Q3 2019 Earnings Call
Please standby.
Good day, everyone and welcome to the Eastman Chemical company third quarter 2019 conference call.
Today's conference is being recorded.
This call is being broadcast live on the he spends website www dot dot com.
I'll now turn the call over to Mr., Greg <unk> Chemical company Investor Relations. Please go ahead Sir.
Thank you, Matt Good morning, everyone and thanks for joining us on the call with me today are Mark Costa Board Chair and CEO .
Curtis Blonde executive Vice President and she also.
Jay Claro manager Investor Relations.
Before we begin I'll cover two items.
First during this presentation you will hear certain forward looking statements concerning our plans and expectations.
Actual events or results could differ materially.
Certain factors related to future expectations are or will be detailed in the company's third quarter 2019 financial results news release.
During this call and in the accompanying slides and in our filings with the Securities Exchange Commission, including the Form 10-Q filed for a second quarter 2019, and the Form 10-Q to be filed for third quarter 2019.
Second earnings referenced in his presentation exclude certain non core an unusual items and use as an adjusted tax rate the forecasted full year tax rate.
Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluding an adjusted items are available in the third quarter 2019 financial results news release, which can be found on our website www dot Eastman dotcom skinny investors section.
Projections of future earnings exclude any non core unusual or non recurring items and assume a forecasted full year tax rate.
With that I'll turn it over to Mark.
Thanks, Greg Good morning, everyone I'll start on slide three or some strategic highlights.
I had solid results in the third quarter, despite a challenging macroeconomic environment.
Which has deteriorated in the second half of this year.
Yes, that's a quarter was similar to the second quarter, especially considering the local electrical outage it caused to shutdown at our Longview side.
We took actions offset a decline in volumes as our teams are focusing on what they can control men's costs better accelerate or innovation programs remain disciplined with discretionary spending among other actions.
Which led to this solid performance.
Despite the economic challenges remain on track for approximately $400 million and new business revenue closes from innovation in 2019.
Led by advanced materials.
This segment as a number of innovative products that are showing tremendous resilience in this environment.
Even with exposure to the challenge auto OEM markets strong growth across specialty products like pay protection, So Triton acoustics and heads up.
Heads up display interlayers are offsetting weakness in the core business.
And resilience is a testament to the strengths of the strategy and our innovation programs, we've been leading for close to a decade.
In other ways. If these innovation initiatives were started later.
I'm confident they will make substantial progress over the next couple of years.
As we've discussed before in this challenging business environment, we continue to achieve our cost reduction targets, where we stay focused on innovation to create around growth.
Consistent with our disciplined capital allocation strategy returned $583 million to stockholders through the first nine months of 2019.
Through a combination of dividends and share repurchases.
We're also focused on improving the strength of our balance sheet by delivering $300 million for the full year.
And finally, we expect our free cash flow to approach 1.1 billion.
Two additional highlights I'm, especially proud of earlier this week, we announced that we've achieved commercial operation of our carbon or an old technology or CRT.
Which is a form of chemical recycling.
This is a significant step forward in our efforts to help solve the problem of plastic waste and accelerate the circular economy.
He or she is a game changer for recycling because it provides an end of life solution for many plastics from a variety of sources that have no alternative use and end up in landfill or the ocean.
Syracuse Opera hearing Kingsport at our largest manufacturing sites. So we can take full advantage of our integration to make this happen.
This means the plastic ways, we recycle through CRT will go into products used in markets, we already participating.
Including textiles, cosmetics personal care not foamix.
And with CRT plastic ways can be recycled an infinite number of times without degradation or quality. Unlike mechanical recycling.
And 2020, we expect to use up to 50 million pounds of waste plastic in our CRT operations. This technology significantly changes the value proposition of our cellulose or products, which have been about 60% biobase from certified sustainable for US now the other 40% will be recycled content, which creates a very compelling offer with a drug.
Attic increase in the environmental sensitivity in many of these markets that we serve.
And within the next several years, we expect revenue from CRT will be in the two to 300 million dollar range with significant upside from there so the product.
So we're very excited about this milestone.
In addition by the ended the year, we also expect to be commercial scale for another chemical recycling technology for polyester.
One of many more advancements you can expect from east and in the area of waste plastic recycling and accelerating a circular card.
Second we recently recognized for our leadership in the area sustainability by Lux back.
The premier cosmetic packing packaging event for luxury brands.
You said, there's one to 2009 Lux packed Green award for activating a circular economy. That's all expect show Eastman showcase next generation easement Riva engineering, Socialistic bio plastics and introduced Eastman Crystal Rozelle, Copolyesters, which has a new line of proprietary consumer.
Recycled content compounded polyesters these investments and able to be a leader in accelerating the circular economy, a commercial scale, how many others.
With that I'll turn it over to Curt discuss a corporate and segment financial results. Thanks, Mark and again good morning, everyone starting with the corporate review on slide four and beginning with the year over year comparison.
Sales revenue declined due to lower selling prices lower sales volume and mix and the stronger dollar.
Chemical intermediates was the biggest contributor to the lower selling prices and this is mostly due to prices falling lower raw material energy prices as you would expect.
The lower volume was primarily due to the challenging economic climate, which worsened during the quarter as industrial production do celebrated.
As well as the impact of planned and unplanned shutdowns this quarter.
This deceleration had a significant unfavorable mix impact with lower volumes of high value specialties.
Partially offset these factors with growth in new business revenue from innovation.
EBIT declined due to the combination of lower sales volume unfavorable product mix increased maintenance cost and the stronger dollar somewhat offset by cost reduction efforts.
Looking sequentially revenue declined slightly due to lower selling prices.
EBIT was down somewhat mostly due to the higher maintenance related costs.
So a number of factors that have changed since our call in July .
Industrial production has decelerated.
Driven by the further escalation and global trade issues, including the U.S., China trade dispute in August .
As you can see in the German and U.S. economic data.
And we believe it is also occurring in China.
In particular, we can see the impact of key consumer discretionary end market slowing, including transportation consumer durables and electronics.
As a result volume has come in lower than expected, which in turn has resulted in lower capacity utilization.
In an environment like we are now we remain focused on what we can control closing new business revenue, reducing costs and generating strong free cash flow.
Now turning to slide five to review advanced materials, which had a record quarter. Despite about one third of the segment exposed to the automotive market.
On a year over year basis sales revenue decreased modestly as our innovation success is mostly offset the man challenges caused by the global trade disputes disruptions and reduced global automotive sales.
In particular, we delivered strong growth in premium products, including Tritan Copolyester safely continues to get all layers and paying protection film.
EBIT increased primarily due to lower raw material costs more favorable product mix and continued cost management.
Sequentially revenue was stable in EBIT increased.
The increase in EBIT was largely driven by higher trading volumes the flow through lower raw material costs and the benefit of cost management.
As we think about the balance of the year. We expect it continues to benefit from strong growth in some more premium product lines, which will help to offset the general weakness in some of our end markets such as transportation.
Also consistent with my corporate comments, we expect the normal seasonality deceleration and demand in the fourth quarter.
Well to also benefits from lower raw material costs and cost actions.
All in we think the fourth quarter EBIT will be up significantly year over year.
Putting it all together, we expect advanced materials EBIT to grow in the low single digits for the full year of 2019.
These results in this challenging economic climate demonstrate the strength of our innovation driven growth model to trade to create our own growth and defend our value with customers.
Turning to slide six and additives and functional products year over year sales revenue decreased due to lower selling prices lower sales volume and less favorable product mix and a stronger dollar.
Lower selling prices were primarily due to lower raw material prices with about 50, I'm sorry, 40% of the decline from cost pass through contracts and the remainder attributed to increased competitive pressure, particularly for it and he says resins.
Tire additives and formic acid that sort of several end markets.
We realized solid growth in care chemicals water treatment and specialty fluids, but that growth was more than offset by weaker end market demand, resulting from continuing global trade related pressures, particularly in transportation and other consumer discretionary markets.
EBIT decreased primarily due to less favorable product mix lower sales volume increased planned manufacturing site maintenance costs and a stronger dollar.
Excluding currency spreads were flat.
Turning to the sequential comparison sales increased as higher volume and better product mix was mostly offset by lower prices, particularly for care chemical cost pass through contracts.
EBIT decreased due to the volume growth and mix improvement being more than offset by higher maintenance shutdown costs as well as lower prices entire outages and formic acid products.
Looking to the fourth quarter, we expect earnings to moderate due to normal seasonality, albeit from a lower base due to the slower economy.
Uncertain environment is weighing on the end markets for <unk>.
We're seeing some signs that customers may have decided to stay down longer coming out of their fourth quarter shutdowns.
With this risk in mind, we expect if peas EBIT in the fourth quarter to be similar to last year.
Before moving on let me take a moment to discuss the performance in additives and functional products this year and add a little more color.
Although it is hard to see in the results we had about two thirds other revenue performing well in this difficult business environment.
These areas, where care chemicals water treatment specialty fluids, and coatings businesses as well as parts of animal nutrition.
Strong girls and care chemicals water treatment and specialty fluids, expanding spreads and fixed cost reduction reduction actions were offset by lower podiums volumes in high value additives in auto model.
Currency headwinds and lower animal nutrition demand due to China slotting fees.
Earnings in these businesses combined have only declined modestly year to date.
Well there has been the most pressure in the remaining third of the segment has been specifically targeted as adhesives resins and formic acid businesses.
So the pressure is seen in this segment is not in most business, but rather in those three businesses I just mentioned.
Now the chemical intermediates on slide seven year over year sales revenue decreased due to lower selling prices and lower sales volume.
Lower selling prices were due to lower raw material prices and competitive activity.
The lower sales volume was due to weaker demand, particularly for agricultural end markets as a result of wet weather and for other intermediate products due to increased competitive activity.
EBIT decreased due to increased plant shutdown costs and a local power disruption impacting the Longview, Texas manufacturing site.
Taken together these costs were about a 30 million dollar headwind for chemical intermediates and the quarter 15 million of which was due to the unplanned outage.
EBIT also decreased due to lower sales volume and lower spreads.
These headwinds were partially offset by the benefits from the recent refinery grade propylene investment and continued cost management.
On a sequential basis sales revenue decreased due to lower sales volume, particularly for a functional and means due to normal seasonality.
EBIT decreased primarily due to the planned and unplanned outages continued spread declined in olefins and ask materials and functional I mean volumes seasonality.
Looking ahead to the fourth quarter. There are few headwinds in front of US first volume is lower due to weak demand environment, but also increasing competitive pressure as markets outside the United States are increasingly challenged by global trade issues also remember the cost of the turnaround of a lost largest cracker in Longview, Texas is in both the third and fourth.
Quarters, so similar amount of the cost of that plant shutdown will be in the fourth quarter.
And finally customer inventory management at year end potentially beyond Martin that normal seasonality that put pressure on our volumes and our capacity utilization rates.
[noise], finishing up the second my views on with fibers on slide eight year over year sales revenue decreased primarily due to lower acetate flake sales volume due to our acetate tow joint venture in China attributed to customer buying patterns.
The sales revenue decline was partially offset by the sales from the recently acquired Cellulosics yarn business and increased sales of textile innovation products.
EBIT decreased due to the impact of the inventory recovery in the third quarter last year third quarter 2018 from the coal gas incident, and less favorable product mix.
On a sequential basis results for stable with second quarter.
Looking at the fourth quarter, we expect earnings to be consistent with the run rate or the last two quarters as we've made good progress stabilizing results in this business.
Lastly, a quick update on our textiles business within fibers, we're making great progress in our focus areas within textiles, as we are aligned with some of the leading brands and our materials particulate or nyah is incorporated into these customers sustainability collections.
This has been somewhat offset by slower demand and more traditional applications, such a suit linings and tapes due to slower economic growth.
With that said, we remain confident that we're on track with our textiles initiatives to offset the expected continued decline in tow demand in the long term.
In particular I am very excited about how we can accelerate growth in Nigeria with carbon renewable technology, adding recycled content to a product that is already bio based.
Switching to the financial highlights on slide nine we continue to expect free cash flow approaching 1.1 billion.
Free cash flows up about 50 million this quarter compared to third quarter 2018.
And our business teams are working hard to deliver this result in a challenging fourth quarter.
Consistent with our track record I'm confident in our ability to deliver solid result.
Through nine months, we've returned $583 million to stockholders through a combination of share repurchases and dividends.
And we remain committed to our investment grade credit rating.
For the full year, we still expect to de lever by about $300 million.
In the last few years, we remain disciplined in our capital allocation through a combination of share repurchases and increasing dividend and debt pay down as we progress into 2020 will continue to use our cash and the combination of all three including further de levering into any in 2020.
Our full year effective tax rate is expected to be 16% capital expenditures will be approximately $425 million to $450 million <unk> 2019, and we still expect corporate other net cost to be a little above 60 million for the full year.
With that I'll turn it back tomorrow.
Thanks, Kurt on Slide 10 will provide an update on our 2019 outlook.
Continue making progress in closing new business from innovation to market development initiatives.
The increase trade uncertainty, including from the U.S., China trade dispute has caused a meaningful deceleration industrial activity around the world, including Asia and Europe now here in the U.S. and it's kind of economic environment. We're resolutely focused on the things that we can't control.
Instead, we've made excellent progress on increasing new business from innovation in this environment in this environment, particularly in advanced materials.
In addition, we continue to aggressively manage costs across the company and we continue to expect to generate strong free cash flow. This year, despite the challenging environment.
However, this market context is leading to lower volumes in the second half for the year than we had previously expected.
There was some continuing pockets of de stocking related to lower demand such as transportation in Europe in the U.S.
We're also seeing some customers extended maintenance downtimes and shift turnarounds into the fourth quarter to manage inventory due to the student Celleration that was not expected in the summer.
We're also managing our inventory in the quarter inline with what we're seeing from our customers.
Lower volumes are resulting in lower capacity utilization than we'd expected in the fixed cost hit of utilization is mostly offsetting the cost savings from a productivity actions. We took in the first half of the year.
Putting this all together, we're updating our full year adjusted EPS guidance to a range of $7 and 720.
Our guidance is based on current economic conditions and normal seasonality from here.
However, we can't predict macroeconomic conditions and the extent to its customers will choose to manage inventory at the end of the year.
I gave you scenarios, where we could be higher given the strength of October orders were lower if we face unusually high inventory management December .
We are maintaining a free cash flow guidance of approaching 1.1 billion, which remains a priority and will be a great result in this environment, what present very attractive free cash flow conversion.
Further I mentioned, it's our robustness it gives me confidence in our future what remains true for me today.
Even though some unprecedented challenges we face to people easement remain steadfast their commitment to drive results I don't want to thank them for continued to execute on our strategy while aggressively managing costs.
Big picture will continue to focus on what we can't control as we manage through this incredibly uncertain environment remain committed to long term attractive earnings growth and sustainable value creation for owners for all of our stakeholders.
At the same time, we're looking at every action we can take two increased performance this year indexed.
Focusing on engaging with customers, who seek innovation, especially in areas of sustainability excuse or growth in new business revenue closes providing resources grow in markets that are favorable trends and resilience in this environment.
[noise] play to take additional productivity actions to accelerate topline growth to the bottom line.
Building on our strong Crocker track record of disciplined portfolio management.
We will continue to look for opportunities were optimization makes sense.
Continues to be focused on free cash flow generation as we manage working capital.
And we'll be disciplined in how we deployed free cash flow.
In addition, we're creating another big vector growth, where with our new technologies for chemical recycling.
To enable a circular economy as we once again innovate solutions to improve the quality of life in a material way.
And we there's meaningful acceleration industrial production reverses as we know will.
Well be poised to create even more of our own grows from our innovation driven growth model and accelerate earnings growth as the mix and fixed cost leverage becomes favorable in the recovery.
So I'm comfortable going to win today and into the future with that I'll turn it back to great. Okay.
Okay. Thanks, Mark as usual, we have a lot of people on the line. This morning, and we'd like to get to as many questions as possible. So I ask you to please limit yourself. So one question and one follow up with that Matt we are ready for questions.
Thank you.
Ask your question. Please press star one on your telephone keypad.
As you know speakerphone. Please make sure your mute function is turned off seems like your signal to reach our equipment again that is star one if you'd like to ask a question.
Well go to David Begleiter Deutsche Bank.
Hi, Thank you good morning.
Mark looking ahead to 20, according to its early but I'm. Good. Thank you I know it's early to 2020, but can you still achieve you think your long term, 8% to 12% MPS growth in 2020 versus a versus this past year.
Hi, Thanks, a question Dave good to hear from me.
So we're not going provide a quantitative bridge at this stage in this environment, but let me sort of walk you through how we think about it from where we are today.
So if the current economic conditions continue into next year, because we all know we have to make that assumption.
We believe will deliver earnings growth going into 20 versus 19, and it really sort of breaks down into sort of three core buckets and how we do that.
First you know as innovation is always at the heart of our strategy and you've seen a great demonstration of how that's created value for us and advanced materials, and we're going to driving a you know growth there as well as you know can here to get traction on some innovation than they have to be even though it's.
Much more early stages, a day of P. you know, it's going to contribute like it has this year in some places. It's also important remember that we have a lot of markets that do have favorable growth or cross advanced materials, a b and.
And in a and C <unk> as well as textiles, there's a lot of places where we have good growth whether its current chemicals water treatments.
Going back to a more normal seasonal demand.
You know medical applications. So there's just good growth that's going to help while we do have exposure and consumer discretionary around 45% sporting keep in mind that 55% is actually quite stable consumables et cetera.
The other part that's gonna help on the demand side will be the vast majority the de stocking if not all should have played out by the end of this year.
So at least on a relative basis, there's no way that we can see the amount to de stocking that we've seen this year occur again next year. So that gives you some additional relief in demand and growth.
So volume should be better.
On a variety of different fronts. The second of course is you know what you can control as well as your your cost structure.
And as is a industrial recession that we've been in for the last a you know nine to 12 months continues to drag out we know that we also have to start taking more additional actions on productivity. So we'll start looking at how we build on what we've done this year, we've taken out and that's $40 million of costs are down in manufacturing this year has that Andy.
Our lives this into next year, and if we have volume equal to or better than this year, you know that's going to start to flow through and be a benefit.
We're going start looking at our asset footprint and whether there's opportunities to optimize our asset footprint and pick up trucks of costs. We're going to look at how are we getting much more productive with digital investments weve made choices to invest a lot in digital this year and productivity in commercial execution.
And I'm already seeing a lot of benefits that's paying for those investments. This year, we'll start seeing the benefits on a net basis next year and there's more investments going to continue making.
There's a broad set of manufacturing initiatives that we're doing on productivity that are giving benefits to the success. We had this year that we'll continue to increase the benefits next year around maintenance and [noise].
It's both in earnings and cash as well as some other activities.
But to be clear, we're going to continue investing innovation. So next year, we'll spend more innovation that we did this year. We have so many huge a innovation programs going commercial and am and especially in a S.P. Oh, we have to provide the resources to close of business with customers and ensure we get the benefits of those investments.
So that's the second bucket third bucket is strong free cash flow even in this tough environment, we're generating incredibly strong free cash flow at a very high conversion rate way of every expectation. We can do the same thing next year and we'll continue to be disciplined and how we deploy that cash and dividends share repurchases debt repayment and bolt ons, where it makes sense.
So that's sort of relative current economic conditions or if there's a trade war settlement you.
We will do a lot better than that or you know then and if a there's a recession, obviously where demand is more challenged you know we have additional levers we can pull to manage costs.
And the innovation will still create some gross offset those challenges and I still think Oh, the de stocking is behind us.
The thing that keep in mind is if there is a recovery you know the leverage on the upside is equal to that leverage on the downside that you've seen in the last.
Nine months, so mix volume asset utilization will come back a in a mirror image of what you what we've been through <unk> that could provide substantial upside.
Very helpful. Thank you just one more thing for both you encourage you commented the reason Moody's action to put you on negative watch and how you are thinking maybe about.
Debt reduction versus buybacks next year would you be focused more on debt reduction just to remove this issue.
At least on the table rather than keep on buying back stock. Thank you.
Yeah. The recent change to negative watch really doesn't significantly change our capital allocation philosophy.
As you would expect we have a very open dialogue with our agent rating agencies about her plans and expectations. They understand we remain committed to investment grade credit rating, which isn't getting not only important to us, but many of our investors that I speak with.
So we'll remain disciplined with our approach to capital K. allocation, which you know 19 includes $300 million of de leveraging.
If the environment continues to be challenging as we go into 20, Tony will probably do a similar amount of delevering at a minimum I imagine over the next couple of months there'll be a few debates internally and externally or on what should be them on a de levering.
And I look forward to your opinion, David and others on that topic, but regardless of what we do we will remain on a path of improving our overall debt and EBITDA ratios and further strengthen our balance sheet. A couple other things I'd just remind everyone that I David I know you know these well is we have no material debt maturities over the next couple of years.
We generate great cash flows and even in a recessionary environment.
And then we also plenty of access to liquidity. So we're well positioned to manage through this uncertain economic environment. So I feel very good about that and also remind or that you know a disciplined capital allocation approach, whether that's putting cash to share repurchases bolt on acquisitions or even debt pay down our all viable ways are creating value for shareholders.
So we're going to remain committed to investment grade rating well, we have a reasonable pathway to continue to improve our credit metrics and that's that's consistent with our coming around the disciplined capital allocation philosophy.
Thank you.
Our next question will come from P.J. Juvekar with Citi.
Yes, hi, good morning.
You know I had a quick question on New York Diet.
Hi that it comes business.
I just you can sort of Chinese tires, [laughter], how is that data flow impacting your China business.
And it's been an offset offsetting benefit in your western Europe business.
So yeah, the tire duties in the U.S. and in Europe .
At a real impact on a tire demand in a ASCII.
What happened is you know this is really on the customer level. They were shipping a lot of tires and it was found that there were dumping in both Europe and and U.S. So the all those tires got backed up into China.
And there's too many tire companies in China, and so there's been a pretty aggressive site there, but trade flows rebound. So these Chinese companies also bill plants in southeast Asia. So they just shift their production efforts to go into Europe , and the U.S. from there so.
So its overall created a lot of pressure for all the tire companies you can see that by some of the big multinational car company announcement recently about the actions are taking to improve their cost structure.
But for US it did create predominately a very competitive situation among additives suppliers into tires in China, and we felt that impact both in volume.
And in pricing, which is why we've had the pressure in that business and that you know ultimately moves across the globe to some degree.
Thanks, a question for car Park, you just talked about potential more de leveraging in 2020.
How many demand suite.
You know its economic demand Sweet what do you know what would you try to get something called <unk> and then as well.
And get somebody Nonorganic growth I know that doesn't.
Six <unk> de leveraging but when you want the choices how would you I look at capital.
New actions come down.
And when it looks attractive thank you [laughter].
Sure well, we've always consider the you think about that strategic cash that we have after we funded all all are already <unk> organic growth.
We love the opportunity to pursue opportunities of growth and bolt on acquisitions through M&A.
And and I think we will just have to do that in a smart way.
Always told the business teams that if they find a great attractive bolt on acquisition or acquisition in general will find a way to finance it and we'll find a way to finance it that's still consistent with our investment grade credit rating.
Thank you.
Your next question will come from Vincent Andrews with Morgan Stanley .
Thank you good morning, everyone. A question on chemical intermediates, the agriculture impact on the on the Amy.
Obviously, we know it's tough season, the U.S. do we need to laugh that meaning you need the channel inventory to be drawn down before you're going to sell back through so that this could be an issue all the way through the middle of next year or is it already sort of played out.
[noise] Havent from what we can see what our customers are telling us there one of the volume challenges, we're having a back half of this year's their efforts to.
Take their inventory down given to the week season, we had this year our belief is they will achieve those goals.
I get back to sort of what is a sort of normal production strategy next year, and we'll see the benefits of that the Matt.
Okay and confidence here, the other and corporate costs appeared to be up a lot in the quarter.
There are reasons for that and how should we think but that number next year.
Yeah. So if you think about the year over year impact of the in the other segment. The primary driver has been that higher pension costs that we talked about.
The third that 30 million, a roughly 20 cents impact and most of that which is really driven by the.
Discount rate as well as the lower assets. We started the year, that's really what drove that the delta well so great management of our cost innovation programs to the other areas. So it's really the pension cost.
I think about 2020, a little early but you're already seeing a the discount rates coming down so that could very well.
Improve our pension costs next year, we'll see if that holds true as we finish healthier.
Okay. Thanks, guys.
Next we'll hear from Jeff Zekauskas JP Morgan.
Ah things turned much.
On your cash flow statement their spend a 165 million positive swing for the first nine months and other items that.
What is that and that does reverse next year or continue can you provide some collaboration.
Sure. It really there's two main drivers and that other cash items.
Jeff that are out kind of an anomaly. This year first last year and they end of third quarter of 18, we had to 65 million dollar insurance receivable that we collected the following months, obviously, we don't have that kind of receivable this year.
And then secondly, a this year, we actually have a higher restructuring a cool a higher than last year because of the events that took place earlier this year and that's roughly $25 million. So those are the two main drivers of note. The other things are just the normal things you see a resulting from timing of tax payments other miscellaneous payables receivables. So you shouldn't see this may.
Magnitude as change next year, just because of those two things I just mentioned.
Okay.
In listening to your conference call on you.
You spoke about competitive increased competitive activity.
The number of businesses and chemical intermediates and then your A.S.P. segment and it leads to my years, that's sounds new.
And you seem to tie it to.
Slowed down into Mantech trade difficulties.
Can you elaborate on your competitive position in a number of businesses, where it seems that the competitive activity has intensified can you talk about why that's the case and how long you think well maintain itself.
Sure Jeff It's good question and.
I love to address it so first of all advanced materials I think is looking exactly as a great specialty business should it's got demand challenges.
She does competition, but the innovation is allowing.
To offset those market challenges and deliver strong growth, especially when you think about the hi, just <unk> consumer discretionary spend and benefit from raw material flow through as you can sort of inside the value in your pricing. So that business is on track and looks like it should.
And as Curt mentioned in the prepared remarks about two thirds of the.
Revenue they S.P. looks just like a up right. It's got good strong market growth and a bunch of end markets, even though it does have headwinds in the macro economy, especially in automotive its offsetting it with expanding spreads and if you back out currency the earnings or or even closer to just year over year flat.
So that business and that that part of the portfolio is doing quite well.
And then you've got this one third a that goes to your question.
Where there's increased competitive activity and and obviously, we have some of that in and see I in a few places on the upfront.
The Threers, we identified tires adhesives, and formic acid, you know have that dynamic other dynamics all the different in each business. So in tires really is a demand driven event as I mentioned earlier, where you've got a drop in demand, it's increasing competitive activity.
And of course, we have our new next generation Crystex Weve launch we have other innovation in tire resins et cetera to offset some of that pressure, but it's just too early stage on on the new crystex launch to sort of offset it and so you've got a in a pressure and earnings both in the volume in the macro as well as in spreads.
Same is true in adhesives, but which is more of a supply driven event the demands a little bit more stable there.
But a it had the new supply, which we've been talking about for a while similar we've got innovation launch there.
To offset it with Ultrapure, which is not emissive load or node or resin, a great and inventions and amorphous polyolefins that we're launching.
Without sufficient in this environment off offset some of that pressure informix, a more narrow story of just a competitor that was shut down in China that came back and.
I would have been fine or or mitigated if demand for swines was done going well and trying to consume that new capacity, but a when this wind populations off 25% to 40% you've got a problem.
So overall, which you've got as a situation where you.
You know this one third is.
Not performing the way, we'd like and a you know we recognize that this is not the kindness is built stability and overall ASP.
We wanted to deliver I'm. So we're going to start looking at you know all options are on how we address this.
Those options could be you know to restructure some of these businesses or how to partner with or potential divestment.
What's important to keep in mind that.
A lot of considerations have to go into how you make portfolio decisions like this so you've got to make sure you're not overreacting to sort of short term macroeconomic problems you make sure you really assess what is the innovation potential.
Or other improvement opportunities you could pursue and of course, you have to think about timing of these kinds of decisions.
But we're going to start doing that see eyes, you know critical vertical integration, we haven't changed your view on the value of it.
But we're gonna look at.
Asset optimization opportunities there to improve our.
Ability to be more sort of stable RGB is a great example of investment we made last year that reduced our ethylene exposure that's been quite beneficial this year and we're going to try and think of what else. We can do so.
So we do recognize we've got some volatility you know the pressures and see I think is welcome covered sort of competitive pressure you know what eskelsen olefins, but we're not standing still we're going to take action and see what we can do to improve things.
Okay, great. Thank you somebody.
Next question will come from Matthew.
America.
Morning.
Oh right.
Stated.
Backdrop continues to worsen due to trade uncertainty at least as one of the.
A key drivers.
Volumes actually shifting on the headlines that you're seeing or just pointing a general middle aged six I'm trying to gauge how sensitive you topline is you had mentioned orders picked up in October briefly, but then you would that be consistent with the trade discussions and possible traction there or is that just you know maybe a one off.
Yeah.
Well first I've learned my lesson about predicting the macro economy, this year and exactly what to interpret from any.
Order pattern in one month.
I think theres a lot of volatility uncertainty out there you know where you go back and forth between an escalation that trade war in August and where there was you know.
Phase one progress that's debatable in October .
There's just a lot of uncertainty that's impacting business and consumer confidence out there, especially in China, and how that's impacted their economy and a sort of global effect that has is places like Europe and south these areas, you're so dependent on exporting to China.
You can even does he is impacting suraj U.S. industrial activity. So it's a little hard to predict you know how this is going to trend, but I would tell you that as we look at the impact that you know that that our guidance and performances had through the year. It is entirely a volume mix story.
You know where we were in July we were expecting you know the economy be stable relative to the second quarter as we said.
Obviously things escalated.
And that's you know wire volume forecast came off you know what are the ones are actually off a bit as Curt mentioned in Threeq, you and now as we go into Fourq you. This lower activity plus normal seasonality leads to this decline in volume.
But it's hard to interpret.
Okay, and if I look at a NSP EBIT margins are down.
210, Bips in two key like 260, Bips and Threeq you.
How much of this is actually due to.
Process poor utilization rates versus competition on price versus volume metric to clients.
Okay.
Yeah. So they the entire yeah. It free of P. in total the entirety of the hit is a volume mix and asset utilization story. So [noise].
If you look at the total segment altogether spreads are about flat.
Year over year.
Obviously, there's a bit of a currency hit but it is much more moderate in the second half of the year.
So it is totally volume mix hit and a on the impact that hasn't variable margin as well as the impact it has on asset utilization.
But you know as I said to serve a two thirds one third story, where we have in improving spreads in some places and.
And compressing spreads and others netting out to flat.
So that's not the margin story.
[noise].
Next we'll hear from Matt Sheehan with Suntrust.
Good morning. Thank you. So you just referenced in A.S.P. about a third of the business or is not performing the way you would have liked but could you also assess what proportion of the to make a business is falls into that category as well.
So the only part of to make or that's in the one third is formic acid.
When we bought to make that we were very excited about the alkylamines platform and.
The value of that integrated platform into a wide range of in markets.
They had acquired a small business.
And former Gossett I'm about a year ahead of buying.
Let me go for us.
That was a business, we'd actually looked at it didn't find very attractive. It was just part of the deal that we got except so it's a it's a business that just has some competitive challenges, but it's a very small part of a to minco. If I could add some of the positives that mark referenced in the two positive two thirds were also to me black physician.
Yeah, we tremendous growth in care chemicals, and water treatment, you know and long term, we've had great growth in the AG business as well over and a CIO aside from to make the it's been a great acquisition.
And on the chemical recycling projects you referenced you know several hundred million dollar. So revenue ultimately how quickly could you start to see commercial revenues for not a what segment, where you report those results and if you could just comment on long term project returns. If we were kicking pair you expect.
The returns of those recycling initiatives to other more traditional product innovation is the ROI higher lower or about the same.
Sure. So we're incredibly excited about what we can do on the circular economy. So those of you who've been pay attention. This industry you know in the last 18 to 24 months.
Sustainability in environmental sensitivity about the impact we're having in the environment, especially with plastics in the ocean and the issues with landfill et cetera is one of the biggest disruptive macro trends I've seen in a decade.
And it's either a great opportunity as is for easement or challenging as it might be.
For others, who are heavily in single use plastics Fortunately for us.
Got a P.P.T. in in 2011, so we're not doing circular economy to defend our existing business and single use plastics all of our investments are to improve.
Our competitive offerings and more durable applications and more specialty applications by adding recycled content into it to deliver that growth and so we'll be commercial as we said in the fourth quarter. This year with both technologies. The one we announced this week as well as the polyester one by the end of the year and that will be incorporate.
In products and driving revenue growth for us next year into the first quarter.
Customers are incredibly excited, especially the luxury world. So think cosmetic pacsun packaging high end ophthalmic sunglasses, where our polymers go.
Our textile business, even though bio content is highly valued by our customers.
The women's wear fast fashion industries are extremely focused on how to close the loop a lot of textiles phenomena about textiles and up in.
The landfill, especially with a fast fashion and so they want it close the loop in our unique CRT technology allows us to actually take back textiles garments.
And recycle them.
Not just you know a you know waste single use plastic we can even take carpet back so can solve a lot a real serious problems that other technologies can't do you. So we're really excited about it. It's just a it's a great opportunity and and this is just the beginning to be clear. These first two steps are very incremental capital and modify.
<unk>.
Yes fire with the CRT to sort of take classic waste instead of coal.
And turned that into cellulose it products same thing with bias to the first up is fairly modest. So they are a wise are extremely high a there are bigger investments we can make to do a lot more than what we're going to do this first step, but even when I look at those capitals. The returns are well above a typical investment project because we're leveraging into products we.
Already make and already sell into existing markets. It's a drop in replacement. It's just now has a recycled content. So they'll have to do qualification.
Thank you.
Your next question will come from John Roberts, Yes.
Thank you Mark in your concluding comments on scenarios. It sounded like your October orders actually picked up from September .
Why would that have been.
What I'd say is actually October orders are holding similar to September where they normally start trending off you know seasonally.
Is I don't want overstate, you know the October or claim, but it's certainly coming in a bit better than.
And we had forecasted I think it's just you know customers are managing you know and growing with a little more optimism and Ah, we're holding in a reasonably well.
I can't say, there's any specific reason I can point to at this stage and we really have to watch out for you know where December plays out this year with.
You know this uncertainty you know could go either way.
And then secondly, do you expect IMO 2020 to have an impact on spreads between refinery grade propylene and chemical grade propylene.
As we look at it we're not you know seeing that as a significant events I know theres a lot written about it and a lot of the pins opinions about it.
Actually our GP investment I think helps us a bit and and that gives us more flexibility on that's an area.
Thank you.
We'll hear from Kevin Mccarthy.
Search partners.
Good morning, Mark when you look across your portfolio do you see opportunities for rationalization of assets. It sounds like some of the margin pressure is utilization related you know quite understandably given the environment.
So are there opportunities to consolidate plants or would that be a mistake, because you'll need to capacity when the macros start to cooperate again in the future.
Hey, Kevin I'm. So we are looking for opportunities like that we're not going to talk about it on this call, but oh, we have several pass it options are under investigation for that reason, but our focus is always on innovation being the core thing but.
And this kind of environment you have to look at every lever you can do improve productivity and your your cost position to compete.
Okay, and then secondly for Kurt.
It seems as though you've you would hold the capital budget to some degree maybe you can talk about.
What has changed there in a what your preliminary views of of the trajectory could be looking into 2020 and beyond.
Sure on the capital front, what we've been doing is Clos and making some adjustments to the investments. We make mostly are those are growth investments just because of the environment. When we're not quite sure when we're going to need that new capacity. We've already added a large portion of capacity to support our growth Oh. This year in last year. So we've kind of just tweak things because we can move things out.
Just because the demand environment is not there right now and then we got a great capital team that is also being disciplined on the amount of support capital that's needed.
To run this company in this kind of environment looking next year I'd, probably still keep it right now in the same range. We're at today, but lot of its going to depend on what the economic environment is if it's starting to improve we might pick up our capital a bit if a deteriorates. So we may slow down a little bit more.
Okay. Thanks, gentlemen.
Your next question will come from Frank Mitsch.
Search.
Hey, good morning, gentlemen.
I want to think about the fourth quarter and you know your implied guidance there because it's looking like it's the lowest D. P. S. Xcede guy that you've done in the last five years, and obviously volume mix is gonna be a big part of that and so I'm trying to think what the what the ranges I mean, you're buying mix has been improving throughout the year was down 6% Q1 down 5% Q2 down 3%.
This past quarter, what are what are you baking in to get to this ER to get to this low level for for for Q.
So Frank could mean part of where we're coming from is we assume the we always do this to some degree is assumed the current activity you know economic and Macroeconomically is is the basis for our forecast. So obviously it moderated through the third quarter.
And they were adding normal seasonality on to that lower base I mean, that's how the forecast Scott constructed in addition to that you've got a lower capacity utilization because volumes. This year are going to be lower than last year for the second half.
So you've got some headwind on asset utilization and that you know adds to through some of the decline you know from a third quarter to fourth quarter.
But those really are it I mean, there's a little bit of increased competitive pressure in spreads and CDAI. That's part of the story as well, but that's a small part of the story relative to the volume mix and asset utilization.
So I mean, Suzhou sitting out we should be thinking about low single digits or low double digits in terms of a decline in volume mix in terms of what's embedded in your guidance.
No I'd say, a frank as it and some of the volume mix that you've seen a last quarter to is kind of what we're expecting and it's really that utilization effect that really.
Starting hurt our margins in the fourth quarter.
And then we'll see how those respond to depending on demand environment and 2020.
Yeah, So bad out on that front is that you know.
What I'd say is what you're seeing is how we're performing.
<unk> industrial recession, Frank I don't think there's one in front of as I think we're already in the middle one that started in the fourth quarter of last year or where you put a lot of this or a de stocking drop in volume that's where some primary demand you know we've already been enduring all of that and some of its continuing in the fourth quarter as the U.S. is starting to slow down.
You know we turned over high cost inventory from third quarter of 18, you know to low cost inventory, that's always really painful a lot of that there's no. A you know behind us all that's behind us at this point.
So you're more a bit about where primary demand goes as you look at next year, but you're still sort of finishing a lot of that sort of.
Adjustment to the recessionary environment out now.
And of course, you got all these actions we're gonna take you know another reference point is.
You know when you when you look at what we said innovation day in 2014 that are new portfolio would be a lot more resilient.
And only down sort of 20% if you did the onein recession that you know what the current portfolio versus what we had and Oh nine versus what we were down was 40% you know that sort of playing out or ratio basis. Now. So if you look at sort of our earnings performance for the first nine months, we're about half.
You know a sort of the commodity diversified companies and how we have decline. That's the portfolio is performing better. We're obviously not happy about parts of our portfolio and we're gonna look at ways to address it but Ah you know I think we're doing quite well in this environment.
Okay. That's helpful. Thank you.
Your next question will come from Bob <unk> with Goldman Sachs.
Hi, Good morning, I Cant me walk on for Bob.
Oh during the call you guys replicates the several buckets that would impact 2020 results and understanding you're not providing a bridge to next year I was hoping that you could maybe walk us through several onetime items impacting 2019 results that you'd expect absolute <unk> next year.
[noise] so the only other onetime items that I can think of we've talked about issues. One is the unplanned outage. So that you don't expect.
And in pension I already mentioned earlier, where things sit today pension can be a lower pension costs should be a lower next year versus this year.
And then currency will be stable. So those are the two or three other major items that I can think of that help next year that are different than they are this year.
But its important keep in mind that a lot of cost reduction actions. We've taken you know organiser annualized and flow into a benefit next year.
And if we get volume to be better next year, which I believe we will.
You know that will flow through.
Active way without the utilization.
And then its can you help us on the bridge to free cash flow and 2019, a wish you maintained despite the reduction and yes, I assume you're anticipating a pretty big tailwind from working capital.
Yeah sure. So you know we do have a great track record of managing our free cash flow you, what you've seen a ready we've generated $525 million of free cash flow through nine months, that's $40 million higher than last year. If you look at fourth quarter last year, you know, we generated $600 million or free cash flow in just in that quarter now that did include.
That 65 million dollar insurance receivable that mentioned, so it's kinda 535, excluding that.
So I think we're going to generate roughly that same amount of free cash flow in fourth quarter. This year. Despite the lower cash earnings and that's primarily as what you had mentioned, we expect higher working capital release than the $365 million. We did last year, given the current environment as well as various working capital initiatives, we've been them implementing throughout the year and then as you see where also.
So expecting lower capital expenditures of roughly 10 to 20 million that helped us achieve a this kind of result in this tough environment.
Next we'll hear from Laurence Alexander from Jefferies.
Hi.
Could you flush out the yearend de stocking or extended shutdowns comments that you've made through the call. It from a different angle, which is if you look at it more as a cumulative effect spread between Q4 in Q1.
What degree of impacts are you concerned about and it just in the auto and industrial customers or are you concerned about abroad or kind of destock cycle.
So the de stocking concerns that we have in the fourth quarter or more about normal seasonality. A then some sort of dramatic de stocking event. I mean, clearly you know we've seen significant destocking in the first half of this year that goes way beyond you know where primary demand was at that.
Point as people are pulling their inventories down trying to access lower cost raw materials.
That were available.
And then just too uncertain environment, and but the rate of de stocking the amount of it as you know decreased significantly as you look through the year, even a third quarter would I would say was less than the first half and fourth quarter, we'll have some of that but not not to the degree of we saw in the first half of this year and if I could add Laurence the area that I.
Hearing from our businesses. These are just our customers trying to work to their inventory targets to finish this year.
And then that you would get back to that more normal production levels next year. So this is more about a fourth quarter rather than something carrying into first quarter next year.
Thank you.
And next we'll hear from Mike Sison with Wells Fargo.
Hey, guys I'm just one quick question <unk>, if you think about your guidance for for 2019.
Dan talked about 20, if if if you get a similar volume mix improvement in 2020.
Is that kind of the leverage upside meeting you would get a dollar for dollar 20 in earnings per share as a little bit maybe potentially higher because you've taken some cost out and improve the you know productivity the portfolio.
[noise] well, Mike I welcome back and Yeah, we can pay said Dallas different models and get excited about different scenarios.
But yeah. If there is a bounce back and restock event, we could see a material improvement in E. B S. Next year, that's what mark talked about.
But it's really there's just different scenarios that could play out next year and it's just really too early to call.
But I can be substantial Mike and then when we believe that that'll happen when you get a sort of settlement of the trade War.
Let's make that next question to last one please.
Certainly your final question will come from Duffy Fisher with Barclays.
Yeah. Good morning, guys and number of your coatings customers have already gone and there's some cross currents there where they've talked about you know raw materials moderating in you know some numbers on demand had been a little bit stronger little bit weaker can you walk through your coatings raw material portfolio you know what do you see.
The market is doing that you're selling into and then how are your products fairing in that market.
<unk>.
Yes, the Duffy I think our our coatings volumes situation and it reflects our downstream customers. When we look at just not part of ASP. So I don't see any sort of on an overall volume point of view any any real differences in what you're hearing from from them.
The only thing that would be the exception is we do have some very high value additives that go into some automotive coatings or into a China to look you know predominately to local Oems for the for their cars and that part of the market really is off dramatically, it's probably down 25% year over year.
So that's been a pretty big sort of mix. It in the overall cutting story, but besides that sort of one part of the story you know everything else is pretty similar and that's one we're not at all worried about its proprietary product or the only we make in.
And Oh, I'm pretty confident Chinese will make cars again and all the ease that they're expected to produce will be largely made by these logo Oems with you know these paint lines and be a real benefit for us. It's just a short term issue.
Okay, and then a one for Curt Lastly, can you explain to me why pension is a benefit next year with interest rates dropping so much more this year than we would've expected one might have thought that actually you know the discount rate hurts the gap and so that pension costs would start to move up and maybe more cash flow.
Would have to be put into pensions, but can you just walk through that for me.
Sure just two dynamics there first is the discount rate and you just need to think about because we mark to market our pension liability that pension liability gets reduced adjusted at into this year based on that new discount rate and then that discount rate as the determination of your interest cost so with a lower interest.
With a lower discount rate you have lower interest expense on your pension liability next year and then secondly last year, we had a dramatic decline in our pension assets because of the fourth quarter of a performance in our overall market. They assets, obviously are performing much better. This year. So if you start the year with a better as a total amount of pension assets then.
He also get to assume the return on those assets. That's another contributor that would help our pension expense on a year over year basis. So what I'm talking about pension could cost could return to more normal levels like they were in 18 versus the headwinds we faced in 19.
Great. Thank you.
Okay. Thanks again, everyone for joining us a replay of this call will be available on our website later today and I'll give a great game. Thanks.
Once again that does conclude or call for today. Thank you for your participation.
Correct.
[noise].
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