Good day, everyone, and 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. Greg Riddle of Eastman Chemical Company Investor Relations.
Please go ahead, sir.
Thank you, Cody, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO Curtis Bellon, Executive Vice President and CFO and Jake LaRoe, Manager, Investor Relations. Before we begin, I'll cover 2 items. 1st, 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 20 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 exclude 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 tax rate for the 1st 9 months 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 3. During the 1st 9 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 asthma functional products.
We also delivered sequential earning stability in fibers and stability in CI. The portfolio, especially 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. Unovation programs are the key to our success, and we're seeing great progress on a number of fronts. For example, AAM delivered 9% volume growth in the quarter and 7% through the 1st 9 months through attractive premium products like Triton, SafeFlex heads up display interlayers and performance films, well above in market growth rates in transportation and consumer durables. In AFP, despite a tough comp from the large solar fields last year, volume growth increased 1% in the quarter and 6% through the 1st 9 months.
We continue to have double digit growth in products lines such as Impara Tire resins, animal nutrition, water treatment, airfin Polymers and adhesives, crop protection plant growth regulators, among others, which were driven by revenue synergies from our acquisitions. And in Fibers, we're continuing our trend in delivering excellent revenue growth in textiles. Innovative product offerings in Acetate yarn delivered an exceptional revenue growth of 30% this quarter, giving us confidence that the fiber segment is stabilizing. We continue to be on track to deliver more than $350,000,000 in new business close this year across the company with a greater than 20% increase through the 1st 9 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 $1,100,000,000 in free cash flow this year. And we are allocating our strong free cash a disciplined manner and in line with our priorities.
Through 9 months, we've returned $615,000,000 to shareholders. With $375,000,000 of share repurchases and $240,000,000 of dividends. And we remain very committed delevering $300,000,000. Our 3rd 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 4, 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 Tamingo 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 requires 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, and highly demanding water treatment applications. The growth opportunities 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 Triton Copolyesters, We continue to relentlessly engage customers innovate and win in this market. And 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.
Trying 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 thermoplast 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 the recent win we've had with Mindray, an emerging technology leader in patient monitoring anesthesia and ultrasound. After successful trials, Mindray launched Triton and all of its North American patient monitors, making them disinfect and ready and more durable over time.
With this success, we are poised to drive additional growth minder 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, Triton is on track to deliver another year of double digit growth. With that, I'll turn it over to Kurt.
Thanks, Mark, and good morning, everyone. I know it's been a rough couple of weeks in the market, so hopefully you will sense that Eastman remains calm and is marching ahead with a compelling growth strategy and a face in some of this un global uncertainty. So with that, I'll start with third quarter results on Slide 5. 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 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 This progress was offset by 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 6, which delivered 9% volume growth in the 3rd 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 Triton Co polyester, 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 costs and increased growth investments. Looking at our expectation of the 7% to 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 co polyester products to mostly offset the substantial increases Overall, a solid quarter and Advanced Materials is positioned for strong earnings growth in 2018. Now to Additives and Functional Products on Slide 7, which had a solid third quarter. Sales revenue increased primarily due to higher selling prices across most product lines, and modest volume growth to EBIT decreased slightly, primarily due to higher raw material and energy costs and increased growth investments, partially offset by higher selling prices and volume growth. Additives and functional products is doing a good job managing through a number of headwinds. Raw material and energy costs have increased and we are making progress in catching up with higher prices.
And we've now had our year over year price increases for 3rd I'm sorry, 6 consecutive quarters. An exception is the adhesives resins market or 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 chemicals and airfin polymers, and we expect some destocking from customers in deep tires and coatings in the fourth quarter. Adding to NOL together, we expect full year EBIT to grow towards the low end of the 5% to 7% range we communicated at our Innovation Day. Now on to Chemical Intermediates on Slide 8.
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 9, 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 non woven applications was partially offset by lower acetate total 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 NIA product line. EBIT declined year over year as expected and was about flat sequentially showing stability for the 1st 9 months of 2018. In the second half of the year, we've been working to manage through recent trade situation with China that started in the middle of third quarter, which is resulting in no new Chinese tow import from U.
S. Manufacturing sites. As a result, we now expect total revenue for China for the full year of 2018 will be approximately 3% of Towable Fibers revenue segment revenue versus the previous expectation of 5%. We continue to expect acetate tow volume outside of China to be stable for the to flow through and the progress of our growth initiatives is contributing to earning stability. Looking at full year 2008, considering all these factors, we expect EBIT in this segment to be slightly lower compared to last year.
And 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 non wovens, 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 an app just an acetate toll 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 Capital expenditures for the 1st 9 months of 2018 totaled $381,000,000, excluding insurance proceeds. And we expect full year capital expenditures, including insurance proceeds, to come between $525,000,000 to $550,000,000 somewhat lower than our previous projected as we manage capital in this uncertain global economy.
On free cash flow, we have a number of in the fourth quarter beyond normal seasonality that give us a path to generate approximately $1,100,000,000 of free cash flow for the year. First, the fourth quarter will include receipt of the final coal gas insurance payment of $65,000,000. 2nd, we expect additions to property and equipment in the 4th quarter will be more than $50,000,000 lower than a year ago period. 3rd, we have plans in place to aggressively manage our working capital. Looking at the balance sheet, we remain committed to using free cash flow to reduce debt this year.
Additionally, we remain committed to returning cash to stockholders. Through the first 9 months, we returned $615,000,000 split between $240,000,000 in dividends and $375,000,000 in share repurchases. We have improved our expected full year effective tax rate to be approximately Lastly one more comment on the coal gas incident. We have previously indicated we expect the final net impact of the incident to be between $25,000,000 $50,000,000 with the final insurance settlement recorded in the third quarter of 2018, The net impact was approximately $25,000,000. And a 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. And with that, I'll turn it back to Mark.
Thanks, Kurt. On Slide 11, I'll discuss our 2018 outlook. Through the 1st 9 months of 2018, we delivered strong volume growth and mix improvement in our specialty segments, over two times of 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 1st 9 months.
And we expect to continue creating our own growth in the mini applications across the company through innovation, enabling us to grow faster than underlying markets. We're also on track to offset inflation through productivity. And as I mentioned in my first slide, we returned $615,000,000 to our stockholders through the 1st 9 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 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. And 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% to 14% range, and will likely be towards the bottom of that range.
And as Kurt mentioned, we have a path to deliver over $1,100,000,000 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 twenty eighteen. In this context, 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 costs next year.
With our expected growth and fixed cost leverage, we'll convert a variable margin to the bottom line much more effectively than this year providing an attractive return on these investments as we move forward. And 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 On a segment level, we expect to see sustainable earnings growth in the specialties due to the volume growth and fixed cost leverage, along with stability in fibers and CI, is consistent with what we shared with you at Innovation Day. And disciplined allocation of our strong free cash will also contribute to EPS growth. As we as a result, we expect EPS growth to be in the 8% to 12% long term range we communicated at Innovation Day.
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% to 80% of our business and specialties, which is especially important in the face of on certain 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 to the scale and integration, which gives us a competitive advantage in how we develop new products and bring them to market.
And 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 we 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
Absolutely. 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. So we're making great progress on that front, already through through the 3rd fourth quarter, you know, AFPs had 6 consecutive quarters of price increases, making good progress on that. And 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. Mean, the fourth quarter includes normal seasonality and destocking as we've mentioned. So we'll get some of it then, but, the remainder in the first quarter.
Very good. And Kurt, just in 2019, how should we think about share buybacks versus debt reduction in terms of capital deployments for next year? So 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'll be assessing how much deleveraging. I think our deleveraging will decline in part that'll determine based on how much EBITDA growth we expect next year So if you think about cash flow deployment, it's 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. And in absence of bolt ons, it will be deployed for share repurchases. Thank you very much.
Thank you. We'll now move on to our next question from Vincent Andrews with Morgan Stanley.
Thank you and good morning everyone. Just you referenced the destocking. Can you just clarify, are you seeing any destocking outside something that's a derivative of auto production?
Sure, Vince. So right now, it's It's always hard to know exactly what's going on, especially at the beginning of fourth quarter. We certainly see some destocking and coatings and tires 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 customers' ability to export back to the U. S, which would be more sort of especially plastics, consumer durable oriented But I tell you right now, orders are holding up relatively well in October, across the specialties.
So outside of autos where we can see some decent talking. It's more about anticipation of these issues more than things we see at the moment.
Okay. That's good to hear. And 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 system third quarter, is we did our settlement with our insurance provider, for the coal gas incident that created a $65,000,000 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 $25,000,000 on cash this year. So if you assume that $65,000,000 of benefit in the 4th quarter, That means our cash flows have been hurt mostly this year and a good part of that was in the third quarter. So that's what you're seeing is the seasonality cash flows. But that specific item that you're seeing in other is a $65,000,000 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. Good morning. Hey, following up on the talking question, I believe you said the pace of business in October was holding up well. And kind of your guidance is patient 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 destocking 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. 1 is the destocking issue as we've identified.
And it's our best estimation. You've also got raw materials, prices 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.
And so 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 T X prices are going to sort of trend off. And in AFP, we're still doing the same thing, which is managing our price relative to raws with the exception of Atesis where we have been talking about a known coming challenge for quite some time. So when you put those 2 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 the solar fields that were really strong in the third quarter of AFP was also about a third of them were in the fourth quarter. So there's a lot of things we're trying to in that guidance.
But, we still feel it's a very good 4th quarter.
A little bit of the gallows humor on the dividend yield. To what extent, and you outlined what your thoughts were in 2019, but and you accelerate 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 we're going to complete, utilizing $300,000,000 of free cash flow to de lever. So you can do the math up over $1,100,000,000 determine kind of roughly how much share repurchases we'll be doing this quarter. And I can assure you, what's the discipline that our treasury team We've been in the market with our 10b5-1 plan. So, we will 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 share as 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, and good quarter in Advanced Materials. Your volumes have been growing nicely at high single digits for a few quarters, but prices are not following. Is that just a lag or is that a deliberate strategy so that you can push, plastics like try to enter new applications?
So there are 2 different sides of this story as we've discussed in the past. The first of all, we're very happy about Advanced Materials and the strong progress that's having delivering very strong growth relative to the underlying markets across the whole business. So the top line has been great. The mix upgrade been great. Within the third quarter, PX prices moved up pretty dramatically within the quarter.
And 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. And we've introduced a price increase that should cover most of that PX increase as we work through the fourth quarter. So if you look at our history on that side of things and all of our co polyester 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 and 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 and 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. So net, there's 2 different stories and strategies there. Both of them working incredibly well.
And I think we're on track to deliver good growth important to remember that it's not just price to raws, as part of the story in the third quarter 4th is the growth investments we've made in this segment. Which in the third quarter was around $10,000,000 higher growth costs than 2017. When you sort of think about those 2 factors put together, it was actually very strong results for AM.
Great. Thank you. And just on strategy front, in last three years, you stayed away from big M and A. After acquiring solution and Tamingo. Are there smaller bolt on deals that you're looking at that you can add to the portfolio?
And 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 last 3 years?
So, 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 and bid ask spreads that we're encountering in some of our activity out there. So again, nothing imminent right now on the bolt on acquisition front we're going to remain patient and a disciplined buyer.
Yes, I would just add that on the large M and A question, we're actually quite happy with the portfolio we have. I think we're well ahead of the industry and being very disciplined in portfolio management. As you all know, we divested a lot of, commodity businesses, $3,500,000,000 of revenue, And we did some substantial acquisitions with solution to Minko and a few bolt ons that got us over $4,000,000,000 of revenue dramatically improving the structural quality of our EBIT margins as well as improving the stability and ability to create our own growth times like this where economics, the macroeconomy is a little less certain. So we feel like we've done what we need to do in improving the quality of our portfolio. We're not for large M and A, at this stage, because we've done the transformation we need.
We're now just focused on bolt on, as Kurt 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, 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.
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, Mark and Krystex. It does seem like maybe some of the tire manufacturers, a few other chemical into that space have sounded a little bit more somber. Can you give us a sense of what you're seeing on sell through do you think there versus maybe the destocking issue you talked about?
Hey, Bob, it's good to hear from you. So yeah, we 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. So there are relatively stable as well when you think about it over time in macroeconomic uncertainty. But 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 aligned 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 Cure Pro product from our new KRYSTEXX technology into the marketplace. It's being very well received, and it brings significantly better performance in the products that are currently on the market, including our own. By helping tire companies improve mixing efficiency anywhere from 15% to 20% plus So 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 costs that we have as a headwind this year, turning that into leverage earnings growth next year.
But yes, the overall market is going slow. We don't see it any differently. I would know we're more connected to commercial tires and commercial demand. So that's actually been quite attractive, especially in North America.
Thank you. And then shifting over to the means business, have you noticed there's been some puts and takes around demand trends, I guess, in active ingredient what's going on there. Is that business been relatively stable or what's sort of the outlook in the crop chemical part of that business?
So yeah, no, the business has been stable. There's always been continued regulation in Europe. Around, components of crop protection 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 Temiko, as we've worked to help them have a more global reach 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. So 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. And so the business overall net is very stable. And very profitable.
Thank you. We'll now move on to our next question from Alexei 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. And Mark, on Triton, 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, it's a we doubled our capacity.
So it was a very significant capital investment, which is why the growth headwinds this year are material relative to last year. So it's not going to fill out overnight. But with the continued solid and very strong growth we're seeing, across the marketplaces and consumer durables. Now we're adding on this medical application environment, in a variety of new applications it's sort of 3, 4 years to fill it out.
Thank you. We'll now take our next question from Jim 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?
Well, 1st of all, we're not trying to predict when the trade issue gets resolved. That's that's at a much higher level than my pay grade. But what we're saying is, like all companies, they're mitigating actions you can take 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. And so we have options we can work on to mitigate that exposure, in fibers and in other products as well.
And can you update us on your excess ethylene position?
Sure. So we continue to sort of do great work in mitigating our exposure to the ethylene market. As we mentioned in the last call, there are 2 different things we're doing. So for the back half of this year, we significantly reduced the amount of ethylene we were selling. By reconfiguring how we run our crackers, the shutdowns that we had, in particular, the unplanned shutdown that we're forced into by our industrial gas supplier in the second quarter allowed us accumulate quite a bit of propylene in inventory.
So that allows us to run our crackers in a different way in the back half of this year minimizing ethylene production that comes out a bit less propylene and storing a bit of ethylene. And so that takes us pretty much out of the ethylene mark for the back half of this year. Now that's not sustainable, which is why we're making the RGP investment to dramatically reconfigure cracker, and give it more flexibility to reduce the amount of ethylene we're producing. So 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. And that allows us to significantly reduce our exposure there.
RGP investment also produces more propylene from the production process as well as reducing the ethylene. And then the feed slate changes pretty significantly in how we're feeding our crackers. So 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. And so what we've done is sniff 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. And this is a $20,000,000 investment with the payback less than in less than a year. So it's just a great investment opportunity for us.
Thank you. We'll now take our next question from Jeff Zekauskas with JP Morgan.
Thanks very much. Your SG and 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 and A at a different than lower level? And then secondly, in additives and functional products, if you x out the solar comparisons, what was the volume growth in the quarter?
So, Jeff, on the SGA, I think maybe the way I'd answer that is, let me 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 the part of our plan of building capabilities, particularly application development activity. So over time, you actually should expect SGA and R and D to increase, kind of throughout the year.
Quarter to quarter, there could be variables that change SGA. 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 little bit more. In the third quarter. So you should see SGA growing over time.
3rd quarter was just some variability. And then just let me just close out and remind our SG and R and D is still one of the lowest in the industry as a percentage of sales. And then 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 to every dollar. Not just in the SGA on the R and D, we have made tremendous success in repurposing or refocusing the R and D resources. So within our spend, we've doubled the amount of people working on application development reducing what we're working on on some process elements that weren't as critical in creating value for shareholders. So I think we have a great track record of being disciplined. But overall for the year, you're still going to see about a $50,000,000 headwind in growth costs on a full year basis.
30 plus of that is in the manufacturing costs and about 20 in the SG and R and D, but we do have some productivity offsetting the net spend that you're going to see show up on the P and L.
What would end, on the AFP issue, if you x out the solar comparison, what would have been your volume growth in that
quarter? I roughly call it half and half, Jeff. So about half of the 14% volume growth rate last year was the solar performance. So when you think about that and back that out of the results we have this year, you're talking sort of 8% volume growth, year over year in AFP and everything else. So it's a strong story of continued growth in that business.
Thank you. We'll now take our next question from Mike Sison with KeyBanc.
Mark, when you think about 2019, I know it's a little bit early to give specific guidance by segment, but can you maybe gauge how much of the growth will come from your specialty businesses. They were really the key drivers this year and relative to the other, the other segment.
Yes, sure, Mike. So as I said in the prepared remarks, the specialty businesses, which is 70% of earnings and we're driving be a higher percentage of earnings. We'll continue to be the horses that drive forward and build our earnings growth next year. So we will continue to see good growth in AFP and strong in AM. And I think fibers will stabilize CI with with the investments we're making RGP have the opportunity to be a little bit better next year than this year.
But I think it's way early to call any of these items, but I do think overall we're driving towards a 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. And some of those isolated trade issues around fibers that on a full year basis next year really isn't much headwind because now it's China tow is just so small. And importantly, a tough comp in 2017 to 2018 that will now put behind us.
So 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. And even on the price front to RAS, if RAS stabilizes, I expect they will, given the environment we're in, That doesn't become a headwind. You're chasing all your like we did this year. So that's not a drag next year.
Great. And then 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 and maybe remind us what are the end markets that the specialty fibers are penetrating and growing in?
So in Fibers growth is repurposing this business to become a specialty business again. It's 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. So the timing couldn't be better for us.
To take advantage of that trend. So, in NIA, our estate yarns, it's a biopolymer made from sustainable certified forest And, we've made some investments to materially improve its performance, in fashion industry. So you're talking about fast fashion, and luxury fashion, women's wear 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 the than some of the other alternatives in the marketplace. And there's a biopolymer that can be biodegradable.
So 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. So 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. So 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. And the margins are good. There's certainly not tow margins, but they're attractive margins 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 Triton and then on Triton. I've always thought about Triton's strength was in the high clarity applications. Is it useful to think about Triton sales, how much is high clarity versus how much are other properties that's driving the use of Triton?
Historically, you're absolutely right. I mean, the value proposition we've had historically and continues, in consumer durables and some metal medical applications is high clarity parts, very strong, high strength requirements, chemical resistance requirements, and VPA free. And that's been a core part of it. But the story we told you today is actually opening up an entirely new space that is more about compounding Triton 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 Triton and our new Treva sorry, those plastic launch.
So 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 like something that adds additional dimensional stability But it's a whole new addressable market for us going forward.
And then on Fibers, margins, I think, are still higher on Sigtope. Than they are in the new application. So should we expect earnings growth to lag, volume growth in the fiber segment?
Well, certainly, the margins are different. But I'd still say they're reasonably attractive more like the company average. And places, it's better than that. It's a relative growth rate issue, but the reality is to drive overall earnings growth as we push forward, it's possible because you have, toes 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. But it's still going to take a little bit of time. 2019 is about stability and then moving towards growth as we go into 2020.
Thank you. We'll now from Lawrence Alexander with Jefferies.
Hi, 2 quick clarifications. You gave in the prepared remarks a little bit of a laundry list of items that helped your 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. And secondly, I guess, 2 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, there's, demand 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 it without the efforts you've made in the last few years? Or do you think it's more just that demand is actually fairly benign And we haven't really stressed tests to the new portfolio mix yet. All right. So let
me stop
the free cash flow. Maybe a way to bring this life a little bit. Let's just kind of bridge 4th quarter for you a little bit. If you remember, fourth quarter of last year, we generated $435,000,000 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 $50,000,000 of lower CapEx.
So In order to achieve our $1,100,000,000 of free cash flow, we are only needing some $60,000,000 plus of additional free cash flow generation over last year. And 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 $25,000,000 headwind the insurance. And then 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 is that you've had this year. So I see a path where we're going to continue to have good conversion. I don't see that conversion rate coming down.
And on the second question, the sequentially, I think, is probably better to go at it because the 17 comp was so tough in some of the businesses, especially AFP and fibers. But the trends we see sequentially in demand are relatively stable. So we continue to see solid growth, in the specialties. You're always going to see normal seasonality as you go into fourth quarter. And then at the AM level, clearly, we had strong volume growth in AFP, when you adjust for the solar fields, you had strong volume growth.
I think in, 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 others shutdown dynamics of customers. Nothing sort of concerning. But as you sort of go into the fourth quarter with this inflationary raw material environment, that we've been in through the third quarter. It's natural expect destocking, especially in places where demand has moderated a bit like the transportation sector.
As we've highlighted in sort of coatings and tires or some trade related caution there. So 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 fourth quarter when there's normal destocking anyway. And so we're not in a position where we're sitting there saying that we see a primary demand problem out there in the marketplace is outside of the obvious sort of stuff going on in autos.
And it's really important to remind you all about autos and easement in the way that works. Overall, we've said our exposure and transportation is about half OEM, half, sort of refinished replacement. But it's important to break that down in a couple of 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 our paint protection films, allowing us to grow much faster than the underlying market, which demonstrate already in the third quarter and expect that to continue into the 4th. And then on the AFP side, about 2 thirds of that business is more sort of refinished replacement, when you think about tires and where our products are going into automotive coatings.
So quite a bit of stability in those kind of markets in this kind of timeframe. And even within these markets, we target different applications. So 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. And so we're still seeing good growth in our Performance Films business and some of our High Value interlayers. That go into more than electric cars that are actually still growing in China.
So 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 in a pretty solid position.
Thank you. We'll take our next question of Matthew Blair with Tudor, Pickering, Holt.
Do you have any more color on the the 15% effective tax rate in the quarter, it seemed a little low. And then your guidance for, 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% to 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 3rd quarter is just to catch up to that 17% rate on a year to date basis.
But for the full year of 2018, it'll be around 17%. And I can assure you, we're working towards that rate next year.
Got it. And then, so 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% to 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. So Is that the right interpretation?
Is there anything else that we should be taking into account?
So, no, when I think about 2018, it's just there some moving parts between EBIT and tax rate. So some of our year over year growth this year is improvement in tax rate a little bit better than we thought last year. But when you go into 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. Triton most notably, but Krystex and other product lines.
As I listen to Kurt's comments about CapEx, it seems like you could trend down slightly in 2019. So 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? Yes, 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. So, when you think about maintenance CapEx, it's in that $350,000,000 We said that innovation day could be anywhere from $500,000,000 to $600,000,000, going into 2019 and probably be more towards that low end of that range. Yes.
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 $50,000,000 of growth investment costs, and if you look at the planned and unplanned operational headwinds we had this year. There's another $50,000,000. So you've got $100,000,000 of headwind. Against variable margin in growing EBIT in 2018 versus 2017.
And if you think about how that translates to 2019, some of that annualizes, so netted down to $75,000,000 of tailwind, if you will, if variable margins growing, in how you have much less headwind in 2019 to 2018. So 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.
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.