. While we are not relying heavily on this for growth, ongoing enforcement could positively impact our forecast.

All right. Thank you very much.

Yeah. Good morning. First question, just around the raws again. I know you've got an accounting benefit that will flow through in the back half, but a lot of your suppliers would talk about kind of the same destocking events happening that you are seeing with your products. So, if you get that back half pickup in economic activity like you're expecting, what do you think the odds are when you look at all your raw materials and kind of the supply-demand that actually prices there will rise fairly rapidly and maybe we're talking about raw material headwinds in the back half of the year?

Yeah. When we look at the specific products that we buy, Duffy, I don't see there is a significant risk there. I mean, you can always get into oil price scenarios. And if demand driven where oil goes up then we'll have the demand market conditions to raise prices and we'll be fine. Supply driven events in oil is a different discussion. But we're not really worried about that with the raws that we buy, especially because the one that was a biggest problem for us in the back half of last year was PX and there's so much new capacity coming online.

Fair enough. And then just to jump to Fibers, can you breakout if you just look at say the EBITDA year-over-year kind of they're down $14 million, how much of that was China versus ex-China? And then do you think it will be difficult to get your Chinese business back once the deal is settled because obviously they are players inside China that have excess capacity they're probably back filling that today. Is that a structural step down do you think, or will that be pretty quick to come back?

In the first quarter, demand appears balanced between the situation in China and customer purchasing trends across this year's quarters. Regarding your second question, there is no competitor in China filling our gap. All the companies or plants that produce tow in China operate as joint ventures with CNTC, our customer. They maximize their production every day throughout the year, which is why imports declined as they expanded capacity over the last five years. The imports, which have now decreased to minimal levels, are merely being redistributed among domestic plants. We maintain a strong relationship with our customer there, and they are collaborating with us, so we believe we will regain our position.

Great. Thank you, guys.

Thanks. You mentioned the coming paraxylene capacity, I think it's the primary target of some of the new crude to chemical projects coming online globally. So I guess this could be a multi-year kind of weakness in paraxylene. Do you think structurally you'll end up passing some of that through because the whole polyester, I guess, complex could come under pressure with weaker paraxylene over time here?

There is a significant amount of paraxylene capacity being introduced. The major additions scheduled for the latter half of this year will be from traditional paraxylene plants, rather than oil or chemical operations. However, we will be transferring some of that paraxylene value to our customers, which is expected. It's essential to maintain a balanced approach with customers to ensure their ongoing loyalty, as we have been collaborating with the same clients for the past ten years and aim to continue doing so for the next decade. We must foster respect, trust, and innovation in our relationships.

Thank you.

Let’s make the next question the last one, please.

Thank you for squeezing me in. Mark, I had a question for you on interlayers. In your prepared remarks, I think you referenced double-digit growth prospects for Saflex. And you threw out I believe 20% in Europe. And so I was just wondering if you could elaborate on what is driving that? The build rates have obviously been tough and my recollection is that Sekisui was adding some capacity in the Netherlands. So perhaps you could elaborate are you gaining share? Is it penetration mix heads-up displays construction what would be driving that premium?

Yeah. So, specifically that 20% applies to heads-up display interlayers in Europe, not the overall interlayer business. So what you're doing is you're replacing standard interlayers with one that includes acoustics and heads-up display. And we're the world leader in that specific product, but it's a very small percentage of the overall market right now. There's not that many heads-up displays in cars yet. So we're seeing just tremendous growth as we're adding that feature because auto OEMs are always looking for a way to value up cars especially in the slow growth markets. They want more feature packages to offer to get more volume per car which is a great lever for us in the different kind of features we had. So that's going quite well. And I'd also add the architectural is also growing really well in Europe as well. So that gives us a way to offset the underlying auto market trends. It's very impressive that performance films and interlayers is stable in this auto market.

So Mark, how would you characterize the all-in structural growth rate in the interlayers business, I don't know over the next three-plus years or so?

Well, I think that again volume mix, we continue to expect that the Advanced Materials segment including ASP will grow sort of double the underlying market growth rates. So any one guess on what the automotive growth rate is going to be, but we're real better in there.

All right. Thank you.

Thanks, Kevin.

All right. Thanks again everyone for joining us this morning. A replay of this call will be available on the website later today. And hope you all have a great day.