Good day, everyone, and welcome to the Eastman Chemical Company First 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 Eastman Chemical Company, Investor Relations.
Please go ahead.
Okay. Thank you, Kim, 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 Claro, Manager, 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 first quarter 2019 financial results news release, Also, during this call and in the accompanying slides, and in our filings with the Securities And Exchange Commission, including the Form 10 K filed for 2018, and the Form 10 Q to be filed for first quarter 2019. 2nd, earnings referenced in this presentation exclude certain non core and unusual items. In addition, historic quarterly earnings using adjusted tax rate, using the forecasted tax rate for the full year that excludes the provision for income taxes for the same 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 first quarter 2019 financial results news release which can be found on our website www.eastman.com in the Investors section. Projections of future earnings exclude any non core, unusual, or non recurring items. With that, I'll turn the call over to Mark.
Thanks, Greg, and good morning, everyone. I'll start on Page 3. In the first quarter of 2019, we had a number of accomplishments we can be proud of and a number of challenges to take on. Before we get into the financial results of the quarter, I'd like to pause and take a moment to discuss some of the important highlights from the quarter. First, after a challenging 4th quarter, we delivered a 28% sequential improvement in our earnings, and we expect this momentum to continue on to the second quarter.
We also received an Energy Star partner of the Year award for the 8th consecutive year, demonstrating our commitment to operator facilities responsibly and efficiently. Eastman is always searching for ways to leverage our world class operation macrotrends like Sustainability, and I'm proud of the investments we're making in methanolysis and the Carbon Renewal Technology, which provides serious solutions to enable the Circular Economy. In this environment, we continue to see strong customer engagement with our innovation programs and delivered an 8% increase in new business revenue closes from our innovative products. As always, we also continue to aggressively execute on cost management running a highly productive organization and we've increased our cost reduction actions given the short term macroeconomic challenges. Consistent with our strategy to pursue bolt on acquisitions in our specialty businesses, We completed the acquisition of Marlotherm, heat transfer fluids from Sasol, opening up their product offerings in new regions, and we'll continue to pursue bolt on M and A where it makes sense.
Cor to how we win is our ethics and integrity, and we appreciate the recognition as one of the world's most ethical companies by Ethosphere for the 6th consecutive time. And finally, these rewards and the focus of our strategy comes back to our owners, where we consistently return cash to our shareholders we returned $212,000,000 to shareholders in the first quarter of 2019, an 18% increase over the first quarter of 2018. On Slide 4, we continue to execute our innovation driven growth model to create superior value. Today, I'd like to highlight 2 specialty product lines one in Advanced Materials and another in Additives and Functional Products, both in a challenging end market transportation. Although we've seen weakness in global transportation markets over the past 2 quarters, especially in Asia.
I'm very excited to report that our team continues to deliver strong growth in our premium innovative products. One example fueling this growth is Safelex heads up display, where we are delivering double digit growth, including an impressive 20% growth in Europe. We're well positioned to create growth in an even challenging transportation market for a number of reasons. Our world class PVV technology platform enables us continue to introduce new products to meet the evolving needs of the marketplace. We are deeply engaged both with our customers and equally important across the entire value chain, including the premium auto OEM brands and project and projector manufacturers.
And our application development capabilities enable us to tune our product in the for the unique challenges associated with each model, including standards for optical clarity and the complexity of the design. The end result is a product sold at a premium price growing at multiples of the underlying market. To me, this reinforces the value of our innovation driven growth model. Another innovation in transportation is where we're winning with customers on our next generation Crystex product, which is essential in a challenging tires market.
Is produced at
our new facility in Quanta, Malaysia, which is now fully operational, and we're seeing accelerated adoption of our new and innovative product Krystex Cure Pro. Tire makers who win in their markets are under constant pressure to improve tire performance as well as operational efficiency. Working closely with our customers to better understand these challenges drove us to develop a superior product, and we're getting validation from customers that they're seeing significant benefit, line speed improvements, scrap production and energy savings. As a testament to the tire additives teams, relentless engagement with the market, we're now working with more than half top 30 tire makers in the world on our next generation Crystex and have 9 new plant trials in progress in the first quarter. Finally, we're proud that Crystex Cure Pro is recognized as a finalist in the 2019 Tire Technology International Awards.
For innovation and excellence. And we're the only innovation, honored that was not created by a tire company. While the tires markets will be challenging for us in this year, given our legacy products, curpa is already demonstrating that we can extend our differentiated position as we move forward and filling out this new plant. These are just two of many great examples we have that demonstrate how our specialties are delivering today. And our innovation and market connections position us to continue to win in the future.
With that, I'll turn it over to Kurt.
Thanks, Mark, and good morning, everyone. It's always a pleasure to spend this hour together. I'll begin with a review of our We increased EBIT by 28% sequentially, with growth in 3 of our 4 segments. Driving this improvement was a seasonal increase in volume, improved product mix and higher spreads. On a year over year basis, sales revenue and earnings decreased mostly due to lower volume.
We managed our controllable costs down significantly in the quarter. These actions were more than offset by a stronger dollar and and costs in which we have less discretion such as higher pension costs, netting out to greater than a $30,000,000 headwind year over year. Looking across our end markets, we experienced volume softness, particularly in transportation, consumables and consumer durables, especially in Asia and Europe. Global economic uncertainty persisted throughout the first quarter which contributed to the softness. In particular, high margin specialty businesses such as tire additives, adhesives and specialty plastics, were most impacted by the challenges in these end markets.
The primary driver continues to be the U. S.-China trade wars impact on demand in China and its associated impact on Europe, which is highly dependent on exports to Asia. Looking at the cadence through the quarter, January was about as expected, but after Chinese New Year, demand was sluggish and did not pick up as we had hoped. Destocking was evident throughout the quarter and a substantial contributor to our volume decline. That said, March was a strong month, and April orders gave us confidence, we will continue the trend upwards into the second quarter, and we're seeing signs of destocking coming to an end across many of our end markets.
Both sales revenue and EBIT increased sequentially with EBIT up $30,000,000 or 42 percent. Higher sales volume and improved product mix drove the sequential improvement in first quarter. On a year over year basis, sales revenue decreased primarily due to lower specialty plastics sales volume and an unfavorable shift in foreign currency exchange rates. Lower volume in specialty plastics was due to continued customer inventory destocking, particularly consumer durables, related to the uncertainty caused by the U. S.
China trade dispute. As a highlight for the quarter, performance films and advanced interlayers volume and mix were relatively unchanged despite declining vehicle build rates globally. Growth in high margin innovation products such as paint protection film, heads up display interlayers and architectural interlayers is offsetting declines in the underlying auto market. EBIT declined year over year primarily due to lower sales volume and unfavorable exchange rates. And we're also still working off our high cost inventory last year.
Looking forward, we expect strong sequential improvement for Triton destocking coming to an end with primary demand intact, continued mix upgrade due to products like paint protection films and premium interlayer products, typical seasonality, and improvement in the flow of the lower raw material costs in our inventory. Taking these factors together, we expect EBIT in this segment will be similar to the second quarter of 2018. Looking at the full year, given relative to 2018. Moving now to Slide 7. Additives and functional products also had strong sequential improvement with EBIT up $27,000,000 or 22 percent.
The sequential improvement was due to improved product mix and increased spreads. Sales revenue decreased year over year, particularly for adhesives resins due to continued competitive pressures. And for tire additives projects attributed to trade related pressures. In tire additives, in particular, trade related uncertainty has had a significant impact on Chinese tire production, during a time when overall Chinese economic demand is slowing down. Chinese tire producers have adjusted accordingly by destocking their inventories.
As a result, tire additive competitors have excess capacity in China which has caused some short term competitive dynamics in our legacy products. As we continue to see competitor capacity as we have discussed in prior calls. Revenues were also negatively impacted by a stronger dollar. Lower selling prices year over year were largely attributed to Care Chemicals due to cost pass through contracts producing stable earnings. Looking at EBIT, the year over year decrease was primarily due to lower sales volume and an unfavorable shift in foreign currency exchange rates.
To a lesser extent, excluding the Care Chemicals cost pass through contracts, prices were relatively flat sequentially, with higher costs raw material flow through creating some pressure on spreads year over year. Looking at the second quarter, we expect sequential improvement in both revenue and EBIT, due to seasonally stronger volume and increasing spreads as lower cost raw materials continue to flow through inventory. But earnings will not get back to last year's levels due to volume still recovering and unfavorable currency. And we expect spreads to be similar to last year. As we move to the second half of the year, we expect demand to improve for coatings, adhesives, and tire additives assuming the trade dispute with China is resolved.
There may also be some upside as China appears to be stepping up environmental enforcement actions. For the full year, Now to Slide 8 in Chemical Intermediates, which delivered a strong improvement in sequential earnings. On a year over year basis, sales revenue decreased primarily due to lower sales volume mostly because of the refinery grade propylene project reducing bulk ethylene sales as planned. Remember in the first quarter of 2018, we were still selling ethylene at attractive prices due to market conditions. Lower raw material prices in a few products also led to reduced pricing in the segment.
EBIT decreased primarily due to lower sales volume and lower selling prices declining slightly for a few olefin products, particularly glycos. Looking at the second quarter, while we don't have the headwind of the industrial gas supplier outages, market conditions have changed from a year ago. The benefit of not having supplier outages from last year is being offset by a sequential decline in spreads Similarly, in the full year, we expect to benefit from the lack of some of the 2018 headwinds in 2019, to be offset by weakening market conditions, especially impacting spreads in acetyls and glycols leading us to expect EBIT in 2019 to be similar to 2018. Sales revenue decreased year over year primarily due to lower acetate tow sales volume attributed to China trade related issues and other customer buying patterns as well as lower acetate tow selling prices. EBIT decreased primarily due
to lower acetate tow selling prices.
EBIT decreased primarily due to lower acetate take to a sales volume, somewhat offset by growth in textiles and lower raw material costs. This is consistent with the guidance we gave you on our fourth quarter call that first quarter EBIT would be the lowest quarter for the year. For the full year, we expect acetate tow volume declines consistent with the underlying market, offset by growth in textile market and cost reduction actions. Therefore, we continue to expect fiber's EBIT to be about the same as 2018. On Slide 10, I'll transition to some corporate financial highlights.
In the first quarter, we did a nice job managing our cash flows and remain on track to deliver greater than $1,100,000,000 of free cash flow in 2019. Priorities for use of this cash will remain balanced between deleveraging, funding an increasing dividend And in the absence of bolt on M and A, we will use the remainder of our cash for share repurchases. I'll add that you should always assume that we fully deploy our cash. We returned $212,000,000 to stockholders in the first quarter through share repurchases and dividends, and we remain committed to an investment grade credit rating and will de lever as needed to maintain our solid balance sheet, likely in the $250,000,000 to $300,000,000 Our effective tax rate in the first quarter of between 16% to 17%. With that, I'll turn it back over to Mark.
Thanks, Kurt. On Slide 11, I'll provide an update on our 2019 outlook. Our earnings challenge in the first half of the year is predominantly a volume challenge for a high value specialties in slow growth world, especially in Asia and Europe, compounded by the destocking. Spreads in the specialties in the 2nd quarter improving and are expected to be similar to last year's level. That said, we are encouraged by the improvement in our orders through March into April and believe most of the destocking is behind us.
And as the 16th largest exporter by volume in the U. S, with Exxon is the only chemical company above us, we're probably more exposed to trade disruptions we've seen for the last two quarters. The stronger U. S. Dollar is having a negative impact, which is a challenge given our U.
S. Manufacturing footprint. We've assumed that on average, the dollar euro exchange rate will be around $1.14 for the year. And we expect the impact of the first half to be around $30,000,000 with AFP and AM most impacted and with limited impact in the second half. To recall from our fourth quarter call that we discussed that slow flow through of high cost raw materials from last year would impact our earnings in the first quarter.
Which it did. Given the slower than expected volume in the first part of this year, this impact was greater than we expected. So the benefits of the lower cost raw materials will now be more of a second half impact. Lastly, we're expecting higher pension costs for the year and approximately $30,000,000 split relatively evenly between the quarters. Putting this together, we're expecting 2nd quarter EBIT to increase between 15% 20% compared to the first quarter.
Moving next to the second half of the year. We are assuming that the U. S. China trade dispute is settled at some point here in the second quarter removing uncertainty that is impacting the Chinese economy. We're also expecting improving global demand, and we are starting to see it already with strong demand in March April compared with January February.
I would describe April at more normal levels. Plus innovation is creating our own growth. As demand improves, our asset utilization levels will pick up, and that should result in lower cost raw materials and conversion costs flowing through. And then roughly $30,000,000 first half year over year headwind from the stronger dollar is expected to be much lower in the second half of the year. And then we have the additional $40,000,000 of cost actions we're taking.
Moving on to the full year, obviously, we have to offset a substantial earnings decline in the 1st half, It's also important to remember that we have an easy comp in Q4. With all of the growth drivers in the second half that I've mentioned, we have confidence that we can deliver low single digit EBIT growth for the year. And then with returning cash to shareholders and share repurchases and a lower interest expense, We expect our EPS can grow at the low end of the 6% to 10% range that we provided in the 4th quarter call. As Kirk mentioned earlier, we continue to see a pathway free cash flow for greater than $1,100,000,000. I often get asked what makes me confident Eastman's future, and here's the bottom line for me.
Big picture, we continue to focus on what we can control and are winning with customers because of our innovation driven growth model. And at the same time, we're aggressively reducing our costs accelerate top line growth to the bottom line. If nothing happens without the dedication and the drive of the east, the people of Eastman throughout the world who face our challenges and opportunities head on and every Day, they find ways to overcome them and are determined to win. And that's why I'm confident we're going to win today. And far far into the future.
With that, I'll turn it back to Greg.
Okay. Thanks, Mark. We've got a lot of people on the line this morning and would like to get to as many questions possible. So as always, I ask you to please limit yourself to one question and one follow-up. With that, Kim, we are ready for questions.
Thank
you.
Our first question today is from David Begleiter from Deutsche Bank.
Thank you. Good morning. Good morning, Jason. On your full year guidance, it looks like you lowered segment guidance in one segment, AF and P, but maintained in the other 3, you maintained the full year guidance Can you talk about that dynamic and why you didn't take the opportunity now to trim the full year guide given the challenging macro?
Thanks, Dave. And, and your observation around the guidance is sort of directionally correct. Obviously, in the first quarter, earnings came in a little bit lower than we expected, and we, we have that adjustment, in the second quarter. And that's why you saw us take the aggressive cost actions that we announced in late March. So while we have these challenges, we stepped up our cost reductions to take another $40,000,000 out relative to the plans we had in the beginning of the year.
That sort of balances that equation out that allows us to stay on track for our guidance. And we also feel very encouraged by the improvement in volume we saw in March a continued improvement in the volume that we're seeing as we go into April and getting our mix back. One of the bigger challenges we've had here is mix. Of our high value products, and that gives us confidence we're on the right track for the rest of
the year.
And, Mark, on these additional cost actions, how permanent are these actions and where are they coming from?
So, David, as we started the year, as a reminder, we were already taking aggressive cost actions to kind of help offset higher turnaround costs and other anticipated challenges at the time. So as Mark mentioned, as we started the year, we decided to take additional actions, which are primarily headcount, contractors and discretionary spend. So the additional actions are expected to contribute $40,000,000 to our 2019 results. So I'd call those a pretty permanent kind of reductions and AO, again, predominantly in the second half of the year. So these factors plus the additional expectation expected improvements in 2019 should provide us good momentum going into 2020.
I'd also note about 3 quarters of those cost reductions going to manufacturing. And so they'll go into COGS and then they'll have to flow out. So that's why they're going to be very back end loaded and where the benefit shows up.
Thank you very much.
Moving on, we'll hear from Jeff Zekauskas from JP Morgan.
Thanks very much. What was the magnitude of the cash restructuring charge that you took in the first quarter?
So you saw the restructuring charge, I believe, was about $28,000,000. That's a good portion of that is the anticipated severance of our restructuring programs. There'll be a little bit more in the second quarter and maybe a small tail in the second half of the year. But a good portion of that is that $28,000,000 of severance charge accruals that we took in the first quarter. That will be the cash impact.
Now not all that cash flows out this year, it could go over a 12 month time period too. So some of these severances accruals get paid out over a 12 month period.
And then for my follow-up, your prices in Advanced Materials in the quarter, I think, were up 1%. And if you and you had negative volumes in the quarter of some mid single digit level and like if you think about the Celanese earnings, I think in their engineered materials, their prices were up 7% and they had a similar volume decline to you. When you look at your businesses versus their businesses, do you find them in any way comparable do you think you're more disadvantaged in terms of being able to raise price? Or do you think that there was an opportunity where you could have been more aggressive and you plan to be more aggressive in the future. Can you kind of assess those different?
Can you assess that comparison?
Sure, Jeff. And good morning. First of all, the selling these business and our business are just fundamentally different. So it's it really doesn't make sense to make a lot of comparisons. They're primarily a compounding business with a completely different set of polymers.
And different set of applications. So I'm going to really focus on us. The business that we have has been incredibly successful delivering very strong earnings growth for the 6 years and this year will be the 7th. And the underlying driver of that is volume and mix improvement as the key to sort of driving that growth where we're selling at very high growth rates, very high value, high margin products like Triton heads up display interlayers, performance zones, etcetera. Relative segment average, and we keep on driving the weighted average mix growth up.
So that's the core and part of our strategy. Pricing is obviously a key part of how you manage your spreads for any product relative to raw materials. And our goal is always to keep it stable, because that's how you keep a solid relationship with your customers long term for innovation. So in our business and SP was probably the specialty plastics guys were probably up about 3% in price And then that was offset by some price declines in advanced interlayers for high value products. We've discussed this all the way back in innovation day.
When you have these very high value products, You're in the early phases of adoption. Your prices, because your cost structure are quite high. And then as you develop scale, in volume and growth of that, you share some of that benefits of scale with your customers and price declines, which is especially typical in the automotive industry where those products go. So you see that going on, but the volume mix growth is so strong, double digit levels that the earnings grow despite, those modest price declines. So in general, that sort of where it played out.
What I'd say is that when you're trying to build a business and have innovation be at the heart of your business, and the markets we serve, we work with the same large customers forever, right? The glass customers or even the tire coating customers in AFP side, you've got to have a relationship where they have trust in you and that you're being balanced in how you manage your price versus raws, which we do very well as our spreads are relatively stable. But you can't be greedy, right? So when you have a declining raw material situation raising prices aggressively at the same time, creates a significant amount of tension with your customers where they are not as excited about innovating with you and they're certainly very motivated to find alternatives suppliers to you when you if you do that. And in specialty business, you can do that for a short period of time in our kind of businesses.
But then you suffer the consequence later on about losing volume 12 months or so later as they work to find alternatives. So We think we have a good balanced relationship with our customers. I understand, what we're trying to do, we keep our spread steady and we drive volume mix growth and center on innovation.
Okay, great. Thank you so much.
Our next question today is from Robert Koort from Goldman Sachs.
Thank you. This is Ragil Stora on for Bob. You're highlighting some sequential earnings improvements through the year. And the 4Q to 1Q improvement was notable, but when you fast forward to 4Q 2019, what kind of year over year growth is possible given the easier comp
So, great question. And it's an important one to remember when we talked about our back half guidance. With macroeconomic growth occurring, with innovation in our high value specialties also creating our own growth, we're assuming that 2018 2019 is going to be materially better. And the fourth quarter is an easy comp. Right?
So if we can just get back to 2017 levels in Q4, that's $80,000,000, of the hole we have to fill in the 1st half. And then we look at, for both 3rd and 4th quarter, volume and mix growth being better than 2017, you've got that as a tailwind to help the back half of the year. And you got the cost flow through, which will flow through through the back half of the year, especially go into the fourth quarter. So I expect the 4th quarter to be very strong compared to the past.
And what I might add on top of it, remind you roughly $30,000,000 of impact of foreign currency you're expecting in the first half of the year goes away to a greater extent in the second half of the year. So we don't have that headwind to overcome anymore. In both third and 4th quarters. Right.
So you put all that together, and you in the cost reductions, you've got the hole basically being filled in the front half and you've got to just believe in some reasonable volume mix growth and some raw material tailwinds and you can get to our guidance.
Okay. Thank you. And are you seeing any signs that the specialty plastics destocking has ended? Any indication on volume changes for that for quarter over quarter and maybe also year over year for 2Q?
Yes, we've already seen that. So January in particular February were rough. The destocking in the fourth quarter that continued those 1st 2 months, was pretty significant. You have to remember that the vast majority of what we sell into China from specialty plastics is made into products that are predominantly exported back to the U. S.
And to some extent, Europe. You get into this trade war issue, a lot of those producers really lost confidence in their ability to sort of export back to the U. S, because they fear the trade and tariffs going back to 25%. That's what held them up in the 3rd quarter, I'm sorry, in the fourth quarter last year, as well as the uncertainty of what would happen on March 1. As things started to sort of stabilize and look like things were going to get settled to some degree, people started to get them back to business and we saw a pretty good recovery in Triton orders in particular in March.
And March was, as a month, pretty strong. And those orders are holding up as we go into April. So we feel pretty good about the destocking question when it comes to specialty plastics. And when you combine that with raw materials finally starting to flow through, at a benefit in the second quarter, it leads to a pretty strong second quarter. Sequentially from the first.
We'll take our next question from Vincent Andrews from Morgan Stanley.
Thanks and good morning everyone. Maybe a little bit of a follow-up on the last one. As it relates to trade and the settlement of the trade dispute, what's your sort of sense from talking to customers about how activity or behavior or buying patterns, will improve. It sounds like there's already been some improvement sort of people sense that a resolution is within sight. So how much of an incremental step up would you anticipate right away post settlement or is this something that it's going to take a few months or a quarter before we sort of have a real sense of, how much of a snapback there's going to be?
That's a great question. And it's obviously a pretty difficult one to forecast since we're dependent on President Trump settling a trade dispute with President Xi. And the timing of that is unknown or and the details of it are unknown. But based on everything we've seen, which is same stuff you've seen, it seems like they're making good progress and, the odds of escalation now are going down. And I'd say that's very well covered here in the press and the U.
S. But from what we can tell in China, they're pretty quiet. They're being very careful about declaring any kind of victory or possible victory with their inside their country because they just don't know what's going to happen, with President Trump. So there's still a lot of caution and uncertainty in China today. But I'd say that destocking is mostly playing out and behind us.
So you've got the removal of that headwind. And primary demand is still out there, including exports, to some degree, but we really haven't seen any restocking yet, that could be material at some point. And we're not banking on much of that in our forecast. So that would be upside. So what we need is a trade settlement to sort of get settled, not escalate and the Chinese government to send the all clear signal to their companies and their consumers.
That things are going to get back to normal. You've also got them dumping a ton of stimulus into their economy, which is also, of course, helping improves things right now and we can see some of that benefit. So when you put that all together, we feel like it is stabilizing news is getting out that things are going to be okay in China. But we're not really seeing a dramatic recovery yet. But we're a lot better off than where we were in January February.
Okay. And on the adhesives resins competitive activity, Has that been sort of made worse by the trade issue? And, or just weak demand? And if that's something that potentially we're about to lap or could could snap back, post resolution?
Yes. So for on the, on adhesives, The global underlying market growth rates for adhesives is very strong. It's consumables, hygiene applications. And overall, I'd say, pretty good. There's no question in China demand has been a bit off, especially in some applications, that are a little bit more consumer discretionary.
And that's contributed to some of the pressure in the marketplace. But adhesives is more of a supply driven issue than it is a demand driven issue, as we told you, in the past, we've had some new capacity come on the marketplace in Asia. And the globe slowing down a bit doesn't help in that equation. The good news is this business under has very strong underlying market growth rates that will continue, but are really not that discretionary. To use the diapers and we've got to use them.
And so we feel good about absorbing this capacity that's been added on top of that. We've got innovation rolling out in the marketplace this year. That is a huge sustainability trend. This market is a low odor no odor, preferably no odor, no VOC kind of product. We've now launched the best in class product for those applications with this sensitivity on the environment out there.
And it's expected to grow quite well. We'll get that in the marketplace in the back half of this year towards the end. And that gives us another way to grow out of this business. And the rosin resin conversions also continues where, same environmental trend rosin's have a lot of odor and smell to, consumers don't want that. And so that's another way we're picking up resin growth to fill up the capacity.
Okay. Thanks very much guys.
We expect second half to be better.
TJ Juvekar from Citi has our next question.
Yes, hi, good morning. I'm looking at ethylene prices, ethylene prices have collapsed. They're down to what $0.13 And I know you don't sell as much ethylene now with your RGP project, but then looking at propylene, is also down with propylene inventories close to 6,000,000 barrels. So I guess my question is, if one of our complex remains weak, are you able to get pricing on your derivative products?
Good question. So on the ethylene side, as you just mentioned, we had a considerable headwind in ethylene last year and the RGP investment we made this year, which is up and running incredibly well. And performing better than we expected, has taken us a long way in reducing the ethylene we sell this year in the merchant market. And that helps mitigate a lot of that headwind giving us a year over year benefit. So that's been great.
When it comes to derivatives, you're right to point out that propylene ethylene don't define the price of derivatives. It's just an indicator of the underlying market conditions. And in a lot of places, prices are holding up well in our derivatives from propylene and ethylene. But there are a few places where Kirk called out that we do see some price pressure, in particular, glycols MPG, MEG, glycol ethers are the places where we're seeing some price pressure, creating some spread compression. So that's factored into our guidance.
And to some degree, that's what offsets the benefits we've created through our GP and, and not having the industrial gas outages from last year, those sort of net out those benefits to sort of keep the segment stable this year.
Okay. And then you added a lot of new capacity and products like Triton, Krystex and PVB. So if I look at all of them together in aggregate, what sort of the ballpark EBITDA do you expect in 2019 from that?
P. J, we don't break out the EBITDA growth just from distinct projects. What they're really driving is the underlying growth in the markets we serve that we've been providing in our guidance. So like Advanced Materials, where we're talking about earlier, again, that business is looking to grow EBIT 7% to 10%, EBITDA would be reciprocal to that, other than the the factor is a little different. So overall, those projects are typically greater than cost of capital returns, driving good returns and there'll be one of the factors that long term contribute to our EBITDA growth as a percentage.
I mean, what I'd add is that, the fact that we did all those plants is because our volume growth has been so strong from 2015 through 2017. We were running out of capacity on all those last summer. And they started up just in time. Obviously, we didn't predict a trade war impacting demand in the short term. But, as as those markets come back through this sort of short term disruption on the macro, the fixed cost leverage of all that's going to be very attractive when that volume from those high value products come in, as we work through the back half of this year and even more so in 2020.
Great. Thank you.
Next we'll go to Aleksey Yefremov from Nomura Instinet.
Hey, good morning. It's Matt Skowronski on for Aleksey this morning. On the last call, you kind of gave out a Brent Crude prediction for the year. It seems to have changed since then. Can you just tell us how this changes your outlook?
It doesn't really have much of an impact on our outlook. We were in sort of the $70 range. We're now at what $74 before So I think that it's important to remember that oil is part of an indicator power raw material prices move But it's not the only indicator. Last year, oil did move up quite a bit, especially as we've got into the third quarter. But the spreads above oil also dramatically increased.
So if you looked at something like paraxylene, normal spreads above naphtha were like $300 a ton, you look at history, we were well over $700 in third quarter last year. We're now back to the $500 range. And even with oil up, we expect that 500 keep moving its way back to normal because there's a lot of capacity coming along in PX in the back half of this year. So you got to remember that those are indicators, but they're not there's a lot more going on in any of these markets. So even if with oil being a bit higher than we expected, a lot of the raw materials that we buy, we don't expect those prices to move up much.
And in places where they do, we'll increase prices. We've demonstrated. We're very point about managing prices. We offset all the raw material increases through the third quarter last year with price increases in And as we look at the price raw trade off in the specialties, we expect to get back to 2nd quarter spreads of last year by the second quarter of this year, And then that becomes a tailwind as we go to the back half. So we can manage that.
Thanks for that. And then in Fibers, on the last call, you kind of noted it would be the weakest quarter, which it was. How did trends look so far in April? And can you give an outlook on pricing for the remainder of the year?
Sure. So on the on the volume side, as Kurt mentioned, we expect volumes for the year, to be slightly down with the overall market decline. So what's underneath that assumption is customer buying patterns in this business as you look at our history, it bounce around a lot. So Q1 was just a uniquely low customer buying pattern outside of China. In China, This is a trade related issue where they stop buying tow from us made in the U.
S. And we had to start shifting to our Korean facility. To import in the U. S. We have orders now from the green facility, but we're still in the qualification process on some of the with some of the customer plants there.
But we feel like we'll get back to sort of where we needed to be on that volume relative to last year as well. So I think we're fine. It's just going to be lumpy in how it spreads out. And second quarter will be a lot better than the first quarter on volume. And price, another good question prices were down a little bit more, in the first quarter versus the rest of the year, because some of the price declines we put in place last year didn't go effective until April 1.
So you're going to just see a bit more of a drop in Q1 than what you'll see for the rest of the year on a full year basis, prices won't be down very much at all.
Thank you.
Moving on we'll hear from Frank Mitsch from Fermium Research.
Hey, good morning folks, and appreciate some of the color so far. Curt, you were talking about the use of that $1,100,000,000 plus cash flow that bolt ons are part of that equation. How is that market looking to you right now? How should we think about the probabilities or possibilities of Eastman doing more than just Marlotherm?
Yes, I would say our bolt on acquisition pipeline is active. There are several tunes we're looking at. As always, you know, you've got to make sure you do the right diligence, pay a fair price. And, and hopefully don't find big, big ass spreads. I'd say right now, it's possible you might see 1 or 2 more small acquisitions during the course of the year.
But we'll see how those play out.
And small, just for, for definitional purposes, what, less than $100,000,000 sort of ballpark?
Yes, I would say less than $100,000,000 in that ballpark, yes, in aggregate.
All right, terrific. And Mark, you did a nice job talking about how March came back in terms of volumes and certainly seeing that through the month of April
as well. I was wondering if
you could give some granularity by region on what you're seeing there and what the expectation for the second quarter?
Sure, and good morning, Frank. So, the biggest hit across all regions when it comes to value was China. It's important to keep in mind that different regions have very different margin profiles. So when you look at our specialty businesses, 2 thirds of their revenues outside the U. S.
And, and so when you're in China, we sell very few commodity products in there. It's almost all specialties variable margins are substantially higher, than the U. S. Average that includes a lot of CI since very little of that is exported. So the big volume and what I'm saying is mix hit was China.
And mostly that was where we also saw the most stream amount of destocking going on on things like Triton tires, even a little bit of adhesives and some coatings. And so when we got to March, we saw a good recovery in Triton. We saw a good recovery in some of our highest value, specialties and coatings And, and tires are still sort of working itself out. So China has been a pretty big, good, pretty attractive snapback you know, towards the end of the quarter and it seems to be holding up so far through April. Europe, it's a little bit different story, and I would say Europe is still very much attached to the China trades issue.
When the Chinese cut back on imports, it's not just a U. S. Impact. It actually has a bigger impact on Germany than it does on us because they're so dependent on exports. So you've seen that economy slow down, all connected to the same issue We've seen demand recover there, as well, but it's more of a lag effect.
So a little bit slower in its recovery. And that's why you see AFP having a bit more challenge in recovering its earnings to last year versus AM, which is much more sort of China, dependent on where the impact occurred. The U. S. Has been sort of stable and moving along just fine.
Terrific. Thanks Mark.
And up next we have Mike Sison from KeyBanc.
Hey guys. In terms of Advanced Materials, you know, still maybe struggling a little bit to see the growth in the second half. I did the math, the EBIT growth with operating income growth needs to be somewhere around 30%. You have 3 kind of factors you noted like lower raw materials, volume and maybe less FX. Can you maybe help us understand what the Are they about even in terms of the recovery for the second half or am I missing a couple other variables that helped grow that?
Volume mix is the primary driver, Mike. Obviously, we don't have the currency headwind that we had in the first half of the year. So you don't have that $15,000,000 headwind. That is on AM in the first half of the year repeating in the second So there's that. There's raw material flow tailwind, of course, with PX, that's going to help, as that price comes off relative to very high price last year.
But the biggest driver by far is volume mix. You got to remember that what we're saying is we're going to grow volume mix, through the back half of this year relative to the first half of this year, which means it's going to be materially better than 2017, And when you look at the drop in earnings in the fourth quarter of 2018 due to volume and mix and the high raw material costs, you're going to fill that entire hole and then add to it with some additional volume and mix, especially when we've got all these products like heads up display interlayers and performance films growing at double digits. So when we put all that math together, you can get to the guidance we're giving you.
And if I could add just two comments on top of it, Don't forget that easy comp on a fourth quarter basis. Look at what they did in fourth quarter of 2017 versus fourth quarter of 2018, and we expect that to be growing on top of what we saw back in fourth quarter 2017. So that is a good pillar. The second thing I'd add is this not only for Advanced Materials, but for the corporation as a whole, is this benefit of the flow through of lower raw material costs. And so to give you some sense, if you think about just the first quarter, the flow through of lower raw material costs was only a benefit of roughly $10,000,000.
And that is only a small piece. And within that, it was mostly a benefit in the commodities and still a headwind in these specialties. So as these lower raw materials flow second quarter as well as second half of the year, you will see improved EBIT resulting from the flow through lower raws on top the utilization and the volume mix growth.
Got it. I also want to emphasize asset utilization is a big deal, guys. So when you have to slow the plants down like we did last year in fourth quarter to adjust the demand situation and even run them a little bit slow in the first half first quarter, your asset utilization, your fixed cost per kg goes up in a meaningful way. So as volume picks up, that starts to accelerate how all the cost cuts we're doing can flow into a lower cost per kg and benefit earnings in the back half of the year.
Okay, great. And then as quick follow-up, you spent a lot of time over the years moving your portfolio into more specialty areas. If you look at the 1st, the 4th and first quarter results for the specialty businesses, I'm still a little bit surprised that earnings got hit so much. So When you think about the performance that you expect to see, and I understand it's they're much higher margin businesses, but What's kind of the takeaway you want us to see in terms of supporting the notion that your portfolio is much more special than it was?
Yes. So I mean, the growth in the specialties has really been a tremendous success story. If you even just go back and look at history here from 2014 to now, We've done a series of acquisitions here. We've delivered a significant amount of innovation, growth on top of that. And we've grown the EBITDA from these two segments by over $500,000,000 from 2014.
And if you put it on a constant currency basis over $600,000,000, So this is a great story of delivering a phenomenal amount of earnings growth in the last 5 years, all to, due to our growth model and our innovation, that allows us to sustain our spreads and drive volume and importantly mix upgrade. And I don't think anything in that that that story has changed from a long term point of view as I look forward. No question, we in our portfolio have a high exposure to consumer discretionary spend. Transportation, BNC, consumer durables, it's about 45% of the company's total revenue. So if you have a situation where there's a correction in demand in those spaces, and that is clearly what we saw in 4Q, 2Q and for 4Q and 1Q and a little bit still dragging on into 2Q, for AFP.
When you lose that very high variable margin demand with destocking to correct to this the sort of trade economic situation, you're going to take a hit, given the value of those KGs relative to the company average. But the good news is, we've already seen demand coming back in March April, so that demand comes back. The economies improve. And that value that we've created over the last 5 years through volume and mix growth comes back in a pretty dramatic fashion on the other side of the equation, just like it went away, it comes back same way. And so there is sort of sensitivity we have to consumer discretionary.
I don't think that's a secret about our portfolio. And the good news is we make a lot of money in China and I believe long term China is going to be an attractive growth market to continue to deliver a lot of growth in
the future. Mike, one other, just takeaway as you think about all those long term benefits that Mark talked about on a short term basis, don't forget that these specialties have a long supply chain. And so when you have a disruption like these trade wars, that's why it has some of the negative impact, like you see in fourth quarter, first quarter, those will return to more normal levels and we have also might have a bounce back at some point as those supply chains fill back in. So just keep in mind, short term, it's been impacted by those supply chains in those market dynamics.
Our next question today is from Lawrence Alexander from Jefferies. Hi
guys, it's Dan Mizzo on for Lawrence. How are you?
Good morning.
Good morning.
I just really just have one question. The softness in auto and entire has been well documented. Could you tell us what you're seeing in your construction and ag end markets?
So on the, on the Ag market, obviously things were a little bit slower with the wet weather in the first quarter and we saw some of that impact particularly in CI. But everything we can see in those markets are all coming back we'd expect. So we feel good about the Ag market this year on a full year basis. And we're seeing some innovative growth with a few of our customers to help us create our own growth there as well. When it comes to the construction market, it's been relatively stable.
So from an architectural interlayer's point of view, it's been great. Vast majority of where we sell the interlaces in Europe, where they do laminated glass, and, we've seen strong growth there through, 2018 and that's continued continuing on through 2019 and that's pretty visible with the back orders that you can see in construction. On the architectural side, North America has been fine. Obviously, China and Europe have been a bit off, but we've seen some recovery there. One other thing I'd mention is environmental enforcement does create benefits as well with this unfortunate accent that's occurred in China.
We do see an impact on a few producers that we compete with being shut down for environmental inspections and things like that. That's giving us a modest tailwind. We're not banking on much of that, but if that continues that enforcement continues, there'll be another upside to our forecast.
All right. Thank you very much.
Duffy Fischer from Barclays is up next.
Good morning. First question just around the raws again. I know you've got an accounting benefit that will flow through in the back half, but a lot of your suppliers would talk about kind of the same destocking events happening that you're seeing with your products. So If you get that back half pickup in economic activity like you're expecting, what do you think the odds are when you look at all your raw materials and kind of the supply demand that actually prices there will rise fairly rapidly and maybe we're talking about raw material headwinds in the back half of the year.
Yeah, when we look at the specific products that we buy Duffy, I don't see there's a significant risk there. Mean, you can always get into oil price scenarios. And if it's demand driven where oil goes up, then we'll have the demand, market conditions to raise prices and we'll be fine. Supply driven events in oil is a different discussion. But, we're not really worried about that with the raws that we buy, especially because the one that was the biggest problem for us in the back half last year was PX and there's so much new capacity coming online.
Fair enough. And then just to jump to Fibers, Can you break out if you just want to say the EBIT Delta year over year kind of that down $14,000,000, how much of that was China versus ex China? And then do you think it'll be difficult to get your Chinese business back once the deal is settled? Because obviously there are players inside China that have excess capacity, they're probably backfilling that today. Is that a structural step down, do you think, or will that be pretty quick to come back?
Yes. As far as the demand hit goes, I would, in the first quarter, I would say it's sort of balanced between the China factor and sort of just customer buying patterns across the for this year with other customers. In regards to your second question, there's no competitor in China backfilling us The all the companies that are the plants that make tow in China are joint ventures with CNTC, our customer They run those plans flat out every day as best as they possibly can every year, which is why imports dropped when they added that capacity over the last 5 years. So the imports, and we're now down to pretty small levels, are just being shifted around from plants different plants that are not outside the U. S.
But we have a great relationship with our customer there. They're working with us and we believe we'll get back in.
Great. Thank you guys.
Moving on, we'll hear from John Roberts from UBS.
Thanks. You mentioned the coming paraxylene capacity. I think it's the primary target of some of the new crude to chemical projects coming online globally. So I guess this could be a multi year kind of weakness in paraxylene. Do you think structurally, you'll end up passing some of that through because the whole polyester I guess, complex could come under pressure with weaker paraxylene over time here.
Yes. So there's a lot of PX coming online. The big chunks in the back half this year, just traditional Px plants, not these sort of oil to chemical things. But, we there'll be some passing along with some of that PX value, to some of our customers, which is natural. And the logic I started with in the beginning of the Q and A session here, I'll reference you back to, which is you got to have a balanced approach to their customers if you want them to continue buying from you.
And we work with the same customers for the last decade and I hope the next decade. And so we've got to have, respect and trust and innovation together.
Thank you.
Let's make the next question the last one, please.
And that will come from Kevin McCarthy from Vertical Research Partners.
Thank you for squeezing me in. Mark, I had a question for you on interlayers. In your prepared remark, I think you referenced double digit growth prospects for Saflex and you threw out, I believe, 20% in Europe. And so I was wondering if you could elaborate on what is driving that? The build rates have obviously been tough and my recollection is that Sekisui was adding some capacity in the Netherlands.
So, perhaps you could elaborate, you're gaining share, is it penetration mix, heads up displays, construction, what would be driving that premium? Yes,
so specifically that 20% applies to heads up display interlayers in Europe, not the overall interlayer business. So what you're doing is you're replacing standard interlayers with one that includes acoustics and heads up display and we're the world leader in that specific product, but it's a very small percentage of the overall market right now there's not that many heads up displays in cars yet. So we're seeing tremendous growth as we're adding that feature, because auto OEMs are always looking way to value up cars, especially in the slow growth markets. They want more feature packages, to offer, to get more value per car. Which is a great lever for us, in the different kind of features we add.
So that's going quite well. And I'd also add the architectural is also growing really well in Europe as well. So that gives us a way to offset the underlying auto market trends. It's very impressive that performance films and and interlayers is stable in this
accrual growth rate in the interlayers business? I don't know over the next 3 plus years or so.
Well, I think that, you know, again, volume mix, we continue to expect that, you know, the Advanced Materials segment, including, SP will grow sort of double the underlying market growth rate. So anyone guess on what the automotive growth rate is going to be, but we'll grow better in it.
All right. Thank you.
Thanks, Kevin.
All right. Thanks again, everyone, for joining us this morning. A replay of this call will be available on the website later today. And I hope you all have a great day.
And that does conclude our conference today. Thank you for your participation. You may now disconnect.