Good day, everyone, and welcome to the Eastman Chemical Company Third Quarter 2019 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Measman Chemical Company, Investor Relations.
Please go ahead, sir.
Thank you, Matt, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO Kurt Espolon, Executive Vice President and CFO, 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 events or results could differ materially.
Certain factors related to future expectations are or will be detailed in the company's third quarter 2019 financial results news release, During this call and in the accompanying slides and in our filings with the Securities And Exchange Commission, including the Form 10Q, filed for second quarter 2019 and the Form 10 Q to be filed for third quarter 2019. 2nd, earnings referenced in this presentation exclude certain non core and unusual items and use as an adjusted tax rate, the forecasted full year tax rate. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the third quarter 2019 financial results news release, which can be found on our website, www.eastman.com, in the Investors section. Projections of future earnings exclude any noncore, unusual, or non recurring items, and assume a forecasted full
We had solid results in the 3rd quarter despite a challenging macroeconomic environment, which has deteriorated in the second half of this year. EPS in the 3rd quarter was similar to the 2nd quarter, especially considering the local electrical outage that caused a shutdown at our Longview site. We took actions to offset a decline in volumes as our teams are focusing on what they can control to manage costs better, accelerate our innovation programs, and remain disciplined with discretionary spending among other actions, which led to this solid performance. Despite the economic challenges, we remain on track for approximately $400,000,000 in new business revenue closes from innovation in 2019, led by Advanced Materials. This segment has a number of innovative products that are showing tremendous resilience in this environment, even with exposure to the challenged auto OEM markets.
Strong growth across specialty products like paint protection film, Triton, acoustics and heads up display interlayers are offsetting weakness in the core business. AAM's resilience is a testament to the strength of the strategy and our innovation programs we've been leading for close to a decade. And although AFP's innovation initiatives were started later, I'm confident they will make substantial progress over the next couple of years. As we've discussed before in this challenging business environment, we continue to achieve our cost reduction targets, while we stay focused on innovation to create our own growth. Consistent with our disciplined capital allocation strategy, we returned $583,000,000 to stockholders through the 1st 9 months of 2019.
Through a combination of dividends and share repurchases. We are also focused on improving the strength of our balance sheet by delevering $300,000,000 for the full year. And finally, we expect our free cash flow to approach $1,100,000,000. 2 additional highlights I'm especially proud of Earlier this week, we announced that we have achieved commercial operation of our carbon renewal technology, or CRT, which is a form of chemical recycling. This is a significant step forward in our efforts to help solve the problem of plastic waste and accelerate CRT is a game changer for recycling because it provides an end of life solution for many plastics from a variety of sources that have no alternative use and end up in landfill or the ocean.
CRT has operated here in Kingsport at our largest manufacturing site, so we can take full advantage of our integration to make this happen. This means the plastic waste we recycle through CRT will go into products used in markets. We are already participating including textiles, cosmetics, personal care and ophthalmics. And with CRT, plastic waste can be recycled an infinite number of times, without degradation of quality unlike mechanical recycling. In 2020, we expect to use up to £50,000,000 of waste plastic in our CRT operations.
This technology significantly changes the value proposition of our cellulosic products, which have been about 60% bio based from certified sustainable forests. Now the other 40% will be recycled content, which creates a very compelling offer with a dramatic increase in the environmental sensitivity in many of these markets that we serve. And within the next several years, we expect revenue from CRT will be in the $200,000,000 to $300,000,000 range with significant upside from there in our specialty products. So we're very excited about this milestone. In addition, by the end of the year, we also expect to be commercial scale for another chemical recycling technology for polyester.
One of many more advancements you can expect from Eastman in the area of waste plastic recycling and accelerating the Circular economy. 2nd, we recently were recognized for our leadership in the area of sustainability by Luxback, the premier cosmetic packaging event for Luxury Brands. Eastman has won the 2009 Luxe Pack Green award for activating the Circular Economy. At the Luxepec Show Eastman Showcase next generation Eastmond Treva, engineering cellulosic bioplastics and introduced Eastman Cristal Revel Co Paul Jesers, which is a new line of proprietary consumer recycled content, compounded polyesters. These investments enable us to be a leader in accelerating the circular economy and commercial scale ahead of many others.
With that, I'll turn it over to Kurt to discuss the Corporate And Segment Financial Results.
Thanks, Mark. And again, good morning, everyone. Starting with the corporate review on Slide 4 and beginning with the year over year comparison. Sales revenue declined due to lower selling prices, lower sales volume and mix and the stronger dollar. Chemical and intermediates was the biggest contributor to the lower selling prices, and this is mostly due to prices, following lower raw material and energy prices, as you would expect.
Climate, which worsened during the quarter as industrial production decelerated, as well as the impact of planned and unplanned shutdowns this quarter. This deceleration had a significant unfavorable mix impact with lower volumes of high value specialties. We partially offset these factors with growth in new business revenue from innovation. EBIT declined due to the combination of lower sales volume, unfavorable product mix, increased maintenance costs and a stronger dollar, somewhat offset by cost reduction efforts. Looking sequentially, revenue declined slightly due to lower selling prices.
EBIT was down somewhat mostly due to the higher maintenance related costs. There are a number of factors that have changed since our call in July. Industrial production has decelerated, driven by the further escalate and global trade issues, including the U. S. China trade dispute in August.
As you can see in the German and U. S. Economic data, and we believe it is also occurring in China. In particular, we can see the impact of key consumer discretionary end market slowing, including transportation, consumer durables and electronics. As a result, volume has come in lower than expected, which in turn has resulted in lower capacity utilization.
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. Now turning to Slide 5 to review Advanced Materials, which had a record quarter, despite about 1 third of the segment exposed to the automotive market. On a year over year basis, sales revenue decreased modestly as our innovation successes mostly offset demand challenges caused by the global trade disputes, disruptions and reduced global automotive sales. In particular, we delivered strong EBIT increased primarily due to lower raw material costs, more favorable product mix and continued cost management. Sequentially, revenue was stable and EBIT increased.
The increase in EBIT was largely driven by higher Triton volumes, the flow through of to continue to benefit from strong growth in some of the more premium product lines, which will help to offset the general weakness in some of our end markets such as transportation. Also, consistent with my corporate comments, we expect a normal seasonal deceleration in demand in the 4th quarter. Which will offset benefits from lower raw material costs and cost actions. All in, we think the 4th quarter EBIT will be up significantly year over year. Putting it all together, we expect Advanced Materials EBIT to grow in the low single digits for the full year of 2019.
These results in this challenging economic climate demonstrate the strength of our innovation driven growth model to trade to create our own growth and defend our value with customers. Turning to Slide 6 and additives and functional products. Year over year sales revenue decreased due to lower selling prices, Lower selling prices were primarily due to lower raw material prices with about 50 I'm sorry, 40% of the decline from cost pass through contracts, and the remainder attributed to increased competitive pressure, particularly for adhesives resins, tire additives and formic acid that serves several end markets. We realized solid growth in care chemicals, water treatment and specialty fluids, but that growth was more than offset by weaker end market demand resulting from continuing global trade related pressures, particularly in transportation and other consumer discretionary markets. EBIT decreased primarily due to less favorable product mix, lower sales volume, increased planned manufacturing site maintenance costs, and a stronger dollar.
Excluding currency, spreads Sales increased as higher volume and better product mix was mostly offset by lower prices, particularly for care chemical cost pass through contracts. EBIT decreased due to the volume growth and mix improvement being more than offset by higher maintenance shutdown costs, as well as lower prices and tire additives and formic acid products. Looking to the 4th quarter, we expect earnings to moderate due to normal seasonality, albeit from a lower base, due to the slower economy. We are seeing some signs that customers may have decided to stay down longer coming out of their fourth quarter shutdowns. With this risk in mind, we expect AFPs EBIT in the fourth quarter to be similar to last year.
Before moving on, let me take a moment to discuss the performance year and add a little more color. Although it is hard to see in the results, we had about 2 thirds of the revenue performing well in this difficult business environment. These areas were care chemicals, water treatment, specialty fluids and coatings businesses, as well as parts of animal nutrition. Strong growth in care chemicals, water treatment and specialty fluids, expanding spreads and fixed cost reduction actions were offset by lower coatings volumes and high value additives in auto model, currency headwinds and lower animal nutrition demand due to China swine fever. Earnings in these businesses combined have only declined modestly year to date.
Whether has been the most pressure in the remaining third of this segment has been specifically tire additives adhesive resins, and formic acid businesses. So the pressure you're seeing in this segment is not in most business, but rather in those three businesses I just mentioned. Now to Chemical Intermediates on Slide 7, year over year sales revenue decreased due to lower selling prices and lower sales volume. The lower selling prices were due to lower raw material prices and competitive activity, The lower sales volume was due to weaker demand, particularly for agricultural end markets as a result of wet weather and for other intermediate products due to increased competitive activity. EBIT decreased due to increased planned shutdown costs, and a local power disruption impacting the Longview Texas manufacturing site.
Taken together, these costs were about a $30,000,000 headwind for chemical intermediates in the quarter, $15,000,000 of which was due to the unplanned power outage. EBIT also decreased due to lower sales volume and lower spreads. These headwinds were partially offset by the benefits from On a sequential basis, sales revenue decreased due to lower sales volume, particularly for functional means due to normal seasonality. EBIT decreased primarily due to the planned and unplanned outages, continued spread decline in olefins and acetyls, and functional mean volume seasonality. Looking ahead to the fourth quarter, there are a few headwinds in front of us.
First, volume is lower due to weak demand environment, but also increasing competitive pressure as markets outside of the United States are increasingly challenged by global trade issues. Also, remember, the cost of the turnaround of our largest cracker in Longview, Texas is in both the 3rd And Fourth quarters So a similar amount of the cost of that planned shutdown will be in the fourth quarter. And then finally, customer inventory management at year end potentially beyond more that normal seasonality could put pressure on our volumes and our capacity utilization rates. Finishing up the segment reviews on with fibers on Slide 8. Year over year sales revenue decreased primarily due to lower acetate flake sales volume due to our acetate tow joint venture in China, attributed to customer buying patterns.
The sales revenue decline was partially offset by the sales the recently acquired cellulosic yarn business and increased sales of textile Innovation Products. EBIT decreased due to the impact of the inventory recovery in the third quarter of last year third quarter of 2018 from the coal gas incident and less favorable consistent with the run rate of the last two quarters as we've made good progress stabilizing results in this business. Lastly, a quick update on our Dollars business within Fibers. We are making great progress in our focus areas within Textiles as we are aligned with some of the leading brands and our materials particular Naya is incorporated into these customers' sustainability collections. This has been somewhat offset by slower demand in more traditional applications such as suit linings and tapes due to slower economic growth.
With that said, we remain confident that we are on track with our textiles initiatives to offset the expected continued decline in tow demand in the long term. In particular, I am very excited about how we can accelerate growth in NIA with carbon renewal technology, adding recycled content to a product that We continue to expect free cash flow approaching $1,100,000,000. Our free cash flow is up about $50,000,000 this quarter compared to third quarter of 2018. And our business teams are working hard I'm confident in our ability to deliver a solid result. Through 9 months, we've returned $583,000,000 to stockholders through a combination of share repurchases and dividends and we remain committed to our investment grade credit rating.
In the last few years, we remain disciplined in our capital allocation through a combination of share repurchases and increasing dividend and debt pay down. As we progress into 2020, we'll continue to use our cash in a combination of all 3, including further delevering in 2020. Our full year effective tax rate is expected to be 16%. Capital expenditures will be approximately $425,000,000 to $450,000,000, for 2019, and we still expect corporate other net cost to be a little above $60,000,000 for the full year. With that, I'll turn it back to Mark.
Thanks, Kurt. On Slide 10, I'll provide an update on our 2019 outlook. We continue making progress in closing new business from innovation and market development initiatives. With the increased trade uncertainty, including from the U. S.-China trade dispute, has caused a meaningful deceleration in industrial activity around the world, including Asia and Europe and now here in the U S.
In this kind of economic environment, we are resolutely focused on the things that we can control. As I mentioned, we've made excellent progress on increasing new business from innovation in this environment in this environment, particularly in Advanced Materials. In addition, we continue to aggressively manage costs across the company, and we continue to expect to generate strong free who expected. There are some continuing pockets of destocking related to lower demands such as transportation in Europe and the U. S.
And we're also seeing some customers extend maintenance downtime since shift turnarounds into the fourth quarter to manage inventory due to the steep acceleration that was not expected in the summer. We are also managing our inventory in the quarter, in line with what we are seeing from our customers. These lower volumes are resulting in lower capacity utilization than we had expected, and the fixed cost hit of the utilization is mostly offsetting the cost savings from our productivity we took in the first half of the year. Putting this all together, we are updating our full year adjusted EPS guidance to a range of Our guidance and the extent to which customers will choose to manage inventory at the end of the year. I can give you scenarios where we could be higher given the strength of October orders or lower if we face unusually high inventory management in December.
And we're maintaining our free cash flow guidance of approaching $1,100,000,000, which remains a priority. And will be a great result in this environment and will present very attractive free cash flow conversion. Earlier, I mentioned it's our robustness. It gives me confidence in our future and what remains true for me today. Even with some unprecedented challenges we face, people at Eastman remain steadfast in their commitment to drive results, and I want to thank them for continuing to execute on our strategy while aggressively managing costs.
Big picture, we will continue to focus on what we can control as we manage through this incredibly uncertain environment and remain committed to long term attractive earnings growth sustainable value creation from our owners for all of our stakeholders. At the same time, we are looking at every action we can take to increase performance this year and next. Focusing on engaging with customers who seek innovation, especially in the areas of sustainability. This fuels our growth and new business revenue closes. Providing resources to grow in markets that have favorable trends and resilience in this environment.
Planning to take additional productivity actions to accelerate top line growth to the bottom line. Building on our strong track record of disciplined portfolio management, we will continue to look for opportunities where optimization makes sense. Continue to be focused on free cash flow generation as we manage working capital, and we'll be disciplined in how we deploy free cash flow. Addition, we're creating another big vector of growth with our new technologies for chemical recycling to enable a circular economy as we once again innovate solutions to improve the quality of life in a material way. And with this meaningful deceleration industrial production reverses, as we know will, we'll be poised to create even more of our own growth from our innovation driven growth model and accelerate earnings growth as the mix and fixed costs leverage becomes favorable in the recovery.
That's why I'm confident we're going to win today and into the future. With that, I'll turn it back to Greg.
Okay. Thanks, Mark. As usual, we have a lot of people on the line morning, and we'd like to get to as many questions as possible. So I ask you to please limit yourself to one question and one follow-up. With that, Matt, we are
first we will go to David Begleiter with Deutsche Bank.
Mark, looking ahead to 2020, but good. Thank you. I know it's early for 2020, but can you still achieve, you think, your long term 8% to 12% EPS growth in 2020 versus a versus this past year?
Thanks for the question, Dave. Good to hear from you. So we're not going to provide a quantitative bridge at this stage in this environment, but, let me sort of walk you through how we think about it, from where we are today. So if the current economic conditions continue into next year, because we all know we have to make that assumption, we believe we'll deliver earnings growth. Going into 2020, versus 2019.
And it really sort of breaks down into sort of 3 core buckets and how we do that. First, innovation is always at the heart of our strategy and you've seen a great demonstration of how that's created value for us in advanced materials. And we're continuing to driving growth there as well as continuing to get traction on some innovation in AFP, even though it's much more early stages of AFP, it's going to contribute like it has this year in some places. It's also important to remember that we have a lot of markets that do have favorable growth, across Advanced Materials AFP and in CI. As well as textiles.
So there's a lot of places where we have good growth, whether it's care chemicals, water treatments, ad going back to a more normal seasonal demand, medical applications. So there's just good growth that's going to help. We do have exposure in consumer discretionary around 45%. It's important to keep in mind that 55% is actually quite stable consumables, etcetera. The other part that's going to help on the demand side will be the vast majority of the destocking, if not all, should have played out by the end of this year.
So at least on a relative basis, there's no way that we can see the amount of destocking that we've seen this year occur again next year. That gives you some additional relief in demand and growth. So volume should be better on a variety of different fronts. The second, of course, is what you can control as well as your cost structure. And as this industrial recession that we've been in for the last 9 to 12 months continues to drag out, we know that we also have to start taking more additional actions on productivity.
So we'll start looking at how we build on what we've done this year. We've taken out a net $40,000,000 of cost down in manufacturing this year. As that annualizes into next year. And if we have volume equal to or better than this year, that's going to start to flow through and be a benefit. Gonna start looking at our asset footprint and whether there's opportunities to optimize our asset footprint and take out chunks of costs.
We're gonna look at, how we get much more productive with digital investment. We've made choices to invest a lot in digital this year and productivity and commercial execution. And already seeing a lot of benefits that's paying for those investments this year and we'll start seeing the benefits on a net basis next year and there's more investments we're going to continue making. And there's a broad set of manufacturing initiatives that we're doing on productivity that are giving benefits to the success we had this year will continue to increase the benefits next year around maintenance and that's both in earnings and cash as well as some other activities. But to be clear, we're going to continue investing in innovation.
So next year, we'll spend more on innovation than we did this year. We have so many huge innovation programs going commercial, in AM and especially in AFP. We have to provide the resources to close that business with customers and ensure we get the benefits of those investments. So that's the 2nd bucket. The 3rd bucket is strong free cash flow.
Even in this tough environment, we're generating incredibly strong free cash flow at a very high conversion rate. We have every expectation we're going to do the same thing next year, and we'll continue to be disciplined in how we, deploy that cash and dividends or purchases debt repayment and bolt ons where it makes sense. So that's sort of relative current economic conditions. If there's a trade war settlement, we'll do a lot better than that. Then, and if there's a recession, obviously, where demand is more challenged, we have additional levers we can pull to manage costs and innovation will still create some growth to offset those challenges.
And I still think a lot of the destockings behind us. The thing to keep in mind is if there is a recovery, the leverage on the upside is equal to the leverage on the downside that we've seen in the last 9 months. So mix volume asset utilization will come back in a mirror image of what we've been through, that could provide substantial upside.
Very helpful. Thank you. And just one more thing for both you and Kirk. Can you comment on the recent Moody's action to put you on negative watch how you are thinking maybe about debt reduction versus buybacks next year? Would you be focused more on debt reduction just to remove this issue?
Completely from the table rather than keep on buying back stock? Thank you.
Yes, the recent change to negative watch really doesn't significantly change our capital allocation philosophy. As you would expect, we have a very open dialogue with our agent rating agencies about our plans and expectations. As they understand, we remain committed to our investment grade credit rating, which is again, not only important to us, but many of our investors that I speak with. So we'll remain disciplined with our approach to capital allocation, which 2019 includes $300,000,000 of deleveraging. If the environment continues to be challenging as we go into 2020, we'll probably do a similar amount of de levering at a minimum.
I imagine over the next couple of months, there'll be a few debates internally and externally around what should be the amount of delevering And I look forward to your opinion, David and others on that topic. But regardless of what we do, we will remain on a path of improving our overall debt and the EBITDA ratios and further strengthen our balance sheet. A couple of other things, I'll just remind everyone. And I, David, I know you know these well. Is we have no material debt maturities over the next couple of years.
We generate great cash flows. And even in a recessionary environment, And then we also have plenty of access to liquidity. So we're well positioned to manage through this uncertain economic environment. So I feel very good about that. And also a reminder that a disciplined capital allocation approach, whether that's putting cash to share repurchases, bolt on acquisitions or even debt pay down are all viable ways of creating value for our shareholders.
So we're going to remain committed to our investment credit rating. We have a reasonable pathway to continue to improve our credit metrics. Then that's consistent with our commitment around the disciplined capital allocation philosophy.
And our next question will come from P. J. Juvekar with Citi.
Yes. Hi. Good morning. I had a quick question on your tire additives business. You had those duties on Chinese tires.
How is that trade flow impacting your China business? And is there an offset offsetting benefit in U. S. And Europe business?
So, yeah, the tire duties in the U. S. And in Europe had a real impact on tire demand in AFP. What happened is, this is really at the customer level. They were shipping a lot of tires, and it was found that they were dumping in both Europe and U.
S. So all those tires got backed up into China. And there's too many tire companies in China. And so there's been a pretty aggressive fight there. But trade flows rebalanced these Chinese companies have also built plants in Southeast Asia.
So they just shift their production efforts to go into Europe and the U. S. From there. So it's overall created a lot of pressure for all the tire companies. You can see that by some of the big multinational tire company announcement recently about the actions they're taking to improve their cost structure.
But for us, it did create predominantly a very competitive situation among additive suppliers into tires in China. And we felt that impact both in volume and in pricing, which is why we've had the pressure in that business. And that ultimately moves across the globe to some degree.
Thank you. And question for Kurt. Kurt, you just talked about potential more deleveraging in 2020, if the economy remains weak, if the economy remains weak, will you would you try to get some growth through M And A as well and get some inorganic growth? I know that doesn't sit well with deleveraging, but but due on the choices, how would you allocate capital if valuations come down and M and A looks attractive?
Sure. Well, we've always considered, you think about that strategic cash that we have after we funded our own or already organic growth We love the opportunity to pursue opportunities of growth and bolt on acquisitions through M And A. And, and I think we would just have to do that in a smart way I've always told the business teams that if they find a great, attractive, bolt on acquisition or acquisition in general, we'll find a way to finance it and we'll find a way to finance it that's still consistent with our investment grade credit rating.
Thank you. And your next question will come from Vincent Andrews with Morgan Stanley.
Thank you. Good morning, everyone. A question on chemical intermediates, the agriculture impact on the A means, Obviously, we know it's tough season in the U. S. Do we need to lap that?
Meaning, do you need the channel to be drawn down before you're going to sell back through so that this could be an issue all the way through the middle of next year or is it already sort of played out?
Hey, Vincent. From what we can see and what our customers are telling us, there, one of the volume challenges we're having in the back half of this year their efforts to take their inventory down given the weak season we had this year. Our belief is they will achieve those goals and get back to sort of what is a sort of normal production strategy next year and we'll see the benefits of that demand. Okay.
And can I also ask you, the other and corporate costs appeared to be up a lot, in the quarter? Was there a reason for that? And how should we think about that number next year?
Yes. So if you think about the year over year impact of the in the other segment, the primary driver has been that higher pension cost that we talked about. The $30,000,000 or roughly $0.20 impact. And most of that, which is really driven by the discount rate as well as the lower assets we started the year. That's really what drove the delta.
Well, still great management of our cost and innovation programs to the other areas. So it's really the pension cost. As I think about 2020, a little early, but You're already seeing the discount rates coming down. So that could very well improve our pension costs next year. We'll see if that holds true as we finish out the year.
Okay. Thanks guys. Next
we will hear from Jeff Zekauskas, with JP Morgan.
Thanks very much. On your cash flow statement, there's been $165,000,000 positive swing for the 1st 9 months in other items net. What is that And does it reverse next year or continue? Can you provide some elaboration?
Sure. Really, there's 2 main drivers in the other cash items, Jeff, that are kind of an anomaly this year. First, last year, in the end of third quarter of 2018, we had a $65,000,000 insurance receivable that we collected the following months. Obviously, we don't have that kind of receivable this year. And then secondly, this year, we actually have a higher restructuring accrual, a higher than last year because of the events that took place early in this year, and that's roughly 25,000,000 dollars.
So those are the 2 main drivers of note. The other things are just the normal things you see, resulting from timing of tax payments other miscellaneous payables receivable. So you shouldn't see this magnitude as change next year just because of those two things I just mentioned.
Okay. In listening to your conference call, you spoke about competitive increased competitive activity in the number of businesses in chemical intermediates and in your AFP segment and at least to my ears, that sounds new. And you seem to tie it to slowdown in demand and trade difficulties. Can you elaborate on your competitive position in a number of businesses where it seems that the competitive activity has intensified Can you talk about why that's the case and how long you think it will maintain itself?
Sure, Jeff, it's a good question. And I'd love to address it. So 1st of all, Advanced Materials, I think, is looking exactly as a great specialty business should. It's got demand challenges. Obviously, it has competition, but the innovation is allowing it to offset those market challenges and deliver strong growth, especially when you think about the high consumer discretionary spend and benefit from raw material flow through as you can sort of defend the value in your pricing.
So that business is on track and looks like it should. And as Kurt mentioned in the prepared remarks, about 2 thirds of the revenue of AFP looks just like AM, right? It's got good strong market growth in a bunch of end markets, even though it does have headwinds the macroeconomy, especially in automotive. It's offsetting it with expanding spreads. And if you back out currency, the earnings are even closer to just year over year flat.
So that business in that part of the portfolio is doing quite well. And then you've got this one third that goes to your question, where there's increased competitive activity. And obviously, some of that in CI in a few places. On the AFP front, the 3 areas we identified tires adhesives and formic acid have that dynamic The dynamics are a little bit different in each business. So in tires, really is a demand driven event, as I mentioned earlier, where you've got a drop in demand that's increasing competitive activity.
And of course, we have our new next generation Krystec we've launched. We have other innovation, entire resins, etcetera, to offset some of that pressure. But it's just too early stage on the new Crystex launch to sort of offset it. And so you've got, pressure and earnings, both in the volume and the macro as well as in spreads. Same is true in adhesives, but which is more of a supply driven demand is a little bit more stable there.
But, you've had the new supply, which we've been talking about for a while. Similar, we've got innovation launched there. To offset it with UltraPure, which is just non emissive low odor or no odor resin, great inventions and amorphous polyolefins that we're launching. But not sufficient, in this environment to offset some of that pressure. Informix, a more narrow story of just a competitor that was shutdown in China that came back.
And it would have been fine or mitigated if demand for swines was going well in China to consume that new capacity when the swine population is off 25 to 40%, you've got a problem. So overall, what you've got is a situation where this one third is not performing the way we'd like. And we recognize that this is not the kind of stability and overall AFP that we wanted to deliver. So we're going to start looking at all options on how we address this. Those options could be how to restructure some of these businesses or how to partner with them or potential divestment.
But it's important to keep in mind that a lot of considerations have to go into how you make portfolio decisions like this. So you've gotta make sure you're not overreacting to sort of short term macro economic problems, make sure you really assess what is the innovation potential, or other improvement opportunities you could pursue. And of course, you have to think about timing of these decisions. But we're going to start doing that. CI's critical vertical integration, we haven't changed our view on the value of it.
But we're going to look at, asset optimization opportunities there to improve our ability to be more sort of stable. RGP is a great example of an investment we made last year that reduced our ethylene exposure. That's been quite beneficial this year. And we're going to try and think about what else we can do. So we do recognize we've got some volatility, the pressures in CI, I think is well covered to competitive pressure in STTLs and olefins, but we're not standing still.
We're going to take action and see what we can do to improve things.
Okay, great. Thank you so much.
Next question will come from Matthew Deo with Bank of America.
Good morning. Good morning.
You had stated like the backdrop continues to worsen due to trade uncertainty at
least was one of the
key drivers, volumes actually shifting on the headlines that you're seeing or just pointing to general malaise I'm trying to gauge how sensitive your top line is and you had mentioned orders picked up in October briefly, but then would that be consistent with the trade discussions and possible traction there or is that just maybe a one off?
Well, first I've learned my lesson about predicting the macro economy this year, and exactly what to interpret from any border pattern in 1 month. I think there's a lot of volatility uncertainty out there where you go back and forth between an escalation and trade war in August. Where there is phase 1 progress that's debatable in October. And there's just a lot of uncertainty that's impacting business and consumer confidence out there. Especially in China and how that's impacted their economy and the sort of global effect that has places like Europe and Southeast Asia, so dependent on exporting to China.
And you can even now see it impacting sort of U. S. Industrial activity. So it's a little hard to predict, how this is going to trend. But I would tell you that as we look at the impact that our guidance and performances had through the year.
It is entirely a volume mix story. Where we were in July, we were expecting the economy would be stable relative to the second quarter as we said. Obviously, things escalated And that's why our volume forecast came off. Our volumes were actually off a bit, as Kurt mentioned, in 3Q. And now as we go into 4Q, this lower activity plus normal seasonality leads to this decline in volume.
But it's a little hard to interpret.
Okay. And if I look at ANFP, EBIT margins are down 210 bps in 2Q like 260 bps in 3Q. How much of this is actually due to perhaps poor utilization rates versus competition on price versus volume metric declines. Give me some clarity there.
Yes, for AFP in total, the entirety of the hit is a volume mix and asset utilization story. So, if you look at the total segment altogether, spreads are about flat year over year. Obviously, there's a bit of a currency hit, but it's much more moderate in the second half of the year. So it is totally volume mix hit, on the impact that has on variable margin as well as the impact it has on asset utilization. But as I said, it's sort of a 2 thirds, 1 third story where we have improving spreads in some places and compressing spreads and others, netting out to flat.
So it's that's not the margin story.
Next, we will hear from Tim Sheehan with SunTrust.
Good morning. Thank you. So you just referenced an AFP about a third of the business. I was not performing the way you would have liked Could you also assess what proportion of the Temako business falls into that category as well?
So the only part of Taminka that's in the 1 third is formic acid. So when we bought Taminka, we were very excited about the alkaminase platform and the value of that integrated platform into a wide range of end markets. As they had acquired a small business, informic acid, about a year ahead of buying, Temiko for us. That was a business we had actually looked at and didn't find very attractive, but which part of the deal that we had to accept. So it's a business that just has some competitive challenges, but it's a very small part of, Temiko.
And if I could add some
of the positives that Mark referenced in
the 2 positive twothree were also Tamika acquisition. Yes, tremendous growth in care chemicals and water treatment. And long term, we've had great growth in the ag business as well over in the CI side from Temaco. It's been a great acquisition.
And on the chemical recycling projects, you referenced several $100,000,000 of revenue ultimately. How quickly could you start to see commercial revenues from that? What segment will you report those results? And if you could just comment on long term project returns we were to compare the expected returns of those recycling initiatives to other more traditional product innovations is the ROI higher, lower or about the same?
Sure. So we're incredibly excited about what we can do in the circular economy. For those of you who've been paying attention in this industry, you know, in the last 18 to 24 months, sustainability and environmental sensitivity about the impact we're having in the environment, especially with plastics in the ocean and the issues of landfill, etcetera, is one of the biggest disruptive macro trends I've seen in a decade. And it's either a great opportunity as is for Eastman or challenge as it might be for others who are heavily in single use plastics. Fortunately for us, We got our PET in 2011.
So we're not doing circular economy to defend our existing business in single use plastic. All of our investments are to improve, our competitive offerings in more durable applications and more specialty applications by adding recycled content into it, to deliver, you know, net growth. And so we'll be commercial as we said in the fourth quarter this year with both technologies, the one we announced this week, as well as the polyesterone by the end of the year. And that will be incorporating products and driving revenue growth for us next year into the first quarter. Customers are incredibly excited, especially in the luxury world, So think cosmetic packaging, high end ophthalmic sunglasses, where our polymers go.
Our textile business, even though bio content is highly valued by our customers, the women's wear, fashion industries are extremely focused on how to close the loop. A lot of textiles, a phenomenal amount of textiles end up in, landfill, especially with, in a fast fashion. And so they want to close the loop in our unique CRT technology allows us to actually take back textiles garments and recycle them, not just, waste, so we can use plastic. We can even take carpet back. We can solve a lot of real serious problems that other technologies can't do.
So we're really excited about it. It's just a it's a great opportunity. And this is just the beginning to be clear. These first two steps are very incremental capital and modifying, our gas fire with the CRT to sort of take plastic waste instead of coal, and turn that into cellulosic products same thing with probably us. The first step is fairly modest.
So the ROIs are extremely high. There are bigger investments we can make to do a lot more than we're going to do first step. But even when I look at those capitals, the returns are well above a typical investment project. Because we're leveraging into products we already make, and already sell into existing markets. It's a drop in replacement.
It just now has, recycle content, so they don't have
to do qualification. Thank you.
The next question will come from John Roberts with UBS.
Thank you. Mark, in your concluding comments on scenarios, it sounded like your October orders actually picked up from September. Why would that have been?
What I'd say is actually October orders are holding similar to September where they normally start trending off seasonally And so I don't want to overstate the October order coin, but it's certainly coming in a bit better than we had forecasted. I think it's just customers are managing, and growing with a little more optimism And we're holding in reasonably well. I can't say there's any specific reason I can point to at this stage. And we really have to watch out for where December plays out this year with all this uncertainty. It could go either way.
And then secondly, do you expect IMO 2020 to have an impact on spreads between refinery grade propylene and chemical grade propylene?
As we look at it, we're not seeing that as a significant event. I know there's a lot written about it, and a lot of opinions about it. Actually, our RGP investment, I think, helps us a bit and, and that gives us more flexibility on that scenario.
Next we will hear from Kevin McCarthy with Vertical Research Partners.
Mark, when you look across your portfolio, do you see opportunities for rationalization of assets? It sounds like some of is to consolidate, plants or would that be a mistake because you'll need the capacity when the macros start to cooperate again in the future?
Hey, Kevin. So we are looking for opportunities like that. We're not going to talk about it on this call, but we have several asset options under investigation for that reason. But our focus is always on innovation being the core thing, but this kind of environment, you have to look at every lever you can to improve productivity and your cost position to compete.
Okay. And then secondly, for Kurt, it seems as though you've whittled the capital budget to some degree, maybe you can talk about, what has changed there and what your preliminary views of of the trajectory could be looking into 2020 and beyond?
Sure. On the capital front, what we've been doing is this, we're also making some adjustments the investments we make mostly are those are growth investments just because of the environment when we're not quite sure when we're going to need that new capacity. We've already added a large portion of capacity to support our growth this year and last year. So we've kind of just tweaked things because we can move things out just because the demand environment's not there right now. And then we got a great capital team that's also being disciplined on the amount of support capital that's needed, to run this company in this kind of environment.
Looking next year, I'd probably still keep it right now in the same range we're at today. But a lot of it's going to depend on what the economic environment is. Starting to improve, we might pick up our capital a little bit. If it deteriorates, we may slow it down a little bit more.
Your next question will come from Frank Mitsch with Fermium Research.
I want to think about the 4th quarter and your implied guidance there because it's looking like it's the lowest EPS CGI that you've done in the last 5 years. And obviously, volume mix is going to be a big part of that. And so I'm trying to think what the range is. I mean, your volume mix has been improving throughout the year. It was 6% Q1, down 5% Q2, down 3% this past quarter.
What are you baking in to get to this low level for 4Q?
So, Frank, I mean, part of where we're coming from is we assume the we always do this to some degrees, assume the current activity economic and macroeconomically is the basis for our forecast. So obviously had moderated through the third quarter. And then we're adding normal seasonality on to that lower base. I mean, that's how the forecast got constructed. In addition to that, you've got lower capacity utilization because volumes this year are going to be lower than last year for the second half.
So you've got some headwind on asset utilization that adds to serve some of the decline from third quarter to 4th quarter. But those really are it. I mean, there's a little bit of increased competitive pressure and spreads in CI that's part of the story well, but that's a small part of the story relative to the volume mix and asset utilization. So I mean, should
we should be thinking about low single digit or low double digits in terms of a decline in volume mix in terms of what's embedded in your guidance?
Yes, I would say, Frank, some of the volume mix that you've seen in the last quarter too is kind of what we're expecting. It's really that utilization effect that's really starting to hurt our margins in the fourth quarter. And then we'll see how those respond depending on demand environment in 2020.
Yes, something I'd add on that front is that, you know, what I'd say is what you're seeing is how we're performing in an industrial session, Frank. There's one in front of us. I think we're already in the middle of one that started in the fourth quarter of last year, where you've put a lot of the sort of destocking drop in volume that's worse than primary demand. We've already been enduring all of that. And some of it's continuing in the fourth quarter as the U.
S. Is starting to slow down. We turned over high cost inventory from third quarter of 2018 to low cost inventory. That's always really painful. A lot of that is now behind us, all of that's behind us at this point.
So you're more a bit about where primary demand goes as you look at next year, but you're still to finishing a lot of that sort of adjustment to the recessionary environment out now. And of course, we got all these actions we're going to take. Another reference point is when you look at what we said at Innovation Day in 2014 that our new portfolio would be a lot more resilient in only down sort of 20% if you did the 'nine recession, with the current portfolio versus what we had in 'nine versus what we were down 40%, that's sort of playing out, on a ratio basis now. So if you look at sort of our earnings performance, for the 1st 9 months, we're about half of sort of the commodity diversified companies and how we've declined. So portfolio is performing better.
We're obviously not happy about parts portfolio and we're going to look at ways to address it. But I think we're doing quite well in this environment.
All right, that's helpful. Thank you.
The next question will come from Bob Koort with Goldman Sachs.
Hi, good morning. It's Anthony Walker on for Bob. Earlier in the call, you guys referenced the several buckets that would impact 2020 results and understanding you're not providing a bridge to next year. I was hoping that you could maybe walk us through the several one time items impacting 2019 results that you would expect not to repeat next year?
The only other one time items that I can think of, we've talked about this year. 1 is the unplanned outage. So that you don't expect, and in pension, I already mentioned earlier, where things sit today, pension could be, a lower pension cost should be lower next year versus this year. And then currency will be stable. So those are the 2 or 3 other major items that I can think of that help next year that are different than they are this year.
But it's important to keep in mind that a lot of cost reduction actions we've taken, you know, arguments are annualized and flow into a benefit next year And if we get volume to be better next year, which I believe we will, that will flow through in an attractive way with asset utilization.
And then, can you help us on the bridge to free cash flow in 2019, which you maintained despite the reduction in EPS, I assume you're anticipating a pretty big tailwind from working capital. Thanks.
Yes, sure. So we do have a track record of managing our free cash flow. What you've seen already, we've generated $525,000,000 of free cash flow through 9 months. That's $40,000,000 higher than last year. If you look at fourth quarter last year, we generated $600,000,000 of free cash flow and just in that quarter.
Now that did include that $65,000,000 insurance receivable that I mentioned. So it's kind of $535,000,000 excluding that. So I think we're going to generate roughly that same amount of free cash flow in fourth quarter of this year. Despite the lower cash earnings, and that's primarily as what you had mentioned. We expect higher working capital release than the 3 $65,000,000 we did last year given the current environment as well as various working capital initiatives we've been implementing throughout the year.
And then as you see, we're also expecting lower capital expenditures of roughly $10,000,000 to $20,000,000 that helped us achieve this kind of result in this tough environment.
Next we will hear from Laurence Alexander from Jefferies.
Hi. Could you flesh out the year end destocking or extended shutdowns comments that you've made through the call from a different angle, which is if you look at it more as a cumulative effect spread between Q4 and Q1, what degree of impact are you concerned about And is it just in the auto and industrial customers, or are you concerned about a broader kind of destock cycle?
So the destocking concerns that we have, in the fourth quarter are more about normal seasonality. Than some sort of dramatic destocking event. I mean, clearly, we've seen significant destocking in the first half of this year that goes way beyond where primary demand was at that point as people are pulling their inventories down trying to access lower cost raw materials, that were available and adjust to an uncertain environment. And but the rate of destocking, the amount of it has decreased significantly As you look through the year, even in 3rd quarter, I would say, was less than the first half and 4th quarter, we'll have some of that, but not to the degree what we saw in the first half of this year.
And if I could add, Lawrence, the area that I'm hearing from our businesses is that these are just our customers trying to work to their inventory targets to finish this year. And then you'd get back to that more normal production levels next year. So this is more about a 4th quarter rather than something carrying into first quarter of next year.
Thank you. And next we will
hear from Mike Sison with Wells
Fargo.
Hey guys. Just one quick question. If you think about your guidance for 2019, down buck to buck 20. If you get a similar volume mix improvement in 2020, Is that kind of the leverage upside, meaning you would get a dollar a dollar 20 in earnings per share or is it a little bit maybe potentially higher because you've taken some costs out and improve the productivity of the portfolio?
Well, Mike, welcome back. And, yeah, we could probably sit down different models and get excited about different scenarios. But yeah, if there is a bounce back and restock event, we could see a material improvement in EPS next year. That's what Mark about. But it's really just different scenarios that could play out next year and it's just really too early to call them.
I think it can be substantial, Mike. And we believe that, that'll happen when you get a sort of settlement of the trade war.
Let's make the next question the last one, please.
Certainly. And your final question will come from Duffy Fischer with Barclays.
Hey, good morning, guys. A number of your coatings customers have already gone and there's some cross currents there where they've talked about raw materials moderating and some numbers on demand have been a little bit stronger, a little bit weaker. Can you walk through your coatings raw material Folio. What do you think the market is doing that you're selling into and then how are your products faring in that market?
Yes, so Duffy, I think our coatings volume situation reflects our downstream customers when we look at just that part of AFP So I don't see any sort of on an overall volume point of view, any real differences than what you're hearing from them. The only thing that would be the exception is we do have some very high value additives that go into some automotive coatings into China to predominantly to local OEMs for their cars. And that part of the market really is off dramatically. It's probably down 25% year over year. So that's been a pretty big sort of mix hit, in the overall cutting story.
But besides that sort of one part of the story, everything else is pretty similar. And that's one we're not at all worried about. It's a proprietary product that only we make. And And I'm pretty confident Chinese will make cars again and all the EVs that they're expected to produce will be largely made by these local OEMs with these paint lines and be a real benefit for us. It's just a short term issue.
Okay. Good. And then one for Kurt, lastly. Can you explain to me why pension is a benefit next year with interest rates dropping so much more this year than we would have expected One might have thought that actually, the discount rate hurts the gap. And so the pension costs would start to move up and maybe more cash flow would have to be put into pensions.
But can you just walk through that for me?
Sure. Just two dynamics there. First is the discount rate and you just need to think about because we mark to market our pension liability, that pension liability gets read adjusted at the end of this year based on that new discount rate. And then that discount rate is to determine of your interest cost. So with a lower interest, with a lower discount rate, you have lower interest expense on your pension liability next year.
And then secondly, last year, we had a dramatic decline in our pension assets, because of the fourth quarter of performance in our overall market. The assets obviously are performing much better this year. So if you start the year with a better, total amount of pension assets, then you also get to assume the return on those assets. That's another contributor that would help our pension expense on a year over year basis. So what I'm talking about, pension costs could return to more normal levels like they were in 2018 versus the headwind we faced in 2019.
Great. Thank you.
Okay. Thanks again everyone for joining us. A replay of this call will be available on our website later today. And I hope you have a great day. Thanks.
Once again, that does conclude our call