Eastman Chemical Company (EMN) — Q4 2019 Earnings Call Transcript

Thank you. Deanna. 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; Willie McLain, Vice President, Finance; 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 results or events concerning our plans and expectations could change. Certain factors related to future expectations are or will be detailed in the company’s fourth quarter and full year 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 third quarter 2019 and the Form 10-K to be filed for full year 2019. Second, earnings referenced in this presentation excludes certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the fourth quarter and full year 2019 financial results news release, which could 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 will turn the call over to Mark.

Thanks, Greg. And good morning, everyone. I’ll begin with the full year 2019 highlights on page 3. 2019 was a significant year of macroeconomic challenges that continued to get tougher through the year. I am incredibly proud of how Eastman employees around the world responded to these challenges and stepped up to the plate to deliver almost $400 million in new business revenue closures from innovation led by Advanced Materials, which achieved a decade of EBIT growth in 2019. We delivered on our cost management targets while we continued to make progress on our innovation programs. I’m also proud of how our cash engine generated free cash flow at a record level of almost $1.1 billion for the third consecutive year. Although we aren’t satisfied with our earnings performance in what was a difficult environment, we are well positioned for earnings growth in 2020 and going forward. Here are a few highlights from 2019; first, we’re celebrating Eastman centennial this year. Our 100-year history is filled with many successes and meaningful innovations that have enhanced the quality of life in a material way. The segment that best demonstrates its innovative spirit is Advanced Materials, which delivered impressive results considering the challenging macro environment. Advanced Materials greatly outperformed its underlying markets, despite this exposure to transportation and several other consumer discretionary markets. And as our free cash flow results demonstrate, we can consistently deliver in any environment. We continue to push our cash to work in a disciplined way, including significant delevering, which will remain a priority for us in 2020. Bolt-on M&A, like you saw with Marlotherm and INACSA this year, two great businesses opening up new markets for our technologies. And capital returns through a combination of share repurchases and dividends, which have increased for 10 consecutive years. Finally, on a personal note, I want to highlight that Curt Espeland, our CFO of 11 years, has elected to retire in 2020, after nearly a quarter century of service. Curt’s a hugely talented financial professional and has had an extraordinary career. I’m personally very grateful for his pragmatic leadership and the vital role he has played in the portfolio transformation, which has been a foundational element of our strategy to become a leading specialty materials company. I’d also like to share that I have every confidence in Curt’s successor, Willie McLain. Willie has been a key player at Eastman for 20 years and has worked closely with Curt as part of our long-term succession planning process. He is a proven leader with deep knowledge of Eastman’s financial organization, businesses, and capital markets, which will be integral as we continue the company’s transformation. With that, I’ll hand the call over to Curt to review some financial results, his final quarterly review as he closes this chapter and opens another.

Thanks, Mark. And good morning, everyone. First of all, I appreciate the kind words, Mark, and want to thank you, the Board, and all the men and women at Eastman for allowing me to serve as the CFO since 2008. It has been a real honor. I’d also like to reiterate that Willie is absolutely the right CFO to take Eastman forward and is supported by a very talented and motivated team at Eastman. We are in good hands. With that said, let me start on slide 4. For the full year, revenue, EBIT, and EPS all declined as global growth decelerated and trade disputes created uncertainty for Eastman and our customers. At a corporate level, lower volumes due to destocking and reduced primary demand, alongside a strong dollar, contributed the most to the year-over-year decline in earnings. The lower volume resulted in lower utilization rates, variable margin spreads were flat at a corporate level for the year. Despite the difficult economic environment, we delivered strong growth across many of our innovative products, particularly in Advanced Materials. Similar to the trends for the full year, fourth quarter results were impacted by a slowdown in the global economy, on top of normal seasonality. Revenue decreased mostly due to lower selling prices, as a result of lower raw material prices. EBIT increased slightly due to lower raw material costs and improved product mix. In an environment like we are in now, we remain focused on what we can control: closing new business revenue, reducing costs, and generating strong free cash flow. Moving now to segment results and starting with Advanced Materials; considering the business environment in 2019, full year performance was solid, with EBIT growing over 3%. While Advanced Materials had challenges in the early part of 2019, once destocking had largely played out in the supply chain between the U.S. and China, volumes returned to a more normal level and the segment’s innovation programs drove growth. The results in Advanced Materials are a great example of the importance of innovation. The core business was not immune due to the challenges with global trade uncertainty and transportation, but premium products provided resilience. We are also able to realize spread expansion in the second half, as lower cost raw materials flowed through and we remained disciplined on pricing. Looking at the fourth quarter; revenue EBIT increased due to strong volume and a more favorable product mix. Ahead in 2020, we expect to deliver another year of EBIT growth in this segment, as we benefit from both continued progress and growing new business revenue from innovation and a dollar headwind on foreign currency exchange rates. As a result, we expect Advanced Materials EBIT to be up mid-single digits in 2020. Now moving to Additives & Functional Products on slide 6; unlike Advanced Materials, AFP was impacted more gradually with destocking picking up through 2019. While primary demand in many of the geographies we serve was decelerating, particularly in China and Europe, I’m encouraged that two-thirds of AFP delivered solid results in this environment, including strong growth in care chemicals, water treatment, and specialty fluids, as well as spread expansion across the portfolio. We also had some challenges in this part of the segment, including slow demand in China for autos and disruptions in the ag market in China. All in all, the bulk of AFP's businesses are performing as a specialty business should in this environment. The remaining one-third of the business, adhesives, tires, and formic acids, that we previously called out at our third quarter call, contributed the significant majority of the earnings decline for the year. We are continuing to actively work on solutions for this part of the segment. Looking ahead to 2020, we expect solid growth in the two-thirds, offset by continued challenges in the one-third, impacting both spreads and volumes. Putting it all together, we expect AFP's EBIT to be flat to slightly down, compared to 2019. Turning now to slide 7 in Chemical Intermediates; for the full year and the fourth quarter, sales revenue decreased for the reasons summarized on the slide. In the fourth quarter, EBIT decreased mostly due to increased planned shutdown costs. As 2019 progressed and industry activity slowed, spreads in many of our derivative product lines declined, but we now think we’re seeing signs of stabilization at this point. We expect to carry the lower level of spreads in the back half of 2019 into 2020, which will be a headwind in the first half of the year, but we also expect to see higher volumes in agriculture, as North America gets back to a more normal planting season and we’re expecting to see the benefits of our cost management programs and other stabilizing actions. All in all, we think Chemical Intermediates EBIT in 2020 will be lower than 2019. Finishing up the segment views, with Fibers on slide 8, revenue and EBIT declined in full year 2019 due to general market decline for acetate tow, and some chunkiness related to customer buying patterns. Fourth quarter EBIT was up due to increased tow volumes in China. In the textiles market, we continue to make progress with our key initiatives, including growth in women’s wear, which was up approximately 20% this year. This progress was offset by softness in the global market for more traditional textile applications. In 2020, we expect acetate tow to be down slightly, consistent with the market. For textiles, we expect continued strong growth in key end markets such as women’s wear to be offset by a softer overall textile market impacting our more traditional textile applications. Putting it together, we expect Fibers segment EBIT in 2020 to be slightly lower than 2019, consistent with the market. I’ll finish with some financial highlights on slide 9; free cash flow was strong at almost $1.1 billion, sustaining the record level we achieved in 2018. Another great result delivered by a variety of BA teams across Eastman. We also continued our track record of returning cash to owners and reducing debt, which both created value for our stockholders. Reducing debt will remain a top priority in 2020, and we expect to de-lever greater than $400 million this upcoming year, further improving the strength of our balance sheet. Our tax rate was approximately 15.5% for the full year and I expect the 2020 tax rate to be similar to 2019 in that 15% to 16% range. Capital expenditures for the year are expected to be $450 million to $475 million in 2020. The main driver behind the planned increase in capital spending is associated with site tenant projects, which will be reimbursed across other lines of the cash flow statement over a number of periods. Finally, don’t miss the modeling slide in the appendix as well as our manufacturing shutdown scheduled for this year. One final comment on the appendix; in 2020, we project that depreciation and amortization will decline approximately $50 million, as part of the Taminco acquisition, Eastman mark-to-market and advantage methanol contract and certain other assets with a five-year life. With the expiration of this advantage contract at the end of 2019, market-based methanol purchases in 2020 will substantially offset the $30 million reduced amortization of the Taminco methanol contract. With that, I’ll turn it back to Mark.

Thank you, Curt. Now let's discuss our 2020 outlook. We are in a dynamic and uncertain macro environment, but we have made several assumptions for our outlook. First, we anticipate modest volume growth and improvements in our product mix based on three factors: we expect global industrial production growth to align with 2019 levels, we believe that destocking is mostly behind us, although some areas like North American agriculture may still see some destocking, and we aim to generate our own growth through market development and innovation. In 2020, we foresee several additional factors, including certain tailwinds. We project our operating costs to decrease by $20 million to $40 million for the year, reflecting ongoing productivity improvements that exceed the typical inflation range of $75 million to $100 million annually. We also expect pension costs to decrease by around $25 million, and a reduction in depreciation expenses, providing about a $20 million net benefit to EBIT. Overall, these tailwinds amount to roughly $75 million. Conversely, we face some headwinds, such as higher variable compensation, increased benefit costs as we return to target levels, and a stronger U.S. dollar against the euro, with an anticipated exchange rate of $1.10 for the year. Along with a few other minor factors, these contribute to an expected headwind of $85 million. Additionally, we expect spread reductions primarily in Chemical Intermediates and one-third of AFP, as we enter this year at a lower level compared to the first half of 2019, due to the declines in spreads throughout last year, particularly during the trade war. We will continue to be disciplined in our capital allocation, focusing on deleveraging, share repurchases, and strategic acquisitions where appropriate. We anticipate our 2020 earnings per share to fall between $7.20 and $7.60, with the first quarter EPS expected to be flat or slightly lower compared to the same quarter last year. We also expect our free cash flow for the year to range from $1.0 billion to $1.1 billion. Factors in the macroeconomic environment could influence these projections. As we navigate through current uncertainties, we expect to have a clearer perspective by April, allowing us to make necessary adjustments at that time. Next, I'm going to address the actions we are taking to enhance our performance in 2020 and the following three years, starting with new business revenue from innovation. Our innovation-driven growth model has yielded significant progress, particularly through our investment in application development capabilities. In 2017, we generated approximately $300 million in new business revenue, which grew to $400 million by 2019, and we project it will approach $500 million in 2020. Advanced Materials is leading this growth with numerous innovative products, such as Tritan copolyester and various interlayers. Additionally, our new chemical recycling technologies have expanded our offering in many applications, including cosmetics and toys. While Advanced Materials has excelled, Additives and Functional Products are also poised for substantial contributions. We're receiving commercial orders in various innovation platforms, which we will highlight throughout the year. We've made significant headway with Naia cellulosic yarn in the textile market, particularly in women's wear. This sustainable yarn appeals to consumers, and with our circular economy technology, we'll offer Naia with recycled content, further enhancing its marketability. Overall, we have made impressive strides in boosting new business revenue, which has made our results more resilient amid current challenges and positions us favorably for future growth. Now, let’s move to our investments in building a stronger and more efficient organization to support our strategy. We've made impressive advances in our commercial capabilities by implementing a new business operating model that enhances decision-making, driving growth, and managing costs. Our CRM and other digital investments are significantly improving our commercial operations. We are also accelerating the commercialization of our innovative programs through our application development investments while driving efficiency to offset inflation costs. We are committed to optimizing our cost structure and have created a plan to reduce it by more than $100 million net of inflation, with $20 million to $40 million expected this year. We will achieve these goals through site optimization, including a decision regarding our Singapore olefins plant, which will allow us to realize $25 million in benefits. Furthermore, we are employing various productivity initiatives and optimizing our global supply chain to adapt to changes in customer and geographic demands. On slide 13, beyond enhancing our operational capabilities, we are also pursuing additional strategies to improve performance. Leveraging our sites effectively may yield $30 million to $60 million in recurring EBIT over the next three years. For instance, we recently added two new strategic tenants at our Texas City site. In St. Gabriel, Louisiana, we are constructing a new asset that leverages integration in alkylamines for Corteva’s innovative growth. We also see potential in increasing our licensing activities, which could contribute another $25 million to $50 million in EBIT within the next three years. Eastman has a strong portfolio of innovative technologies, and we aim to enhance value creation through our partnership with JM Davy technologies, particularly with a new mono ethylene glycol technology that can utilize various raw materials. Lastly, as mentioned in our previous discussions, we remain dedicated to addressing the volatility in one-third of AFP through restructuring, partnerships, or potential divestments, being mindful of current market conditions. Our efforts in site optimization, enhanced licensing, and portfolio optimization will continue to generate value for Eastman and are vital to our success in 2020 and beyond. In conclusion, I want to emphasize our multi-year plan to improve performance and achieve success in the coming years. This progress would not be possible without the dedication of the Eastman team, who continue to prove their commitment. As macroeconomic challenges subside, our innovation-driven growth model will position us well for further growth through innovation and leadership in specialty markets. For now, we will concentrate on our controllable factors while staying committed to long-term earnings growth and sustainable value creation for our stakeholders. I'll now turn it back to Greg.

All right, thanks Mark. As usual, we’ve got a lot of people on the line this morning and we’d like to get to as many questions as possible. So I ask that you please limit yourself to one question and one follow-up. With that, Deanna, we are ready for questions.

Thank you. Good morning everyone. Mark, maybe you could just talk about the volume growth in Advanced Materials, which continues to be impressive on an absolute and relative basis, versus what we’re hearing elsewhere. Can you maybe just talk about how insulated or how much of a moat you have around that volume? We’re hearing sort of generically, a pickup in competitive behavior and decreases in pricing and pricing is still holding up well. So how are you staying so differentiated there in an obviously difficult environment?

Thanks, Vincent. Good morning. Yeah, great question and it’s really the heart of the whole company strategy around having an innovation-driven growth model, as a way you create your own growth in tough environments, as well as defend your margins. Across the entire segment, we’ve been investing in innovation and this is—2019 is sort of our decade of continuous earnings growth through it. The differentiation really comes from innovating differentiated and sustainable products that are important to the marketplace. So our Tritan success, which is a patented proprietary product being the only solution that is BPA free for polycarbonate placement, continues to have tremendous success in housewares and durables, and now growing in medical and that’s just the story that continues to deliver performance. It’s the same with heads up display interlayers and acoustic interlayers, where you can significantly enhance the driver experience and enable lightweighting in a car, and where we have not just this generation but are now launching the next generation of even better HUD in acoustic as we speak, and this year to continue to drive differentiation and growth in that space. Same with paint protection films, where we’ve launched the best product to the marketplace last year, rolled out new software where we have the best cutting software support for the dealers. So it’s always about enhancing and developing new features and growing these businesses at much higher rates than the underlying market. This segment has a lot of consumer discretionary exposure, whether it’s autos or appliances or electronics that the underlying markets are down and we felt that some— in our core interlayers or some of our core copolyesters. But it’s that innovation allows you to continue to grow, and why our model works so well.

Okay. And as a follow-up, could I just ask you that—I believe you said you planned on paying down more debt this year versus last year with a similar amount of free cash flow. So I’m just curious what’s driving that decision versus share repurchases, and congrats to Curt.

Thanks, Vince for the question and the comment as well. So as you know, we are always disciplined with our capital allocation across those buckets of share repurchases, bolt-on acquisitions, and pay down of debt. We consider all three of them as very viable ways to create value for our stockholders. So as we finish 2019, we ended up shifting our capital allocation of that excess cash towards further delevering as a priority, and as Mark mentioned, that’s going to continue in 2020. So the result was that we used $370 million of our free cash flow for pay down versus the original $300 million that we promised. So what we’re looking at now for—if you look at 2020, that kind of discipline is going to be maintained. So we’re kind of looking at—if you think about that, $1 billion to $1.1 billion and let’s just take the midpoint of $1.050 billion. So $350 million of it will go kind of towards that increasing dividend that we’re very proud of. Greater than $400 million will be used to reduce debt at a minimum. And then I’m sorry—and at a minimum, we will repurchase shares to offset dilution, which is roughly $50 million. So that remaining $200 million to $300 million of free cash flow is going to be applied for acquisitions, additional share repurchases or further debt pay down, and really that’s going to depend on how the macro environment plays out, and that we will probably hold those extra choices till the second half of this year just so we have more time to see how it plays out.

Operator, can we have the...

Thank you. Good morning. Mark, on the one-third of AFP that you’ve identified for potential action here. Have you—how much more clarity do you have on a potential option today than you did three months ago, and are outright sales possible or even likely for some of these businesses? Thank you.

Thanks, David. Good morning. So we are looking at all the options. This environment requires us to be thoughtful about what options make sense. Certainly, we’re looking at everything we can do on the restructuring front, and driving both innovation as well as how it optimizes the cost structure in this environment, and then we’re looking at partnering and divestment options, as things we consider. Divestment is certainly in the consideration set, but we’ve got to make sure we don’t overreact to short-term challenges in the marketplace and make sure we understand the impact of the restructuring activities for understanding both, the qualities of businesses, as well as how we position them to a potential new owner. So we’re going to keep driving it forward and we’ll update you when we have more clarity.

And Mark just on—in the businesses that saw destocking over the last three to five quarters, et cetera, is all that do you think done, and where do we stand with supply chains and inventory levels heading into 2020 across your businesses? Any customers? Thank you.

Yeah, I’d say, across the entire company in most places. I think we’ve seen channels destock in Advanced Materials. I think the destocking has run its course, and even maybe a little bit of stabilization and inventory management in a few of those businesses. In AFP, I’d say it’s mostly destocked in the channels and we’re more looking at where primary demand goes at this point. As I mentioned agriculture & Functional means and CI is one place where you could see some additional destocking here in the first quarter. We do believe in net volume growth for that business, assuming a normal weather pattern here in North America, but it may not be as dramatic as we still have a bit of inventory to work off. But I would say in North America, where the economy has been stronger, there are probably people sitting on a bit more inventory than where Asian and European customers are. So there is always a risk, if the U.S. economy slows down, you could see a better destocking there. So we’ll just have to see how it plays out. But I do think net-net, the vast majority of the destocking is behind us, and that lack of it will provide some volume growth this year versus last year, assuming similar economic growth between the two years.

Thank you.

Yes, thank you. First of all, Curt, congratulations on your retirement.

Thank you, PJ.

And congrats to Eastman as well for your centennial year. I know it’s not easy to survive for 100 years, through all the depressions and wars and all that. So congratulations.

Thank you. We’re proud of it.

So, a question on some of Taminco assets; care chemicals. I think they have a lot of pass-through pricing, feed additives, and in the last quarter you had mentioned about Asian swine flu. So can you just update on some of those intermediate products? Thank you.

Overall, the Taminco businesses are doing great across the portfolio, with the exception of the formic acid business that we called out in the third quarter, which was a small acquisition Taminco had done just ahead of us buying Taminco. But when we look at the core alkylamine platform, which is what we are centering our acquiring care chemicals, has delivered really strong growth and very stable margins as you just highlighted, with cost pass-through contracts. Water treatment is having really great growth in this environment, with the environmental trends out there and again, doing quite well, stable margins. And then as you look at the functional means going into ag, those—again very stable margins given the market structures and the contracts we have in place. Obviously, there is demand that goes up and down with the seasons, but overall, the whole portfolio has really been great. The management team has been great. We’ve had phenomenal retention of the talent and the cost structure has been well managed.

Thank you. And then for my follow-up, I have sort of a big picture question. I know you’ve done some bolt-on acquisitions over the years but stayed away from any major M&A since the Solutia deal. So in this slow environment, why not use low rates to get some growth? One company in Wilmington has some businesses for sale, especially in transportation, I know this is a large deal, but would you have risk appetite in looking at a deal of that size?

So PJ, I think we’ve been really proud of the portfolio transformation, way ahead of what people are doing in the industry now, where we divested $3.5 billion of revenue of underperforming businesses, and did great acquisitions with Solutia and Taminco and some bolt-ons to add $4.2 billion of great attractive businesses. So I think we have a very impressive track record of not just doing good acquisitions at good prices, where we paid nine times EBITDA for the things that we bought, and have delivered very attractive returns with the synergies that we delivered. So we’re very much open to portfolio management, both in and out of the portfolio. But when we look at the market conditions right now, they seem to be very expensive, and so we don’t see that there are opportunities out there, especially large ones that are financially attractive. More importantly, we like the portfolio that we have, and we’ve been focused on making sure we deliver return to our shareholders for the money we spent on these acquisitions up through ‘14, and deliver growth and I think we’ve done that quite well. If you look at the two specialty businesses, we’ve had before the trade war started, over $600 million EBITDA growth from ‘14 to ‘18, one third of that was acquisition, but two thirds of it was organic growth that came from these acquisitions, as well as the core Eastman businesses. So we feel good about how we can integrate acquisitions. So I’m not saying we’ll never do anything, but large ones right now don’t seem necessary or financially prudent.

And PJ, if I could add, I’m still a traditionalist and since Willie and I both went to the same MBA school, I think it will continue. And that is, when we look at investments, whether it’s acquisitions or organic growth, we look at things on an unlevered basis. So that way, we make sure we’re driving good value without considering the leverage. And then once we find good opportunities and/or growth programs, we find great ways to finance it. So we’ll continue to look at things in a disciplined, unlevered basis.

Good morning. So, by my numbers, raw materials and Advanced Materials were maybe something like a $50 million tailwind to the second half of ‘19, and you mentioned giving some of that back with lower prices, but I think things get fairly sticky with Tritan, and you did absorb a lot of inflation in 2018. So when it comes to 2020, where should we think about annualization of the second half tailwinds? Should there be more give back? Is there more opportunity? If you can expand on that.

Yeah. If you look at Advanced Materials, the main driver of their growth continues to be innovation and volume growth, and then there is an opportunity to really keep pricing off of what we’d call the product performance. There are some input costs that do vary, and they did have some tailwind in 2019. I think some of that will moderate, but it will still be there. And I think they’ve shown good discipline on pricing of their products relative to the performance it provides. And so that’s why we think this business will grow at mid-single digits EBIT in 2020.

We do expect prices to come down a little bit, as you share some of the raw material value. We’ve had thorough conversations with investors on previous calls on this topic, but we expect to hold onto a good portion of it. More importantly, we’re going to have volume and mix growth that is the heart of our strategy across the company, as well as the fixed cost leverage and other cost management activities that sort of flow into the segment.

Okay. And then I know you plan on divulging a little bit more of this to come, but opportunities at Crystex, you doubled capacity in Malaysia and the market has been under pressure since. So I got to think that some are older cats and dogs out there, like these facilities, can you imagine opportunities for footprint rationalization there?

So that’s one of the areas where we’ve added advantaged technology with the capacity that we added, that produces a far better product, which we call Cure Pro, relative to the current product we make, as well as our competitors. So we can help customers improve their tire mixing efficiency by 10% to 20% on their tire plants. So the new capacity is also differentiated and advantaged, and we are now looking at the overall footprint in this business. Just look at where demand is, where we expect demand to grow, what sort of assets really makes sense in that, and then we’ll make some decisions on what’s appropriate as we go forward.

Thank you.

Yes, good morning. Mark. I’m intrigued by your program to leverage your sites, I think you indicated $30 million to $60 million of benefit on the EBIT line over the next three years. Can you talk a little bit about, which sites are in play? Are there any beyond for the GCA and Air Products project at Texas City? How will that flow through over the next three years, and which segments might be affected?

So we did an acquisition at Sterling, the Texas City site, which is just a phenomenal site, when you look at the scale, infrastructure, ports, rail, everything. It’s just a great opportunity to leverage, and this is a great example—one of I think several that will have at Texas City, and how we can sort of provide that site opportunity and the Gulf Coast Ammonia and the Air Products project set a great example of what several other opportunities could look like. So I’d see multiple things there. I’d say what we’re doing at St. Gabriel is more unique to supporting Corteva, we’ll offer our alkylamine platform. But there are other sites around the world we’re looking at. But I do think it can be substantial and very reliably and predictable earnings.

Yes, Kevin, this is Willie, if I may add, I would also highlight the fact that on a segment basis that we would see that primarily benefiting CI and the Additives & Functional products businesses today. But as we think about further integration beyond those two projects, it could benefit other assets as well.

Okay. Then a financial question for Curt or Willie perhaps, you’ve raised your dividend for 10 years in a row, would you expect that streak to continue, notwithstanding the current choppy industrial production environment? What is the level of commitment to long-term growth there, recognizing that it’s ultimately a Board decision?

Kevin, to your point, it is definitely—we collaborate with the Board on that decision. I think you will also see that we moderated our dividend as our dividend payout ratio is—I’ll call it gotten back in line with where we would expect it to be post the Solutia and Taminco acquisition. And as we think about future growth, we will continue to grow it, but it will be based on the long-term expectation, consistent with how we have in the past.

Thank you. And Curt, it has been a pleasure. Willie, we look forward to working with you.

Thanks, Kevin.

Yes, thank you. Curious about your comments on an advantaged methanol contract that’s expiring, are you going to be exposed to a lot more methanol price volatility, and in which segments would that occur and how would you expect to deal with it?

Yes, this is Willie. What I would tell you is, we’re diversified across our methanol exposure as we think about—we produce methanol here at our Kingsport site as well as we purchase methanol market-based as well as other benchmark. So I think we’ve diversified our exposure as we think about going forward, and that exposure is primarily in our Chemical Intermediates and Additives & Functional Product segments.

Thanks. And can you give us your thoughts on the Coronavirus impacts in China, what’s embedded in your guidance for post-Chinese New Year demand?

So as I said in our outlook statement, our outlook statement does not include the impact of the Coronavirus. I think it’s—we can all agree it’s a little too early to call what those impacts are going to be. But most importantly, we’re focused on the safety and health of the people in China as well as around the world, including our employees, and making sure we’re taking the right set of actions which we’ve implemented around controlling travel within China, travel in and out of China, and making sure people are as safe as possible. We do have nine plants in China and two offices. So we’re focused on those and there is obviously going to be a delay, based on the Chinese extending the New Year out by one to two weeks, depending on where you look at the location. So we’ll have to sort of factor that into our thinking. I don’t think it’s a simple conclusion though, where you just look at the impact of what’s going to happen to demand in China, which obviously will occur. So our customers will be shut down, but it’s important to keep in mind that our competitors are going to be shut down as well, both in China, as well as how they compete around the world. So there are probably some opportunities for us to see some volume improvement outside of China, as a lot of customers have become dependent on some Chinese sources, and we want to make sure we’re there to help them when those sources may not be available, and help them be a reliable supplier that we’re proud of, with our more global and diverse and reliable footprint.

Thank you.

Yeah, good morning. I think most of us know we had ag issues here in North America. Curt mentioned some ag issues, it sounds like, in China. So can you just kind of size the headwind that you saw in your ag business last year, and do you think you get all of that back this year to a normalization level?

Yeah, the ag is actually animal nutrition. So it’s mostly about in China. So it’s mostly about the pig population that was hit by the African swine flu. It’s hard to give exact numbers, but somewhere around 30% to 50% reduction in that population, which is a huge consumer of these organic acids that we and some others sell. So we saw a volume hit associated with that; that’s also contributed to some of the pricing challenges in Formic Acid and a couple of other products. So it’s really that dynamic. Obviously, they’ve got that flu under control, the swine flu, and with the rebuilding of that population. So we’ll start to see it recover this year and next, but it doesn’t snap back like the North American ag market could this year.

Okay. And then on the licensing effort, is that kind of a proactive effort on your side, that will be a lot of little projects, or is that kind of reverse inquiries, where one or two big guys are coming to you for some of your technology and we’ll see one or two big lumpy contracts signed?

Well, our historical program is more of the former, where we get some inbound inquiries around acetyls and olefins which we always do. But what we’re identifying here and calling out is this value is a more substantial proactive approach. So a number of years ago, we had developed a breakthrough technology to make MEG through an alternate process than ethylene, to leverage coal gasification, and we sort of turned down that effort internally, as we focused more on specialty growth. So we partner with JM Davy to work with us and finish off that technology and take it to market leveraging their strength as a licensing organization. So we’ve been in the background working that with them, and they’re close to success in the first license. These licenses are quite large and significant in the scale of what plants will be built. MEG is a critical product and this technology is a lot better than the obsolete technology they’ve been trying to use, which has some quality problems. So I think it’s a great opportunity for sort of multiple licenses as we go forward. Important to remember, these licenses show up in chunky ways. So it’s really hard to predict exactly when they’re going to hit, and you register the value.

All right, thank you guys.

Thank you so much and best wishes. Mr. Espeland. I hope our paths continue to cross.

Thank you.

Mark, I apologize I didn’t quite catch what you were talking about with respect to Singapore and the raw material contract in the order of magnitude there. Can you give a little more detail there?

Sure, I’ll start and I’ll let Willie finish off. The contract there was a long-term supply contract that we had in place for a number of years, and it’s finally coming up for expiration at the end of this year, and it allows us to terminate it and then consider other options, I will let Willie cover what those options are.

As we consider as other options, obviously we look at our existing footprint and our integrated facilities in Texas to support the Chemical Intermediates business. Obviously, this gives us the ability to use that footprint, the sort of the market and the regions where we are best leveraged to compete, based on the cost curve of that business. But you can think about, probably in 2021, that we would have an improvement of $25 million versus our current run rate.

All right, terrific. That’s what I thought I heard, but I wanted to clarify that And you also discussed some of the—in the AFP business, the part that was doing well. You mentioned Specialty Fluids. And I know that that business can be chunky from time to time. Is there—can you expand upon what might have been the benefit that we saw in 4Q? And is that going to recur in 1Q, in your opinion?

Yeah, the Fluids business has been great and developed a much more robust portfolio of end market applications. So historically, it was very dependent on PET applications, for example on the heat transfer fluids, we’ve now diversified into LNG facilities and some other things. So we’ve diversified our market exposure, which is helpful. And we continue to have a very strong competitive position in this business relative to a couple of other small players. As we see that business continuing on, there is always capital construction cycles, Frank, as you pointed out, where this business will moderate up and down, the solar field sometimes that can be fairly chunky and how they show up. It’s also important to mention, that a good portion of this business is the Aviation Fluids business that is actually very steady. This is our hydraulic fluids and turbine oil fluids that go into aircraft, and have a much more stable continuous revenue stream, where we’ve had great growth in revenue as well as margin improvement, and that’s just been a great acquisition that we’ve done as well.

Very helpful and best wishes for your next 100 years.

Thank you.

Thank you very much. Couple of questions, first, Mark on slide 12, you showed some interesting metrics around R&D and admin to profitability to revenue base. I guess, I’m sort of struck, it would seem like that would be more favorable for commodity companies than specialties. I mean, what are the metrics do you look at from a benchmarking standpoint, that can help us sort of dimensionalize your business relative to those peers?

Yeah. So Bob, I think the point we’re trying to make there is we’re a very lean organization that are good stewards of our shareholders’ money and trying to make sure every dollar we spend delivers a return. I’m incredibly proud of how our Chief Technology Officer has, within the budget, transformed our technology organization in a dramatic way. So we had a lot of projects going on around process development, new technologies that we’re going to have a payback for a very long time, and we put those to a stop, reorient the organization much more towards application development and product development. But this AD capability we built is really the key to our success, and we’ve doubled the amount of resources and capability we’ve had in that business since 2014 to where we are now, within that mix of spend. That AD as we explained in our Innovation Day in ‘18 is how we can do what our customers do, we can make a tire, we can make a windshield, we can make thermoplastic final products, we can make a coating, and so we can accelerate our innovation, accelerate the value we understand in those formulations and accelerate how we can go to market, not just with our direct customers, but downstream to drive specification through the market, by showing what we can do. So that is really the real test of it and we’re, of course, adding the commercial resources as we gear that side up and find efficiency in the support functions. The metrics, I think the one that we shared with you, the new business revenue from innovation is the real test. It’s the revenue we’re getting every year, that’s the—the metric is, year one. So it’s really about the next year, when you see that $400 million last year, that’s about helping this year. The $500 million we’re aiming for this year will help next year. But we keep very careful track of that and that’s the most important metric to sort of say you are getting results from this portfolio. We have a bunch of internal stage-gate project metrics and milestones and everything else to have good discipline to manage our portfolio in a very disciplined way, and we’re constantly optimizing and focusing and shifting resources where we see the best value.

Got it. That’s helpful. Thank you. And then at your third-quarter call, it seems you’re putting the brakes on a little bit of your working capital and production levels trying to lean out into the end of the year. Do you have any sense or can you help us quantify what that fixed cost absorption pain might have been, and when that might release, as you go through ‘20? Is the recovery of that an advantage to that, as you go through the year?

Yeah, the way I’d characterize it, where you are seeing that right now is kind of in the margin. So while we were able to implement the cost reduction actions, those cost reduction actions are harder to see in COGS and our margins. This is because we had to slow down our plans. We don’t give our specific utilization rates, etc., but when you get our 10-K, you’ll see that our finished goods in intermediate products in inventory declined 5%. Some of that is value, but also some of its—some of the slowdown we did in our production rates. And Bob, I’d just add that we’re going to be careful about how we run our plants as we go into the first half of this year. So that volume growth is a way to sort of move inventory down and continue to make progress on that. It’s a great opportunity for us to release a lot of cash as we go forward.

Thanks, guys.

Good morning. Can you give a sense for the recycling technologies, what commodity environments would not be competitive? And secondly, I may have missed this, in terms of the spreads stabilizing in the middle to back half of the year, are you seeing competitor shutdowns helping improve the prospect for the spreads or is it purely tied to your perspective on end-market demand?

Okay. Good questions. So the first one on the Circular Economy, at this point with the trends in the marketplace, it’s not as much about competing against the price of oil or fossil fuel feedstocks. The train has left the station; you’ve got legislation in Europe and coming in multiple other jurisdictions of banning single-use plastics or putting what they call EPRs, Enhanced Producer Responsibility, which is basically taxes on single-use plastic. So the drive for recycling and the value that it’s putting on it is creating a real cost choice, not just a consumer preference choice for brands around the world. Even China now is banning plastic bags in all major cities by the end of this year for groceries and things like that. So the recycled content part, we’re really excited about what we’re doing, is a critical differentiator for us. Fortunately, we got out of the single-use plastic business, so we’re not trying to defend it when we got rid of the PET business in 2011. We’re more focused on how we provide solutions to customers around the actual recycled content, as well as put our recycled content in finished products and durables, so a whole another differentiation back to Vince’s questions earlier, is not only do we have a lot of product differentiation in the performance of the product, we now have a whole new vector of growth in specialty plastics, as well as over in textiles and fibers, by putting recycled content in these products, which is a very significant demand. We do think that we will get a premium relative to fossil fuel-based products for providing these solutions to the marketplace. You can look at rPET through last year in Europe; they traded at roughly a 60% premium to PET in the marketplace. I think that’s a bit high. But we do think on a long-term basis and we do think our technologies provide real solutions because we can access feedstock that’s going to landfill and not compete against some mechanical recycled streams. So the cost structure for us will be more advantaged for our feedstock because it has no alternative value, and that’s an important differentiator for what we’re doing. So we feel really good about that and we feel like we’re in a good differentiated position to sort of move those programs forward in both AM and fibers. The second question was on spreads in the back half of last year. As we said, you know, spreads declined through the back half relative to the first half of ‘19, as people realize that the economy was not going to improve with the settlement of the trade war, and so that elongated economic stress led to a more competitive behavior, in particular, CI and that one-third of AFP. In CI, we do see prices very much stabilizing out relative to competitors, who are hitting their cash cost in Asia. So we have seen that, and we are seeing people will start moderating run rates or potentially shutting down plants temporarily. I’m not sure I think any of these plants are going to shut down permanently. So when the market recovers, some of these people will come back in the marketplace, which is why we’ve been cautious on how we think about spreads this year and we’re assuming spreads do not improve this year. And so I think we’re in a good place there.

Thank you.

Yes, best wishes Curt, and welcome Willie. I assume most of the lower raw materials for the overall company are purchased, paraxylene and glycols, but could you talk a little bit about acetyls and propylene? Did the Advanced Materials in fiber segment benefit from the lower acetyls prices? And how does lower propylene play out between C&I and AFP?

So you’re correct, polyester benefited from lower PX prices. The olefins benefited from lower ethane and propane prices, as well as a propylene supply contract that’s formulated to propane. So we saw raw material benefits in the olefin chain. On the asset yield chain, we are coal-based on how we make our asset yields with our gasifier, coal prices have been relatively stable, so there wasn’t any tailwind there.

Thank you.

Good morning. Willie, could you quantify the currency impact on EPS in 2019?

Yes, it’s basically consistent with what we were saying in Q3, which is about $0.30 a share. So it was slightly up. I’d also remind you that about 85% of that’s in our Advanced Materials and it is in Functional Products businesses.

Great. And then could you provide any color on the overall trajectory of the business during Q4. You do come in a little bit above the midpoint guidance provided in October. Does that imply that things are picking up a little bit in December?

They did. So we had a good October, we had a weak November that gave us some concern about what might happen in December. And then both volume came in better than expected and cost came in quite a bit better than expected on the raw material side.

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

Hey, guys. Curt congrats and it was great working with you. In terms of your outlook for AFP, I just want to make sure I understood flat to down for EBIT. The specialty side, the two-thirds grow pretty—there is a growth next year, maybe mid-single digits and the one-third that’s more challenged, down double digits or something. Can you just give us a little bit of color on each of the pieces?

Yeah, so first of all through ‘19, the two-thirds did quite well as Curt laid out, prices were relatively flat outside of the cost pass-through contracts, and we expect that to continue this year, where prices will be stable and we saw a raw material benefit as a result, and we saw volume growth. This will net out to being modestly down for last year. So as we look at this year, we see volume, we see raw stable as well as pricing, so that’s going to deliver some growth as well as some cost reduction. So you do see some earnings growth in the two-third side of the portfolio. And you’re correct, the potential for down net earnings for the AFP segment is in the one-third segment, as we take in those lower spreads from the back half of last year. We do regain some volume, so as we had good discipline on pricing through the first half of 2019, we lost some volume in adhesives and tires, regaining that with some pricing in the fourth quarter. So we will have a volume improvement, but some pricing down net in the one-third, as well as you’re going to have some earnings challenges there, just given where spreads are at this point. So I think you’re directionally correct.

Great and then one quick one on China, it’s been a good growth business for several years. How are you on capacity? Do you need to add capacity or do you have enough to sort of support the growth that you’re seeing?

We’re well positioned in capacity. We had doubled the capacity in 2018 because we had run our capacity, because the volume growth had been so strong. This was one of several plants that we brought online in 2018, where volume was really great across AFP and AM, with the growth we’ve been having, until the trade war hit. So we’re well positioned to support growth there.

And if I could add, Mike, that’s an example for this business, not only do you get volume growth, you get mix upgrade, and now you get fixed cost leverage as well.

Great, thank you.

Thank you everyone.

Thanks again everyone for joining us this morning. Appreciate your time. Have a great day. There’ll be a replay of this available on our website later this morning. Thanks again.