Good day, everyone, and welcome to the Eastman Chemical Company first quarter 2018 conference call. Today's conference is being recorded. This call is being broadcast live on Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, investor relations. Please go ahead, sir.
Thank you, Lauren, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO, Curtis Espeland, Executive Vice President and CFO, and Lewis Reavis, 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 first 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-K filed for 2017 and the Form 10-Q to be filed for first 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 first quarter 2018 financial results news release, which can be found on our website at www.eastman.com in the investors section. Projections of future earnings exclude any non-core or unusual items and assume that the adjusted tax rate for first quarter 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 begin on page three. We're off to a compelling start to the year with strong first quarter results, which include revenue up over 13% and adjusted EPS up 22% year-over-year. Our results demonstrate the strength of our specialty portfolio as we delivered over 15% revenue growth combined in our two specialty segments, Advanced Materials and Additives & Functional Products. We continue to deliver strong volume growth of high margin specialty product lines through execution of our innovation-driven growth model, particularly in AM and AFP. During the quarter, AM and AFP delivered greater than 7% volume growth combined year-over-year, with earnings growth of more than 15%. Through innovation leadership in specialty markets, we continue to create our own growth. In a moment, I'll share two examples of what's fueling our progress and driving a significant increase in new business closes.
I'm particularly proud of the quality of this corporate earnings growth coming primarily from our specialty businesses, which is sustainable over time. Moving next to the cost management front, we remain well on track with our corporate cost reduction efforts without sacrificing our long-term growth initiatives. Our cash flow in the quarter was consistent with our expectations, and we remain on track to deliver over $1.1 billion of free cash flow in 2018, enabling an increasing dividend, de-leveraging, and an increasing rate of share repurchases. Beyond these great results, we've also been the recipient of numerous awards over the past several months, which highlight many of the qualities our stakeholders have come to expect from Eastman. We were named one of the world's most ethical company for the fifth consecutive year by Ethisphere for outstanding corporate ethics and corporate responsibility, characteristics highly valued by our employees, shareholders, communities, and customers.
We also earned the Military Friendly Employer designation by Victory Media for the second straight year, which recognizes exceptional hiring programs for transitioning service members, veterans, and spouses. Finally, we were recognized by the EPA as an ENERGY STAR Partner of the Year, becoming the only chemical company to have achieved this recognition consecutively for seven years, a win both for the environment and our cost structure. Our first quarter results and the continued recognition we are receiving are a direct result of the great work being done by Eastman employees around the world, and I want to thank them for their outstanding contributions. These results also demonstrate that we can execute on the things we can control, from cost reductions to returning cash to stockholders to innovating throughout our enterprise.
On slide four, we continue to upgrade the quality of our product mix by increasing revenue of high margin specialty products through execution of our innovation driven growth model. Our top innovation programs in AM and AFP are accelerating as more customers validate our innovative differentiated products, which is driving growth today and into the future. I'm pleased to report that we are on track to deliver more than $350 million in new business closes this year, which will be a record for the company and is more than 15% over last year's rate. Here are two of the many ways we're creating our own growth and winning with customers. We're also expanding beyond AM and AFP to include fibers and how we drive innovation throughout the enterprise. Our first example is about Naia cellulosic yarn program.
As we've discussed in Innovation Day, repurposing our tow assets into a growth market is a top priority for us. Through the first quarter, we have seen great progress, from wins with a leader in the fast fashion industry in Asia to several high-end luxury brands. The sustainability drive in the fashion industry is strong, and designers want a product that has a better environmental footprint and better performance. Naia delivers on this mandate on both fronts. As a biopolymer made from pulp from sustainable forests and manufactured in a responsible manner, we can make a significant improvement relative to viscose, which is unmatched by other products. The softness, what they call hand of the product, is outstanding relative to anything else on the market.
As a result, we were recently recognized as one of the top 10 textile innovations by FabricLink, and our business closed revenue here is accelerating through the first quarter and looks great going forward through the rest of this year. It's incredible to see our textile team leverage our new application development capability to relentlessly engage the market. The team is doing an outstanding job demonstrating our value proposition to the brands, enabling the mills to convert to our product. Another great example where we leverage a world-class technology platform through application development is our Aerafin amorphous polyolefins. The hygiene packing markets are demanding lower odor adhesives due to consumer health sensitivity and are in desperate need of productivity in their competitive markets. Our Aerafin product is delivering on both fronts, and we have realized several wins across the globe.
We have leveraged our application development capability we built for tackifying resins to design a suite of differentiated Aerafin polyolefins that deliver superior performance and odor and enable broader operation window for the OEMs in applying the adhesives in their product relative to the current metallocene polymers. Our growth across this amorphous polyolefin business has exceeded our expectations, as we expect to double our Aerafin volume in 2018 relative to 2017. As a result, we're expanding our capacity in Longview, Texas. These two successes among many are a testament to our ability to leverage our innovation-driven growth model. Our world-class technology platforms provide the foundation for competitive advantage and sustainable growth. We're relentlessly engaging the market to create our own growth. We bring both elements together with our differentiated application development, which turns market complexity into sustainable value.
Overall, I'm incredibly excited and proud of how our teams are driving innovation and winning with our customers. With that, I'll turn it over to Curt.
Thanks, Mark, and good morning, everyone. I'll start with our corporate results on slide five. Sales revenue grew to increases in all four business segments. We continue to do a nice job of driving growth in our more specialty businesses, which accounted for more than 70% of our top-line growth in the quarter. We executed well on the pricing front as we realized further positive pricing momentum in the quarter to offset the impact of higher raw material costs. Adjusted EBIT grew due to increases in all four business segments, with our specialty businesses accounting for more than 70% of our earnings growth in the quarter. We are growing earnings while we're continuing to invest in growth for both the near term and long term.
EBIT margins improved 20 basis points as we improved the quality of earnings through mix improvement with our double-digit growth in many of our innovative specialty products. Overall, earnings per share increased year-over-year by 22%, with EBIT contributing about 17% of the growth. Moving next to the segment results and starting with Advanced Materials on slide six, which delivered another impressive quarter driven by our innovation initiatives. Sales increased due to improved product mix, resulting from double-digit growth of high-margin innovative products and a favorable shift in foreign currency exchange rates. In particular, we saw an acceleration in volume growth towards the end of the quarter. EBIT increased due to higher sales volume, improved product mix, and a favorable shift in exchange rates, partially offset by higher costs associated with growth initiatives. Year-over-year, we expanded our EBIT margin 80 basis points to 20%.
Looking at the full year, we expect to drive revenue growth from volume and mix in the mid-single digits and continue to get a further lift from price and currency. This robust revenue growth will enable us to deliver earnings growth near the upper end of our range of 7%-10%, provided at our recent Innovation Day. Overall, these results continue Advanced Materials' track record of delivering strong performance by executing strategy of volume growth, mix improvement, and fixed cost leverage. Now to Additives and Functional Products on slide seven, which had another outstanding quarter. Sales revenue increased 21%, primarily due to higher sales volume throughout this segment. This impressive growth came from multiple sources. For example, improved market conditions and enhanced commercial execution in animal nutrition and care chemical products is driving growth above market growth rates.
Strong growth in tire additives due to innovation in our tire resins and superior operational reliability. We also made great progress improving our pricing on the strengths of our value proposition to our customers. A favorable shift in foreign currency exchange rates were also a benefit for the quarter. As mentioned in our press release, certain products previously reported in the Chemical Intermediates segment are now reported in Additives and Functional Products due to alignment of production and growth strategies. For first quarter 2018, these product lines generated approximately $18 million in revenue, with EBIT margins slightly above the segment average. Will have similar impact expected with the remaining quarters of 2018. EBIT in the quarter increased due to higher sales volume and higher selling prices, partially offset by higher costs associated with growth initiatives.
Looking at full year 2018, consistent with our guidance for Additives and Functional Products at Innovation Day, we continue to expect mid-single digit volume growth to translate earnings growth in the 5%-7% range with earnings likely toward the upper end of this range this year. I would remind you that second half will have a more challenging comp due to the very strong solar film volume in the back half of last year, and some expected competitive pressure in adhesives. All in Additives and Functional Products is well positioned to deliver strong earnings growth for the year. Now to Chemical Intermediates on slide eight. Sales revenue increased due to higher selling prices attributed to higher raw material costs and continued improvement in market conditions.
One example is functional amines, where sales volume increased due to a recovery in the energy and agricultural markets, and they also benefit from higher methanol prices. Overall higher segment sales revenue was partially offset by lower volume and lower merchant ethylene selling prices. Earnings increased primarily due to higher selling prices, more than offsetting higher raw material and energy costs. Looking at full year 2018, we're off to a good start with strong results in the first quarter. The Chemical Intermediates team continues to do an impressive job offsetting higher raw material and energy costs with higher selling prices. These actions will help to mitigate anticipated headwinds from continued weakness in ethylene margins and higher scheduled maintenance costs during the year, particularly in the second quarter.
Overall, Chemical Intermediates is set up for 2018 earnings to be somewhat below 2017, which would be a good result given its various moving parts. I'll finish up the segment review with Fibers on slide nine. In our news release tables, you see that revenue increased by 15% year-over-year, which is really due to two factors. First is the different seasonal trends we expect in this business in 2018 under the new revenue recognition standard. Similar to the overall company, the change is not expected to materially impact full year 2018 versus 2017, but will impact quarterly trends. Second, we are very encouraged by the acceleration we saw in textiles through the quarter, setting this product up for nice, strong double-digit growth this year. As a result, we moved the textiles and nonwovens innovation platform from other to the Fiber segment.
In Q1 2018, this program had revenue of approximately $13 million, and the EBIT is about $1 million, which includes a substantial increase in growth resources to drive commercialization of this platform. Looking at the full year consistent with Innovation Day guidance, we expect earnings in this segment will be up between 1% and 3% beyond the impact of these product moves. We expect solid earnings growth in the second quarter versus the first for Fibers. We remain on track to stabilize this business. We expect our total volume for the year to be about flat compared with last year. We are making continued progress on productivity, including raw material costs, and the impact of these initiatives will start to flow through in the second quarter. As mentioned, we expect the progress we're making on innovation initiatives in this segment to contribute to earnings growth.
On slide 10, I'll transition to an overview of our cash flow and other financial highlights. We used $35 million in cash for operating activities during Q1 2018, in line with our normal seasonality of cash flow generation. Operating cash reflects our normal beginning of the year working capital build, in addition to an increase in trade receivables attributed to higher sales revenue and the timing of collections. Capital expenditures for the quarter totaled $128 million. We continue to expect our full year capital expenditures will be approximately $550 million. We remain very confident in our ability to generate over $1.1 billion of free cash flow for the year. Looking at the balance sheet, we continue to expect to use greater than $300 million of free cash flow to reduce debt this year. Additionally, we remain committed to returning cash to our stockholders.
In the first quarter, we returned $180 million through our first quarter dividend of $80 million and $100 million in share repurchases. For full year, we continue to expect increased share repurchases compared to 2017 in absence of bolt-on acquisitions. We continue to expect our full year tax rate to be between 18% and 20%, reflecting the continued benefits of our improved business operations and resulting impact of recent tax events. Sitting here today, it feels like 19%, which would be a modest improvement compared to last year and is reflected in our results for the first quarter. A strong start to the year for our earnings and cash flow performance. With that, I'll turn it back to Mark.
Thanks, Curtis. On slide 11, I'll discuss our 2018 outlook. We continue to benefit from the strong growth of high-value innovative products with leading positions in attractive niche markets. We're also delivering revenue synergies through launching new products and improvements in commercial execution capabilities of our acquired businesses. We're seeing the benefits of scale and integration, translating this attractive growth into earnings. Our continued aggressive productivity is expected to offset inflation and some of our growth investments. In addition, a modest improvement in our tax rate is expected to contribute to growth. Disciplined allocation of our strong free cash will continue to contribute to our growth, including planned increases in our share repurchases in 2018 compared to 2017. To accelerate our momentum in the coming years, we are also continuing to invest in innovation and product development and capacity expansions to support our growth programs.
We expect higher scheduled maintenance costs in the year as we have a significant turnaround here in the second quarter for one of our crackers in Longview, Texas. Lastly, expect pressure in the ethylene spreads to impact earnings, especially in the second half. Putting this all together, our expectations for 2018 EPS growth have improved to be 10%-14% compared to 2017. When I consider the tailwinds and headwinds at this time, I would expect to be in the middle of this range. When you think about the shape of the year, you should expect first half EPS to be modestly higher than the second half due to our new revenue recognition method, ethylene, and a tough 2017 comp in AFP.
On free cash flow, we continue to expect at least a 10% increase, which is one of the most compelling in the industry, especially when you consider we are investing in long-term growth at the same time. On slide 12, I'll summarize where we are. As you think about our portfolio, we continue to march down the path to make two specialty businesses a much bigger percentage of the total, with our goal of driving from 70% to 80%. This all comes together for a terrific bottom line. We can grow faster than the underlying market. We can sustain and improve our margins through mix upgrade. We do this through our unique innovation-driven growth model, which is the heart of how we win. We also do this through scale and integration and investing in the unique capabilities we have in place to drive it.
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 a compelling compounded EPS growth through 2020 and beyond. When you put this all together, we are well positioned for long-term attractive earnings growth and sustainable value creation for our owners.
Thanks, Mark. We've got a lot of people on the line this morning and like to get to as many questions as possible, please limit yourself to one question and one follow-up. With that, Lauren, we are ready for questions.
Thank you, sir. If you'd like to ask a question, please signal by pressing *1 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. Again, press *1 to ask a question. Our first question comes from David Begleiter with Deutsche Bank.
Thank you. Good morning. Mark, in AM, you got 6% pricing in the quarter. Where do you stand at segment in recapturing offsetting raw material costs?
Good morning, David. We're proud of our discipline in driving price improvements throughout last year and into the first quarter. What you're seeing is the accumulation of that action over that period of time. At this stage, our prices have caught up to raw materials. In fact, our spreads are a little bit better in the first quarter.
Very good. Also you mentioned enhanced commercial execution in AFP in Q1. Can you give us some concrete examples of that execution?
Sure. It's a great story of creating value through synergies in the acquisitions. We have been building, as we talked to you about on Innovation Day, a very powerful growth model that combines how we engage the market, how we leverage our technology, and bring it together with application development capability. You're seeing that right now. One of the strongest drivers of growth that we had in AFP was our animal nutrition and care chemical business. There's a place where we've combined the products of Eastman and Taminco, where we have a broader portfolio of organic acids, making us much more relevant to the market. The Taminco team was somewhat geographically limited in their commercial execution capability, so we've now built a broader global capability.
We've added application development capability to that, so we can be much more of a formulation expert and enhance what we're offering to the marketplace. That's all combined to drive significant growth, incredible growth, in fact, for that combined set of portfolio to the marketplace. It's a great example. Same thing's true in tires. We've built an integrated capability now where we started with what Solutia had, which was somewhat limited in what they had to offer to the market, expanded it with our resin portfolio, some other products that we're developing for the innovation side. Now we're not just Crystex and PPDs, but have innovative resins that can improve the performance of tires. Built a strong application development capability where we're insightful in how we design those products and can be a true advisor and consultant in formulating the tire.
We've gone from debating the price of Crystex in 2012 to being an innovation partner with all the top MNCs in this space, as well as some of the key leading Asian players. These examples of the growth model, bringing capability together, is driving double-digit growth in tires across that portfolio, strong double-digit growth in animal nutrition, and we're doing this in a bunch of other places.
Thank you.
Our next question comes from Duffy Fischer with Barclays.
Yes, good morning, guys.
Hey, Duffy.
Question around the contract with Enterprise and PDH. Is there a ramping? Was that material in the first quarter? Going forward now that you have both that contract and your own crackers, what's your balance on propylene, and where are we trying to get to over the next year or two with that?
First on the question around the Enterprise contract, that has not had a material impact on our first quarter input cost or performance. On the balance of propylene, remember, we're a net consumer of propylene. I think we're pretty balanced on what we produce now, what we need for our derivatives, including that Enterprise contract.
Okay. Could you quantify the accounting change? You said it won't impact the year, but when we think through quarter to quarter, how big of a number are we talking about between quarters, and can you help size that throughout the year?
Sure. Let me just recap the change in revenue and recognition, hopefully just this one time. In 2017, let me remind you, revenue was recorded based on a confirmed delivery dates.
In 2018, revenue we recorded based on when goods ship, which will accelerate when revenue is recognized compared to previous years. We believe this new method is more consistent with industry practice. To transition to this new method, let me also remind you, we recorded an increase to retained earnings for $53 million. What this really relates to is the net earnings of approximately $200 million of revenue for product that had shipped but not yet delivered at the end of 2017. This transitional revenue will not be recognized in revenue or EBIT in 2018 under the new method. This ensures both 2017 and 2018 now only have 52 weeks of revenue in each period. As such, again, as you mentioned, this change is not expected to have a material impact on revenue or EBIT for 2018 taken as a whole when compared to previous years.
However, as you've seen in the first quarter, this can impact seasonal trends of revenue and EBIT within a year. Looking specifically at first quarter, the first quarter revenue impact under the new standard and in 2018 was driven mostly by fibers, as mentioned in my prepared comments. We had a similar but smaller revenue impact on Advanced Materials, offset by similar change in Chemical Intermediates. When you put it all together, the company probably accelerated $30 million of revenue and roughly $18 million of EBIT or $0.10 a share in first quarter of 2018 that would have otherwise be recognized later in 2018 if we're still under the old method. Again, this change does not impact our expectation of strong revenue and EBIT growth for the company or any segments when comparing 2018 versus 2017 for the full year.
Great. Thank you, fellas.
Our next question comes from Bob Koort with Goldman Sachs.
Hi, good morning. This is Dylan Campbell on for Bob. For Advanced Materials, you guys called out a stronger sales mix for the premium products. Can you provide an update on the % of the current mix that comes from these premium products?
We don't provide this specific breakdown. What I can tell you, and that we've said in the past, is Tritan as an example is around $300 million. Double-digit growth, very powerful story there, where we continue to be the most unique offering of clarity, chemical resistance, and toughness in that marketplace and extending into a lot of new applications. That's just one third, if you will, of the premium products. The heads-up display and acoustic interlayers is of similar size, also growing double digits at very attractive margins to the segment and the company. Performance films, also similar size to Tritan, growing at double digits with very attractive margins. It's a pretty big % of the overall total.
It's still got a ton of room to grow double digits for quite some time because these markets are quite a bit bigger than where we are today.
Got it. Thank you. With the increased EPS growth expectations in 2018, do you see a risk to the upside for your longer term 8%-12% growth, or does this kind of create a higher bar to cross for 2018 and 2020?
First of all, we're incredibly excited about a 10%-14% range this year. Love to see it being driven by the specialties and stability with some earnings growth in fibers, which is a very nice change in stability in CI. I think it's a powerful story. Anything about the long term, we still view the long term in the 8%-12% range. There are some unique advantages we have this year in currency, for example, that you don't plan on repeating in the future years. We think that's a very compelling range for us to grow sustainably and consistently every year as we go forward. With an increasing free cash flow to go with it, I think it's a very powerful story for the market.
Got it. Thank you.
We'll go next to James Sheehan with SunTrust.
Morning. Could you update us on your strategic options for the Longview ethylene excess capacity?
Sure. We remain committed to address our excess ethylene position, as we've mentioned in the past. We remain engaged with multiple parties with a long-term view who are interested in leveraging our integrated ethylene position in the U.S., as well as there's parties interested in our land, utilities, and other infrastructure to build a derivative project at the Longview site. We're working diligently to see what we can get done within these current market dynamics, and we'll update you as we make any progress on it.
On adhesive resins, could you give us more color on the competitive pressure you're seeing there? Is it all in hydrogenated or non-hydrogenated type of resins?
The specific change in the marketplace is ExxonMobil's bringing on some capacity in Asia this year. We expect that to have some impact on margins. It has not yet had an impact on margins. They're still in the process of starting up and qualifying that product to the marketplace. It's really more of a back half of year risk at this point. To keep in mind, though, the amount of capacity they're adding is around 90,000 tons. The market's growing around 25,000 to 30,000 tons a year because it has this incredible underlying market growth of 5%-7% in hygiene. Also, the markets are incredibly tight right now, so there's a lot of pent-up demand for hydrogenated resins that we expect to help fill out that asset and accelerate fill out rate.
Another thing to keep in mind is there are market trends now driving rosins to be converted to resins. Rosins is about the same size as the resin market, overall resin market. There's a lot of pressure on that. There's a very strong odor
To rosins and not great color. The market has become very sensitive to odor and adhesives, especially in Asia. A lot of people are looking to sort of convert from one to the other. That's another way of demand sort of filling up this asset. Overall, we feel comfortable that this is a great attractive business long term. Obviously, we'll see some short-term pressure here as that capacity comes to the marketplace. There's such strong demand potential, we see the long-term margins being quite attractive.
Thank you.
We'll go next to P.J. Juvekar with Citi.
Yes. Hi, good morning.
Good morning, P.J.
Mark, you shifted some products from intermediates to AFP. I think that's small, about $18 million. That's about 2% growth in AFP. What are these products, and are they too specialty in terms of margins?
Yeah, it's a great question. It goes back to something I talked about in the first question. As we have built this growth model and seen the power of how application development connects sort of markets and technology together, we launched a program last year not just to build this capability, but to reexamine how our business teams are structured and making sure that we had the right products aligned to take advantage of that capability. We realized that there were some products that were still being sold in CI that would be much more effectively sold in AFP. By bringing our better market connect and our application development capability to bear on these products, we could accelerate growth, sustain those margins. These products are actually pretty attractive margins to start off with.
Some of them are already being sold partially by AFP, and we're just consolidating all the product into one place to be more efficient in how we manage the assets. It just made sense. Animal nutrition was one of those places where we saw that opportunity with the success we're now seeing in that marketplace, and we're cleaning that up, and there are also some products in coatings that made sense to sort of have all sold in one place with that greater commercial and technical capability. The natural thing you do is you're sort of evolving your strategy and see what you can do and want to maximize your growth.
Okay. Thank you. Then you got strong double-digit volume growth in tow after several years of declines. Do you believe that we've ended the destocking cycle, or were there any other factors like your repositioning into textiles that caused the volume growth?
As Kurt mentioned around revenue recognition, the principal driver of the revenue looking higher on a year-over-year basis in the first quarter was actually revenue recognition method being different this year versus last year. It's a very long supply chain for a lot of that tow to go from Kingsport, Tennessee, to markets around the world. As a result of the coal gas incident, we weren't shipping as much in the beginning of the quarter as we normally do as we were bringing that asset back up and then ramping up the production of the downstream tow product. A lot of that product shipped in March that would have shipped earlier. When you have these two different methods, it just gets caught up as recognized revenue this year, but would have not shown up in the same way last year.
That's part of it, P.J. The other part was obviously some of the revenue being transferred, the $13 million of revenue from other to the Fibers segment . When you actually sort of put it on an apples-apples basis from a revenue recognition basis, the tow volumes within this story are about flat year-over-year. There isn't a story of growth or decline in tow. It's stable. As we said last year, we expected tow volume to be stable this year to last year, and that's what we expect, and you'll see on a full year basis. That'll be stable.
That's helpful. Thank you.
We'll go next to Jeff Zekauskas with JPMorgan.
Thanks very much. Can you remind us how much of the chemical intermediates volume as a percentage goes for internal purposes versus external purposes?
It's about a 50/50 split, Jeff.
Okay. If it turns out that your operating income in Chemical Intermediates was up about $7 million, is it fair to say that there's a $7 million benefit that filters through your other segments as they capture the same margin differential? Since for the year you guys think that you'll be down a little bit, does that mean that the overall margin benefit to the other segments will also be down a little bit?
Jeff, you can't translate that in that direct way. You've got different set of products you're selling in specialties with different supply demand dynamics and selling on values. The price of those olefin derivatives are going to be determined by those market conditions. Even within CI, the market prices and the value captured isn't directly correlated to ethylene and propylene. I know that everyone sort of tends to make that simplistic assumption that they're just all going up and down with propylene ethylene prices, but it doesn't work that way. We don't sell propylene at all, right? We sell derivatives and specialties and in Chemical Intermediates. The value and the pricing of that's actually holding up quite well through the first quarter as well as into the second, including ethylene.
Of course, some of that's being offset by the bulk ethylene that we're selling into the marketplace at these much lower prices. You can't sort of do that translation one for one like that.
Thanks very much.
We'll go next to Aleksey Yefremov with Nomura Instinet.
Good morning, everyone. Thank you. In regards to Aerafin capacity expansion, are you currently sold out in these types of adhesives? What % of your capacity does this represent in terms of % or kilotons, and when will this project be finished?
Aerafin's been a product we've had in the marketplace for over a year, and the growth rate and the interest of it has been quite strong. It's a component of our overall amorphous polyolefin program, which in total is showing very strong double-digit growth. In this particular area, we're seeing a strong uptake, and we hit some capacity limits, expect to, I should say, as we go into this year. We're expanding capacity. We don't see any risk of missing orders, but we're rushing to get this capacity online to continue supporting the strong interest. We're not going to provide the detailed breakout on a quantitative basis.
Okay. Thank you. You also mentioned animal nutrition and care chemicals as the source of upside in the first quarter. Was it pricing or volume or both, and is this something that's sustainable going forward?
On animal nutrition, it's been tremendous volume growth as well as improvement in pricing as the market's become tighter for two factors. The first would be the answer to Dave's question around how we build a better commercial technical capability. The second factor driving it is that China environmental enforcement has shut down some of our competitors in this space, as well as competitors in the tire space and some of the coatings. We're seeing benefits across the segment in AFP as well as CI. That's helped on the pricing front as well as the volume growth. From a sustainability point of view, the innovation, the commercial execution is all very much sustainable. It's just growing in the marketplace. The China environmental enforcement part of that question, I think is, we'll have to see how it plays out.
These are players that have been shut down for environmental violations. They have to either rebuild in a chemical park and operate at a higher cost structure under better environmental standards if they can get the financing, or they won't come back. In a few places, you can see people trying to build, and they will come back eventually at a higher cost structure. In some places, we don't expect that they will. We'll have to just see how it plays out over time. For this year, we expect it to be very attractive, both pricing and volume growth.
I would emphasize that there's a sustainable advantage that we get out of all this, is that many of our customers, both the big MNCs around the world, as well as many of our Chinese customers, have learned a painful lesson about how much they want to depend on a small, private, single plant in China supplying their needs on critical products. Procurement departments are having to reevaluate how much of that risk they want to take going forward. I think it really emphasizes the value that we provide as a sustainable supplier on a global basis.
Thank you.
Our next question comes from Kevin McCarthy with Vertical Research Partners.
Good morning. Mark, back at the Investor Day, I think on various earnings calls, you've alluded to the concept of upgrading your mix across a variety of specialty products. Is there a way to quantify the benefit from that, either retrospectively or prospectively in terms of margin uplift? You've got a lot going on across a lot of different products. Just wondering if you have in your mind any sort of glide path or rule of thumb to help us understand better the benefits associated with those efforts on the margin line.
Yeah. One, this is the heart of our story and our strategy, it's a great question. We've got double-digit growth in a wide range of products across AM/AFP, from Tritan to heads-up display, acoustic interlayers to performance films to some display products, the resins in tires, Tetrashield in AFP. The list goes on. All these are above segment average margins as well as above company average margins. As they grow, the weight average mix on the variable margin at the corporate line is going up. It's attractive.
From a specific point of view, we actually provided several slides at Innovation Day that actually give you a sort of quantitative look about how we've dramatically improved the margins from 2010 to 2017 and our outlook for how those margins will continue to improve at the corporate level and as well as an example in advanced materials from 2018 to 2020. I think those slides will be helpful for you.
Then, second, how would you describe your strategic playbook in the event that China proceeds with tariffs on cellulose acetate flake?
Yeah. The tariff question is a good one. On the acetate flake side, first of all, it's unclear what products will finally be implemented versus what's on a preliminary list. They often change. Second, it's unclear when they might implement this, if ever. In this case, it's unclear how the tariff would be applied. CNTC is a government entity, you're sort of just moving tax revenue from one pocket to another pocket. We'll just have to see how that all plays out.
Thank you very much.
We'll go next to Vincent Andrews with Morgan Stanley.
Thank you. Just a question on the tow volume market. You referenced a very long supply chain. I've noticed that the 2 of the larger tobacco companies reported already, and they've got volume down about 6%, 7%. I'm just wondering, you're expecting to be flat for the year, and cigarette volumes move around all the time, so I don't want to read too much into one quarter of their results. When would we expect to see that type of a down quarter flow through your tow volume?
Good question, Vincent. You said the key thing in the beginning or at the end there of your comments, which is one quarter is not something to react to by a couple of companies. I think we need to see how they all report, because share shifts around a lot between these guys on a quarter-to-quarter basis, and what the overall market trends are. We're not seeing anything that says that there's suddenly been an acceleration of the downturn of cigarette demand from what our customers are telling us. At this stage, we're not expecting a change in tow demand in any material way. I think we're just going to have to see how this plays out. There's been a lot of very consistent, steady sort of 2%-3% decline in this business for a very long time.
I think we need to give it a little more time before we start sort of reacting to that one quarter bit of news.
Okay. Just is there sort of a rule of thumb on how long the supply chain is, though?
Oh, on the supply chain side, in this case, it's probably six months.
Okay. Thanks very much.
Our next question comes from Michael Sison with KeyBanc.
Hey, guys. Nice start to the year.
Thank you.
In terms of, you talked about $350 million of new business wins in 2018. If I combine AFP and AM together, it's about 6% growth, and you got pricing as a tailwind. I'm just curious, in terms of your outlook for revenue for AM and AFP, it seems a little bit conservative. Can you maybe walk us through any negatives that we're missing?
No negatives. In AM, I think what you're going to see is strong, high single-digit revenue growth for the year driven by the things you just mentioned. Volume, significant mix upgrade that we've consistently done for several years now, some pricing improvement, FX tailwind, all sort of come together to sort of deliver that. On the AFP side, it's obviously been incredibly strong in the first quarter. We expect continued strength in the second quarter. By the way, AM and AFP, we do expect seasonal improvement in revenue and earnings from first to second quarter. There's a tougher comp in the back half of the year for AFP. You have to remember last year we had very high solar fill volume for a couple of huge projects come in in the third and the fourth quarter that won't repeat this year.
We do see fills coming in 2019 and 2020. It's just a sort of chunkiness issue in this year versus last year and the future. There's also the other dynamic. This environmental China enforcement drove a constant and meaningful share improvement for us through last year. You saw the benefit of that really in the third and fourth quarter. There is an additional environmental enforcement on top of what we've benefited from. We're holding our share this year, obviously that's a tougher comp to last year in the back half. Then the third thing is some price pressure in adhesives, as I already mentioned. All those sort of make the comp tougher.
We do expect earnings growth year-over-year in the back half of the year, just to be clear, and we actually expect margins to sequentially improve from first quarter to second and third as the mix continues to improve with the specialty innovation products. It will just be a tougher comp to 2017.
Okay, great. Quick follow-up in terms of tire business continues to see good momentum. A lot of the tire companies look sluggish this quarter. Any thoughts there in terms of underlying demand? Is it really just your new products that are driving the growth?
It's not a primary demand story. We go to extensive effort in our market segmentation and targeting where we have the best value proposition and aligning ourself with the customers who we believe are going to have the highest growth. We have really seen benefits in Asia in particular of aligning with the winners in that market and seeing the benefit as they're taking share and consolidating, frankly, failing Chinese tire companies into themselves. We're benefiting from that. On top of that, you have the share gains, as I mentioned, from environmental enforcement. On top of that, you have the innovation growth that's happening where we have double-digit growth in things like our tire resins. It all combines together to a story of where we're creating our own growth in a market where the underlying primary demand, as you noted, is not that strong.
Great. Thank you.
Our next question comes from Frank Mitsch with Wells Fargo Securities.
Hey, good morning, gentlemen.
Good morning, Frank.
Hey, apologies, I'm feeling pretty good after last night's draft. Celebratory environment, kind of like you guys celebrating a nice start to the year. Speaking of a nice start, you reiterated that you expect to get greater than $1.1 billion in free cash flow this year. Was there a thought to raise that metric as you raised the EPS guidance?
Well, delivering greater than the 1.1 by itself is a pretty remarkable effort, Frank. Let us deliver on that this year. If we do a little bit better, we'll celebrate with you in the fall with maybe some victories.
Oh, terrific. Something for me to look forward to. Mark, you just indicated that you do expect a seasonal improvement in some of your businesses in Q2. Can you talk about the pace of business so far in Q2 on a geographic basis that you're seeing out there?
As you saw in the first quarter, tremendous growth in Europe and Asia. We'll continue to see strong growth in those regions as the economies are improving in Europe. Asia still, while it may not be the growth of old days in China, it's still very attractive growth compared to the rest of the world. We're benefiting from our positions in there, as well as throughout Asia. The overall automotive market's feeling a little stronger than people expected at the beginning of the year, that's great for us, of course. I'd say it feels good everywhere. To be clear, our forecast isn't forecasting improved economy. If that does happen, that would be upside to our forecast. We believe in realizing the growth that we're having.
It's also important to remember that revenue growth doesn't just include volume, it includes FX and price improvements, et cetera.
Terrific. Thank you.
Our next question comes from John Roberts with UBS.
Thank you. The cig tow industry will still decline gradually over time and eventually need more consolidation and rationalization. Do you see the block of the merger of Celanese and Blackstone business a problem down the road if the industry can't consolidate, or how do you see things playing out longer term?
Let me take that in two parts. First is our overall view of demand in the world, and then I'll get to the second part of the question. Overall demand, as I mentioned, we don't see a significant change in the overall demand of cigarettes. We expect a slow decline outside of China. If you look at China demand at primary level, I think it's actually been a lot more stable than any of us thought. There was an overbuilding of inventory that was occurring in 2011, 2012, and 2013, and then there was a destocking in that backward integration that they had with JVs with us and others that created a huge up and then down in tow in that marketplace. Underlying it, I think it's stable.
I'd also note that at this stage, the exposure to imports into China with tow is down to about 5% of our revenue in the segment or half of 1% at the company level. The exposure we have to that question right now has been dramatically reduced on what happens inside China. The key elements of how we think about this business stays the same as it always has been. We're focused on running our business the best we possibly can. I think we're doing a good job of that. We've secured a lot of our volume outside of China, two-thirds of it in these long-term agreements that provide stability and volume and pricing for our customers and for us. We're obviously pursuing productivity aggressively this year in the amount of cost we think we can improve, including our raw materials.
That's going to help offset, will offset the price declines that we expect this year. Most importantly to our story is on the asset side. When we added capacity in China, we took out capacity in the U.K., and now we're down to our last asset in flake, largest, lowest cost asset, backward integrated coal, and our tow capacity that we have left matches that flake. We're focused on how we fill that remaining capacity, that excess capacity, including what declines may come with our innovation. As I just told you in the beginning of this call, we're seeing tremendous success in textiles. We're also seeing success in nonwovens, where we're going to get strong double-digit growth this year over last year in this space. While the margins aren't tow, they're decent, attractive margins similar to company average.
That's how we fill these assets and drive earnings growth net for this business. We're going to repurpose those assets, this excess capacity, to markets where we see attractive growth, the ability to value them up over time, and where markets would actually grow. That's what we've done for 90 years in cellulosics, and we'll keep doing.
Thank you.
Our next question comes from Laurence Alexander with Jefferies.
Hi, it's Daniel Rizzo for Laurence. How you doing, guys?
Good.
You mentioned we've talked a lot about mix improvements and how that's going to help support growth, I was wondering if like productivity efforts and cost controls can also add to margin improvement over the next two to three years.
Over the next two to three years, what we've been talking about is we do have cost productivity goals. To some degree, those are being used to help offset some of the increase in manufacturing costs, some of the turnaround costs, et cetera. Our productivity is helping us grow in the right places, you ultimately see some growth in some of our SG&A and R&D areas. Manufacturing does an outstanding job offsetting inflation, trying to give us a little bit more than that. Again, those investments, while we call it cost increases, they are investments, and you need to see those increases because that's what drives the future growth profile of this company.
Okay, thanks. With the solar fill volumes, should we think about the cadence going forward that there will be like a very strong period of, say, one to two quarters followed by some weakness? Is that how it kind of plays out over a period of quarters and years?
Yeah, these are these huge concentrated solar power arrays, these mirrors that are out in the desert concentrating sun. They are massive projects. Once they finish the construction, in a couple of weeks, they fill the plant up with fluid. You will literally build this inventory over like a year and a half, then you fill it. It comes in chunky bits, in quarters and across years. It is a very attractive business. We love it, but it has a tendency to be a little chunky.
The good news is the new revenue recognition method will smooth that out a little bit better because it will be more based on goods issue rather than delivery.
Thank you very much.
Our next question comes from Matthew Blair with Tudor, Pickering, and Holt.
Hey, good morning, Mark and Kurt. I wanted to go back to the accounting impact. Kurt, I think you said that it provided about a $0.10 EPS boost in Q1, but would not affect really the full year number. Could you talk about when that $0.10 benefit would roll off as we progress through the rest of the year?
Sure. If I think about revenue recognition as a new method compared to 2017, what you're going to see is you'll see a little bit of this same impact in the second quarter, but on a smaller degree. It'll start reversing in third quarter, and then you'll really feel the reversal in fourth.
Got it. Thanks. We've also seen some price increases come through from Eastman that were attributable to freight surcharges. Did you have any volume impacts in the quarter due to logistics restrictions? What % of your product is moved by truck?
First of all, we haven't seen any impact on volume due to logistical constraints. We're meeting every customer need and order across the planet. Our supply chain does sort of miraculous things every day. When you think about how we didn't miss an order through the hurricanes last year, when you think about the phenomenal things we did of bringing acetic acid into this site during the coal gas interruption, and also managing a very complex inventory supply chain problem to serve all of our customers last year and not miss any orders through that recovery effort. We're really good at this. We've got it covered on the logistical front. We are seeing higher costs like everyone else, for the cost of trucking, which isn't a huge portion of our cost structure when it comes to logistics.
We're pricing to recover it, like everyone else is doing.
Thank you.
Let's make the next question the last one, please.
Our final question comes from Arun Viswanathan with RBC Capital Markets.
Hi. There was a lot of volatility in Q1 on propylene and ethylene. I guess, going forward, would you expect your propylene-based products to increase, given recent inflation? Would that be a headwind? Thank you.
On the propylene side, I think what I'd say is we expect stability, right? It's been good pricing improvements through the first quarter. We expect those mostly to hold into the second, and that business to be stable through the year. Ethylene's obviously a different story. Even on there, the ethylene derivatives are pretty stable. We're just down to the bulk ethylene, where obviously prices are a lot lower, which is really a second half impact. You have to remember, the second quarter has our shutdown in it with one of our crackers. We just aren't producing much excess ethylene in the second quarter. This is really more about the second half when you think about that.
Thanks.
Okay. Thanks again, everyone, for joining us this morning. A replay of this call will be available on our website later this morning. Thanks again.
This concludes today's conference. Thank you for your participation. You may now disconnect.