Eastman Chemical Company (EMN) — Q2 2019 Earnings Call Transcript

Good day, everyone, and welcome to the Eastman Chemical Company Second Quarter 2019 Conference Call. This call is being broadcast live on the Eastman's website, www.eastman.com. As a reminder, today's conference is being recorded. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir. Okay. Thank you, Ebony. 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 second quarter 2019 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-K filed for 2018, the Form 10-Q for the first quarter of 2019 and the Form 10-Q to be filed for the second quarter of 2019. Second, earnings referenced in this presentation exclude certain non-core and unusual items and interim period earnings using adjusted forecasted tax rate. 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 second 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 begin on page three. I'll start with the strategic highlights from the second quarter. We continued on our path of solid sequential earnings growth after a challenging fourth quarter of 2018 and the start of this year. Adjusted EBIT increased 11% sequentially in the face of continued global uncertainty and weak underlying demand in many of our end markets. From our perspective, the uncertainty around trade began in the fourth quarter of last year and escalated in May, which has resulted in a challenging global macroeconomic environment that we're continuing to work through. Despite these challenges, we're still on track for greater than $400 million in new business revenue closes from renovation in 2019, with a 27% growth in the second quarter year-over-year. I've been on the road globally with many of our customers recently and their focus on strong engagement with us on innovation has never been higher, especially on sustainability, which is encouraging in this environment. Leading the charge on innovation and market development is Advanced Materials, which posted excellent sequential growth in the second quarter. This growth was driven by specialty plastics, led by Tritan. We also offset the underlying decline in the auto market with strong growth in premium products, like our paint protection film and premium auto inner layers, as well as strong growth in architectural inner layers. These products, among others, show the resiliency of our innovation model as they offset general macroeconomic weakness. I should note that we're also making great progress on innovation initiatives in Additives & Functional Products with commercial orders confirming the value in what we do. That said, we're in a much earlier stage of development in AFP than in AM. As we discussed before, we're aggressively managing costs in this challenging business environment. Overall, we're reducing costs by $120 million. That includes $80 million in offsets of inflation. In addition, in this environment, we took another $40 million in cost actions in April that will mostly impact the second half of the year, which we're on track to deliver. Consistent with our strategy to remain disciplined on capital deployment, we recently completed a small bolt-on acquisition of INACSA, a Spanish cellulosic yarn company that will accelerate the growth of our textiles innovation products like Naia. We're excited to have the INACSA team as part of Eastman, and the integration is off to a great start. Lastly, we returned $423 million to stockholders in the first six months of 2019 through a combination of share repurchases and an increasing dividend. This included $125 million of share repurchases in the second quarter. Before I turn over to Curt for a review of the corporate and segment performance in the quarter, I'd like to express how proud I am of our employees around the world who continue to execute our strategy while also aggressively managing costs in this challenging environment.

Thanks, Mark. And good morning, everyone. I'll start on slide four with a review of our corporate results, and I'll begin with the sequential comparison where our second quarter revenue declined slightly, and adjusted EBIT increased 11%. The increase in earnings was driven by strong sequential volume and mix growth in Advanced Materials and continued cost management across the company. On a corporate basis, EBIT increased 170 basis points sequentially, with the margin increasing in all segments except chemical intermediates. Turning next to the year-over-year comparison, revenue and earnings decreased as macroeconomic uncertainty and the slower demand in some of our key end markets in China and Europe, both of which we believe are primarily related to global trade issues, negatively impacted volume and mix. The decrease was also attributed to an unfavorable shift in foreign currency exchange rates and a decline in spreads for some chemical intermediate products. Before I get to the segments, I'll give you our macroeconomic assumptions for the remainder of the year, which have changed. We're now expecting current challenging global market conditions to continue, driven by uncertainty around trade issues. And just to be clear, we are not expecting underlying macroeconomic conditions to improve or deteriorate from what we experienced in the second quarter. We do believe that inventory destocking is mostly behind us, and therefore, our specialty volumes will grow, but will be modestly offset by higher shutdown schedules in the second half of 2019 impacting volumes in chemical intermediates. We are also expecting oil prices and the related raw materials to remain around current levels, which will benefit the second half as those lower costs flow through inventory. Turning now to slide five and Advanced Materials, where significant progress on innovation and market development is positioning us to be resilient despite the challenging global economy. Starting with the sequential comparison, volume and mix increased 7% due to an easing of customer destocking, particularly with specialty plastic product lines such as Tritan, and continued great progress on innovation and market development. Adjusted EBIT increased 42% sequentially, with roughly two-thirds of the increase driven by improved volume and mix and the remainder from a combination of improved spreads as lower-cost paraxylene is beginning to flow through and cost management. The EBIT margin increased 530 basis points sequentially, given these factors plus improved fixed cost leverage. Turning to the year-over-year comparison, revenue declined due to lower sales volume and the stronger dollar. While we had strong volume growth sequentially as destocking slowed, we still haven't reached our year-ago volume levels due to the weakness in global demand related to the trade issues. One market that has been under pressure is transportation, which represents about a third of the revenue for this segment. Despite this exposure, EBIT increased as improved mix due to strong growth of premium products, including paint protection film and acoustic and architectural inner layers, more than offset the lower volume and the impact of the stronger dollar. Advanced Materials also did a nice job holding on to prices and managing their costs. The EBIT margin year-over-year was 110 basis points. Looking ahead, we expect earnings in the second half of the year to be higher than the first half for a few reasons. First, lower-cost raw materials are set to flow through in the back half of the year. Second, while we don't project underlying demand fundamentals to improve in the second half of the year, destocking looks like it is mostly behind us and is therefore no longer expected to be a headwind. And third, we expect to realize lower costs from the actions we have taken. When we put it all together, we expect Advanced Materials EBIT to be up mid-single digits for the year, which would be an outstanding result in this environment. Turning next to Additives & Functional Products on slide six. Adjusted EBIT was solid at $147 million, relatively flat from the first quarter as we saw stability in volume mix with a modest decline in prices, offset by cost actions. Year-over-year revenue declined due to lower volume and mix as well as lower selling prices and unfavorable currency. The volume and mix decline was about two-thirds unit volume and one-third mix. Volume growth in care chemicals and architectural coatings was more than offset by declines in adhesives, tires, and some consumer discretionary markets. In particular, China and Europe have slowed due to the anxiety caused by global trade issues, particularly the US-China dispute. At the same time, we believe destocking that began in the fourth quarter continued through the second quarter. As we look forward, we believe that destocking should mostly be behind us, so volume should improve in the second half of 2019. The mix was unfavorable, primarily due to lower sales of high-value cellulosic additives into the auto OEM markets in China and Europe compared to the prior year, which was a tough comparison. Pricing was somewhat lower, with the largest contributor being cost pass-through contracts in care chemicals and a few other products, while the remainder was due to competitive rivalry in adhesives and tire additives. The impact of swine fever in China increased competitive rivalry in the animal nutrition business in the second quarter. EBIT declined year-over-year due to the lower volume and mix as well as a stronger dollar, partially offset by continued cost management. Spreads were similar to last year as lower raw material costs were offset by price declines. With spreads stable, the entirety of the margin decline in AFP is due to lower asset utilization related to sluggish demand. Looking forward, given our economic assumptions, we expect EBIT in the second half of the year to increase slightly versus the first half due to higher volume as we believe the destocking is mostly behind us. On slide seven, I'll move to Chemical Intermediates. Year-over-year revenue decreased primarily due to lower selling prices for olefins and acetyls products resulting from raw material price declines and increased competitive activity. As the trade dispute continues to drag out, competitors in China are getting increasingly aggressive and are starting to try to place volume outside of Asia, particularly in Europe, causing additional competitive rivalry. In addition, sales revenue was impacted by lower functional needs product sales volume attributed to weakened demand in agricultural end markets due in part to wet weather in North America. EBIT decreased slightly as lower spreads were mostly offset by lower costs. These lower costs included supplier operational disruptions in the second quarter of 2018 not recurring this year, lower planned maintenance costs in the quarter and continued cost management. Looking to the back half of the year, we are seeing spreads in acetyls and glycols stabilizing at second quarter levels, and we expect to carry this run rate into the remainder of the year. Consistent with our corporate guidance, we're not projecting an improvement in underlying demand in the back half. The stabilized, but lower spreads, coupled with higher shutdown schedules in the second half of the year compared to the first, led us to expect that EBIT in the second half will be lower than the first half. Finishing up the segment reviews on slide eight with Fibers. Starting with the sequential comparison, sales revenue was flat, while adjusted EBIT increased $9 million or 21%. The sequential increase was primarily due to cost management and slightly higher tow sales. The EBIT margin also increased 420 basis points sequentially to 24%. Year-over-year, sales revenue decreased primarily due to lower acetate tow sales volume attributed to weakened market demand resulting from global trade-related pressures and general market decline. In addition, demand in 2018 was unusually high in the first half of the year due to trade issues and multinational customers' buying patterns. EBIT decreased due to lower acetate tow sales volume, partially offset by lower raw material costs and continued cost management. As we move into the second half of the year, we expect earnings improvement compared to the first half for a few reasons. First, we continue to make progress qualifying tow at our Korean facility with CNTC. As a result, we expect improved Chinese demand for the remainder of the year. Second, the overall textile market was soft in the first half due to general macro uncertainty resulting in destocking for some of the traditional end-market applications. We see signs that the dynamic is improving in the second half and will continue to benefit from greater than 25% growth in our textiles innovation initiatives. Finally, we continue to aggressively manage costs in this business. Putting it all together, including the promised improvement in the second half, we expect Fibers adjusted EBIT to be in the $200 million to $210 million range for the full year of 2019. Finally, on slide nine, I'll cover some financial highlights. First of all, let me just correct the EBIT for Fibers will be in the $200 million to $210 million range. Thank you. Finally, on slide nine, I'll cover some financial highlights. We plan to continue our track record of solid free cash flow conversion and expect to generate free cash flow approaching $1.1 billion in 2019. Despite lower projected net income, we remain confident in our ability to generate solid free cash flow through a variety of levers, including aggressive working capital management. Consistent with our capital deployment, we have remained disciplined in our allocation of cash, including returning $423 million to stockholders in the first six months of 2019. We're excited about the value creation from our recent two bolt-on acquisitions, first in the first quarter and the last one that Mark mentioned here in July, and continue to look forward to value-creating opportunities. Consistent with previous expectations, we will delever as needed to keep our solid investment-grade credit rating, likely in the $250 million to $300 million range this year. For corporate other, consistent with the run rate in the first half, we expect the full year to be around $60 million. Finally, we continue to expect our full-year projected tax rate to be between 16% and 17%. And with that, I'll turn it back to Mark.

Thanks, Curt. On slide 10, I'll provide an update on our 2019 outlook. In the first half of the year, we've been challenged by a weak macroeconomic environment that began in the fourth quarter of 2018. We believe it's primarily caused by global trade tensions, including the US and China trade dispute. This dispute was escalated in May, and there are no signs of when it will be resolved. The impact has been significant destocking across supply chains as well as reduced demand, which we've seen most prominently in China and Europe. In particular, we have seen a meaningful impact on consumer discretionary markets like autos and consumer durables, especially in China and Europe. We've also seen challenges in ag and animal nutrition end markets due to weather and the swine flu in China. This is all much different than what we had expected in our last call in April. I would add this dynamic environment has made order patterns more volatile and the outlook for global demand more opaque. We expect the lower volume will continue to negatively impact fixed cost leverage in the back half of the year. With that said, we're taking actions on what we can control to offset the impact of this environment. We continue to make significant progress driving growth in our new business revenue closes from innovation as we leverage our innovation-driven growth model. You're seeing how this works with the first half results of Advanced Materials and our expectations for the year in this business, which reflect a strong contribution for new business revenue closes to offset weakness in key end markets like autos. I am confident you'll see accelerating new business revenue growth in AFP that will add to their resiliency as we scale up their innovations in the future. In addition, we're aggressively managing costs in this business environment by taking out $120 million of cost to deliver a net $40 million reduction in costs. Finally, we're expecting lower-cost raw materials to flow through into our results in the second half, improving spreads over last year in the specialty businesses. As we consider Q3, we have an unusually high shutdown schedule and the potential for a limited amount of additional destocking, and we can all recognize the exceptionally uncertain environment we live in today. So, expect Q3 to be similar to Q2 in EPS and you will not see the normal drop in Q4. When I put this all together, we expect our full-year adjusted EPS to be in the range of $7.50 to $8 a share. This includes a headwind of about $0.50 a share from currency and pension. On cash, we expect our free cash flow to approach $1.1 billion as we take actions to generate cash in this environment. Given the challenges we're facing, I view these as solid results and, again, a testament to the resiliency of our business model and the execution of our team. It's this robustness that gives me confidence in our future. Despite the exceptionally challenging environment, we're well-positioned for long-term attractive earnings growth and sustainable value creation for our owners and all of our stakeholders. Our results demonstrate that our innovation-driven growth model is delivering as we create our own growth through innovation and leadership in specialty markets. We continue to win with customers every day. As I saw on my travels around the world recently, we have unparalleled engagement levels with our customers to innovate, a hallmark of what differentiates us. Our focus on what we can control is working as we continue to reduce our costs to accelerate topline growth to the bottom line. Most importantly, we have the dedication and drive of Eastman's people, who rise to the challenge every day and prove that they want to win no matter what the headwinds are. We are winning with so many customers today. In the end, it's our collective determination in the face of challenges that make me so confident in our future. With that, I'll turn it over to Greg.

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

Thank you. Good morning, everyone. I guess my question is just – as we exit 2019, and if we assume there's some trade resolution hypothetically for the start of 2020, should we envision a snapback in earnings, sort of 2019 being a throwaway year and 2020 going back to the trend rate you were on before then? Or should we think about 2019 being a new base off of which there will be some level of growth in 2020?

So, first of all, I think it's a little hard to predict 2020 at this point. But to answer your question, the challenges that we have predominantly this year, and really stemming from the fourth quarter last year and this year, are volume and mix-based issues. It's important to emphasize the mix part of this too because a lot of the consumer discretionary markets that we sell to are very high-value additives. So, if the trade war gets resolved or stimulus in China works despite a neutral trade situation that starts getting business confidence and confidence in China back up that drives growth back into gear, which would also substantially improve the European economy, you would get a snapback. You'd see not just volume recovery in primary demand, but restocking associated with people going back to more normal inventory levels compared to where they are now, which is exceptionally low. The earnings on the volume and mix side would come back the same way they have dropped this year. So, you would see a very good recovery on that front, on the volume mix side. We, obviously, have taken costs out, and so you get the fixed cost leverage that comes with that as well as you go into next year. On spreads, though, I would assume spreads stay relatively neutral because, in a recovering economy, raw materials will go up and we'll increase prices to keep up with raws like we did last year; it will still be a volume mix story just on the other side.

Okay. And, Curt, if I could just ask you on the cash flow, obviously, very strong performance year-to-date despite the earnings challenges. When you talk about improved working capital performance, should we be thinking that the work you're doing this year is going to lead to sustainably different or better working capital ratios that we can build into next year? Or are these just extraordinary efforts you're making this year given the challenging macro circumstances?

Thanks, Vince. What you see right now is our free cash flow has been kind of running similar to last year. And again, we've got a lot of talented people helping us manage cash flow across the company. What I'd say is, on the working capital side, we'll be aggressive. Normally, we'd see working capital relief in the second half of the year. In addition, you're getting some benefit to the flow-through of low raw material value. So, that's helping. We're also taking some additional steps to address our working capital across different fronts, multiple fronts, quite honestly. Yes, I would expect that to improve some of our working capital statistics. I think that's not just an improvement this year. I think it will be a multiyear effort that will help contribute to, again, a wonderful free cash flow story with our business. Following up on Mark's other question, we'd also expect our free cash flow to improve in that kind of environment as well. I love the free cash flow of this company; it reflects the quality of our businesses. That free cash flow is coming to you at a free cash flow yield approaching 10%.

Yeah. I would just add on that, on Curt's comment on the 2020 outlook. Not only do you get the earnings back when the demand recovers and the cash comes with it, you also pull inventory down in that environment. So, it can be quite strong.

Thanks very much.

Thanks very much. Your sales were down in the United States in the second quarter year-over-year. Why was that? What's shrinking in the US and what's growing?

Sure, Jeff. The principal driver of the drop in revenue in the US is pricing in Chemical Intermediates. Remember that, unlike many other companies out there, the predominance of our Chemical Intermediates business is located in North America. The vast majority of the revenue and the price decline is reflected there. The good news is we also don't face the competitive dynamics in Asia or Europe for those kinds of products where prices are lower. That's part of the story. Demand is just a bit off with some destocking and careful behavior, as well as factors like the wet weather in agriculture that's driven that revenue down with the planting season being curtailed.

Okay. And, secondly, perhaps I missed it in your discussion. So, so far Fiber's demand this year is down 11% roughly or 8% in volume terms. What's behind that? Was that your outlook at the beginning of the year?

The outlook was for the first half to be challenged on volume relative to the second half. This is playing out as we expected. It's really about the timing of orders on two fronts, Jeff. So, on the customer buying patterns of the big multinationals, 2018 first half was exceptionally high relative to the second half of last year. There tends to be chunkiness in how they order, and that's the pattern last year. On top of that, you had some trade-related issues as well that drove some pre-buy in Q2, not in China but in some other countries worried about trade that pre-bought around trade uncertainty. You had, of course, good orders in China in the first half of the year for tow imports that dropped significantly as we went into the second half. It's all a timing issue. You'll see this first half drop and then the second half will see some improvement over last year.

Okay, great. Thank you so much.

Thank you. Mark, in AF&P, given the challenged results in the first half of the year and the full year, any concerns that this business may not be as special as you thought it might be?

I was guessing that question might come this morning. No, I'm not concerned about the specialty nature of this business. Let's just start off with the fact that in Q2, which was obviously a challenging quarter for us, we had 25% EBITDA margins, which I think demonstrate very high-quality earnings. But much more importantly, you've got to decompose into its components to really understand what's going on. The price side of the equation, which I think is the bigger test than the volume question, I think we're actually doing quite well on managing price here. When you look at a price decline of 3%, half of that, as we told you, is cost pass-through contracts, predominantly in care chemicals and a few other products. The spreads are absolutely stable, and we're driving good volume growth in those product areas. However, there is so much volatility on the raw materials of those specific products. We neutralize that volatility with the CPG. The other half is competitive pressure. We're talking about a 1.5% decline here year-over-year due to some competitive factors. The underlying story is strong underlying growth, and there is a long-term belief that China will grow beyond the short-term challenges.

Very helpful. And, Curt, just on the shutdown costs in Q3, could you qualify those versus Q2?

What I'd say, just in general, on shutdown costs as a whole, they're only modestly higher year-over-year, but the trend of the shutdown costs are different. Over the last couple of years, we've had the higher shutdown costs in the second quarter and fourth quarter. This year, it's more going to be in the third quarter and fourth quarter. So, the sequential year-over-year impact on the third quarter is going to be just over $30 million higher shutdown costs compared to the third quarter of last year. Last couple of years, you had more headwind from the third quarter going into the fourth quarter, but this year the shutdown costs will be roughly the same in the third and fourth quarters.

Thank you.

Thank you. Good morning, everyone. In the tire additives market, could you describe what's happening with demand there? And also, could you tell us whether pricing continues to come down or has stabilized after the recent declines?

So, on the demand side, this actually predates the trade initiated by the US-China political situation. There were a number of anti-dumping duties put in place by Europe and the US on truck tires that dramatically constrained where the Chinese tire producers could sell their products. It helped the multinationals and we've benefited from that in North America and Europe. However, China is a huge tire production market, and that got very competitive when those companies didn't have any market access. The market has been growing rapidly. Tire companies added a lot of capacity that they were expecting. Unfortunately, some competitors are adding capacity to serve that growth, resulting in a fundamentally changing landscape. Generally, while the truck tire market is down due to lower commercial activity, it's important to remember that 75% of tires are for replacement rather than new production. We're highly levered to commercial activity, and our largest product, insoluble sulfur, is affected by that. As for pricing, I think prices have come off due to the competitive dynamics we've described, but it seems to have stabilized in the second quarter. From what we can see, demand is going to improve as we work through this destocking as we go into the back half of the year.

Thank you. And as a follow-up, on amines, you mentioned a few challenges with demand. How is your inventory in amines and how is the inventory across the industry?

I can’t speak to the industry, but across many of our businesses, including amines, we’ve adjusted our production planning for improvement in the second half versus the first. We're managing our inventory and operations as we adjust to demand across our portfolio.

Thank you.

Yes. Good morning. First question just around the cost-cutting program; you had the net $40 million in kind of before things got worse than you expected. Should we expect another major program in the back half of the year or early next year if these conditions continue?

As we look at our cost structure, obviously, we saw some uncertainty in the macroeconomic environment back in April and took additional actions to cut costs. $40 million is on top of the $80 million to offset inflation is a pretty aggressive program. We don't think there's another step of additional costs that we're going to take in this current economic environment. That's substantial. We will obviously manage costs aggressively wherever we can. But we have a tremendous amount of growth and innovation. We have tremendous engagement with customers that we have to serve. We need to maintain and run our plants reliably in this environment. That said, if we go into a bigger, more significant downturn due to a global recession, we will have additional actions we can take in cutting costs as we have a good amount of variable cost in our large integrated plants and how we run them over time and contractors.

Thank you. And then just on your commentary that Q3 looks like Q2, so right at $2 a share, and then to get to the midpoint of your annual guidance, that would be about $2 a share then in the fourth quarter, which is up almost 45% year-over-year. Can you walk through how you keep things flat; or compare Q4 over Q4, how you'd improve it 40%? Why does the fourth quarter look so much different than it has historically?

It first starts with why is Q3 so different. We expect improvement to be sequentially strong from Q2 to Q3, but it's been offset due to the higher shutdown schedule. Normally, high shutdowns would be in Q2 and Q4. This year is different where we have a large cracker that we're taking down alongside a bunch of other shutdowns in Q3. So, you've got this headwind from Q2 to Q3. And on a year-over-year basis, as Curt noted, there’s about $30 million difference versus last year in Q3 due to that shutdown schedule. We're taking overall costs down just to be clear. It's a timing issue about when costs show up due to shutdowns. For Q4, you're not going to have that headwind this year, which contributes to our confidence about how we're guiding. Second, Q4 is not going to be your typical quarter. There's a lot of innovation and market development that will drive growth, and companies are already destocked to some degree. You will see lower costs flowing through from last year's higher raw materials, impacting our margins favorably as we look forward. You also need to remember that last year featured significant reductions in plant rates to adjust for destocking and high-cost raw materials, versus this year’s low-cost materials flowing through.

Adding to that, the sequential impact of those shutdowns from the second quarter to the third is roughly $20 million compared to the $30 million year-over-year impact.

Great. Thank you, guys.

Good morning. Thanks for taking my question. So, longer term, I think you planned for an innovation-led business model to lift your gross margins higher than they are today. Where are your gross margins per unit tracking and how do you plan to improve that metric over the next 12 months?

You can see at our Innovation Day, we talked about a growing EBITDA margin. We're probably a couple of percentage points below that. Part of that's going to be that volume mix because we're not getting all these specialty business sales we anticipated at our Innovation Day because of the macroeconomic environment. I still believe we can get back to those margins we talked about at our Innovation Day across our portfolio. Part of that involves getting those specialty sales back to where we think they're going, as was part of the earlier comments, to get back to what a more robust economy would support. On top of the fixed cost leverage we get across the portfolio because, with Mark, once we’ve added some areas of new capacity, we have room to grow into them. We believe we have an environment where it's currently sluggish, but we’ll recover in those specialty areas.

I just want to add that mix is a powerful tool in the center and heart of our strategy. By growing high-margin products through innovation, we're above the segment and company average in AM and AFP. This provides a powerful lift in our margins. You can see that in the growth that AM saw from Q1 to Q2, and it's anticipated for the full year.

Great. And for adhesive resins, you've been talking about pressure in the market for quite some time. When do you expect to see an easing in the general conditions and when do you expect your low VOC product to start gaining traction?

I think 2019 is the year where things are bottoming out. It’s really hard to call a specific quarter on it, but prices have stabilized. Demand is still strong in hygiene and continuously growing, which helps absorb capacity. However, some of the other markets that depend on macroeconomic factors are experiencing lower demand. I think it’s playing out this year. As far as innovation products, we have two sets. The low volatile product has been confirmed by customers as the best in the market, and we’re in the trial phase now. The good news is it’s just a modification of existing facilities. We expect to come online next year and help drive those product lines. In addition, we're seeing great success with polyolefins, experiencing strong growth in the hot-melt adhesives for hygiene and applications.

Thank you.

Yes. Hi. Good morning.

Good morning.

So, you mentioned that due to the weakness in China, producers there are getting more aggressive and placing product in Europe. Can you talk about what products or chains this is occurring in? And is that a long-term trend you see or is this something short-term due to weaknesses in China?

The example I think would be adhesives, where you see some of that capacity in Asia getting placed in Europe that was intended to support growth in China. Animal nutrition will be the other example where there's a lot of capacity added in China to serve animal nutrition. With the swine population decimated in China, producers seek alternate homes for that capacity. Nonetheless, we don't have long-term concerns; they’ll return to meeting local demands, and as demand recovers, it should stabilize the market. It's unprecedented that China isn't a growth source right now, which is something the industry is adjusting to.

Okay. Fair enough. Thank you. Quick question for Curt. Curt, you talked about doing bolt-on M&A, like you did in the first half. Has there been any change in valuations of deals you're looking at given the downturn? Would you say you'd look more abroad given your heavy footprint in the US?

Thanks for the question. We’re excited about the bolt-ons we've completed so far this year. We have a good pipeline and have no imminent acquisitions on our horizon. We always remain disciplined, but the businesses we have been in conversation with have maintained reasonable valuation expectations. That said, we're continuing to be active in our M&A strategy. Will we revise our activity based on reasonable multiples if the market allows? It's possible, but we don't have anything specifically lined up just yet.

Thank you.

Hi. Good morning, folks. Eastman started to see a return in rush orders in May and early June, which indicated that business was getting a bit better and that there was no inventory at customer levels, and EPS growth for 2019 was very much still on the table. I'm curious what you've specifically seen since the mid-June till today to take any EPS growth off the table.

Yes, it has been a dynamic time and predicting demand and orders has been tricky for a while now. In the second quarter, we were on track up through the first week of June. Unfortunately, in the last two weeks of June, we saw a dramatic slowdown relative to what should have been a normal order pattern, especially leading up to the G20 meeting. People got nervous about what was going to happen and started managing inventory down and reducing their orders. We saw the same pattern back in February leading up to the March tariff discussions. With the escalation of the trade war in May and no end in sight, it drove our cautious outlook regarding orders. While I had expected a more optimistic outlook, we must now factor in an uncertain marketplace which has caused downward pressure across the board in China and Europe, particularly impacting consumer discretionary markets.

That's very helpful, Mark. Curt, the company has been doing a nice job in its $125 million per quarter pace on share buybacks. Are any factors that may influence either up or down, or should we anticipate that Eastman will continue on that pace?

As we know, capital allocation is dedicated and committed to a variety of areas. One of those is debt repaid, that $250 million to $300 million level. Share repurchases will be pretty disciplined, with adjustments coming only if we are engaging in acquisitions. For budgeting purposes, you can do the math based on our history. We typically dollar average throughout the year.

Thank you so much.

Thank you. I saw some IHS data that said cigarette demand in China was up 6% to 7% year-to-date. Do you think that's correct? Could you reconcile that with the outlook for your business?

Since 2014, imports into China have dramatically decreased. We have a JV there that's running full capacity and making good profits, indicating some local demand, but the imports continue to be incredibly low compared to where we were. The growth IHS noted is probably being met by domestic production from CNTC, not imports. We expect some of that demand to return to our capacity as the Korean plant gets qualified in the latter half of this year.

Hi guys. Mark, if you think about the earnings reduction from April; it is about $1.10 from FX and a little from the shutdown. How much volume do you need in the businesses to recoup the rest at some point in time?

Yes. Our current guidance assumes there will be some modest improvement in demand, particularly because destocking is not occurring as a traditional way specialties can grow. Unfortunately, we will not be selling a bunch of chemical intermediates that we're producing due to the large shutdown. That corporate volume, unfortunately, will be relatively modest and has been a significant factor in our revised guidance from April to where we are now; volume and mix have been the key drivers compounded along with a drop in spreads in CI and headwinds from currency. I would also note that you will likely not see the same tailwind from raw materials flowing through to AFP as before, but that’s minor compared to the volume and mix story. It's important to reiterate that we will regain some of that lost ground if we see even a slight uptick in the economy; it's encouraging to see many signs supporting this.

Right. So, as a quick follow-up then, is it fair to say the bulk of the volume you need in the second half is kind of new products and, to some degree, within your control?

It's in our control to some degree, no question, as innovation drives a lot of growth, especially in AM. The innovation platforms in AFP are exciting but at an earlier stage of development; that’s why we’ll see a difference between AM and AFP demand stories. We're assuming destocking has played its way out as well; that's also a key macroeconomic assumption we're making.

Right. Thank you.

Thank you. I was wondering if you could talk a little bit about the way you buy paraxylene and how that would flow through into the income statement, and what the lag is until we actually see it on a cost of goods line?

In the Advanced Material segment, specifically specialty plastics, I think of their inventory turns probably in the range of five to six months. So, the inventory turns are long due to the supply chain that we have. Maybe four to six months is how I would characterize the inventory turn and how long it takes for that lower paraxylene to show itself.

Would that imply, Curt, that we should see this nice decline in the last couple of months show up probably in the fourth quarter or early next year?

I think that would be a good way. The only thing I'd add on top of this is that we practice LIFO accounting. But yes, I would expect that kind of lag time to see paraxylene flow through. As the business does a nice job getting pricing based on its performance characteristics, that should help margins for this business in the second half and definitely into next year.

And then, on AM, I haven't heard you call out architectural inner layers that often. Could you provide some scale or scope of how big that business is and how those margins might stack up against the segment average?

Architectural inner layers represent about half of the inner layer business inside Advanced Materials. It has been performing well, primarily in commercial buildings, especially in Europe, where regulations drive the use of laminated glass, contributing robust growth last year and this year due to significant commercial building activity.

Great. Thank you.

Good morning. Mark, as you look broadly across the portfolio, are there examples of product lines where your July order books or your visibility into 3Q is materially better or worse than the average 2Q levels? Any outliers on that front?

Looking at it, demand in July is holding up quite well across the company on the order books. We're seeing good growth and, I should say, stability relative to June and July. Yet, I've also learned my lesson at this point not to predict demand for the quarter based on order books in any one month because there's just too much volatility out there. Overall, orders are holding up well.

Okay. And then, second one, if I may on Advanced Materials, just to follow up on the prior thread of discussion; you indicated that the back half will be better than the front half in terms of the earnings prospects. However, if I review the five years prior, the opposite has been true. So, my question is, are there other factors besides the flow through of lower paraxylene costs that are helping you in the back half in that business that you would point out?

A couple of things to note. One, there is the lower raw materials flow-through, as you mentioned. Importantly, the fourth quarter last year was a down year due to significant destocking, which is a contributing factor. The overall destocking trend in the first half of this year has been unusual, and we believe that will not continue into the back half, creating a good basis for comparison as well.

Great. Thank you very much.

Thank you all for joining us this morning. This call will be available on replay on our website this afternoon. We hope you have a great day.