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 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.
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, Curt Espeland, Executive Vice President and CFO, and Jake LaRoe, Manager, Investor Relations. Before we begin, I will cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company's 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. Second, earnings referenced in this presentation excludes certain non-core and unusual items.
In addition, historic quarterly earnings use an 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 investor section. Projections of future earnings exclude any non-core, unusual, or non-recurring items. With that, I will turn the call over to Mark.
Thanks, Greg, and good morning, everyone. I will start on page three. 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 would like to pause and take a moment to discuss some of the important highlights from the quarter. First, after a challenging fourth 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 eighth consecutive year, demonstrating our commitment to operate our facilities responsibly and efficiently.
Eastman is always searching for ways to leverage our world-class operations to macro trends like sustainability, and I'm proud of the investments we're making in methanolysis and the carbon renewal technology, which provide 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 and our specialty businesses, we completed the acquisition of Marlotherm heat transfer fluids from Sasol, opening up their product offerings to new regions and will continue to pursue bolt-on M&A where it makes sense.
Core to how we win is our ethics and integrity, and we appreciate the recognition as one of the world's most ethical companies by Ethisphere for the sixth consecutive time. 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 million to shareholders in the first quarter of 2019, an 18% increase over the first quarter of 2018. On slide four, we continue to execute our innovation-driven growth model to create superior value. Today, I'd like to highlight two 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 two 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 Saflex 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 PVB technology platform enables us to continually 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 projector manufacturers. Our application development capabilities enable us to tune our products 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. It's produced at our new facility in Kuantan, Malaysia, which is now fully operational, and we're seeing accelerated adoption of our new and innovative product, Crystex Cure Pro. Tire makers to 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 this superior product, and we're getting validation from customers that they're seeing significant benefit in line speed improvements, scrap reduction, and energy savings.
As a testament to the tire additives team's relentless engagement with the market, we're now working with more than 1/2 of the top 30 tire makers in the world on our next generation Crystex and have nine new plant trials in progress in the first quarter. Finally, we're proud that Crystex Cure Pro was recognized as a finalist in the 2019 Tire Technology International Awards for Innovation and Excellence. We're the only innovation company 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, Cure Pro is already demonstrating that we can extend our differentiated position as we move forward in filling out this new plan.
These are just two of many great examples we have that demonstrate how our specialties are delivering today. Our innovation and market connections position us to continue to win in the future. With that, I'll turn it over to Curt.
Thanks, Mark. Good morning, everyone. It's always a pleasure to spend this hour together. I'll begin with a review of our corporate results on slide five. Although challenges from the fourth quarter persisted into the first, we increased EBIT by 28% sequentially with growth in three of our four 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 costs in which we have less discretion, such as higher pension costs, netting out to greater than a $30 million 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 war's 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. After Chinese New Year, demand was sluggish and did not pick up as we had hoped. Destocking was evident throughout the quarter. A substantial contributor to our volume decline. That said, March was a strong month. April orders gave us confidence we'll continue the trend upwards into the second quarter. We're seeing signs of destocking coming to an end across many of our end markets.
Moving now to our segment reviews. Beginning with Advanced Materials on slide six, both sales revenue and EBIT increased sequentially, with EBIT up $30 million or 42%. 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, head-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. We're also still working off our high-cost inventory from last year. Looking forward, we expect strong sequential improvement for revenue and EBIT in the second quarter due to a few factors. Tritan 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 2019. Looking at the full year, given the positive trends in the business, we continue to expect Advanced Materials will grow EBIT between 7%-10% relative to 2019. Moving now to slide seven.
Additives & Functional Products also had strong sequential improvement, with EBIT up $27 million or 22%. 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 products 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 going down. Chinese tire producers have adjusted quarterly 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. We have confidence the dynamics will improve as we continue to see great adoption of our next generation Crystex Cure Pro in the marketplace.
For adhesives, we face competitive pressure from new 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. Earnings will not get back to last year's levels due to volume still recovering and unfavorable currency.
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, we expect 2019 EBIT to be similar to or slightly better than 2018. Now to slide eight 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 more than raw material cost for a few olefin products, particularly glycols. Looking at the second quarter, while we don't have the headwinds 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 in acetyls and some continued pressure in glycols. 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. Finishing up the segment reviews with fibers on slide nine.
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 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, plus the impact of the headwinds from China trade issues from the first half of the year, offset by growth in textile market and cost reduction actions. Therefore, we continue to expect fibers 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 $1.1 billion of free cash flow in 2019. Priorities for our use of this cash will remain balanced between deleveraging, funding and an increasing dividend, and in the absence of bolt-on M&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 million to stockholders in the first quarter through share repurchases and dividends, and we remain committed to an investment-grade credit rating and will delever as needed to maintain our solid balance sheet, likely in the $250 million-$300 million range. Our effective tax rate in the first quarter was roughly 16.5%, consistent with our full year expectation of between 16%-17%.
With that, I'll turn it back over to Mark.
Thanks, Curt. 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 our high-value specialties in a slow growth world, especially in Asia and Europe, compounded by the destocking. Spreads in the specialties in the second quarter are improving and are expected to be similar to last year's level. The volume challenge that we see is primarily trade related and to a lesser extent, due to the slowdown in the global transportation market. That said, we are encouraged by the improvement in our orders through March into April and believe most of the destocking is behind us. As the 16th largest exporter by volume in the U.S., with Exxon as 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. We expect the impact of the first half to be around $30 million, with AFP and AM most impacted, and with limited impact in the second half. You'll 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. 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 this is approximately $30 million split relatively evenly between the quarters. Putting this together, we're expecting second 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 and April compared with January and February. I would describe April at more normal levels. 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.
The roughly $30 million first half year-over-year headwind from the stronger dollar is expected to be much lower in the second half of the year. We have the additional $40 million of cost actions we're taking. Moving on to the full year, obviously, we have to offset a substantial earnings decline in the first 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. 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%-10% range that we provided in the fourth quarter call.
As Curt mentioned earlier, we continue to see a pathway to free cash flow for greater than $1.1 billion. I often get asked what makes me confident in 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. At the same time, we're aggressively reducing our cost to accelerate top-line growth to the bottom line. Yet nothing happens without the dedication and the drive of 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. That's why I'm confident we're going to win today and 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 as possible. 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. If you'd like to ask a question today, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. Our first question today is from David Begleiter from Deutsche Bank.
Thank you. Good morning.
Good morning, Dave.
Mark, on your full-year guidance, looks like you lowered segment guidance in one segment, AF&P, but maintained in the other three, yet 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. Your observation around the guidance is sort of directionally correct. Obviously, in the first quarter, our earnings came in a little bit lower than we expected, and we have that adjustment in the second quarter. That's why you saw us take the aggressive cost actions that we announced in late March. While we have these challenges, we stepped up our cost reductions to take another $40 million 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. We also feel very encouraged by the improvement in volume we saw in March and the continued improvement in 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, that gives us confidence we're on the right track for the rest of the year.
Mark, on these additional cost actions, how permanent are these actions and where are they coming from?
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. As Mark mentioned, as we started the year, we decided to take additional actions, which are primarily headcount, contractors, and discretionary spend. The additional actions are expected to contribute $40 million to our 2019 results. I'd call those pretty permanent kind of reductions, and they are, again, predominantly in the second half of the year. These factors, plus the additional expected improvements in 2019, should provide us good momentum going into 2020.
I'd also note about three-quarters of those cost reductions go into manufacturing. They'll go into COGS, they'll have to flow out. That's why they're going to be very back-end loaded in where the benefit shows up.
Thank you very much.
Moving on, we'll hear from Jeff Zekauskas from JPMorgan.
Thanks very much. What was the magnitude of the cash restructuring charge that you took in the first quarter?
You saw the restructuring charge, I believe, was about $28 million. 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. A good portion of that is that $28 million of severance charge accruals that we took in the first quarter. That will be the cash impact. Not all that cash flows out this year. It could go over a 12-month time period, too. Some of these severances accruals get paid out over a 12-month period.
For my follow-up, your prices in advanced materials in the quarter, I think, were up 1%. You had negative volumes in the quarter of some mid-single-digit level. 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? 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 assess that comparison?
Sure, Jeff, and good morning. First of all, Celanese business and our business are just fundamentally different, so it really doesn't make sense to make a lot of comparisons. They are primarily a compounding business with a completely different set of polymers and different set of applications. I'm going to really focus on us.
Okay.
The business that we have has been incredibly successful, delivering very strong earnings growth for the last six years, and this year will be the seventh. 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 Tritan head-up display interlayers, performance films, et cetera, relative to segment average. We keep on driving the weighted average mix growth up. That's the core and heart of our strategy. Pricing is obviously a key part of how you manage your spreads for any product relative to raw materials. Our goal is always to keep it stable, because that's how you keep a solid relationship with your customers long term for innovation.
In our business, SP was probably, the specialty plastics guys were probably up about 3% in price, that was offset by some price declines in advanced interlayers for our high-value products. We've discussed this all the way back in Innovation Day. When you have these very high-value products and you're in the early phases of adoption, your prices, because your cost structure, are quite high. As you develop scale and volume and growth with 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. You see that going on. The volume mix growth is so strong, double digit levels, that the earnings grow despite those modest price declines. In general, that's 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 the 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. You can't be greedy, right? 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 alternative suppliers to you if you do that.
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. We think we have a good balanced relationship with our customers. They understand what we're trying to do. We keep our spreads 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 [Ragini]. I'll fill in for Bob. You're highlighting some sequential earnings improvements through the year, the 4Q to 1Q improvement was notable. When you fast-forward to 4Q 2019, what kind of year-over-year growth is possible given the easier comp?
Great question, it's an important one to remember when we talk 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 2019 is going to be materially better. The fourth quarter is an easy comp, right? If we can just get back to 2017 levels in Q4, that's $80 million of the hole we have to fill in the first half. Then we look at, for both third and fourth quarter, volume and mix growth being better than 2017. You've got that as a tailwind to help the back half of the year. You've got the cost flow-through, which will flow through the back half of the year, especially as you go into the fourth quarter. I expect the fourth quarter to be very strong compared to the past.
What I might add on top of it, I'll remind you the roughly $30 million 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, we don't have that headwind overcome anymore in both third and fourth quarters.
Right. You put all that together, the cost reductions, you've got the hole basically being filled in the front half, you've got to just believe in some reasonable volume mix growth and some raw material tailwinds, you can get to our guidance.
Okay, thank you. Are you seeing any signs that the specialty plastics de-stocking has ended? Any indication on volume changes for that for quarter-over-quarter and maybe also year-over-year for 2Q?
Yeah, we've already seen that. January, and in particular February, were rough. The de-stocking in the fourth quarter that continued those first two 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. When you get in 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 fourth quarter last year, as well as the uncertainty of what would happen on March 1st.
Things started to sort of stabilize and look like things were going to get settled to some degree, people started getting back to business, we saw a pretty good recovery in Tritan orders, in particular, in March. March was, as a month, pretty strong. Those orders are holding up as we go into April. We feel pretty good about the de-stocking question when it comes to specialty plastics. 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.
Thanks.
We'll take our next question from Vincent Andrews from Morgan Stanley.
Thanks. Good morning, everyone. Just 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 as people sense that a resolution is within sight. How much of an incremental step up would you anticipate right away post-settlement? 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. It's obviously a pretty difficult one to forecast since we're dependent on Donald Trump settling a trade dispute with Xi Jinping, and the timing of that is unknown, and the details of it are unknown. Based on everything we've seen, which is the same stuff you've seen, it seems like they're making good progress and the odds of an escalation now are going down. I'd say that's very well covered here in the press in the U.S. 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 inside their country, because they just don't know what's going to happen with Donald Trump. There's still a lot of caution and uncertainty in China today.
What I'd say is the destocking is mostly playing out and behind us. You've got the removal of that headwind. Primary demand is still out there, including exports to some degree. We really haven't seen any restocking yet that could be material at some point. We're not banking on much of that in our forecast. That would be upside. What we need is the 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 improve things right now, and we can see some of that benefit. 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. We're not really seeing a dramatic recovery yet. We're a lot better off than where we were in January and February.
Okay. On the adhesives resins competitive activity, has that been sort of made worse by the trade issue and/or just weak demand? Is that something that potentially we're about to lap or could snap back post-resolution?
Yeah. On adhesives, the global underlying market growth rates for adhesives is very strong. It's consumables, hygiene applications, and overall, I'd say it's 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. That's contributed to some of the pressure in the marketplace. 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. The globe slowing down a bit doesn't help in that equation. The good news is this business has very strong underlying market growth rates that will continue, that are really not that discretionary. Got to use the diapers when we got to use them. 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 in 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. I expect it to grow quite well. We'll get that in the marketplace in the back half of this year towards the end. That gives us another way to grow out of this business. The rosin to resin conversions also continues where same environmental trend rosins have a lot of odor and smell to them. Consumers don't want that. That's another way we're picking up resin growth to fill up the capacity.
Okay. Thanks very much.
We expect second half to be better.
P.J. Juvekar from Citi has our next question.
Yes. Hi, good morning.
Morning, P.J.
I am looking at ethylene prices. Ethylene prices have collapsed. They are down to $0.13. I know you do not sell as much ethylene now with your RGP project. Looking at propylene is also down with propylene inventories close to six million barrels. I guess my question is, if one of our complex remains weak, are you able to get pricing on your derivative products?
Yeah, good question. 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 actually performing better than we expected, has taken us a long way in reducing the ethylene that we sell this year in the merchant market. That helps mitigate a lot of that headwind, giving us a year-over-year benefit. That has been great. When it comes to derivatives, you are right to point out that propylene and ethylene do not define the price of a derivative. It is just an indicator of the underlying market conditions. In a lot of places, prices are holding up well in our derivatives from propylene and ethylene. There are a few places where Curt called out that we do see some price pressure.
In particular, glycols, MPG, MEG, glycol ethers are the places where we are seeing some price pressure creating some spread compression. That is factored into our guidance. To some degree, that is what offsets the benefits we have created through RGP 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. You added a lot of new capacity in products like Tritan, Crystex, and PVB. If I look at all of them together in aggregate, what sort of 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. Like, Advanced Materials, where we were talking about earlier, again, that business is looking to grow EBIT 7%-10%. EBITDA would be reciprocal to that, other than the factor's a little different. Overall, those projects are typically greater than cost of capital returns, driving good returns, and they'll be one of the factors that long term contribute to our EBITDA growth as a percentage.
What I'd add is that the fact that we built 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 products last summer. They started up just in time. Obviously, we didn't predict a trade war impacting demand in the short term. 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 Matthew 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, what, $74 before. I think that it's important to remember that oil is part of an indicator of how our raw material prices move. It's not the only indicator. Last year, oil did move up quite a bit, especially as we got into the third quarter. The spreads above oil also dramatically increased. If you looked at something like paraxylene, normal spreads above naphtha were like $300 a ton. If you look at history, we were well over $700 in the third quarter last year. We're now back to sort of the $500 range.
Even with oil up, we expect that $500 to keep moving its way back to normal because there's a lot of capacity coming along on PX in the back half of this year. You got to remember that those are indicators, but there's a lot more going on in any of these markets. Even 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. In places where they do, we'll increase prices. We've demonstrated we're very disciplined about managing prices. We offset all the raw material increases through the third quarter last year with price increases. As we look at the price raw trade-off, and especially as we expect to get back to second quarter spreads of last year by the second quarter of this year.
That becomes a tailwind as we go to the back half. We can manage that.
Thanks for that. Then in fibers, on the last call, you kind of noted it would be the weakest quarter, which it was. How do trends look so far in April, and can you give an outlook on pricing for the remainder of the year?
Sure. On the volume side, as Curt mentioned, we expect volumes for the year to be slightly down with the overall market decline. What's underneath that assumption is customer buying patterns in this business as you look at our history, bounce around a lot. Q1 was just a uniquely low customer buying pattern outside of China. In China, this is a trade-related issue where they stopped 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 Korean facility, but we're still in the qualification process with some of the customer plants there. We feel like we'll get back to sort of where we needed to be on that volume relative to last year as well. I think we're fine.
It's just going to be lumpy in how it spreads out, second quarter will be a lot better than the first quarter on volume. 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.
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 $1.1 billion+ free 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 the possibilities of Eastman doing more than just Marlotherm?
I would say our bolt-on acquisition pipeline is active. There are several opportunities we're looking at. As always, you've got to make sure you do the right diligence, pay a fair price, and hopefully, don't find big ass spreads. I would say right now, it's possible you might see one or two more small acquisitions during the course of the year, we'll see how those play out.
Small, just for definitional purposes, what, less than $100 million, sort of a ballpark?
Yeah, I would say less than $100 million in that ballpark. Yes. In aggregate.
All right. Terrific. Mark, you did a nice job talking about how March came back in terms of volumes, and certainly you're 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 is for the second quarter.
Sure. Good morning, Frank. 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. When you look at our specialty businesses, 2/3 of their revenue is outside the U.S. When you're in China, we sell very few commodity products in there. It's almost all specialties. Verbal margins are substantially higher than the U.S. average that includes a lot of CI, since very little of that is exported. The big volume, and what I'm saying is mix hit, was China. Mostly, that was where we also saw the most extreme amount of destocking going on things like Tritan, tires, even a little bit of adhesives and some coatings.
When we got to March, we saw a good recovery in Tritan, saw a good recovery in some of our highest value specialties in coatings, and tires are still sort of working itself out. China's been a pretty attractive snapback towards the end of the quarter, and it seems to be holding up so far through April. Europe, it's been a little bit different story, and I would say Europe is still very much attached to the China trade 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. You're seeing 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. A little bit slower in its recovery.
That's why you see AFP having a bit more challenge in recovering its earnings to last year versus AM, which is much more China dependent on where the impact occurred. The U.S. has been sort of stable and moving along just fine.
Terrific. Thanks, Mark.
Up next, we have Mike Sison from KeyBanc.
Hey, guys. In terms of advanced materials, I'm 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 three kind of factors you noted, like lower raw materials, volume, and maybe less FX. Can you maybe help us understand, are they about even in terms of the recovery for the second half, or am I missing a couple other variables that help 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. You don't have that $15 million headwind that is on AM in the first half of the year repeating in the second half. 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. 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.
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 head-up display interlayers and performance films growing at double digits. We put all that math together, you can get to the guidance we're giving you.
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 2017 versus fourth quarter of 2018, and we expect that to be growing on top of what we saw back in fourth quarter 2017. 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. 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 million. That is only a small piece, and within that, it was mostly a benefit in the commodities and still ahead within the specialties.
As these lower raw materials slow second quarter as well as second half of the year, you will see improved EBIT resulting from the flow through lower raws on top of the utilization and the volume mix growth.
Got it.
Yeah. I also want to emphasize asset utilization's a big deal, guys. When you have to slow the plants down like we did last year in the fourth quarter to adjust to the demand situation and even run them a little bit slow in the first quarter, your asset utilization, your fixed cost per kg, goes up in a meaningful way. 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. Then as a quick follow-up, you spent a lot of time over the years moving your portfolio into more specialty areas. If you look at the fourth and first quarter results for the specialty businesses, I'm still a little bit surprised earnings got hit so much. When you think about the performance that you expect to see, and I understand 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?
Yeah. I think 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 million from 2014. If you put it on a constant currency basis, over $600 million. This is a great story of delivering a phenomenal amount of earnings growth in the last five years, all due to our growth model and our innovation that allows us to sustain our spreads and drive volume and importantly, mix upgrade. I don't think anything in 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, B&C, consumer durables is about 45% of the company's total revenue. If you have a situation where there's a correction in demand in those spaces, and that is clearly what we saw in 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 sort of trade economic situation, you're gonna take a hit given the value of those kgs relative to company average.
The good news is we've already seen demand coming back in March and April, that demand comes back, the economies improve, and that value that we've created over the last five 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 the same way. There is sort of sensitivity we have to consumer discretionary. I don't think that's a secret about our portfolio. The good news is we make a lot of money in China, and I believe long term, China's gonna 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. When you have a disruption like these trade wars, that's why you have some of the negative impact like you see in fourth quarter and first quarter. Those will return to more normal levels, and we also might have a bounce back at some point as those supply chains fill back in. Just keep in mind, short term, it's being impacted by those supply chains and those market dynamics.
Got it. Thank you.
Our next question today is from Laurence Alexander from Jefferies.
Hi, guys. It's Daniel Rizzo for Laurence. How are you?
Good morning.
Good morning.
I just really just have one question. The softness in auto and tires has been well documented. Could you just tell us what you're seeing in your construction and ag end markets?
On the ag market, obviously things are a little bit slower with the wet weather in the first quarter, and we saw some of that impact, particularly in CI. Everything we can see in those markets are all coming back as we'd expect, so we feel good about the ag market this year on a full year basis. 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. From an architectural interlayers point of view, it's been great. The vast majority of where we sell the interlayers is in Europe, where they do laminated glass. We've seen strong growth there through 2018, and that's 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 accident 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. If that continues, that enforcement continues, that'll be another upside to our forecast.
All right. Thank you very much.
Duffy Fischer from Barclays is up next.
Yeah, 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. 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 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. 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 and oil is a different discussion. 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 of last year was PX, and there's so much new capacity coming online.
Fair enough. Just to jump to fibers, can you break out if you just look at, say, the EBIT delta year-over-year, kind of that down $14 million, how much of that was China versus ex-China? Do you think it'll be difficult to get your Chinese business back once the deal is settled? Obviously, there are players inside China that have excess capacity that are probably backfilling that today. Is that a structural step-down, do you think, or will that be pretty quick to come back?
As far as the demand hit goes, 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 quarters for this year with other customers. In regards to your second question there's no competitor in China backfilling us. All the companies that plant at [Makto] in China are joint ventures with CNTC, our customer. They run those plants 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 five years. The imports, and we're now down to pretty small levels, are just being shifted around from plant to different plants that are not outside the U.S. 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. 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?
Yeah. There's a lot of PX coming online. The big chunks in the back half of this year are just traditional PX plants, not these sort of oil to chemical things. There'll be some passing along of 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&A session here, I'll reference you back to, which is you got to have a balanced approach to the 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. We've got to have respect and trust and innovation together.
Thank you.
Let's make the next question the last one, please. 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 I referenced double-digit growth prospects for Saflex, and you threw out, I believe, 20% in Europe. 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. Perhaps you could elaborate. You're gaining share. Is it penetration mix, heads-up displays, construction? What would be driving that premium?
Yeah. Specifically, that 20% applies to heads-up display interlayers in Europe, not the overall interlayer business. 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. It's a very small percentage of the overall market right now. There's not that many heads-up displays in cars yet. We're seeing tremendous growth as we're adding that feature, because auto OEMs are always looking as a way to value up cars, especially in a slow growth market, 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. That's going quite well. I'd also add the architectural is also growing really well in Europe as well.
That gives us a way to offset the underlying auto market trends. It's very impressive that performance films and interlayers is stable in this auto market.
Mm-hmm. Mark, how would you characterize the all-in structural growth rate in the interlayers business, I don't know, over the next three plus years or so?
Well, I think that, again, volume mix, we continue to expect that the Advanced Materials segment, including SP, will grow double the underlying market growth rate. 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.
That does conclude our conference today. Thank Thank you for your participation. You may now disconnect.