Good day, everyone. Welcome to the Eastman Chemical Company third quarter 2018 conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We'll now turn the call over to Mr. Gregory Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.
Thank you, Cody. Good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO, Curtis Espeland, Executive Vice President and CFO, and Jake LaRoe, Manager Investor Relations. Before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company's third quarter 2018 financial results news release, during this call and in the accompanying slides and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2018 and the Form 10-Q to be filed for third quarter 2018.
Second, earnings referenced in this presentation excludes certain non-core and unusual items and have been adjusted for the forecasted tax rate as of the end of the interim periods. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the third quarter 2018 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 items and assume that the adjusted tax rate for the first nine months of 2018 will be the actual tax rate for the projected periods. With that, I'll turn the call over to Mark.
Good morning, everyone. I'll start on page three. During the first nine months of the year, we delivered a 13% year-over-year increase in adjusted EPS growth, and our third quarter was in line with our expectations. We delivered strong volume growth with innovation-driven mix improvement across our specialties, Advanced Materials, and Additives & Functional Products. We also delivered sequential earnings stability in Fibers and stability in CI. The portfolio of specialty businesses we've built is showing resiliency in the face of global uncertainty, and we remain confident in our ability to deliver sustainable earnings growth. Innovation programs are the key to our success, and we're seeing great progress on a number of fronts.
For example, AM delivered 9% volume growth in the quarter and 7% through the first nine months through attractive premium products like Tritan, Saflex Heads Up Display interlayers, and performance films, well above end market growth rates in transportation and consumer durables. In AFP, despite a tough comp from the large solar films last year, volume growth increased 1% in the quarter and 6% through the first nine months. We continue to have double-digit growth in product lines such as Impera tire resins, animal nutrition, water treatment, Aerafin polymers and adhesives, crop protection, plant growth regulators, among others, which were driven by revenue synergies from our acquisitions. In Fibers, we're continuing our trend of delivering excellent revenue growth in textiles. Our innovative product offerings in acetate yarn delivered an exceptional revenue growth of 30% this quarter, giving us confidence that the Fibers segment is stabilizing.
We continue to be on track to deliver more than $350 million in new business closed this year across the company with a greater than 20% increase through the first nine months. In a few moments, I'll highlight a couple of examples of how we're executing our innovation-driven growth model. Through relentless engagement in the market, our world-class technology platforms, and powerful application development, we're creating our own growth and winning with customers. On the cost management front, we remain focused on offsetting inflation with disciplined productivity savings. Free cash flow also remains a strength for us. Despite headwinds from higher raw materials, we have a path to deliver $1.1 billion in free cash flow this year. We are allocating our strong free cash flow in a disciplined manner and in line with our priorities.
Through nine months, we've returned $615 million to shareholders, with $375 million of share repurchases and $240 million of dividends. We remain very committed to delevering $300 million. Our third quarter results demonstrate that we continue to execute on what we can control, namely innovating through our enterprise and allocating our strong free cash flow in a disciplined way. On slide four, a key driver of success in growing our specialty business is not only creating new product innovation, but improving our commercial execution and driving revenue synergies from our acquisitions. Our teams continue to make great progress in delivering synergies from the Taminco acquisition. In addition to markets such as animal nutrition or crop protection, which we've highlighted in the past, our care chemicals business is delivering strong growth.
Authorities around the world, including China, are in the process of adopting more stringent environmental laws, which require state-of-the-art water treatment solutions for the industrial municipal water treatment applications. Our unique technology and products allow our customers to manufacture polymers that enhance the clarification and purification of water. These widely used products are recognized as the best available technology today due to their remarkable ability to remove dirt particles efficiently at a low dosage in highly demanding water treatment applications. The growth opportunity is further enhanced by the acquisition of the remaining stake in our China JV last year and our subsequent capacity expansion at this site. So far this year, our water treatment business is up double digits. This growth opportunity, coupled with our continued enhancement of commercial execution capabilities, continue that trajectory. Another exciting example is in Advanced Materials.
After 10 years of tremendous growth with Tritan copolyester, we continue to relentlessly engage customers, innovate, and win in this market. This is exemplified by our recent success in the medical application. As we outlined at Innovation Day, healthcare-associated infections are on the rise. To combat this issue, aggressive cleaning protocols are being used on hospital equipment, which causes the thermoplastics in these devices to fail prematurely, costing the hospitals a lot of money. Tritan has long been an innovative product with consumers for its toughness and BPA-free chemistry. It also has great chemical resistance, which enables it to be the most compelling thermoplastic to hold up under these new hospital cleaning protocols. We continue to build momentum on this program with strong early market adoption in 2018. A great example is a recent win we've had with Mindray, an emerging technology leader in patient monitoring anesthesia and ultrasound.
After successful trials, Mindray launched Tritan in all of its North American patient monitors, making them disinfectant-ready and more durable over time. With this success, we are poised to drive additional growth with Mindray as we pursue opportunities in other devices, as well as other geographies. This combination of market and application development underpinned by world-class technology platforms continues to prove to be the model that delivers great results. In 2018, Tritan is on track to deliver another year of double-digit growth. With that, I'll turn it over to Curt.
Thanks, Mark, and good morning, everyone. I know it's been a rough couple of weeks in the market, hopefully you will sense that Eastman remains calm and is marching ahead with a compelling growth strategy in the face of some of this global uncertainty. With that, I'll start with third quarter results on slide five. Sales revenue increased, led by Advanced Materials delivering double-digit revenue growth. Chemical Intermediates also continues to do a nice job, raising prices to more than offsetting rising input costs in a challenging raw material environment. EBIT in the quarter declined as solid earnings growth in Advanced Materials was offset by other segments. We continue to make strong progress with variable margin per unit, which increased in the quarter through mix upgrade and prices mostly keeping up with increasing raw material costs.
This progress was offset by challenging year-over-year volume comparisons in both the Fibers and Additives & Functional Products segments, as well as we continued to see some investments in growth. Earnings per share increased both year-over-year and sequentially due to solid operating results, a lower effective tax rate, and share repurchases resulting in lower share count. As always, we focus on driving value through every line of the income statement to deliver earnings per share growth. Overall, a strong third quarter. Moving next to the segment results and starting with Advanced Materials on slide six, which delivered 9% volume growth in the third quarter. Sales revenue increased due to higher sales volume and continued improvement in product mix across the segment, driven by double-digit growth in premium products such as Tritan copolyester, Saflex Heads Up Display, and Performance Films.
EBIT increased primarily due to higher sales volume and improved product mix, partially offset by higher raw material cost and increased growth investments. Looking at our expectation for the full year of 2018, we expect EBIT to grow towards the low end of the 7%-10% range we communicated at our Innovation Day. For the year, this reflects mid to upper single-digit volume growth, which is well above their end market growth and reflects the progress we're making on innovation. In addition, we're implementing price increases in our copolyester products to mostly offset the substantial increases in paraxylene costs that occurred through the third quarter. Overall, a solid quarter, Advanced Materials is positioned for strong earnings growth in 2018. Now to Additives & Functional Products on slide seven, which had a solid third quarter.
Sales revenue increased primarily due to higher selling prices across most product lines and modest volume growth to the tough comp in third quarter 2017 from large solar films. EBIT decreased slightly, primarily due to higher raw material and energy cost and increased growth investments, partially offset by higher selling prices and volume growth. Additives & Functional Products is doing a good job managing through a number of headwinds. Raw material and energy costs have increased. We are making progress in catching up with higher prices. We've now had our year-over-year price increases for six consecutive quarters. An exception is the adhesives resins market, where an increase in competitive capacity is making it difficult to raise prices to cover rising oil-driven raw material costs.
With that said, we continue to expect volume growth for the year will be in the mid-single digits, consistent with 6% growth through nine months. In the fourth quarter, we expect continued strong volume growth in animal nutrition, care chemicals, and Arofine polymers. We expect some destocking from customers in tires and coatings in the fourth quarter. Adding to it all together, we expect full-year EBIT to grow towards the low end of the 5%-7% range we communicated at our Innovation Day. Now on to Chemical Intermediates on slide eight. Sales revenue increased due to higher selling prices across most product lines, mostly offset by lower sales volume, primarily due to lower merchant ethylene sales. EBIT decreased slightly due to lower sales volume being offset by higher selling prices, more than offsetting higher raw material energy costs.
Chemical Intermediates has continued to do a nice job raising prices to offset the impact of a challenging raw material environment. In the fourth quarter, we expect EBIT to be up somewhat year-over-year, with higher volume, excluding merchant ethylene and higher selling prices continuing to offset higher raw material and energy costs. I'll finish up the segment reviews with Fibers on Slide nine, which continues to demonstrate progress towards stabilizing results. Sales revenue was down slightly in the quarter as selling prices declined in line with previous quarters this year. Sales volume increased as growth in textile and nonwoven applications was partially offset by lower acetate tow sales volume, reflecting customer buying patterns. We are making great progress in the textiles market, as yarn volume was up 30% in the quarter, led by our Naia product line.
EBIT declined year-over-year as expected and was about flat sequentially, showing stability for the first nine months of 2018. In the second half of the year, we've been working to manage through a recent trade situation with China that started in the middle of the third quarter, which is resulting in no new Chinese tow imports from U.S. manufacturing sites. As a result, we now expect tow revenue for China for the full year of 2018 will be approximately 3% of total Fibers segment revenue versus the previous expectation of 5%. We continue to expect acetate tow volume outside of China to be stable for the year. Our productivity gains are continuing to flow through, and the progress of our growth initiatives is contributing to earnings stability.
Looking at full year 2018, considering all these factors, we expect EBIT in this segment to be slightly lower compared to last year. On the trade issue, we're working to mitigate the impact for 2019 if it persists. One last comment on our asset strategy. Our focus on innovation has resulted in repurposing some of our acetate tow manufacturing lines to textiles and nonwovens, which are no longer needed for tow, and which has led to increased capacity utilization that improves our cost position to serve our tow customers. The net result is that our global acetate tow capacity today is approximately 155,000 metric tons, which is 30,000 metric tons or over 15% less than it was compared to a year-ago.
We are making progress towards a future where when you look at Fibers business, you won't see just an acetate tow business, but rather an innovation-driven Fibers business serving diverse and growing end markets. This is yet another reason we are confident in our ability to stabilize the EBIT and cash flows for this segment. On Slide 10, I'll transition to an overview of our cash flow and other financial highlights for the third quarter. We remain on track to deliver a solid year in cash generation and disciplined capital allocation in 2018. Capital expenditures for the first nine months of 2018 totaled $381 million, excluding insurance proceeds. We expect full year capital expenditures, excluding insurance proceeds, to come between $525 million-$550 million, somewhat lower than our previous projection as we manage capital in this uncertain global economy.
On free cash flow, we have a number of factors in the fourth quarter beyond normal seasonality that give us a path to generate approximately $1.1 billion of free cash flow for the year. First, the fourth quarter will include receipt of the final coal gas insurance payment of $65 million. Second, we expect additions to property and equipment in the fourth quarter will be more than $50 million lower than the year-ago period. Third, we have plans in place to aggressively manage our working capital. Looking at the balance sheet, we remain committed to using $300 million of free cash flow to reduce debt this year. Additionally, we remain committed to returning cash to stockholders. Through the first nine months, we returned $615 million, split between $240 million in dividends and $375 million in share repurchases.
We have improved our expected full year effective tax rate to be approximately 17% below the bottom of our previous range. Lastly, one more comment on the coal gas incident. We had previously indicated we expect the final net impact of the incident to be between $25 million and $50 million. With the final insurance settlement recorded in the third quarter of 2018, the net impact was approximately $25 million. The negative cash flow impact in 2018 is expected to be at a similar level. I really appreciate the efforts of the Eastman team to help minimize the financial impact of last year's incident. Well done. With that, I'll turn it back to Mark.
Thanks, Curt. On slide 11, I'll discuss our 2018 outlook. Through the first nine months of 2018, we delivered strong volume growth and mix improvement in our specialty segments, over two times the growth in the underlying markets. We are continuing to benefit from innovation-driven growth model. We are making great progress on new business revenue closes, which is up 20% through the first nine months. We expect to continue creating our own growth in the many applications across the company through innovation, enabling us to grow faster than underlying markets. We are also on track to offset inflation through productivity. As I mentioned on my first slide, we returned $615 million to our stockholders through the first nine months, including accelerating our share repurchase program. Lastly, we have improved our effective tax rate.
At the same time, while we focus on what we can control, we are managing a number of headwinds. We're seeing some pockets of destocking, but no evidence of a broader slowdown with the exception of autos in China. We've also seen higher raw material and energy prices, although these are volatile, as we've seen over the last several days. We have some limited exposure to trade disputes, particularly in Fibers. Taking all this together, we expect that the EPS growth will remain at the 10%-14% range and will likely be towards the bottom of that range. As Curt mentioned, we have a path to deliver over $1.1 billion of free cash flow, which is one of the strongest in the industry and reflects our outstanding performance, especially in this inflationary environment.
On slide 12, let me make a few comments about our expectations for 2019 and summarize where we are. As we look at 2019, we have a couple of high-level assumptions. Economic growth is similar to 2018, raw material and energy prices are fairly stable, and the U.S. dollar does not strengthen meaningfully from the second half of 2018. In this context, we expect continued growth in volume and mix upgrade, which has been powerful for the last five years. In particular, we will continue to create our own growth through our innovation-driven growth model. We expect to benefit from the absence of significant operational headwinds, including unplanned vendor outages and higher than normal planned shutdowns. We also don't have another large step-up in growth cost next year.
With our expected growth and fixed cost leverage, we'll convert our variable margin to the bottom line much more effectively than this year, providing an attractive return on these investments as we move forward. We expect to benefit from the RGP investment, lowering our merchant sales in ethylene relative to 2018. With more stable raw material prices, we will not be chasing raw materials with price increases through the year in the specialties. On a segment level, we expect to see sustainable earnings growth in the specialties due to volume growth and fixed cost leverage, along with stability in Fibers and CI, which is consistent with what we shared with you at Innovation Day. Disciplined allocation of our strong free cash flow also contributes to EPS growth. As a result, we expect EPS growth to be in the 8%-12% long-term range we communicated at Innovation Day.
We'll talk more about our outlook for 2019 on our call in January, when we have more insight into the macroeconomic conditions. Finally, let me summarize where we are and why I'm so confident about our future. As you think about our portfolio, we're showing progress in our goal of driving from 70%-80% of our business in specialties, which is especially important in the face of uncertain macroeconomic trends. All this comes together for a terrific bottom line. We can grow faster than underlying markets and sustain our margins through our unique innovation-driven growth model. We also do this with a scale and integration, which gives us a competitive advantage in how we develop new products and bring them to market.
Finally, through disciplined portfolio management that leads you to one of the strongest free cash flows in the industry, a strong return on invested capital that is growing, and compelling compounded EPS growth through 2020 and beyond. When you put it all together, we are well positioned for long-term attractive earnings growth and sustainable value creation for our shareholders and all of our other stakeholders. With that, I'll turn it back to Greg.
Thanks, Mark. We've got a lot of people on the line this morning, and we'd like to get to as many of the questions as possible, so I ask that you please limit yourself to one question and one follow-up. With that, Cody, we are ready for questions.
Absolutely. If you'd like to ask a question, 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, that is star one if you'd like to ask a question. We'll take our first question from David Begleiter with Deutsche Bank.
Thank you. Good morning. Mark, just on 2019 guidance, when do you expect selling prices to catch up to raw materials in the specialty businesses?
Hi, David. We're making great progress on that front already through the third and fourth quarter. AFP has had six consecutive quarters of price increases, making good progress on that. We expect that as we work through the fourth quarter and into the first quarter, we should be in a good position to get our prices to catch up. The fourth quarter includes normal seasonality and destocking, as we've mentioned. We'll get some of it then, but the remainder in the first quarter.
Very good. Curt, just on 2019, how should we think about share buybacks versus debt reduction in terms of capital deployment for next year?
It starts with, you should assume that our free cash flow will grow because we're doing a great job converting net earnings to cash flow. We will be assessing how much deleveraging. I think our deleveraging will decline. In part, that will determine based on how much EBITDA growth we expect next year. If you think about cash flow deployment, it is going to be first to pay that nice dividend that we have, which is yielding even better than it was a month ago. Secondly, it will be doing some continuing deleveraging, but less than what we did this year. In absence of bolt-ons, it will be deployed for share purchases.
Thank you very much.
Thank you. I will now move on to our next question from Vincent Andrews with Morgan Stanley.
Thank you, good morning, everyone. Just your reference to destocking, can you just clarify, are you seeing any destocking outside of something that is a derivative of auto production?
Sure, Vince. Right now it's always hard to know exactly what's going on, especially at the beginning of the fourth quarter. We certainly see some destocking in coatings and tires, as you noted, that is associated with the auto industry. We are anticipating that there's some potential destocking that could be driven by trade concerns in China about our customer's ability to export back to the U.S., which would be more sort of specialty plastics, consumer durable oriented. I tell you right now, orders are holding up relatively well in October across the specialties. Outside of autos where we can see some destocking, it's more about anticipation of these issues more than things we see at the moment.
Okay. That's good to hear. Just as a follow-up on the cash flow statement, what's the big swing factor in this other items net line?
What you see in the other net, just in third quarter, is we did our settlement with our insurance provider for the coal gas incident. That created a $65 million receivable at the end of September, which we've now collected in October. Another way to think about it, as you think about our seasonality of cash flows, as I mentioned, the net impact is going to be roughly $25 million on cash this year. If you assume that $65 million of benefit in the fourth quarter, that means our cash flows have been hurt mostly this year, and a good part of that was in the third quarter. That's what you're seeing is the seasonality of cash flows. That specific item that you're seeing in other is a $65 million insurance receivable at the end of September.
Thank you. We'll now take our next question from Frank Mitsch with Fermium Research.
Hey, good morning, gentlemen.
Morning.
Hey, following up on the de-stocking question. I believe you said the pace of business in October was holding up well, and kind of your guidance is anticipation of these issues. Are you meaning to say that you're leaving yourself some wiggle room in terms of the guidance of the various segments? Or you have a pretty clear line of sight that come November, come December, you're going to be hit with these issues?
Well, Frank, I think that any fourth quarter is a tough one to predict. There's always a certain amount of seasonal decline due to normal de-stocking and demand trends. Obviously, we're in a much more volatile time right now when you see what everyone else is saying around the industry. I think our guidance is pretty good. It does include some anticipation. When you think about the fourth quarter, you've got a couple of factors. One is the de-stocking issue, as we've identified, and it's our best estimation. You've also got raw materials, and price is still chasing raw materials, I'd say. In AM, we feel good. We've implemented some price increases in October that have gone quite well to start catching up to PX.
I think we're making really good progress there to get to where we need to be by the first quarter with where we think PX prices are going to sort of trend off. In AFP, we're still doing the same thing, which is managing our price relative to raws, with the exception of adhesives, where we have been talking about a known coming challenge for quite some time. When you put those two things together, and you've got a bit of a tough comp as well, when you think about the fourth quarter, we have some higher shutdown costs. You have some of those solar films that were really strong in the third quarter of AFP, was also about a third of them were in the fourth quarter.
There's a lot of things we're trying to balance in that guidance, but we still feel it's a very good fourth quarter.
All right, thank you. That's very helpful. Curt, I couldn't help but notice a little bit of the gallows humor on the dividend yield. To what extent, and you outlined what your thoughts were in 2019, and you've been accelerating your repurchase here in 2018 versus your original guidance there. What should we be expecting given the decline here in Q4?
Well, welcome back, Frank. As it relates to the share repurchases, we're going to be disciplined with our capital allocation, and we're going to complete utilizing $300 million of free cash flow to delever. You can do the math off of our $1.1 billion to determine kind of roughly how much share repurchases we'll be doing this quarter. I can assure you, with the discipline that our treasury team executes, we've been in the market with our 10b5-1 plan. We've been in the market all year. We're going to be in the market in the fourth quarter, and I can assure you we're going to be in market next year as we continue to repurchase shares, part of our disciplined capital allocation philosophy.
Thank you. We'll now move on to our next question from P.J. Juvekar with Citi.
Yes. Hi, good morning, good quarter in Advanced Materials.
Thank you.
Your volumes have been growing nicely at high single digits for a few quarters, prices are not following. Is that just a lag, or is that a deliberate strategy so that you can push plastics like Tritan into new applications?
There are two different sides of this story, as we've discussed in the past. First of all, we're very happy about Advanced Materials and the strong progress it's having, delivering very strong growth relative to underlying markets across the whole business. The top line has been great. The mix upgrade has been great. Within the third quarter, PX prices moved up pretty dramatically within the quarter. Most of that's quarterly pricing, so you couldn't really take action on that dynamic until you got to October 1, which we did. We've introduced a price increase that should cover most of that PX increase as we work through the fourth quarter. If you look at our history on that side of things and all of our copolymer-related products, I think we've actually managed price to raws fairly well.
As we said in the last call on the interlayers business, we have had an intentional strategy of sharing some of the scale-up of our high-end specialties, heads-up display, and acoustics. As we ramp those products up, get more cost efficiency in how we make them, we've shared some pricing on that with them to support their growth, which has been exceptionally strong. We have very high double-digit growth in heads-up display. Strong growth continues in acoustics. That drives a significant amount of earnings increase on the mix side that is far more valuable than the modest price declines we've been sharing with them as we gain efficiency on the fixed cost leverage. Net, there's two different stories and strategies there, both of them working incredibly well, and I think we're on track to deliver good growth.
It's important to remember that it's not just price to raws as part of the story in the third quarter and the fourth is the growth investments we've made in this segment, which in the third quarter was around $10 million higher growth costs than 2017. When you sort of think about those two factors put together, it was actually very strong results for AM.
Great. Thank you. Just on strategy front, in the last three years, you stayed away from big M&A after acquiring Solutia and Taminco. Are there smaller bolt-on deals that you're looking at that you can add to the portfolio? At what point do you feel that you can go back and look for a bigger deal after that you've grown this portfolio now in the last three years?
No change in our philosophy, P.J. We've been looking primarily at bolt-on acquisitions. There's things in the pipeline. We're going to continue to be disciplined as we go through that process. Who knows, maybe some of this market volatility will create some closure in bid-ask spreads that we're encountering in some of our activity out there. Again, nothing imminent right now on the bolt-on acquisition front, and we're going to remain patient and a disciplined buyer.
Yeah, I would just add that on the large M&A question, we're actually quite happy with the portfolio we have. I think we are well ahead of the industry in being very disciplined in portfolio management. As you all know, we divested a lot of commodity businesses, $3.5 billion of revenue. We did some substantial acquisitions with Solutia and Taminco, and a few bolt-ons that got us over $4 billion of revenue, dramatically improving the structural quality of our EBIT margins, as well as improving the stability and ability to create our own growth in times like this where economics, the macro economy, is a little less certain. We feel like we've done what we need to do in improving the quality of our portfolio. We're not looking for large M&A at this stage, because we've done the transformation we need.
We're now just focused on bolt-ons, as Curt said, and much more importantly, our growth model is really paying off every day. We're driving a lot of innovation and growth across AM and AFP, where we create our own growth, and want to make sure we get a good return on investment for these acquisitions, which are a lot of the growth that we're delivering through the revenue synergies with them.
Thank you. We'll hear now from Robert Koort with Goldman Sachs.
Thank you very much. I was wondering if you could talk a little bit more detail around the tires market and Crystex. It does seem like maybe some of the tire manufacturers, a few other chemical companies into that space have sounded a little bit more somber. Can you give us a sense of what you're seeing on sell-through, you think there, versus maybe the destocking issue you talked about?
Hey, Bob. It's good to hear from you. Yeah, we see the primary demand situation in tires similar, which is it's relatively slow. It's important to keep in mind that tire sales are also about 75% replacement. They are relatively stable as well when you think about it over time in macroeconomic uncertainty. That market isn't growing that fast. We've been benefiting from a lot of growth above market on things like our tire resins, and making sure we align to the right customers in China who are doing more of the consolidating of the other tire companies and picking up some growth from that. More importantly, we are in a great position right now with launching our new CurePro product from our new Crystex technology into the marketplace.
It's being very well received, and it brings significantly better performance than the products that are currently on the market, including our own, by helping tire companies improve mixing efficiency anywhere from 15%-20%+. Right now, when you're trying to manage costs and be very efficient in our customer base, this is a highly valuable product, and we expect to see good growth from it, leveraging that fixed cost that we have as a headwind this year, turning that into leveraged earnings growth next year. Yeah, the overall market is going slow. We don't see it any differently. I would note we're more connected to commercial tires and commercial demand, so that's actually been quite attractive, especially in North America.
Thank you. Then shifting over to the amines business, have you noticed there's been some puts and takes around demand trends, I guess, in active ingredients and what's going on there? Has that business been relatively stable, or what's sort of the outlook in the crop chemical part of that business?
Yeah, no, the business has been stable. There's always been continued regulation in Europe around components of crop protection products or products in total, and we continue to have some degree of restrictions on some of those products we've had in Europe, but it's just more of the same that's been going on for several years. I wouldn't call it anything particularly new. I do have some upside that I think we didn't have when we bought Taminco. As we've worked to help them have a more global reach in their commercial execution capabilities, we've been able to help them create a lot more growth from products like their growth regular products in Canada and North America by bringing better global reach to that business.
While we have these trends in Europe that have been with us for years, we're now accelerating growth in other marketplaces to sort of manage against that. The business overall net is very stable and very profitable.
Thank you. We'll now move on to our next question from Aleksey Yefremov with Nomura Instinet.
Good morning. Thank you. Your preliminary thoughts on 2019 EPS, does this growth rate include any buybacks?
Yes, our growth rate would include the buyback plans that we have. Yes.
Got it. Understood. Mark, on Tritan, following the expansion, I guess your growth here is progressing really nicely. Do you have any thoughts on how soon you could sell out this expansion?
Well, we doubled our capacity, it was a very significant capital investment, which is why the growth headwinds this year are material relative to last year. It's not going to fill out overnight. With the continued solid and very strong growth we're seeing across the marketplaces in consumer durables, now we're adding on this medical application environment in a variety of new applications. It's sort of three, four years to fill it out.
Thank you. We'll now take our next question from James Sheehan with SunTrust.
Thanks. Regarding the trade dispute with China, can you talk about why you're optimistic this issue will be resolved in 2019?
First of all, we're not trying to predict when the trade issue gets resolved. That's at a much higher level than my pay grade. What we're saying is, like all companies, there are mitigating actions you can take to sort of minimize your exposure to some of these trade issues. We're a multinational company. We have assets around the world, not just in the U.S. We have options we can work on to mitigate that exposure in Fibers and in other products as well.
Can you update us on your excess ethylene position?
Sure. We continue to sort of do great work in mitigating our exposure to the ethylene market. As we mentioned the last call, there are two different things we're doing. For the back half of this year, we significantly reduced the amount of ethylene we're selling by reconfiguring how we run our crackers. The shutdowns that we had, in particular the unplanned shutdown that we were forced into by our industrial gas supplier in the second quarter, allowed us to accumulate quite a bit of propylene in inventory. That allows us to run our crackers in a different way in the back half of this year, minimizing ethylene production that comes at a bit less propylene and storing a bit of ethylene. That takes us pretty much out of the ethylene market for the back half of this year.
That's not sustainable, which is why we're making the RGP investment to dramatically reconfigure our cracker and give it more flexibility to reduce the amount of ethylene we're producing. As you look at next year and how this investment will allow us to operate, we can reduce our ethylene production by about 80% relative to normal. That allows us to significantly reduce our exposure there. The RGP investment also produces more propylene from the production process, as well as reducing the ethylene. The feed slate changes pretty significantly in how we're feeding our crackers. Our propane purchases drop in half. Our ethane purchases are about 20% less, and we're buying about 150,000 tons of RGP to get this result.
What we've done is shift significantly our propylene to propane spread volatility towards PGP to RGP, which is much more stable if you look at history, and allows us to significantly reduce our sort of olefin volatility exposure in next year and retain flexibility. If it gets very attractive, we can switch back and take advantage of that. This is a $20 million investment with a payback in less than a year. It's just a great investment opportunity for us.
Thank you. We'll now take our next question from Jeffrey Zekauskas with JPMorgan.
Thanks very much. Your SG&A costs are now in the mid-170s, and in the first half of the year, they were in the mid-180s. Is the decrease a one-off item, or is SG&A at a different and lower level? Secondly, in Additives & Functional Products, if you X out the solar comparisons, what was the volume growth in the quarter?
Jeff, on the SG&A, I think maybe a way I'd answer that is let me just talk about growth investment. We are seeing growth investments during the course of this year. You see that in SG and R&D. That's all a part of our plan of building capabilities, particularly application development activities. Over time, you actually should expect SG&A and R&D to increase kind of throughout the year. Quarter to quarter, there can be variables that change SG&A. You saw some of that in the third quarter. I'd also say that with the current economic environment, maybe we tightened up our SG&A a little bit more in the third quarter. You should see SG&A growing over time. Third quarter was just some variability.
Let me just close out and remind us, our SG&A and R&D is still one of the lowest in the industry as a % of sales.
Part of what I like about our strategy and our continued discipline about protecting shareholder value is how we make sure we're getting a good return on every dollar. Not just in the SG&A, on the R&D, we have made tremendous success in repurposing or refocusing the R&D resources. Within our spend, we've doubled the amount of people working on application development, reducing what we were working on some process elements that weren't as critical in creating value for shareholders. I think we have a great track record of being disciplined. Overall for the year, you're still going to see about a $50 million headwind in growth costs on a full year basis.
30+ of that is in the manufacturing cost and about 20 in the SG&A and R&D, we do have some productivity offsetting the net spend that you're going to see show up on the P&L.
On the AFP issue, if you X out the solar comparison, what would have been your volume growth in the core?
I roughly call it half and half, Jeff. About half of the 14% volume growth rate last year was the solar performance. When you think about that and back that out of the results we had this year, you're talking sort of 8% volume growth year-over-year in AFP and everything else. It's a strong story of continued growth in that business.
Thank you. We'll now take our next question from Mike Sison with KeyBank.
Hey, guys. Nice quarter. Mark, when you think about 2019, I know it's a little bit early to give specific guidance by segment, can you maybe gauge how much of the growth will come from your specialty businesses, were really the key drivers this year and relative to the other segment?
Yeah, sure, Mike. As I said in the prepared remarks, the specialty businesses, which is 70% of earnings, and we're driving to be a higher percentage of earnings, will continue to be the horses that drive forward and build our earnings growth next year. We would continue to see good growth in AFP and strong in AM. I think Fibers will stabilize CI with the investments we're making RGP, have the opportunity to be a little bit better next year than this year. I think it's way early to call any of these items. I do think overall, we're driving towards some pretty solid growth. I'd also sort of remind you not to overly focus on the back half of this year on some of the dynamics that sort of feed into how we go towards next year.
You've got a lot of destocking going on as we expect some of that in pockets in AFP and maybe a little bit in AM. You've got prices catching up to raws through the back half of this year. Importantly, some of those isolated trade issues around Fibers that on a full year basis next year really isn't much headwind because now cig tow is just so small. A tough comp in 2017 to 2018 that we'll now put behind us. Overall, we feel like we're in a really good position to drive volume growth in the specialties, leverage all the fixed cost investments that we've made, and generate a lot of free cash flow. Even on the price front to raws, if raws stabilize, as I expect they will, given the environment we're in, that doesn't become a headwind.
You're chasing all year like we did this year. That's not a drag next year.
Great. A quick follow-up on Fibers. How big is the specialty Fibers business, and how much of that segment do you think you can convert over time? Maybe remind us, what are the end markets that the specialty Fibers are penetrating and growing in?
In Fibers growth, repurposing this business to become a specialty business again is just a great story, and we're really excited about it. The key markets are textiles and nonwovens, and we have a real opportunity here with the change in sustainability environmental trends about products that are certainly more environmentally friendly. The timing couldn't be better for us to take advantage of that trend. In Naia, our acetate yarns, it's a biopolymer made from sustainable certified forests. We've made some investments to materially improve its performance in fashion industry.
You're talking about fast fashion and luxury fashion, womenswear applications, intimate apparel applications is where we're going with those textiles, where we have a product that feels like silk at a much cheaper price, has better breathability by far than some of the other alternatives in the marketplace, and is a biopolymer that can be biodegradable. For the fashion industry, especially the millennials who are driving a lot of these decisions today, this is very exciting to them, and I was just at the largest textile show in Paris a couple of weeks ago in a meeting with both textile mills and brands, and it was just amazing to see how excited they were about this story, and it all focused on sustainability and how we can sort of help them improve their position in the marketplace with it. That's going great.
Same story in nonwovens, where a lot of nonwoven things like facial wipes, baby wipes, things like that, are trying to improve their sustainable position as well with biopolymers and biodegradability that we can offer up with our products. 30% growth rate, even though it's a small part of the overall Fibers business today, we're making great progress. Now it's up to about 15% of the segment revenue. The margins are good. They're certainly not tow margins, but they're attractive margins, and we're excited about where we're going with this business.
Thank you. We'll now move on to our next question from John Roberts with UBS.
Thanks. A quick question on Tritan and then on Fibers. I've always thought about Tritan strength was in the high clarity applications. Is it useful to think about Tritan sales, how much is high clarity versus how much are other properties that's driving the use of Tritan?
Historically, you're absolutely right. The value proposition we've had historically and continues in consumer durables and some medical applications is high clarity parts, very strong, high strength requirements, chemical resistance requirements, and BPA-free. That's been a core part of it. The story we told you today is actually opening up an entirely new space that is more about compounding Tritan into opaque applications. Obviously, that's not been our historical footprint, but we're now expanding and opening up that entire market to us as well through Tritan and our new Treva cellulose plastic launch. The housings we're replacing are all opaque. It's the housings of all these medical devices. You're typically compounding it with impact modifiers and other performance things, or even with ABS or something that adds additional dimensional stability. It's a whole new addressable market for us going forward.
On Fibers, margins, I think, are still higher on cig tow than they are in the new application. Should we expect earnings growth to lag volume growth in the fiber segment?
Certainly, the margins are different, I'd still say they're reasonably attractive, more like the company average. In places, it's better than that. It's a relative growth rate issue, the reality is to drive overall earnings growth as we push forward, it's possible because you have cig tow's only going down 2% a year at this stage going forward, and you've got 30% growth or 20% growth in certain applications. The math is still going to work to get you certain net earnings growth on this, which is why we're repurposing this capacity to support this growth as we go forward. It's still going to take a little time. 2019 is about stability and then moving towards growth as we go into 2020.
Thank you. We'll hear now from Laurence Alexander with Jefferies.
Hi, two quick clarifications. You gave in the prepared remarks a little bit of a laundry list of items that helped you on the free cash flow side. As we think about the bridge for next year, do you have similar items to offset, or will the free cash flow conversion be a little bit lower? Secondly, I guess two threads today, and I just wonder if you could parse a little bit how you're thinking about them. One seems to be that apart from some soft areas of destocking, your demand's overall okay, and the other part is that the portfolio is more resilient. Are you implying that even given what we've already seen in terms of, or what you're seeing with customer conversations, we would have seen in the back half of the year more lumpiness without the efforts you've made in the last few years?
Do you think it's more just that demand is actually fairly benign, and we haven't really stress tested the new portfolio mix yet?
Right. Let me talk to the free cash flow. Maybe a way to bring this to life a little bit, let's just kind of bridge fourth quarter for you a little bit. If you remember, fourth quarter of last year, we generated $435 million of free cash flow. In the fourth quarter, we're going to have an insurance payment that we've already received, as well as we're going to have $50 million of lower CapEx. In order to achieve our $1.1 billion in free cash flow, we are only needing now some $60 million plus of additional free cash flow generation over last year. Those are the types of working capital dynamics that we're working through. As you think about conversion next year, I think we'll still have strong conversion of earnings next year. We might have CapEx maybe a little less than it is this year.
We won't have the net $25 million headwind of the insurance. It's going to come down to how well working capital evolves. If you assume working capital raw material costs normalize, that means you won't have the working capital challenges that you've had this year. I see a path where we're going to continue to have good conversion. I don't see that conversion rate coming down.
On the second question, sequentially, I think it's probably better to go at it because the 2017 comp was so tough in some of the businesses, especially AFP and Fibers. The trends we see sequentially in demand are relatively stable. We continue to see solid growth in the specialties. You're always going to see normal seasonality as you go into the fourth quarter. At the AM level, clearly we had strong volume growth in AFP. When you adjust for the solar films, you had strong volume growth. I think in Chemical Intermediates, there's always a certain amount of volatility. We saw some demand come off in the third quarter. Some of that was just seasonal in ag, and a few other shutdown dynamics of customers. Nothing sort of concerning.
As you go into the fourth quarter, with this inflationary raw material environment that we've been in through the third quarter, it's natural to expect destocking, especially in places where demand has moderated a bit like the transportation sector, as we've highlighted in coatings and tires or some trade-related caution there. I think it's really important we don't overreact to what's going on in the fourth quarter right now. From what we see, it appears to be mostly destocking. It's always hard to know exactly what's going on with primary demand, especially in a fourth quarter when there's normal destocking anyway. We're not in a position where we're sitting there saying that we see a primary demand problem out there in the marketplaces outside of the obvious sort of stuff going on in autos.
It's really important to remind you all about autos and Eastman in the way that works. Overall, we've said our exposure in transportation is about half OEM, half sort of refinish replacement. It's important to break that down in a couple ways. First is on the AM side, it is much more OEM related, but that is where we have so many innovative products in interlayers like heads-up display and acoustics, as well as paint protection films allowing us to grow much faster than underlying market, which we demonstrate already in the third quarter and expect that to continue into the fourth. On the AFP side, about two-thirds of that business is more sort of refinish replacement, when you think about tires and where our products are going into automotive coatings.
Quite a bit of stability in those kind of markets in this kind of time frame. Even within these markets, we target different applications. For example, in China, while the overall auto sales are down, we're actually seeing good growth because we're more aligned with luxury cars than the smaller cars that don't have the tax incentives anymore. We're still seeing good growth in our Performance Films business and some of our high-value interlayers that go into the more luxury cars that are actually still growing in China. We have to be very careful not to sort of apply broad brush on some of these things to make sure you understand, I think we're at a pretty solid position.
Thank you. We'll take our next question from Matthew Blair with Tudor, Pickering, Holt.
Hey, good morning. Do you have any more color on the 15% effective tax rate in the quarter? It seemed a little low. Your guidance for full year 2018, I think, implies that Q4 tax should step up. Could you explain why that is?
Sure. That's just the seasonality of the effective tax rate. Earlier this year, we thought we'd be in the 18%-20% range. Due to, as we continue to evaluate the various moving parts of our effective tax rate, it actually improved to 17% for the year. What you see in third quarter is just a catch up to that 17% rate on a year-to-date basis. For the full year of 2018, it'll be around 17%. I can assure you we're working towards that rate next year.
Got it. If I back out the tax benefit to EPS that you've received in 2018, which I think is about 4%, it seems like your 8%-12% EPS growth target going forward is actually a little bit better than what you're likely to put up this year, which I don't know, I guess that's a little surprising just considering all the talk about the slower growth in the back half of this year. Is that the right interpretation? Is there anything else that we should be taking into account?
No, when I think about 2018, it's just there's some moving parts between EBIT and tax rate. Some of our year-over-year growth this year is improvement in tax rate, a little bit better than we thought last year. When you go to 2019, the tax rate should not be a headwind or a tailwind. It's all around the underlying performance of the business that Mark already talked about.
Thank you. We'll take our next question.
I'm sorry, Cody. Let's make the next question the last one, please.
Absolutely. We'll take our final question from Kevin McCarthy with Vertical Research Partners.
Yes, good morning. Thanks for squeezing me in. Wanted to come back to the capital expenditure profile. It seems to me you've completed quite a few projects over the last 18 months. Tritan, most notably, but Crystex and other product lines. As I listen to Curt's comments about CapEx, it seems like you could trend down slightly in 2019. Is it the case that you've got enough capacity across the portfolio at this point, or are there other prospective growth projects that you plan to layer in over the next several quarters?
I think, Kevin, your intuition is correct. We do expect slightly lower capital expenditures in 2019 versus 2018. Part of that is, keep in mind, some of the capital expenditures were for the coal gas recovery. When you think about maintenance CapEx, it's in that $300 million to $350 million. We said at Innovation Day it could be anywhere from $500 million to $600 million. Going into 2019, it'll probably be more towards that low end of that range.
I think it also connects back to sort of the fixed cost leverage comment. As you think about next year, under the assumption world's growing, we'll have continued variable margin growth next year, and a very different fixed cost situation where this year, if you think about between the $50 million of growth investment costs, and if you look at the sort of planned and unplanned operational headwinds we had this year, there's another $50 million. You've got $100 million of headwind against variable margin in growing EBIT in 2018 versus 2017. If you think about how that translates to 2019, some of that annualizes, net it down to sort of $75 million of tailwind, if you will, of variable margins growing, and how you have much less headwind in 2019 to 2018.
There's considerable leverage here, which feeds into our view about how we can continue growing earnings into 2019, as we don't have another step up of these costs.
Thanks very much.
Okay, thanks again, everyone, for joining us this morning. We hope you have a great day.
Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.