Good day, everyone, and welcome to the Eastman Chemical Fourth Quarter Full Year 2019 Conference Call. This conference is being recorded. This call is being broadcast live under Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations.
Please go ahead, sir.
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. Kurt Espolon, Executive Vice President and CFO Willie MacLean, Vice President, Finance, and Jake LaRoe, Manager of Investor Relations. Before we begin, I'll cover 2 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 entailed in the company's fourth quarter 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. 2nd, earnings referenced in this presentation exclude certain non core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the fourth quarter full year 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 nonrecurring items.
With that, I'll 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 continue to get tougher through the year. I'm incredibly proud of how Eastman employees around the world responded to these challenges and stepped up to the plate to deliver. Almost $400,000,000 in new business revenue closes from innovation led by Advanced Materials, which has achieved a decade of EBIT growth in 2019.
Delivered on our cost management targets while we continue 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 $1,100,000,000 for the 3rd consecutive year. Although we aren't satisfied with our earnings performance, and 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. VAS materials greatly outperformed its underlying markets despite its exposure to transportation with 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. Both on M and A like you saw with Marlotherm and Inoxa this year. 2 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 Kurt Espelin, our CFO of 11 years, has elected to retire in 2020, after nearly a quarter century of service. Kurt's a hugely talented financial professional and has had an extraordinary career.
Personally very grateful for his pragmatic leadership and the vital role he's played in the portfolio transformation, which has been a foundational element of our strategy to become a leading Special Materials company. I'd also like to share that I have every confidence in Kurt's successor, William McLean. Willie has been a key player at Eastman for 20 years and has worked closely with Kurt as part of our long term succession planning process. He's a proven experienced leader with deep knowledge of Eastman's Financial Organization Businesses And Capital Markets, which will be integral as we continue to do the company's transformation. With that, I'll hand the call over to Kurt 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 I want to thank you, the board, and all the men and women at Eastman, for allowing me to service the CFO since 2018 2008. It has been a real honor. I also like to reiterate that Willie is absolutely the right CFO to take Easton forward and is supported by very talented and motivated team in 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 with 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 the 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 corp business was not immune 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 costs raws flowed through and we remain disciplined on pricing. Looking at the fourth quarter, revenue and EBIT increased due to strong volume and 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, growing new business revenue from innovation and a smaller 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 and 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 2 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 and disruptions in the Ag market in China. All in, the bulk of AFP's businesses are performing how a specialty business should perform in this environment.
The remaining 1 third of the business adds Houston's tires and formic acid that we previously called out our 3rd quarter call contributed to 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 2 thirds, offset by continued challenges in the 1 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 and Chemical Intermediates.
For the full year in 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 twenty nineteen into 2020, which will be a headwind in the first half of the year. But we also expect to see higher volumes in Ag 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, 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 volume patterns. 4th quarter EBIT was up due to increased toll volumes in China. In a 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 consistent with the market. Impacting our more traditional textile applications. Putting it together, we expect fiber 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 $1,100,000,000 sustaining the record level we achieved in 2018.
Another great result delivered by a variety of VA teams across Eastman. We also continued our track record of returning cash reducing debt will remain a top priority in 2020, and we expect to de lever greater than $400,000,000 this upcoming year, further improving the strength of our balance sheet. Our tax rate was approximately to 2019 in that 15% to 16% range. Capital expenditures for the year are expected to be $450,000,000 to $475,000,000 in 20.20, The main driver behind the plan increase in capital spending is associated with site tenant projects, which will be reimbursed across actual 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 $50,000,000, as part of the Temiko acquisition, Eastman mark to market an Advantage methanol contract and certain other assets with a 5 year life. With the expiration of this Advantage contract at the end of 2019, market based methanol purchases in 2020 will substantially offset the $30,000,000 reduced amortization of the Temiko Methanol contract. With that, I'll turn it back to Mark.
Thanks, Kurt. Now turning to our 2020 outlook on Slide 10. As we all know, we are currently in a dynamic and uncertain macro environment. Despite this uncertainty, we needed to make a series of assumptions for our outlook. First, we expect modest volume growth and mix improvement from 3 factors.
We're assuming global industrial production growth to be similar to 'nineteen. 2nd, we are expecting that destocking is predominantly behind us, although there may be some pockets where there's more to go, such as North American ag. 3rd, we expect to create expect our operating costs will be lower by $20,000,000 to $40,000,000 for the year, reflecting continued progress on productivity. And this is above offsetting normal inflation, which is between $75,000,000 $100,000,000 annually. We expect pension costs will be lower by about $25,000,000.
And we also expect All in these tailwinds total approximately $75,000,000. And we have a few headwinds for the years such as higher variable comp and increased benefit comps, as we return to target levels and a somewhat stronger U. S. Dollar compared to the euro, with an assumption of exchange rate averages of $1.10 for the year. Together with a few other chemical intermediates and the 1 third of AFP.
This reflects the fact that these spreads in 2019 declined through the year especially as the trade war escalated. And therefore, we enter this year at a lower level relative to the first half of twenty nineteen. Lastly, you should expect that we continue to be disciplined as we allocate capital, including delevering, share repurchases and bolt on acquisitions where they make sense. Putting this all together, we expect our 2020 EPS will be slightly will be between $7.20 $7.60. With the first quarter EPS coming in flat to slightly down from the year ago quarter.
Our full year free cash flow to be between $1,000,000,000 $1,200,000,000. Of course, there are macroeconomic factors that can move us above or below this range. As we get through this short term uncertainty, expect we'll have a more informed view in April and will adjust as necessary at that time. Next, I'm going to discuss actions we're taking to increase performance in 2020 and for the next 3 years. First on Slide 11, new business revenue from innovation, For those that follow eastman, this won't be a new concept as we make great progress.
Key to success has been our innovation driven growth model, and particularly the investment we've made in application development capability. In 2017, our new business revenue was approximately $300,000,000. By 2019, we had increased it to $400,000,000, and in 20, we expect new business revenue approach $500,000,000. The segment leading the way is Advanced Materials, which has numerous examples of innovative products driving new business revenue. They include Triton Co polyester, safe flex acoustic inhalers, heads up display interlayers and paint protection films.
And with our 2 new commercial chemical recycling technologies, we have enhanced our offering specialty plastics for several applications such as cosmetics, ophthalmic, toys, and more. And while Advanced Materials has made the most progress as in Functional Products is poised to make significant contribution in the coming years. We're getting commercial orders in a large number of innovation platforms, including Tetra Shield for PPA nonintense food packaging and auto coatings, especially keytones for sustainable coating solutions, next generation Crystex Retires, and we have several new platforms we'll discuss with you throughout the year. Lastly, I'd add that we have made great progress at NIAcellulistic yarn in the textiles markets, where we're particularly excited about our growth in women's wear. The offering of a bio based yarn that uses cellulosics from certified, sustainably managed forests is compelling in a market where sustainability is a driving consumer behavior.
And now with our Circular Economy technology, we will commercialize Nye with recycled content, which makes the consumer, even more excited and more compelled to buy our product. Overall, we've made outstanding progress in driving new business revenue. This has made our results more resilient in the current difficult environment. And it positions us for strong growth as the economy rebounds. The next year I'll cover is on Slide 12.
And it's about our investments in building an even more capable and efficient organization to execute our strategy. We're making great progress in our commercial capability. We implemented an improved business operating model that is dramatically enhancing our decision making to deliver growth and manage costs. We're also seeing significant improvement with our CRM investments and are making several other digital investments. And application development investments are helping accelerate our commercialization rate of our innovation programs.
At the same time, we're also seeing how we offset inflation and these investment costs. As you can see with the bar graph, we are a disciplined operator and how we manage our costs relative to our peers, especially with, this level of innovation efforts in our portfolio. And at these uncertain times, we are going to step up productivity significantly, as I mentioned on the 3rd quarter call. We have developed a program to reduce our cost structure of inflation by greater than $100,000,000. And as I said, we will get $20,000,000 to $40,000,000 of it in 2020.
We'll achieve these results in three areas. First, site optimization will allow us to adjust our footprint to these new market conditions. One example is our Singapore plant that makes Olefins, we've made the difficult decision to not renew a raw material supply contract by the end of 2020, giving us options to realize $25,000,000 of benefits. We also have a few other sites under consideration the 1 third of AFP. 2nd, we have digital and other productivity investments.
We have a wide range of productivity initiatives across maintenance, energy efficiency, improving yield and business process improvements. 3rd, we are driving supply chain optimization as we look at opportunities across the globe to adjust to changes in customer and geographic mix. In today's world, we must build our capability, continue to improve our safety performance and at the same we were taking to improve our performance. 1st, better leveraging our sites could yield $30,000,000 to $60,000,000 in recurring EBIT by the end of 3 years. For example, we recently welcomed 2 new strategic tenants to our site in Texas City, Gulf Coast, ammonia and Air Products.
At our site in St. Gabriel, Louisiana, we are building a new asset leveraging integration in Alkermes to support Corteva's innovative growth of their enlist system. And we have several additional opportunities in development. 2nd, we also see an opportunity to develop to step up our level of licensing that could contribute another $25,000,000 to $50,000,000 and EBIT to our results in the next 3 years. Eastman has a rich portfolio of innovative technologies that have significant values such as olefins and acetyls, and a strong history of licensing.
We expect to step up this value creation with a partnership we have had with JM Davie Technologies, which is expected to create a meaningful benefit biomass, unlike the majority of the world, MEG, which is currently made from ethylene. This is the first of a number of agreements in the works. Lastly, as we discussed in October, on our third quarter call, we remain fully committed to taking actions in the 1 third of AFP, that has demonstrated more volatility than we expected in this challenging environment. These actions could be restructuring, partnerships or potential divestment. We're actively looking at all these options recognizing the newly sensitive to the current market conditions.
These actions better leveraging our sites stepping up licensing and portfolio optimization will continue to create value for Eastman and are an important contributor to our success in 2020. And for the next in the coming years and when. None of this happens without the dedication persistence of the people of Eastman. Continue to rise the occasion, improve every day that they get it done team and bring to life our commitment of enhancing the quality of life in a material way. When the macroeconomic challenges reverse and we know they will, it's our innovative driven growth model that will allow us to be poised to create even more of our own growth through innovation and leadership in specialty markets.
In the meantime, big picture, we will continue to focus on what we can control and remain committed to long term attractive earnings growth. And sustainable value creation for our owners and for all of our stakeholders. With that, I'll 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
We will now take our first question from Vincent Andrews from Morgan Stanley. Please go ahead. Your line is open.
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 inflated or how much of a moat you have around that volume? We're hearing served generically a pickup in competitive behavior and decreases in pricing and pricing still holding up well.
So how are you staying so differentiated there in an obviously difficult environment?
Thanks Vincent. Good morning. Yes, Great question. And it's really the heart of the whole company strategy around having a 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 the 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 Triton success, which is patented proprietary product, being the only solution that is BPA free for polycarbon replacement, continues to have tremendous success housewares and durables, and now growing in medical. And that's just a story that continues to deliver performance.
It's the same thing with heads up display interlayers and acoustic interlayers where you can significantly enhance the driver experience and enable light weighting in a car. And where we have not just this generation, but are now launching the next generation of even better HUD and acoustic as we speak in this year, to continue to drive differentiation and growth in that space. Same thing with paint protection films, where we've launched the best product in marketplace last year, rolled out new software where we have the best cutting, software support for the dealers. 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 of our core interlayers or some of our core co polyesters, but it's that innovation that 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 plan on paying down more debt this year versus last year with a similar amount of free cash So I'm just curious what's driving that decision versus share repurchases. And congrats to Kurt.
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 repurchase as bolt on acquisitions and a paydown of debt. And we consider all three of them as very viable ways to create value for our stockholders. So as we finished 2019, we ended up shifting our capital allocation of that excess cash towards more further delivering as a priority. And as Mark mentioned, that's going to continue in 2020.
So the result was that we used $370,000,000 of our free cash flow per pay down versus the original $300,000,000 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 $1,000,000,000 to the $1,100,000,000, let's just take the midpoint of $1,050,000,000. So $350,000,000 of it will go kind of towards that increase dividend that we're very proud of. Greater than $400,000,000 will be used to reduce debt at a minimum.
And then I'm sorry, and at a minimum, we'll repurchase shares to offset dilution, which is roughly $50,000,000. So that remaining $200,000,000 to $300,000,000 of free cash flow is going to be applied for acquisitions additional pair to share repurchases of further debt pay down. And really, that's going to depend how the macro environment plays out. And we'll probably kind of hold that extra choices till the second half of this year just so we have more time to see how it plays out. And we
will now take Sorry. Our next question comes from David Begleiter from Deutsche Bank. Please go ahead. Your line is open.
Thank you. Good morning. Mark, on the 1 third ASP that you've identified for a potential action here, have you how much more clarity you have on the potential options today than you did 3 months ago? And are outright sales possible or even life 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.
Driving both innovation as well as how it optimize the cost structure in this environment. And then we're looking at partnering and divestment options as things we considered divestment 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 impact of the restructuring activities for understanding both the quality of these businesses as well as how we position them to potential new owners. So We're going to keep, keep driving it forward and we'll update you when we have more clarity.
And Marcus, in the businesses that saw destocking over the last 3 to 5 quarters, etcetera. 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.
Yes, 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, ag and 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 they still have a bit of inventory to work off. And I would say in North America, where the economy has been stronger, there's probably people sitting on a bit more inventory. Than what's where Asian and European customers are. So there's always a risk. If the U.
S. Economy slows down, you could see a better destocking there. So we'll just have to see a 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 2 years.
We will now take our next question from PJ Juvekar from Citi. Please go ahead. Your line is open.
Yes, thank you. First of all, Kurt, congratulations on your retirement.
Thank you, P. J.
And congrats to Eastman as well for your Sentinel 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 Tominko's assets. Care Chemicals, I think they have a lot of pass through pricing, feed additives. I know last quarter you had mentioned about Asian swine flu. So can you just update on some of those intermediate products? Thank you.
Yes, overall, the Tamika businesses are doing great across the portfolio with the exception of the form of acid business that we called out in the third quarter, which was a small acquisition, Temiko had done. Just ahead of us buying Tamiko. But when we look at the core Alkomene platform, which is what we're center and acquiring Care Chemicals, has delivered really strong growth and very stable margins as you just highlighted with the 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, you know, functional means going into ag, you know, those again, very stable margins given the market structures and the contracts we have in place. Obviously, there's 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 and the cost structure has been well managed.
Thank you. And my follow-up, I have a sort of a big picture question. You've done some bolt on acquisitions over the years, but stayed away from any major M and A since solution deal. So in this SO environment, why not use low rates to get some growth? You know, one company in Wilmington has some businesses for sale, especially in transportation.
I know these are large deals, but would you have risk appetite in looking at a deal that of that size?
So, P. J, 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 $3,500,000,000 of revenue of underperforming businesses and did great acquisitions with solution Minko and some bolt ons to add, 4,200,000,000 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 9 times EBITDA for 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's opportunities out there, especially large ones that are financially attractive. More importantly, we like the portfolio that we have. And we're we've been focused, on making sure we deliver return to our shareholder the money that we've spent on these acquisitions, up through 2014 and deliver growth. And I think we've done that quite well. If you look at 2 specialty businesses, we've had before the trade war started over $600,000,000 of EBITDA growth from 14 to 18 One third of that was acquisition, but 2 thirds was organic growth that came from these acquisitions, as well as the core easement 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 P. J, if
I could add, I'm still a traditionalist. And since Louis and I both went to the same MBA school, I think he'll continue. And that is when we look at investments, whether it's acquisitions or, of 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.
Thank you.
Our next question comes from Matthew Dio from Bank of America. Please go ahead. Your line is open.
Good morning. So by my numbers, raw materials and Advanced Materials, or maybe something like a $50,000,000 tailwind to the second half of twenty nineteen. And you mentioned giving some of that back with lower prices, but I think things get fairly sticky with Triton and you did absorb a lot of inflation in 2018. So when it comes to 2020, what should we think about annualization of those 2nd half tailwinds? Should there be more giveback?
Is there more opportunity? Yeah, if you can expand on that.
Yes, 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 is some input costs that do vary and then, and they did some tailwind in 20, 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 since that's why we think this business will grow that mid single digits EBIT in 2020.
We do we do expect prices to come down a little bit as you share some of that raw material value. We've had thorough conversations with investors on previous calls on this topic. Expect to hold on to 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 know you plan on devolging a little bit more of this to come, but opportunities at Krystex you doubled capacity at Malaysia and the market's been under pressure since. So I got to think there's some are older cats and dogs out there legacy facilities. You imagine opportunities for footprint rationalization there?
Yes. 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% in their tire plants. So the new capacity is also differentiated advantage. 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 set of assets really make sense, in that. And then we'll make some decisions on what's appropriate as we go forward.
And next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead. Your line is open.
Yes, good morning. Mark, I'm intrigued by your program to leverage your sites. I think you indicated $30,000,000 to $60,000,000 of benefit on the EBIT line over the next 3 years. Can you talk a little bit about, which sites are in play? Are there any beyond the GCA and Air products project at Texas City.
How will that flow through over the next 3 years and which segments might be affected?
So, we, we did an acquisition of 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 we'll have at Texas City, on, and how we can sort of provide that site opportunity. And the Gulf Coast ammonia and the Approxed projects, a great example of what several other opportunities could look like. The so I'd seek multiple things there.
I'd say what we're doing at Saint Gabriel is more unique, to, supporting Corteva off a welcoming platform. But there are other sites around the world we're looking at. I do think it can be substantial and very reliably and predictable earnings.
Yes, Kevin. And this is Willie. I may add, I would also highlight the fact that on the segment basis that we would see that primarily benefiting CI and the additives and functional product businesses. Today. But as we think about further integration beyond those 2 projects, it could benefit other assets as well.
Okay. And a financial question for Kurt 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 a 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 solution to MECO acquisition. And as we think about future growth, we will continue to grow it, but it will be based on the long term expectations, consistent with how we have in the past.
Okay. Thank you. And Kurt, it's been a pleasure, Willie. We look forward to working with you.
Our next question comes is open.
Yes, thank you. I'm 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 say is we're diversified across our methanol exposure as we think about, we produce methanol here in our Kingsport site. As well as we purchase on methanol, on 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 added as and functional product segments. Thanks.
And can you give us your thoughts on the coronavirus impacts 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 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 9 plants in China and 2 offices.
So we're focused on those. And there's obviously going to be a delay based on the Chinese extending the new year out, by 1 to 2 weeks depending on where 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 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's probably some opportunities for us to see some volume improvement outside of China, 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 reliable supplier that we're proud of are more global and diverse and reliable footprint.
Thank you.
Our next question comes from Daphne Fisher from Burke Please go ahead. Your line is open.
Yes, good morning. I think most of us know we had ag issues here in North America. Kirk 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?
Yes, 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 get 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 other sell. So we saw volume associated with that. That's also contributed to some of the pricing challenges in formic acid and a couple other products So it's a it's really that dynamic.
Obviously, they've got that flu under control. This is the swine flu. And they're rebuilding 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'll be a lot of little project or is that kind of a reverse inquiries where 1 or 2 big guys are coming to you for some of your technology and we'll see 1 or 2 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've sort of turn down that effort internally as we focus more on specialty growth. So we partner with JM Davie to, work with us and finish off that technology and take it to market and leveraging their strength as a licensing organization.
So we've been in the background working that with them, and they're close success on the first license. These licenses are quite large, and significant in the scale of what the plants will be built MEG is a critical product. And this technology is a lot better than the Approximate technology they've been trying to use, which has some quality problems. So we 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 a little hard to predict exactly when they're going to hit and you register the value.
We will now take our next question from Frank Mitsch from Fermium Research. Please go ahead. Your line is open.
Thank you so much and best wishes Mr. Espin. I hope our path continues 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 and the order of magnitude there. Can you give a little more details there?
Sure. I'll start and I'll let Willie finish off. The contract there, has, was a long term supply contract that we've 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 ops I'll let Willie cover what those options are.
As we consider those 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 to serve the market and the regions where we are our best leverage 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 $25,000,000 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 part that was doing well, you mentioned Specialty Fluids. And I know that that business can be chunky from time to time. Is there a can you expand upon what might have been the benefit that we saw in 4Q and to recur in 1Q in your opinion?
Yes. The, the Foods 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. 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 other small players. So we see that business continuing on. There's always capital construction cycles, Frank, as you've pointed out, where this business will moderate up and down. The solar fill sometimes that can be fairly chunky in 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.
Our next question comes from Bob Kors from Goldman Sachs. Please go ahead. Your line is open.
Thank you very much. A couple of questions. First, Mark, Slide 12, you showed some interesting metrics around, R and D and admin to profitability to revenue base. Guess I'm sort of struck. It would seem like that would be more favorable for commodity companies than specialties.
I'm wondering what other metrics you look at from a benchmarking standpoint that can help us sort of dimensionalize your business relative to those peers?
Yes. So, Bob, I think the point we're trying to make there is we're very lean organization that are good stewards of our shareholders' money and trying to make sure every dollar we spend delivers a return. And I'm incredibly proud of how our Chief Technology Officer has within a within a budget transformed our technology organization a dramatic way. So we had a lot of projects going on around process development, new technologies that weren't going to have a payback for a very long time. And he put those to a stop, reorienting 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. And that AD, as we explained in our innovation day in 2018, is how we can do what our customers do. We can make a tire. We can make a windshield.
We can make thermoplastic vinyl products, we can make a coating. And so we can accelerate our innovation, accelerate the value we understand in those formulations, accelerate how we can go to 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, are the one that we share with you. The new business revenue from innovation is the real test.
It's the revenue we're getting every year. It's the next that metric is year 1. So it's really about the next year. When you see that $400,000,000 last year, that's about helping this year. The $500,000,000 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're getting results from this portfolio. We have a bunch of internal stage gate project metrics and milestone everything else to have good discipline to manage our portfolio on a very disciplined way. And we're constantly optimizing focusing and shifting resources where we see the best value.
Got it. That's helpful. Thank you. And then out of your third quarter call, that seemed 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 'twenty.
Is there a recovery of that and advantage to that as you go through the year?
Yes. Bob, the way I'd characterize it is where you're 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 in our margins is because we had to slow down our plants. We won't we don't give our specific utilization rates, etcetera. But when you get our 10 K, you'll see that our finished goods and our immediate products in inventory declined 5%.
And some of that is value, but also some of it's some of the slowdown we did in our production rates.
I doubt that we're going to be careful as we go to being. Yes. 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 making progress on that. It's a great opportunity for us to release a lot of cash as we go forward.
And our next question comes from Lawrence Alexander from Jefferies. Please go ahead. Your line is open.
Good morning. Can you give a sense for the recycling technologies? What commodity environments it would not be competitive? And secondly, may have missed this, the in terms of the spread 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 is 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 stocks. The trains left the station, right?
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 plastics. 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, 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 semi used 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 recycle content as well as, put our recycled content in finished products and durable. So a whole another differentiation back to Vince's questions earlier is not that we have a lot of product differentiation, 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. And 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 our pet through last year in Europe, it 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 not compete against the mechanical recycle stream. So the cost structure for us will be more advantaged for our feedstock because it has no of value. And that's an important differentiator for what we're doing. So we feel really good about that. We feel like we're in a good differentiated position, 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 twenty nineteen as people realized that the economy was not going to improve with the settlement of the trade war. And so that elongated economic stress led to 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 costs in Asia. So we have seen that.
And we are seeing people start moderating run rates or potentially shut 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.
And our next question comes from John Roberts from UBS. Please go ahead. Your line is open.
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 and fiber segment benefit from the lower acetyls prices And how does lower propylene play out between CI and AFP?
So the 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 a formula to propane. So we saw raw material benefits in the olefin chain. On the acetyl chain, we're coal based in how we make our, our acetyls with our gasifier coal prices have been relatively stable, so there wasn't any tailwind there.
And our next question comes from Matthew Blair from Tudor, Pickering, Holt. Please go ahead. Your line is open.
Hey, good morning. Willy, 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 percent of that's in our Advanced Materials and as is the functional products businesses.
Great. And then could you provide any color on the overall trajectory of the business during Q4 You did come in a little bit above the midpoint guidance provided in October. Does that imply that things were picking up a little bit in December? They did. So we had a good October.
We had a week in November that gave us some concern about what might happen in December. And then both volume came in better than expected and costs came in quite a bit better than expected on the raw material side.
Great. Thank you.
Let's make the next question our last one please.
All right. So the last question comes from Michael Sison from Wells Fargo. Please go ahead. Your line is open.
Hey guys, Kurt, 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. Does the specialty side, the 2 thirds grow pretty you know, does it grow next year, 2, 3rd, maybe mid single digits and the 1 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?
First of all, through 2019, the two thirds did quite well as, as Kurt 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 raw material benefits as a result. We saw volume growth. And we had this headwind, especially in these high value additives for automotive in China, net out to being modestly down for year.
So as we look at this year, we see volume, we see raws, stable as well as pricing. So that's gonna deliver some growth as well, some cost reductions. So you do see some up earnings growth in the twothree side of the portfolio. And you're correct. Potential for down net earnings for the AFP segment is in the 1 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 twenty nineteen, we lost some volume and adhesives and tires regaining that with some pricing in the fourth quarter. So we'll have a volume improvement, but some pricing down net in the 1 third as well as, but 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 Triton. It's been a good growth business for several years. How are you there? How are you on capacity?
Do you need to add capacity or you have enough to sort of support the growth that you're seeing?
We're well positioned capacity. We had doubled the capacity that in 2018. Because we had run out of capacity as 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 you get volume growth, you get mix upgrade, and now you get fixed cost leverage as well.
Great. Thank you.
Thanks 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.