Eastman Chemical Company (EMN) — Q3 2019 Earnings Call Transcript

Thank you, Matt 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 will 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 third 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-Q filed for second quarter 2019 and the Form 10-Q to be filed for third quarter 2019. Second, earnings referenced in this presentation exclude certain non-core and unusual items, and use as an adjusted tax rate the forecasted full year 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 third 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 and assume a forecasted full year tax rate. With that, I will turn it over to Mark.

Thanks, Greg. Good morning, everyone. I will start on Slide 3 with some strategic highlights. We had solid results in the third quarter despite a challenging macroeconomic environment which has deteriorated in the second half of this year. EPS for the third quarter was similar to the second quarter, especially considering the local electrical outage that caused a shutdown at our Longview site. We took actions to offset a decline in volumes, as our teams are focusing on what they can control to manage costs better, accelerate our innovation programs and remain disciplined with discretionary spending among other actions which led to the solid performance. Despite the economic challenges, we remain on track for approximately $400 million in new business revenue closes from innovation in 2019 led by Advanced Materials. This segment has a number of innovative products that are showing tremendous resilience in this environment. Even with exposure to the challenging auto OEM markets, strong growth across specialty products like paint protection film, Tritan, acoustics, and heads-up display interlayers are offsetting weakness in the core business. Advanced Materials' resilience is a testament to the strength of the strategy and our innovation programs we’ve been leading for close to a decade. Although Advanced Functional Products (AFP) innovation initiatives were started later, I am confident they will make substantial progress over the next couple of years. As we discussed before in this challenging business environment, we continue to achieve our cost reduction targets while we stay focused on innovation to create our own growth. Consistent with our disciplined capital allocation strategy, we returned $583 million to stockholders through the first nine months of 2019, through a combination of dividends and share repurchases. We are also focused on improving the strength of our balance sheet by de-levering $300 million for the full year. And finally, we expect our free cash flow to approach $1.1 billion. Two additional highlights, I am especially proud of. Earlier this week, we announced the achievement of commercial operation of our carbon renewal technology (CRT), a form of chemical recycling. This is a significant step forward in our efforts to help solve the problem of plastic waste and accelerate the circular economy. CRT is a game changer for recycling because it provides an end-of-life solution for many plastics from a variety of sources that have no alternative use and end up in landfill or the ocean. CRT is operated here in Kingsport at our largest manufacturing site, so we can take full advantage of our integration to make this happen. This means plastic waste we recycle through CRT will go into products used in markets we are already participating, including textiles, cosmetics, personal care, and ophthalmics. With CRT, plastic waste can be recycled an infinite number of times without degradation of quality, unlike mechanical recycling. In 2020, we expect to use up to 50 million pounds of waste plastic in our CRT operations. This technology significantly changes the value proposition of our cellulosic products which have been about 60% bio-based and certified sustainable for us. Now the other 40% will be recycled content, which creates a very compelling offer with a dramatic increase in environmental sensitivity and many of these markets that we serve. Within the next several years, we expect revenue from CRT will be in the $200 million to $300 million range with significant upside from there in our specialty products. So we’re very excited about this milestone. Additionally, by the end of the year we also expect to achieve commercial scale for another chemical recycling technology for polyester. This is just one of many more advancements you can expect from Eastman in the area of waste plastic recycling and accelerating the circular economy. Second, we recently were recognized for our leadership in the area of sustainability by LUXE PACK, the premier cosmetic packaging event for luxury brands. Eastman has won one of the 2019 LUXE PACK Green Awards for our activities in the circular economy. At the LUXE PACK show Eastman showcased next generation Eastman Treva, engineering cellulosic bioplastics, and introduced Eastman Cristal Revel copolyesters, which is a new line of proprietary consumer recycled content compounded polyesters. These investments enable us to be a leader in accelerating the circular economy at a commercial scale ahead of many others. With that, I will turn it over to Curt to discuss the corporate and segment financial results.

Thanks Mark and again good morning everyone. Starting with the corporate review on Slide 4 and beginning with the year-over-year comparison. Sales revenue declined due to lower selling prices, lower sales volume, and unfavorable mix combined with a stronger dollar. Chemical Intermediates was the biggest contributor to lower selling prices, primarily due to prices following lower raw material and energy prices, as you would expect. The lower volume was primarily due to the challenging economic climate worsening during the quarter as industrial production decelerated, which, in turn, resulted in the impact of planned and unplanned shutdowns. This deceleration had a significant unfavorable mix impact with lower volumes of high-value specialties. We partially offset these factors with growth in new business revenue from innovation. EBIT declined due to the combination of lower sales volume, unfavorable product mix, increased maintenance costs, and a stronger dollar, somewhat offset by cost reduction efforts. Looking sequentially, revenue declined slightly due to lower selling prices. EBIT was down somewhat, mostly due to the higher maintenance-related costs. There are a number of factors that have changed since our call in July. Industrial production has decelerated, driven by the further escalation in global trade issues including the U.S.-China trade dispute in August. As we can see in the German and U.S. economic data, we believe it is also occurring in China. In particular, we can see the impact of key consumer discretionary end markets slowing, including transportation, consumer durables, and electronics. As a result, volume has come in lower than expected, which has led to lower capacity utilization. In this current environment, we remain focused on what we can control which includes closing new business revenue, reducing costs, and generating strong free cash flow. Now turning to Slide 5 to review Advanced Materials, which had a record quarter despite about one-third of the segment exposed to the automotive market. On a year-over-year basis, sales revenue decreased modestly as our innovation success mostly offset demand challenges caused by global trade disputes, disruptions, and reduced global automotive sales. In particular, we delivered strong growth in premium products including Tritan Copolyester, Saflex acoustic interlayers, and paint protection film. EBIT increased primarily due to lower raw material costs, more favorable product mix, and continued cost management. Sequentially, revenue was stable and EBIT increased. The increase in EBIT was largely driven by higher Tritan volumes, the flow-through of lower raw material costs, and the benefit of cost management. As we think about the balance of the year, we expect to continue to benefit from strong growth in some of the more premium product lines, which will help to offset the general weakness in some of our end markets such as transportation. Also consistent with my corporate comments, we expect a normal seasonal deceleration in demand in the fourth quarter which will offset benefits from lower raw material costs and cost actions. Overall, we think the fourth quarter EBIT will be up significantly year-over-year. Putting everything together, we expect Advanced Materials EBIT to grow in the low single digits for the full year of 2019. These results in this challenging economic climate demonstrate the strength of our innovation-driven growth model to create our own growth and defend our value with customers. Turning to Slide 6 in Additives & Functional Products, year-over-year sales revenue decreased due to lower selling prices, lower sales volume, less favorable product mix, and a stronger dollar. Lower selling prices were primarily due to lower raw material prices with about 40% of the decline from cost pass-through contracts and the remainder attributed to increased competitive pressure, particularly for adhesives resins, tire additives, and formic acid that serve several end markets. We realized solid growth in Care Chemicals, water treatment, and specialty fluids, but that growth was more than offset by weaker end market demand resulting from continuing global trade-related pressures, particularly in transportation and other consumer discretionary markets. EBIT decreased primarily due to less favorable product mix, lower sales volume, increased planned manufacturing site maintenance costs, and a stronger dollar. Excluding currency, spreads were flat. Looking ahead to the fourth quarter, we expect earnings to moderate due to normal seasonality, albeit from a lower base due to the slower economy. This uncertain environment is weighing on the end markets for Additives & Functional Products. We are seeing some signs that customers may have decided to remain down longer coming out of their fourth quarter shutdowns. With this risk in mind, we expect AFP's EBIT in the fourth quarter to be similar to last year. Before moving on, let me take a moment to discuss the performance in Additives & Functional Products this year and add a little more color. Although it is hard to see in the results, we had about two-thirds of the revenue performing well in this difficult business environment. These areas included Care Chemicals, water treatment, specialty fluids and coatings businesses as well as parts of animal nutrition. Strong growth in Care Chemicals, water treatment, and specialty fluids was offset by lower coatings volumes and high-value additives in automotive markets, currency headwinds, and lower animal nutrition demand due to the Chinese swine fever. Earnings in these businesses combined have only declined modestly year-to-date, where the most pressure in the remaining third of this segment has been specifically in tire additives, adhesives resins, and formic acid businesses. So the pressure you are seeing in this segment is not in most businesses, but rather in those three I just mentioned. Now the Chemical Intermediates on Slide 7. Year-over-year sales revenue decreased due to lower selling prices and lower sales volume. The lower selling prices were due to lower raw material prices and competitive activity. The lower sales volume was due to weaker demand particularly for agricultural end markets as a result of wet weather and for other intermediate products due to increased competitive activity. EBIT decreased due to increased plant shutdown costs and a local power disruption impact in the Longview, Texas manufacturing site. Taken together, these costs were about a $30 million headwind for Chemical Intermediates in the quarter, $15 million of which was due to the unplanned power outage. EBIT also decreased due to lower sales volume and lower spreads. These headwinds were partially offset by the benefits from the recent refinery grade propylene investment and continued cost management. On a sequential basis, sales revenue decreased due to lower sales volume, particularly for functional amines due to normal seasonality. EBIT decreased primarily due to planned and unplanned outages, continued spread decline in olefins and acetyls, and functional amine volume seasonality. Looking ahead to the fourth quarter, there are few headwinds in front of us. First, volume is lower due to a weak demand environment, but also increased competition as markets outside of the United States are increasingly challenged by global trade issues. Additionally, remember that the cost of the turnaround of our largest cracker in Longview, Texas is being accounted for in both the third and fourth quarters. Thus, a similar amount of the cost from that planned shutdown will be in the fourth quarter. Finally, customer inventory management at year-end potentially beyond that normal seasonality could put pressure on our volumes and our capacity utilization rates. Finishing up the segment reviews with Fibers on Slide 8, year-over-year sales revenue decreased primarily due to lower acetate flake sales volume as a result of our acetate tow joint venture in China attributed to customer buying patterns. The sales revenue decline was partially offset by sales from the recently acquired cellulosic yarn business and increased sales of textile innovation products. EBIT decreased due to the impact of the inventory recovery in the third quarter of last year from the coal gas incident and less favorable product mix. On a sequential basis, results were stable with the second quarter. Looking at the fourth quarter, we expect earnings to be consistent with the run rate of the last two quarters as we have made good progress stabilizing results in this business. Lastly, a quick update on our textiles business within Fibers. We are making great progress in our focus areas within textiles as we align with some leading brands in our materials, particularly Naia, incorporated into these customers' sustainability collections. This has been somewhat offset by slower demand in more traditional applications such as suit linings and tapes due to slower economic growth. With that said, we remain confident that we are on track with our textiles initiatives to offset the expected continued decline in tow demand in the long-term. In particular, I am very excited about how we can accelerate growth in Naia with carbon renewal technology adding recycled content to a product that is already bio-based. Switching to the financial highlights on Slide 9, we continue to expect free cash flow approaching $1.1 billion. Our free cash flow is up about $50 million this quarter compared to the third quarter of 2018. Our business teams are working hard to deliver this result in a challenging fourth quarter. Consistent with our track record, I’m confident in our ability to deliver solid results. Through nine months, we’ve returned $583 million to stockholders through a combination of share repurchases and dividends, and we remain committed to our investment-grade credit rating. For the full year, we still expect to de-lever by about $300 million. In the last few years, we remain disciplined in our capital allocation through a combination of share repurchases, increasing dividends, and debt pay down. As we progress into 2020, we will continue to use our cash in a combination of all three, including further de-levering in 2020. Our full-year effective tax rate is expected to be 16%. Capital expenditures will be approximately $425 million to $450 million for 2019, and we still expect corporate other net costs to be a little above $60 million for the full year. With that, I will turn it back to Mark.

Thanks, Curt. On Slide 10, I will provide an update on our 2019 outlook. We continue making progress in closing new business from innovation and market development initiatives. However, the increased trade uncertainty, including from the U.S.-China trade dispute, has caused a meaningful deceleration in industrial activity around the world, including Asia, Europe, and now here in the U.S. In this economic environment, we are focused on the things that we can control. As I mentioned, we’ve made excellent progress on increasing new business from innovation in this environment, particularly in Advanced Materials. In addition, we continue to aggressively manage costs across the company and we continue to expect to generate strong free cash flow this year despite the challenging environment. However, this market context is leading to lower volumes in the second half of the year than we had previously expected. There are continuing pockets of de-stocking related to lower demand such as transportation in Europe and the U.S., and we are seeing some customers extend maintenance downtimes and shift turnarounds into the fourth quarter to manage inventory due to the deceleration that was not expected in the summer. We are also managing our inventory in the quarter, in line with what we are seeing from our customers. These lower volumes are resulting in lower capacity utilization than we had expected, and the fixed cost hit of the utilization is mostly offsetting the cost savings from our productivity actions we took in the first half of the year. Putting this all together, we are updating our full-year adjusted EPS guidance to a range of $7 and $7.20. Our guidance is based on current economic conditions and normal seasonality from here. However, we can’t predict macroeconomic conditions and the extent to which customers will choose to manage inventory at the end of the year. I can give you scenarios where we could be higher given the strength of October orders or lower if we face unusually high inventory management in December. We are maintaining our free cash flow guidance of approaching $1.1 billion, which remains a priority and will be a great result in this environment, presenting very attractive free cash flow conversion. Earlier I mentioned our robustness, which gives me confidence in our future that remains true today. Even with the unprecedented challenges we face, the people of Eastman remain steadfast in our commitment to drive results. I want to thank them for continuing to execute on our strategy while aggressively managing costs. Big picture, we will continue to focus on what we can control as we manage through this incredibly uncertain environment and remain committed to long-term attractive earnings growth and sustainable value creation for all of our stakeholders. At the same time, we are looking at every action we can take to increase performance this year and next. Focusing on engaging with customers who seek innovation, especially in sustainability, fuels our growth in new business revenue closes, providing resources to grow in markets that have favorable trends and resilience in this environment. We are planning to take additional productivity actions to accelerate top-line growth to the bottom line. Building on our strong track record of disciplined portfolio management, we will continue to look for opportunities where optimization makes sense. We will continue to focus on free cash flow generation as we manage working capital, and we will be disciplined in how we deploy that free cash flow. Additionally, we are creating another vector of growth with our new technologies for chemical recycling to enable a circular economy as we once again innovate solutions to improve the quality of life in a material way. As the meaningful deceleration of industrial production reverses, we will be poised to create even more of our own growth from our innovation-driven growth model and accelerate earnings growth as the mix and fixed-cost leverage becomes favorable in the recovery. That’s why I am confident we are going to win today and into the future. With that, I will turn it back to Greg.

Okay. Thanks, Mark. As usual, we have a lot of people on the line this morning, and we would like to get to as many questions as possible. I ask you to please limit yourself to one question and one follow-up. With that, Matt, we are ready for questions.

Thank you. Good morning. Mark, looking ahead to 2020...

Good morning, David.

I know it’s early for 2020, but can you still achieve your long-term 8% to 12% EPS growth in 2020 versus this past year?

Thanks for your question, David. It’s good to hear from you. We are not going to provide a quantitative bridge at this stage in this environment, but let me walk you through how we think about it from where we are today. If the current economic conditions continue into next year, I guess we all know we have to make that assumption. We believe we will deliver earnings growth going into 2020 versus 2019, and it really breaks down into three core buckets in how we do that. First, innovation is always at the heart of our strategy, and you have seen a great demonstration of how that has created value for us in Advanced Materials. We continue driving growth there as well as continuing to gain traction on some innovation in AFP, even though it’s much earlier stages at AFP; it’s going to contribute like it has this year in some areas. It’s also important to remember that we have a lot of markets that do show favorable growth across Advanced Materials, AFP and in Chemical Intermediates as well as textiles. We have some good growth, whether it’s Care Chemicals, water treatment, or going back to a more normal seasonal demand in medical applications. So, there are many places where we have good growth that will help. But we do have exposure in consumer discretionary of around 45%. It’s important to keep in mind that 55% is actually quite stable in consumables, etc. The second part that will help on the demand side will be the vast majority of the de-stocking, if not all, should have played out by the end of this year. So at least on a relative basis, there is no way that we can see the amount of de-stocking that we are seeing this year occur again next year. That gives us some additional relief in demand and growth. The second of course is what you can control as well as your cost structure. As the industrial recession we’ve been in for the last 9 to 12 months continues to drag out, we know that we also have to start taking more additional actions on productivity. We’ll start looking at how we build on what we’ve done this year. We took out a net $40 million of costs in manufacturing this year, and as that annualizes next year, if we have volume equal to or better than this year, that’s going to start flowing through and being a benefit. We’re looking at our asset footprint and whether there are opportunities to optimize it to reduce costs. We’re looking to get much more productive with digital investments. We’ve made choices to invest significantly in digital this year for productivity and commercial execution and are already seeing a lot of benefits that are paying for those investments this year. We’ll begin seeing the benefits on a net basis next year, and there is more investment we’re going to continue making and a broad set of manufacturing initiatives that we’re doing to improve productivity that will yield benefits next year, especially around maintenance. To be clear, we will continue investing in innovation. Next year, we will spend more on innovation than we did this year due to the many large innovation programs going commercial in Advanced Materials and especially in AFP; we need to provide the resources to close that business with customers and ensure we get the benefits of those investments. The third bucket is strong free cash flow. Even in this tough environment, we are generating incredibly strong free cash flow at a very high conversion rate and we have every expectation we can do the same thing next year. We will remain disciplined about how we deploy that cash in dividends, share repurchases, debt repayment, and bolt-ons where it makes sense. That’s relative to current economic conditions. If there is a trade war settlement, we will do a lot better than that. If there is a recession, obviously where demand is more challenged, we have additional levers to manage costs. Innovation will still create some growth to offset those challenges. I still believe the de-stocking is behind us. Additionally, keep in mind if we experience a recovery, the leverage on the upside is equal to the leverage on the downside that we’ve seen in the last 9 months. So mix, volume, and asset utilization will come back as a mirror image of what we have been through, providing substantial upside.

Very helpful. Thank you. Just one more thing for both you and Curt, can you comment on the recent Moody’s action to put you on negative watch and how you are thinking about debt reduction versus buybacks next year? Would you be focused more on debt reduction just to eliminate this issue completely from the table rather than keep on buying back stock? Thank you.

Yes. The recent change to negative watch really doesn’t significantly change our capital allocation philosophy, as you would expect. We have a very open dialogue with our rating agencies about our plans and expectations. They understand we remain committed to our investment-grade credit rating, which is important to us and to many of our investors that I speak with. We will remain disciplined with our capital allocation approach, which in 2019 includes $300 million of de-leveraging. If the environment continues to be challenging as we go into 2020, we will probably de-lever a similar amount at a minimum. I imagine there will be a few debates internally and externally about the amount of de-leveraging, and I look forward to your opinion and others on that topic. But regardless of what we do, we will remain on the path of improving our overall debt and EBITDA ratios and further strengthening our balance sheet. A couple of other things I’d remind everyone, David, I know you know these well: we have no material debt maturities over the next couple of years. We generate strong cash flows even in a recessionary environment, and we also have ample access to liquidity. So we are well-positioned to manage through this uncertain economic environment. I feel very good about that. Also, a reminder that a disciplined capital allocation approach—whether that’s putting cash to share repurchases, bolt-on acquisitions, or even debt pay-down—are all viable ways of creating value for our shareholders. So, we are committed to our investment-grade rating and have a reasonable pathway to continue to improve our credit metrics, consistent with our disciplined capital allocation philosophy.

Thank you.

Yes, hi, good morning. I had a quick question on tire additives business. You had those duties on Chinese tires. How is the trade flow impacting your China business? And is there an offsetting benefit in the U.S. and Europe business?

The tire duties in the U.S. and in Europe had a real impact on tire demand in AFP. This is really at the customer level. They were shipping a lot of tires, and it was found they were dumping in both Europe and the U.S. So, all those tires got backed up into China, and there are too many tire companies in China. There’s been pretty aggressive competition there, but trade flows are rebalancing. These Chinese companies have built plants in Southeast Asia, so they shift their production efforts to Europe and the U.S., creating a lot of pressure for all tire companies. We can see that from some big multinational tire company announcements recently. It’s created predominantly a very competitive situation among additive suppliers into tires in China, and we felt the impact both in volume and in pricing, which is why we have had pressure in that business, and that ultimately moves across the globe to some degree.

Thank you. And question for Curt. Curt, you just talked about potential more de-leveraging in 2020 if the economy remains weak. If the economy remains weak, would you try to achieve some growth through M&A as well and gain some inorganic growth? I know that doesn’t align well with de-leveraging, but given the choices, how would you allocate capital if valuations come down and M&A looks attractive? Thank you.

Sure. While we always consider pursuing strategic cash after funding our organic growth, we love the opportunity to pursue bolt-on acquisitions through M&A. I think we would just have to do that smartly. I’ve always told the business teams that if they find a great attractive bolt-on acquisition or an acquisition in general, we’ll find a way to finance it and do it in a way consistent with our investment-grade credit rating.

Thank you.

Thank you. Good morning, everyone. A question on Chemical Intermediates: the agriculture impact on the amines. Obviously, we know it's a tough season in the U.S. Do we need to lapse that, meaning do you need the channel inventory to be drawn down before you will sell back through? Could this be an issue all the way through the middle of next year or has it already sort of played out?

Hey, Vincent. From what we can see and what our customers are telling us, one of the volume challenges we are facing in the back half of this year is their efforts to take down inventory given the weak season we had this year. We believe they will achieve those goals and return to what is sort of a normal production strategy next year, allowing us to see the benefits of that demand.

Okay. And can I also ask you about the corporate costs that appear to be up a lot in the quarter? Was there a reason for that, and how should we think about that number next year?

Yes. If you think about the year-over-year impact for any other segment, the primary driver has been higher pension costs that we talked about, which is roughly a $30 million or about $0.20 impact. Most of that, which is driven by the discount rate, as well as the lower asset levels we started the year with, that’s what drove the delta of good management of our cost and innovation programs. So that’s really driven by the pension cost. As I think about 2020, it’s a little early, but you’ve already seen the discount rates coming down, so that could improve our pension costs next year; we will see if that holds true as we finish out the year.

Okay. Thanks, guys.

Thanks very much. On your cash flow statement, there has been a positive swing of $165 million in the first nine months as other items net. What is that, and does that reverse next year or continue? Can you provide some elaboration?

Sure. There are two main drivers behind that other cash items, Jeff, which are kind of an anomaly this year. First, last year at the end of the third quarter of 2018, we had a $65 million insurance receivable that we collected the following month. Obviously, we don’t have that kind of receivable this year, and secondly, this year, we actually have a higher restructuring accrual that is higher than last year because of the events that took place early in the year, which is roughly $25 million. So those are the two main drivers of note. Everything else is just the usual results from the timing of tax payments and other miscellaneous payables-receivables. You shouldn’t see this magnitude of change next year just because of those points I just mentioned.

Okay. In listening to your conference call, you spoke about increased competitive activity in the number of businesses, Chemical Intermediates and in your AFP segment. At least to my ears, that sounds new. Can you elaborate on your competitive position in several businesses where it seems that the competitive activity has intensified? Can you talk about why that’s the case and how long you think it will maintain itself?

Sure, Jeff. It’s a good question, and I’d love to address it. In Advanced Materials, I think it’s looking great as a high-value specialty business. It’s facing demand challenges, and there is competition, but innovation is allowing it to offset those market challenges and deliver strong growth, especially considering the high consumer discretionary spend and benefit from raw material pricing flow-through as you can defend the value in your pricing. In that business, we're on track. As Curt mentioned in the prepared remarks about two-thirds of the revenue in AFP looks exactly like AM, right? It has good strong market growth in many end markets, even though it does encounter headwinds in the macro economy, its offsetting it with expanding spreads, and if you exclude currency impacts, earnings are closer to being flat year-over-year. We have this one-third of AFP that does have increased competitive activity, with some of that, particularly in Chemical Intermediates. On the AFP front, among the three areas we identified—tire additives, adhesives, and formic acid—those segments have that dynamic. The dynamic is a little different in each business. In tires, really it is a demand-driven event as I mentioned earlier, where you’ve got a drop in demand. Competition has increased, and of course, we have our new next-generation Crystex we’ve launched. We have other innovation in tire resins that offset some of that pressure, but it's too early on the new Crystex launch to offset it entirely. So you've got pressure in earnings, both in volume and macro challenges. The same is true in adhesives, although that is more of a supply-driven event. Demand is a little more stable there, but there’s been new supply, which we’ve discussed for a while now. We've also looked into innovation that we launched to offset that. Formic acid presents a narrower story: a competitor was shut down in China and returned, but that would have been fine if demand was not declining in China for swine to consume that new capacity; the impact has been significant. So overall, we recognize there is volatility, particularly in these specific areas. What we plan to do is start evaluating options on how to address these challenges. Those options could include restructuring some of those businesses, potential partnerships, or even divestment. It’s important to consider all decisions carefully, ensuring we’re not overreacting to short-term macroeconomic problems; we must assess innovation potential and other improvement opportunities we could pursue, and of course, the timing of these decisions. But rest assured, we’re not standing still; we’re looking into actions to improve things. Chemical Intermediates are critical for vertical integration. Our belief hasn’t changed regarding its value, but we're looking at asset optimization opportunities to enhance stability. RGP is a prime example of an investment we made last year reducing our ethylene exposure that’s been beneficial this year. We’ll think about what else we can do. We do recognize we’ve had volatility, but the pressures in Chemical Intermediates mainly arises from competitive pressure in acetyls and olefins. We will ensure that we take action where necessary to improve our market position.

Okay, great. Thank you so much.

Good morning.

Good morning.

You just stated that the backdrop continues to worsen due to trade uncertainty. Volume is actually shifting on the headlines you are seeing or just pointing to general uncertainty. So, I’m trying to gauge how sensitive your top line is when you mention that orders picked up in October briefly. Would that be consistent with the trade discussions and possible traction there, or is it just maybe a one-off?

First, I have learned my lesson about predicting the macro economy this year and exactly what to interpret from any order pattern in one month. There’s a lot of volatility and uncertainty out there, swinging back and forth between escalation of the trade war in August versus the Phase 1 progress debatable in October. There’s much uncertainty that affects business and consumer confidence globally. I can’t say if this change will continue, but I can tell you that as we look at the performance and guidance through the year, it’s primarily a story of volume and mix. In July, we expected the economy to stabilize relative to Q2, yet things escalated, which is why our volume forecast came off. We’re now observing slower activity alongside seasonality leading to a drop in volume, but it's essential to remain cautious and not overreact to one month’s data.

Okay. And if I look at AFP, EBIT margins are down 210 bps in Q2, like 260 bps in Q3. How much of this is due to poor utilization rates versus competition on price versus volumetric to clients? Give me some clarity there.

For AFP in total, the entirety of the hit is a volume mix and asset utilization issue. If you look at the total segment together, spreads are approximately flat year-over-year, with a slight currency impact. So it’s entirely a volume mix issue affecting variable margins and impacting asset utilization. But keep in mind, it’s a two-thirds and one-third story where we maintain improving spreads in some areas while facing compressing spreads in others. Overall, that is not the margin story.

Good morning. Thank you. You just referenced that AFP about one-third of the business was not performing the way you would have liked. Could you also assess what proportion of the Chemical Intermediates business falls into that category as well?

The only part of the Chemical Intermediates that’s in the one-third is formic acid. When we bought Taminco, we were very excited about the Alkylamines platform and the value of that integrated platform into a wide range of end markets. They had acquired a smaller business in formic acid about a year prior to buying to Taminco for us. That was a business we’d actually looked at and didn’t find attractive but was part of the deal we had to accept. It faces competitive challenges, but it’s a very small part of income.

Additionally, some of the positives Mark referenced in the two-thirds were also chiefly due to the significant Taminco acquisition.

We have had substantial growth in Care Chemicals, water treatments, and, over in the Chemical Intermediates side from Taminco; it’s been a great acquisition.

And on the chemical recycling projects, you referenced several hundred million in revenue ultimately. How quickly could you start seeing commercial revenues from that? What segment would you report those results? And if you could just comment on long-term project returns, would we compare those expected returns of recycling initiatives to other traditional product innovations, is the ROI higher, lower, or about the same?

We’re incredibly excited about what we can do in the circular economy. For those paying attention to this industry over the last 18 to 24 months, sustainability and environmental sensitivity regarding our impact on the environment, especially plastics in the ocean and landfill issues, it’s one of the largest disruptive macro trends I’ve seen in a decade. This is either a great opportunity for Eastman or a challenge for others. Fortunately, for us, we invested in PT in 2011, which puts us in a strong position. Our investments are designed to improve our competitive offerings in more durable applications and specialty applications by adding recycled content into it to create net growth. We’ll be commercial, as we said, in the fourth quarter of this year with both technologies—the one we announced this week as well as the polyester one by the end of the year. This will allow us to incorporate products and drive revenue in the first quarter of next year. Customers are enthusiastic, especially in luxury markets, think cosmetic packaging, high-end ophthalmics, where our polymer sales occur. Our textile business, while bio-content is valued, is highly focused on how to close the loop. A vast amount of textiles end up in landfills, especially due to fast fashion, and they want to close the loop. Our unique CRT technology allows us to recycle not only single-use plastic but also textiles, garments, and even carpets. We’re truly hitting serious problems that existing technologies can’t address. This is just the beginning; the first two steps are modest investments. The ROIs are exceptionally high. There are larger investments we can make to do more extensively than we will do in the first step, but when considering those capitals, the returns exceed typical investment projects. We’re leveraging products we already develop and sell into existing markets—it’s a drop-in replacement that simply carries recycled content, avoiding the necessity of customer qualifying.

Thank you.

Thank you. Mark, in your concluding comments regarding scenarios, it sounded as if your October orders actually picked up from September. Why would that be?

What I mean is that October orders are holding similar to September, which usually trends off seasonally. I don’t want to overstate October order claims, but it’s coming in a bit better than we forecasted. There is no specific reason I can point to you at this stage, and we need to watch what occurs with December this year. Uncertainly could go either way.

And secondly, do you expect IMO 2020 to impact the spreads between refinery-grade propylene and chemical-grade propylene?

As we look at it, we’re not seeing that as a significant event. I know there’s a lot written about it and many opinions. Our RGP investment helps us and gives us more flexibility in this context.

Yes, good morning. Mark, looking across your portfolio, do you see opportunities for rationalization of assets? It sounds as though some of the margin pressure results from utilization issues, which is understandable given the environment. Are there opportunities to consolidate plants? Or would that be a mistake because you’ll need the capacity when macros start cooperating again in the future?

Hey, Kevin. We are looking for opportunities like that. We’re not going to discuss it on this call, but we have several asset options under consideration due to that reason. But our primary focus is always on innovation as the core driver. However, in this kind of environment, you must evaluate every lever you can pull to enhance productivity and your cost position to remain competitive.

Okay. And then, secondly, for Curt, it appears you have put together the capital budget to some degree. Could you discuss what has changed there and your preliminary outlook for the trajectory looking into 2020 and beyond?

Sure. On the capital front, we’ve been making adjustments to our investments, most of which are growth investments, due to the environment and uncertainty about when we will need new capacity. We’ve already added considerable capacity to support our growth over the past two years. Given these conditions, we’ve tweaked our plans accordingly. The capital team has been disciplined regarding the support capital needed to run the company in this environment. Looking at next year, I currently expect to maintain our budget in the same range, but it will depend substantially on the economic environment. If conditions start improving, we might increase our capital spending slightly; conversely, we may scale it back further if the situation deteriorates.

Okay. Thanks, gentlemen.

Hey, good morning, gentlemen.

Good morning.

I want to think about the fourth quarter and your implied guidance there because it’s looking like it’s the lowest EPS excluding certain items that you’ve done in the last five years. Volume mix will be a significant part of that. I’m trying to think of what the range, your volume mix has improved, it was down 6% in Q1, down 5% in Q2, down 3% this past quarter. What are you using to project this low level for Q4?

Part of our forecast includes using current economic activity and macroeconomic conditions as a basis. We moderated through Q3, adding normal seasonality to that lower base. This construction resulted in the forecast. Further, lower capacity utilization will impact our performance this year due to volumes expected to be lower than last year in the second half. The fixed cost hit from this utilization is negating the cost savings from our prior productivity actions. Those elements represent the primary aspects contributing to the fourth-quarter forecast.

Should we expect low single-digits or low double-digits in terms of a decline in volume mix embedded in your guidance?

In terms of the volume mix you’ve observed in the last quarter, that’s what we anticipate. It’s genuinely the utilization effect that negatively impacts margins during the fourth quarter, and factors will depend significantly on the demand environment in 2020.

Our current performance demonstrates how we are managing through this industrial recession, and I don’t foresee one looming ahead. I think we are already in the midst of one, which started in Q4 of last year. We confronted higher-cost inventory adjustments from Q3 of 2018 to low-cost inventory, and that was a challenging experience. Much of that issue is now in our rearview mirror. The last few components are where we can gauge primary demand trends going into next year, with lower levels of de-stocking that we already faced in previous months. As you observe our earnings performance for the first nine months, we’re about half of the decline of comparative diversified companies. So our portfolio is showing better performance; we know issues exist in pockets, which we are addressing.

Alright. That’s helpful. Thank you.

Hi, good morning. It’s Anthony Walker on for Bob. Earlier in the call you referenced several buckets impacting 2020 results. I understand you’re not providing a bridge to next year, but could you walk us through the one-time items affecting 2019 results that you expect not to repeat next year?

The only other one-time items I can think of that we discussed this year include the unplanned outages, which you wouldn’t expect, and pension, which I mentioned earlier. Pension costs could be lower next year compared to this year, with currency also being stable. Those are the major items impacting next year compared to this year.

While considering adjustments, many of the cost reductions we have implemented will yield benefits next year as they annualize. If we see better volumes next year, which I believe we will, that should produce significant upside.

And can you help us bridge free cash flow in 2019? You maintained that despite a drop in EPS. I assume you’re anticipating a significant tailwind from working capital?

Yes, we have a strong track record for managing free cash flow. As it stands, we’ve generated $525 million of free cash flow through nine months, which is $40 million more than last year. In Q4 last year, we generated $600 million of free cash flow, considering that $65 million insurance proceeds, that would be closer to $535 million for that quarter. I believe we will generate something similar this fourth quarter, despite lower cash earnings, mainly due to expected higher working capital release versus the $365 million we generated last year, alongside working capital initiatives, and we also expect a decline in capital expenditures by about $10 million to $20 million to help us achieve the result in these challenging conditions.

Hi. Could you clarify your year-end de-stocking or extended shutdown comments made during the call? Would you view it instead as a cumulative effect spread between Q4 and Q1? What degree of impact do you foresee? Is it confined to just automotive and industrial customers, or do you expect it to affect a broader de-stocking cycle?

The de-stocking concerns we have in Q4 relate more to normal seasonality instead of a drastic de-stocking event. There has been significant de-stocking in the first half of this year exceeding existing primary demand, with inventory jurisdictions also adjusting in reaction to lower costs of available raw materials. The rate of de-stocking has decreased considerably heading into Q3, with Q4 expected to experience some of that, but not to the level seen previously.

To add to that, Laurence, I hear from our businesses that these customers are simply trying to adjust their inventory targets for the end of this year before exploring normal production rates returning next year. Hence, this isn’t something disproportionately extending into Q1.

Thank you.

Hey guys. Just one quick question. If you think about your guidance for 2019, which is down about 20%. If you have similar volume mix improvement in 2020, would it achieve approximately $1-$1.20 in earnings per share, or might it be potentially higher due to the cost takeouts and productivity enhancements in the portfolio?

Mike, welcome back. The scenario is possible to pace it down different pathways; there are various models we could discuss when we get excited about prospective scenarios. If we experience a bounce-back and re-stock event, we could witness material EPS improvements next year, although Mark highlighted substantial uncertainty.

We believe that the trade war settlement will provide us a significant advantage to mitigate our margins.

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

Good morning, guys. A number of your coatings customers have already gone, and there are some cross currents where they’ve talked about raw materials moderating and some demand numbers a little bit stronger or weaker. Can you walk me through your coatings raw material portfolio? What do you think the market is doing that you’re selling into, and how are your products faring in that market?

Our coatings volume situation reflects our downstream customers, and I don’t see any major differences in dynamics than what you are hearing from them. The exception would be high-value additives used in automotive coatings produced in China for local OEMs, which are down significantly about 25% year-over-year. This has created a substantial mix hit in the overall coatings narrative. Aside from that, it is a positive story that we believe will revert—local OEMs making cars, especially with an expectation around electric vehicles and benefiting from our cutting-edge products, is just an immediate, short-term challenge.

Okay, great. And then one for Curt lastly, can you clarify why pension is a benefit next year, given interest rates have dropped significantly more than expected? Traditionally, one might assume the discount rate would impact the gap and therefore suggest higher pension costs next year, potentially requiring more cash contributions. Can you walk through that for me?

Sure. There are two dynamics at play. First is the discount rate which mandates our interest cost—because we’re marking down our pension liabilities, that new discount rate will readjust our pension liability. A lower discount rate yields lower interest expense on that pension liability next year. Secondly, last year saw a significant decline in pension assets at market's end in Q4. The assets have significantly improved this year. Therefore, if we start the year with better overall pension assets and garner returns on those assets, you’ll notice an advantage against the rising pension expenses on a year-over-year basis compared to last year’s increase.

Great. Thank you.

Okay. Thanks again, everyone for joining us. A replay of this call will be available on our website later today. I hope you have a great day. Thanks.