Q4 2019 Earnings Call
Good day, everyone and welcome to the East month chemicals for Scorches full year 2019 Conference call. This conference is being quoted see school is being built because life on the east and that's website www <unk> adult.
Even though to him to go over to Mr. Greg.
And then chemicals company Investor Relations. Please go ahead so.
Thank you did it and good morning, everyone and thanks for joining us.
On the call with me today are more cost a board chair and CEO Curtis flight Executive Vice President and CFO , well, the Mclean, Vice President Finance and Jake ROE manager Investor Relations before we begin all covered two items first during this presentation you will hear certain forward looking statements concerning our plans and expectations.
Actual results or events concerning our plans and expectations could change.
Certain factors related to future expectations are or will be detailed in the company's fourth quarter and full year 2019 financial results news release during this call and any accompanying slides in our filings with the Securities Exchange Commission, including the Form 10-Q filed for third quarter 2019 in the Form 10-K to be filed for full year 2019.
Second earnings referenced in his presentation exclude certain non core and unusual items reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the fourth quarter and for your 2019 financial results news release, which can be found on.
Our website www dot he's been dot com any investor section.
Projections of future earnings exclude any noncore unusual or non recurring items with that I'll turn the call over to Mark.
Thanks, Greg and good morning, everyone.
Well begin with the full year 2019 highlights on page three.
He doesn't 19 was the summit was a significant your of macroeconomic challenges they can to get tougher through the year.
I'm incredibly proud of how Eastman employees around the world respond to these challenges and stepped up to the point to deliver.
Almost $4 million in new business revenue closes from innovation led by advanced materials, which has it shaved a decade of EBIT growth in 2019.
We delivered on our cost management targets, where we continue to make progress on an innovation programs.
I'm also proud of how accounts engine generate free cash flow at a record level of almost 1.1 billion for the third consecutive year.
Well, Oh, we weren't satisfied with our earnings performance, who was a difficult environment, we're well positioned for earnings growth in 2020 and going forward.
During Q4 highlights from 2019.
First we're celebrating he's been centennial this year.
How did your history is filled with many successes and meaningful innovations that have enhanced the quality of life in a material way.
The segment the best demonstrates this innovative spirit is events materials, which delivered impressive results considering the challenging macro environment.
Vas materials Greeley outperformed its underlying markets. Despite his exposure to transportation with several other consumer discretionary markets.
And as our free cash flow results demonstrate we can consistently deliver in any environment.
We can do to push our cash to work in a disciplined way, including significant delevering, which remain a priority for us in 2020.
Bolt on M&A like you saw with Marla Thurman Inox. This year two great businesses opening up new markets for our technologies.
And capital returns through a combination of share repurchases and dividends, which have increased for 10 consecutive years.
Finally on a personal note I want to highlight the Curt asked when our CFO of 11 years has elected to retire in 2020 after nearly a quarter century service.
Sure. It's a huge on financial professional and has had an extraordinary career I.
I personally very grateful for his pragmatic leadership and the vital role. He's played in the portfolio transformation, which has been a foundational element of our strategy to become a leading specialty materials company.
I'd also like to share that I have every confidence and Curt successor willing to clay will it's been a key player do you spend for 20 years and has worked closely with Kurt as part of our long term succession planning process is a proven experienced leader with deep knowledge of easements financial organization businesses and capital markets.
To begin or grows we continue to the company's transformation.
With that I'll hand, the call over to Curt tree reuse some financial results [noise].
His final quarterly review as it closes this chapter and opens another.
Thanks, Mark and good morning, everyone. Now first of all I appreciate the kind words, mark and want to thank you the board and all the men and women at Eastman for allowing me to serve as the CFO . Since 2018 2008. It has been a real water I also like to reiterate that will he is absolutely the right CFO to take he's been forward and has supported by very talented tallow.
Good and motivated team and he spends that we are in good hands.
With that said, let me start on slide four.
For the full year revenue EBIT and EPS, all declined as global growth decelerated and trade disputes created uncertainty for you spend and our customers.
At a corporate level lower volumes due to de stocking and reduce primary demand alongside a strong dollar.
Contributed the most to the year over year decline in earnings the lower volume resulted in lower utilization rates.
Variable margin spreads were flat at a corporate level for the year.
Despite the difficult economic environment, we delivered strong growth across many of our innovative products and particularly in advanced materials.
Similar to what the trends for the full year fourth quarter results were impacted by a slowdown in the global economy on top of normal seasonality.
Revenue decreased mostly due to lower selling prices as a result result of lower raw material prices.
EBIT increased slightly to two lower raw material costs and improve product mixed.
And then environment like we are in now we are remain focused on what we can control closing new business revenue, reducing costs and generating strong free cash flow.
Moving now to segment results and starting advanced materials, considering the business environment in 2019.
Full year performance was solid with EBIT growing over 3%.
While advanced materials had challenges in the early part of the 2019 once Destocking had largely played out in the supply chain between the U.S. and China volumes return to a more normal level and the segments innovation programs drove growth.
The results in advanced materials are Great example of the importance of innovation.
The core business was not immune to the challenges with global trade uncertainty and transportation, but premium products provided resilience.
We're also able to realize spread expansion and the second half as lower costs raws flow through and we remain disciplined on pricing.
Looking at the fourth quarter revenue in EBIT increased due to strong volume and more favorable product mix.
Ahead in 2020, we expect to deliver another your EBIT growth in this segment as we benefit from both continued progress growing new business revenue from innovation.
And a smaller headwind on foreign currency exchange rates.
As a result, we expect advanced materials EBIT to be up mid single digits in 2020.
Now moving to additives and functional products on slide six unlike advanced materials ASP was impacted more gradually with destocking picking up through 2019.
While primary demand and many of the geographies, we serve was decelerating, particularly in China and Europe .
I'm encouraged that two thirds of ASP delivered solid results in this environment.
Including strong growth in care chemicals, water treatment and specialty fluids as well spread expansion across the portfolio.
We also had some challenges in this part of the segment, including slow demand in China for autos and disruptions in the AG market in China.
All in the bulk of ASP. These businesses are performing how a specialty business should perform in this environment.
The remaining one third of the business at ceases tires, and formic acid that we previously called it out for our third quarter call contributed to significant majority of the earnings declined for the year.
We're continuing to actively work on solutions for this part of the segment.
Looking ahead to 2020, we expect solid growth in the two thirds offset by continued challenges in the one third impacting both spreads and volumes.
Putting it all together, we expect if piece EBIT to be flat to slightly down compared to 2019.
Turning now to slide seven and chemical intermediates for the full year in the fourth quarter sales revenue decrease for the reasons summarized on this slide.
In the fourth quarter EBIT decreased mostly due to increased planned shutdown costs.
As Tony 19 progressed and industry activity slowed spreads in many of our derivative product lines declined but we now think we're seeing signs of stabilization at this point.
We expect to carry the level lower level of spreads in the back half of 2019 into 2020.
Which will be a headwind in the first half of the year, but we also expect to see higher volumes and AG as North America gets back to a more normal planting season.
And were expecting to see the benefits of our cost management programs and other stabilizing actions all in we think chemical intermediates EBIT in 2020 will be lower than 2019.
Finishing up the segment views with fibers on slide eight revenue in EBIT declined and full year 2019, due to general market decline for acetate tow and some chunkiness related to customer buying patterns.
Fourth quarter EBIT was up due to increased toll volumes in China.
And the textiles market, we continue to make progress with our key initiatives, including growth in women's wear which was up approximately 20% this year.
Progress was offset by softness in the global market for more traditional textile applications.
In 2020, we expect acetate tow to be down slightly consistent once the market.
For textiles, we expect continued strong growth in key end markets, such as women's wear to be offset by a softer overall textile market impacting our more traditional textile applications.
Putting that together, we expect fibers segment EBIT in 2020 to be slightly lower than 2019, consistent with the market.
I'll finish with some financial highlights on slide nine free cash flow was strong at almost 1.1 billion sustaining the record level, we achieved in 2018.
Another great result delivered by a variety of BA teams across Eastman.
We also continued our track record of returning cash to owners and reducing debt with both created value for our stockholders.
Reducing debt will remain a top priority in 2020, and we expect to de lever greater than 400 million. This upcoming year further improving the strength of our balance sheet.
Our tax rate was approximately 15.5% for the full year and I expect the 2020 tax rate to be similar to 2019 in that 15% to 16% range.
Capital expenditures for the year expected to be $450 million to $475 million in 2020.
The main driver behind the planned increase in capital spending is associated with site tenant projects, which will be reimbursed across other lines of the cash flow statement over a number of periods.
Finally don't Miss the modeling slide in the appendix as well as our manufacturing shutdown schedule for this year.
One final comment on the appendix in 2020, we project that depreciation and amortization will decline approximately $50 million.
As part of the tomato acquisition, he spent mark to market, an advantage methanol contract and certain other assets with a five year life.
With the expiration of this advantage contract at the end of 2019 market based methanol purchases in 2020 will substantially offset the $30 million reduced amortization of the timing of methanol contract.
With that I'll turn it back to Mark.
Thanks Kurt.
Turning to our 2020 outlook on slide 10, as we all know we're currently in a dynamic and certain macro environment.
Despite this uncertainty we needed to make a series of assumptions for our outlook.
First we expect modest volume growth and mix improvement from three factors.
We are assuming global industrial production growth to be similar to 19.
Second we're expecting that Destocking is predominately behind us, although there may be some pockets, where there's more to go such as North American Ed.
Third we expect to create our own growth through market development and innovation.
In 2020, we have a number of additional items that are tailwinds.
We expect our operating costs would be lower by $20 million to $40 million for the year.
Reflecting continued progress on productivity.
And this is above offsetting normal inflation, which is between 75 and $100 million annually.
We expect pension costs will be lower by about $25 million.
We also expect lower depreciation expense to be about a $20 million net benefit to EBIT as Curt mentioned in his remarks.
All in these tailwinds total approximately 75 million.
And we have a few headwinds for the years, such as higher variable comp and increased benefit comps as we returned to target levels.
And the somewhat stronger us dollar compared to the euro with an assumption of exchange rate averages $1.10 for the year [noise].
Together with a few other small items, we expect a headwind of $85 million.
In addition, we're expecting spreads to be lower primarily in chemical intermediates and the one third of ASP.
This reflects the fact that these spreads in 2019 decline through the year, especially as a trade where escalated.
And therefore, we into this year at a lower level relative to the first half of 19.
Lastly, you should expect it we continue to be disciplined as we allocate capital, including Delevering share repurchases and bolt on acquisitions, where they make sense.
[noise], putting this all together we expect our 2020 bps will be slightly will be between 7020 cents in 760 with the first quarter, if you us coming in flat to slightly down from the year ago quarter.
We also expect our free your full year free of prove a free or.
Our for full year free cash flow to be between one and $1.8 billion of course, there macroeconomic factors that could move us above or below this range.
As we get through this short term uncertain you expect will have a more informed view in April and we'll just as necessary at that time.
Next I'm going to discuss actions were taken to increase performance in 2020 in for the next three years first on slide 11.
New business revenue from innovation for those that follow easement. This will be a new concept as we made great progress. Peter success has been an innovation driven growth model and particularly the investment we've made an application development capability.
In 2017, or new business revenue was approximately $300 million.
By now 19, we had increased it to $400 million and in 20, we expect new business revenue approached $500 million.
The segment, leading the way is advanced materials, which has numerous examples of innovative products driving new business revenues.
Include Tritan, Copolyester say flux acoustic interlayers heads up display interlayers and pay protection films.
And with our two new commercial.
Local recycling technologies, we have enhanced our offer in specialty plastics for several applications, such as cosmetics Ophthalmics toys and more.
Well advanced materials has made the most progress as an functional products is poised to make significant contribution in the coming years.
We are getting commercial orders in a large number of innovation platforms, including Tetra shield for BJ, not intent food packaging and auto coatings.
Especially ketones for sustainable coding solutions next generation Crystex for tires.
And we have several new platforms, who will discuss with you throughout the year.
Last night out there we have made great progress that nihilistic yarn the textiles markets.
Where we're particularly excited about our growth in women's wear.
The offering of a biobase yarns that uses cellulosics from certified sustainably manage force is compelling in a market where sustainability is driving computer consumer behavior.
And now with our circular economy technology, we will commercialize NIE with recycled content, which makes the consumer.
Even more excited and more compelled by our product.
Overall, we've made outstanding progress in driving new business revenue. This is made our results more resilient in the current difficult environment.
And it positions us for strong growth as the economy rebounds.
The next year next year I'll covers on slide 12.
It's about our investments in building and even more capable and efficient organization to execute our strategy.
We're making great progress in our commercial capability, we implemented and improved business operating model that is dramatically enhancing our decision making to deliver growth and manage costs. We're also seeing significant improvement with our CRM investments and are making several other digital investments.
An application development investments are helping accelerate our commercialization rate of our innovation programs.
At the same time, we're also driving efficiency and how we offset inflation and these investment costs.
As you can see what the bar graph, we are a disciplined.
Operator, and how we manage our costs relative to our peers, especially with this level of innovation efforts in our portfolio.
And of these uncertain times, we're going to step up productivity significantly.
As I mentioned on third quarter call. We've developed a program to reduce our cost structure net of inflation by greater than $100 million and as I said, we will get 20 to 40 million of it in 2020.
Which is these results in three areas first site optimization rollouts adjust our footprint to these new market conditions. One example is our Singapore plant that makes olefins, we've made the difficult decision to not renew a raw material supply contract by the end of 2020, giving us options to realize $25 million benefits.
We also have a few other sites under consideration in the one third of ASP.
Second we have digital another productivity investments, we have a wide range of productivity initiatives across maintenance energy efficiency, improving yield and business process improvements.
Third we are driving supply chain optimization as we look at opportunities across the globe to adjust to changes in customer and geographic mix.
In today's world, we must build our capability continue to improve our safety performance and at the same time improve our cost structure to win.
On Slide 13 in addition to building and even more capable and efficient organization. There are additional actions, we're taking to improve our performance.
First better leveraging our sites could yield $30 million to $60 million and recurring EBIT by the end of the three years.
For example, recently welcome to new strategic tenants to our site in Texas City Gulf Coast ammonia and air products.
Our site in Saint Gabriel, Louisiana, We are building, a new asset leveraging integration and outcome means to support Cortez innovative growth of their lis system.
And we have several additional opportunities in development.
Second we also see an opportunity develop step up our level of licensing that could contribute another $25 million to $50 million, an EBIT to our results in the next three years.
He spent as a rich portfolio innovative technologies that have significant value such as olefins and asset deals and a strong history of licensing.
We expect to step up this value creation with a partnership we have had with JM Davy technologies, which is expected to create a meaningful benefit in 2020.
We've developed a new model ethylene glycol technology that could use a variety of raw materials, including coal and natural gas or biomass.
Unlike the majority the world Amegy, which is currently made from ethylene.
This is the first of a number of agreements in the works.
Lastly, as we discussed in October on our third quarter call. We remain fully committed to taking actions in the one third of ASP.
That has demonstrated more volatility than we expected in this challenging environment. These actions could be restructuring partnerships or potential divestment.
We are actively looking at all of these options recognized in the new you'd be sensitive to current market conditions.
These actions better leveraging or sites stepping up licensing and portfolio optimization will continue to create value for Eastman and are important to trued contributor to our success in 2020.
And for the next few years.
Finally in slide 14, let me bring everything together I just shared with you are multiyear plan of actions, we will take to improve performance in the coming years and with it.
It does this happens without the dedication persistence the people of Eastman continue to rise the occasion improve everyday that there to get it done team and bring to life, our commitment of enhancing the quality of life in a material way.
And the macroeconomic challenges reverse and we know they will if their innovative driven growth model, though allow us to be poised to create even more of our own growth through innovation and leadership and specialty markets.
In the meantime, Big picture, we will continue to focus all we can control and remain committed to long term attractive earnings growth and sustainable value creation for owners and for all of our stakeholders.
With that I'll turn it back to great all right. Thanks, Mark as usual, we've got a lot of people on the line. This morning, and we'd like to get to as many questions as possible. So I ask that you. Please limit yourself to one question and one follow up with that Deanna, we are ready for questions.
Thank you.
Ladies and gentlemen to ask a question for everyone.
First question.
And from Morgan Stanley . Please go ahead your line is open.
Thank you good morning, everyone.
Mark maybe you could just talk about the the volume growth in advanced materials, which continues to be impressive on an absolute and relative basis versus what we're hearing.
Elsewhere can you maybe just talk about how insulated or how much of a boat you have around that volume, we're hearing sort of generically a pickup in competitive behavior and decreases in pricing and pricing still holding up well. So so how are you, saying so differentiated there obviously difficult environment.
Thanks, Vince and good morning, Yeah, Great question, and it's really the heart of the whole company strategy around having a innovation driven growth model as a way you create your own growth and tough environments as well as defend your margins.
You know across the entire segment, we've been investing in innovation and this is the you know that 2019 as sort of our decade of continuous earnings growth through it.
The at the differentiation really comes from innovating different differentiated sustainable products that are important to the marketplace. So our triton success, which is patented proprietary product being the only solution that is BP a free for.
Polycarbonate replacement continues to have tremendous success in housewares and durables.
And now growing and medical and that's just the story there continues to deliver performance. It's the same thing with heads up display interlayers with acoustic Interlayers, where you can significantly enhance.
The driver experience and enable lightweighting in a car.
And where we have not just this generation, but are now launching the next generation of even better HUD and acoustic.
As we speak in this year to continue to drive differentiation and growth in that space same thing with paint protection films, where we've launched the best product the marketplace last year rolled out new software, we have the best cutting a software support for the dealers. So it's always about you know enhancing and developing new features.
Growing these businesses at much higher rates in the underlying market.
This segment has a lot consumer discretionary exposure, where there's autos are appliances electronics that the underlying markets are down and we felt that some of the in our core interlayers or some of our core Copel copolyesters.
But as that innovation that allows you to continue to grow and and wire model works so well.
Okay and as a follow up can I just ask I believe you said you plan and paying down more debt this year versus last year with a similar amount of free cash loss I'm just curious what so what's driving that decision versus share repurchases.
And congrats to Kurt.
Thanks, Vince for the question the and the comment as well. So as you know we are always discipline with our capital allocation across those buckets of share repurchases bolt on acquisitions and pay down the debt and we'd consider all three of them on this very viable ways to create value for our stockholders.
So as we finished 2019, we ended up shifting in our capital allocation of that excess cash towards more further delevering as a priority and as Mark mentioned that kind of continue and and 20 2020. So the result was that we used $370 million over free cash flow for pay down versus the original all 300 million million that we promised.
So what we're looking that now for a if you look at 2020 that kinda discipline is going to be maintained so we're kind of looking that if you think about that 1 billion to 1.1 billion, let's just take the midpoint of 4 billion 50, So 350 million of it will go kind of towards that increasing dividend that we're very proud of.
Greater than 400 million will be used to reduce debt at a minimum.
And then I'm, sorry, and then a minimal will repurchase shares to offset dilution, which is roughly 50 million so that remaining $2 million to $300 million or free cash flows can be applied for acquisitions additional pair to share repurchases are further debt pay down and really that's going to depend how the macro environment plays out and that will probably kind of hold that extra choices.
Till the second half of this year, just so we have more time to see how it plays out.
And then though operator can we haven't.
Okay and next question comes from David.
From Deutsche Bank. Please go ahead your line is open.
Thank you good morning.
Mark on the one survey of PV, you've identified for potential.
Action here have you how much more clarity have on the potential options today, they did three months ago, and our outright sales possible or even likely for some of these businesses. Thank you.
Thanks, David Good morning, So we are looking at all the options.
This environment.
Requires us to be thoughtful about what options makes sense I certainly we're looking at everything we can do on the restructuring front.
And driving both innovation as well as how to optimize the cost structure.
In this environment and they were looking at partnering and divestment options as things, we considered a divestment certainly into consideration set.
But we've got to make sure we don't overreact to short term challenges in the marketplace and make sure we understand.
The impact to the restructuring activities for understanding both the qualities businesses as well as how we position them to potential new owner. So we're going to keep a keep driving it forward and we'll update you when we have more clarity.
And Mark your son in the business does that saw destocking over the last.
Three to five quarters et cetera is all that do you think done and what do we stand with supply chains and inventory levels heading into 2020 across across your businesses.
Any customers. Thank you.
Yeah, I'd say across the entire company. It in most places I think we've seen a channels destocking in advanced materials.
I think the Destocking.
Has run its course, and even maybe a little bit of stabilization and inventory management in a few of those businesses.
In in a if p. I'd say, it's mostly to stocked in the channels and were more looking at where primary demand goes at this point as I mentioned AG and functional means you guys. One place where you could see some additional destocking here in the first quarter, we do believe in that volume growth for that business.
Assuming a normal weather pattern here in North America, but it may not be as dramatic as they still have a bit of inventory to work off then I would say in North America, where the economy has been stronger there's probably people sitting on a bit more inventory.
And what's where Asian and European customers are so theres always a risk if you us economy slows down you can see better destocking there.
So just subsea plays out but I do think net net the vast majority the de stocking is behind us.
That lack of it will provide some volume growth this year versus last year, assuming similar economic growth between the two years.
Thank you.
Well take our next question from P.J. Juvekar from Citi. Please go ahead. Your line is open.
Yes. Thank you first of all card congratulations on your retirement.
Thank you could you.
Congrats to east Onetwo folio centered in here I know, it's not it's not easy to sort of life 100 years through all of the deflections and walks and on that so congratulations.
Thank you were proud of it [noise].
So question on.
Domingos assets, you know you had to chemicals I tend to have a lot of pass through pricing feed additives and the last quarter, you had mentioned about Asia and swine flu.
Can you just subjects on some of those.
We did products. Thank you.
The overall the to make a businesses are doing great across the portfolio with the exception of the formic acid business that we called out in the third quarter.
Which was a small acquisition to Minco had done just ahead of us buying to me go.
But when we look at the core Algemene platform, which was what were set or acquiring care chemicals is delivered really strong growth.
And very stable margins as you just highlighted with the cost pass through contracts water treatment as having a really great growth in this environment with the environmental trends out there.
And again doing quite well stable margins.
And then as you look at the you do functional means going into AG.
Into those again very stable margins, given the market structures and the contracts we have in place obviously, there's been a demand that goes up and down with the seasons, but overall the whole portfolio is a you know really been or been great management team's been grade we've had phenomenal retention of the talent and ER and the cost structure has been well may.
Energy.
Thank you for my follow up or sort of a big picture question.
You've done some bolt on acquisitions over the years Buckstein away from any major that mining since solution.
So industrial environment.
Why not use lower rates to get some growth you know one company in Wilmington has some businesses for sale express it in transportation I know I know.
These are large deals, but would you have risk appetite in looking at a deal that have to exercise.
[laughter].
So BJ I think we've been really proud of the portfolio transformation way ahead of you know what people are doing in the industry now where we divested through NAV doing a revenue.
Of underperforming businesses and you know did great acquisitions with solution to Minco and some bolt ons to add a 4.2 billion of great attractive businesses. So I think we have a very impressive track record of not just doing good acquisitions at good prices.
You know, where we paid nine times EBITDA for the things that we bought a and have delivered very attractive returns with the synergies that we delivered.
You know so we're very much opened to portfolio management, both in and out of the portfolio.
When we look at the market conditions right now they seem to be a very expensive and so we don't see that there's opportunities out there, especially large ones that are financially attractive.
Importantly, we like to portfolio that we have and where we've been focused.
Sure we deliver returned to our shareholders for the money that we spent on these acquisitions up through 14.
Deliver growth and I think we've done that quite well if you look at the.
To specialty businesses. We've had you know before the trade where it started over $600 million EBITDA growth from 14 to 18.
One third of that was acquisition, but two thirds of was organic growth that came from these acquisitions as well as the core Eastman businesses. So we feel good about how we can integrate acquisitions. So you know I'm not saying, we'll never do anything that large ones right now don't seem necessary or financially prudent and PJ, if I could add.
I'm still a traditionalist and since Lilly and I. Both went to the same MBS School I think you'll continue and that is when we look at investments whether its acquisitions or.
Of the organic growth and we look at things on an unlevered basis, So that way, we make sure we're driving good value a without considering the leverage and then once we find good opportunities and or a growth programs.
We find great ways to finance at so we'll continue to look at things in a disciplined unlevered basis.
Thank you.
Our next question comes from Mitch you deal from Bank of America. Please go ahead. Your line is so.
Morning.
[music].
So by my numbers raw materials, and vast materials or maybe something like a $50 million tailwind to the second half a 19 and.
You mentioned, giving some of that back with lower prices, but I'd think things get fairly sticky with Triton.
He did absorb a lot of inflation in 2018 so.
When it comes to 2020, what should we think about Annualization of the second half Tailwinds should there be more give back is there more opportunity.
You can expand on that.
Yeah. If you look at advanced materials, a you know the main driver of their growth continues to be innovation and volume growth and then it goes there is an opportunity to do really keep pricing off of a what we'd call. The product performance. There is some input cost that do vary and they did have some tailwind in a in 20 or 29.
Teen I think some of that will moderate but it will still be there and I think they've shown good discipline on pricing of their products relative performance. It provides since that's why we think this business will grow that mid single digits EBIT in 2020, we do I mean do we do expect prices have come down a little bit as you share some of that raw material value we've had thorough covered.
Stations with investors on previous calls on this topic, but we expect to hold onto a good portion of it more importantly, we're going to have volume and mix growth.
That is the heart of our strategy across the company as well as the fixed cost leverage and other cost management activities that sort of flow into the segment.
Okay, and then I know you plan on demolishing a little bit more this to calm but.
Opportunities at Crystex double capacity at Malaysia, and the market's been under pressure since I got to think Theres. Some are older cats and dogs out their legacy facilities hi.
Imagine opportunities footprint rationalization there.
So that's one of the areas where we've added.
Advantaged technology with the capacity, we added that produces a far better product, which we call cure pro relative to the current product, we make as well as our competitors. So we can help customers improve there.
Tire mixing efficiency by 10% to 20% and their tire plants. So you know the new capacity is also differentiating advantage.
And we are now looking at the overall footprint in this business just look at where demand is where we expect demand to grow what set of assets really makes sense.
In that and then we'll make some decisions what's appropriate as we go forward.
Thank you.
Next question comes from Kevin Mccarthy from vertical Research partners. Please go ahead. Your line is open.
Yes, good morning.
Mark.
Treat by your program to leverage your sites I think you indicated 30 to 60 million of benefit on the EBIT line over the next three years can you talk a little bit about.
You know, which which sites are in play are there any beyond the GCA and air products project at Texas City.
How will that flow through over the next three years and which segments might be affected.
[noise] so.
We we Didnt acquisition Sterling, the Texas City site, which is just a phenomenal site. We look at the scale infrastructure ports rail everything it's just a great offer an opportunity to leverage.
And this is a great example, what have I think several that we'll have a Texas city.
On the and how we can sort of provide that a site opportunity and the Gulf coast ammonia in the approach projects are great. Examples of whats several other opportunities could look like.
The so let's see multiple things there I'd say, what we're doing its end Gabriel is more unique to supporting Cortez offer alchemy platform, but there are other sites around the world. We're looking at but I do think it can be substantial and very reliably and predictable earnings.
Yes, Kevin this is Willie out on they add I would also highlights the fact that almost segment basis that we would see that primarily benefiting see I and the added as a product businesses today, but as we think about other integration beyond those two projects that could benefit other assets as well.
Okay.
Hey financial question for hurt or Willy perhaps.
And you've raised your dividend for 10 years in a row.
Would you expect that streak to continue you know notwithstanding the current choppy.
Industrial production environment, what is the level of commitment to long term growth. There you know recognizing that it's ultimately a board decision.
Okay and to your point it is definitely we collaborate with the board on that decision I think you also see that we moderated as our dividend as our dividend payout ratio is I'll call. It gotten back in line with where we would expect it to be a post the solution to Niko acquisition and as we think about the future growth.
We'll continue to grow it but it will be based on the long term expectation consistent with how we have in the past.
Thank you incurred it's been a pleasure a willing we look forward to working with you.
Thanks, Kevin Kevin.
Our next question comes from Jim Sheehan from Suntrust Robinson Humphrey. Please go ahead. Your line is open.
Yes. Thank you I'm curious about your comments on.
An advantaged methanol contract that sick expiring.
Are you gonna be exposed to a lot more methanol price volatility and in which segments would that occur and <unk> and how would you expect to deal with it.
Yes. This is really what I would say is we're diversified across our methanol exposure as we think about we produced methanol Oh here in our Kingsport side as well as we purchase on methanol on market based as well as other.
Benchmark. So I think we've diversified our exposure as we think about going forward and that exposure is primarily in our chemical intermediates and additives and functional products segments.
Thanks, and can you give us your thoughts on the Corona virus impacts in China, what's embedded in your guidance for post Chinese new year demand.
So as I said in our outlook statement our outlook statement does not include the impact of the krona buyers I think it's we can all agree it's a little too early to call with those impacts were going to be but most importantly, we're focused on on safety and health of the people in China as well as around the world, including our employees.
And making sure we're taking the right set of actions, which we've implemented around convert into controlling a travel within China travel in and out of China.
And making sure people or is it safe as possible, we do have nine plants in China and two offices. So we're focused on those and Theres, obviously going to be a delay based on the Chinese extending the new year [noise].
Of I went to two weeks, depending on where you look at the location. So we'll have to sort of factor that into our thinking.
I don't think it's as simple conclusion, though where you just look at the impact of what's going to happen to demand in China, which obviously will occur.
So our customers with a shutdown, but it's important to keep in mind that our competitors are gonna be shut down as well.
Both in China, as well as how they compete around the world.
So there's probably some opportunities for us to see some volume improvement outside of China. The lot of customers become dependent on on some Chinese sources and.
We want to make sure. We're there to help them you know when those sources may not be available.
And and help them a you know <unk> be a reliable supplier that we're proud of our more global and diverse unreliable footprint.
Thank you.
Our next question comes from Delta station from Barclays. Please go ahead. Your line is open.
Yeah. Good morning, I think most of US know we had AG issues here in North America, Kurt mentioned, some AG issues. It sounds like in China. So can you just kind of size that the headwind that you saw in your AG business last year and do you think you get all of that back this year or to a normalization level.
Yes, the AG is actually animal nutrition, so it's mostly about in China. So it's mostly about the pig population that was hit by the African.
Swine flu you know, it's hard to give you exact numbers, but some are growing 30% to 50% reduction and that population, which is a huge consumer of Ah. These organic assets that we and some other cell. So we saw volume hit associated that that's also contributed some of the pricing challenges and formic acid.
And a couple other products. So it's a it's really that dynamic obviously, they've got that's well under control a this is the swine flu.
And and with the rebuilding that population. So we'll start to see it recover this year next but it doesnt snap back like a the North American AG market could this year.
Okay, and then on the licensing effort is that I'm kind of a proactive effort on your side that will be a lot a little projects or is that kind of reverse inquiries were one or two big guys are comedy you for some of your technology and we'll see one or two big lumpy contracts signed.
Well, our historical programs more of the former where we get some inbound inquiries run out steals and olefins, which we always do but what we're identifying here in calling out as this value is a more substantial proactive approach. So a number of years ago, we developed a breakthrough technology to make a M E G.
Through an alternate process than ethylene.
To leverage coal gasification and you know we serve turned down that effort internally as we focus more on specialty growth.
So we partner with JM Davy to work with us and finish off that technology and take it to market and leveraging their strength as a licensing organization.
So we've been in the background working that with them and they are close to success on the first license these licenses or are quite large.
And significant in the scale of what plants will be built images are critical product.
And this technology is a lot better than the Oxylate technology, they've been trying to use which has some quality problems. So I think it's a great opportunity for multiple licenses as we go forward important are meant remember these license to show up in chunky ways.
So its little hard to predict exactly when they're going to hit you Register the value.
Great. Thank you guys.
We will now take on next question from Frank Mitsch from Fadem Research. Please go ahead. Your line is open.
Thank you so much and best wishes Mr. Aspen.
I hope, our Patrick and Frank across.
Thank you.
I I, Mark I apologize I didn't quite catch.
What you were talking about with respect to Singapore, and the raw material contract any order of magnitude. There can you can you give a little give people a little more detailed there.
Sure.
I'll start and they'll let Willie finish off the contract. There has a was a long term supply contract that we've had in place for a number of years. It's finally coming up for exploration at the end of this year.
And it allows US you know to terminate it and then consider other options. All that will then cover with those options are well as we consider those other options. Obviously, we look at our existing footprint, Paul and our integrated facilities law in Texas to support the chemical intermediates business.
Obviously this gives all saw the ability to use that footprint to the sort of all the markets in regions, where we are best levers to compete based on the cost current level, but do you can think about fall probably in 2021 that Paul we will have an improvement of 25 million versus our current run rate.
Terrific Thats, what I thought I heard but I I wanted to clarify that end.
You also discussed some of the any ASP business. The part that was doing well you mentioned specialty fluids and I know that that business can be chunky from time to time is there can you expand upon what might have been the benefit that we saw in for Q and a is that going to recur Q1 in your opinion.
Yeah. The <unk> foods business has been grade and developed a much more robust portfolio of end market applications. So historically it was very dependent on P.T. a applications. For example on the heat transfer fluids, we've now diversified into LNG facilities and some other things. So we've diversified our market exposure, which is helpful.
And we continue to have very strong competitive position this business relative to a couple other small players.
So we see that business continuing on Theres always capital construction cycles, Frank as you pointed out where this business will moderate up and down yeah. The solar fills sometimes that can be fairly chunky and how they show up its also important to mentioned that a good portion of this business is the aviation fluids business.
That is actually very steady this is our hydraulic fluids and turban oil fluids that go into aircraft.
And have a much more stable continuous revenue stream, where we've had great growth in revenue as well as margin improvement.
And that's just been a great acquisition that we've done as well.
Very helpful and best message the best wishes for your next hundred years.
Thank you.
And though next question comes from Bob backlog from Goldman Sachs. Please go ahead. Your line is open.
Thank you very much couple of questions first mark on.
Slide 12, you should some interesting metrics around the R&D and admin to profitability return to revenue base.
Just some sort of struck it seemed like that would be more favorable for commodity companies and specialties.
Im wondering what other metrics do you looked at both benchmarking standpoint.
That can help us sort of Dimensionalize your business relative to those peers.
Yeah. So Bob do you know I think that the point, we're trying to make there's were very lean organization that are good stewards of our shareholders' money and try to make sure every dollar we spend.
Delivers a return.
I mean, I'm incredibly proud of how our chief Technology Officer has within a within the budget transformed our technology organization or dramatic way. So we had a lot of projects going on around process development, New technologies that we're going to have a payback for very long time any any put those two a stop.
Reorient the organization much more towards a application development and product development, but there's a de capability we built.
Is really the key to our success and we've doubled the amount of resources and capability. We've had in that business since 2014 to where we are now within that mix of spend I mean that AG as we explained in our innovation day and 18 is how we can do what our customers do we can make a tire we can make a windshield, we can make thermoplay.
Caustic vinyl products, we can make a coding and so we can accelerator innovation accelerate the value we understand in those formulations accelerate how we can go to market not just with our direct customers, but downstream to drive specification through the market for showing what we can do.
So that is really the real test of it and where of course, adding the commercial resources as we you know gear that site up and find efficiency and the support functions.
The metrics I think of the one that we shared with you the new business revenue from innovation is the real test you know it's the revenue were getting you know every year. It's the next the that metric is you know your ones. So it's really about the next year. When you see that 400 million last year, that's about helping this year.
500 million, we're aiming for this year will help next year.
But we keep very careful track of that and that's the most important metric to serve as their you're getting results from this portfolio.
We have a bunch of internal stage gate project metrics and milestones and everything else to have good discipline you know the manage our portfolio you know on a very disciplined way.
We're constantly optimizing and focusing and shifting resources, where we see the best value.
Yeah. That's helpful. Thank you and then.
You out of your third quarter call. It seems you're putting the breaks down a little bit of your working capital in production levels trying to lean out into the end of the year do you have any sense or can you help us quantify what that fixed cost absorption pain might have been in and when that might releases. You go through 20 is there a recovery of that an advantage to that as you go through the year.
Yeah that Bob just the way I'd characterize it does where are you seeing that right now it's kind of in the margin. So while we are able to implement the cost reduction actions.
You know those cost reduction actions are harder CN cogs in our margins just because we had to slow down or plans. We won't we don't give our specific utilization rates et cetera, but when you get our 10-K, you'll see that are finished goods winner in media products in inventory declined 5% and on some of that is value, but also some of its a.
Some of the slowdown we didnt know production rates.
I'd add that we're going to be careful as we go there could be.
Yeah, and Bob I'd, just add that.
We're going to be careful about how we met run our plants as we go into the first half for this year, so that volume growth as a way to sort of move inventory down.
And continue work, making progress on that it's a great opportunity for us release, a lot of cash as we go forward.
Thanks, guys.
And then next question comes from Laurence Alexander from Jefferies. Please go ahead your line is over.
Good morning can you give a sense for the recycling technologies once commodity environments, it would not be competitive.
And secondly may have missed this.
You are the in terms of this spread stabilizing and in the middle come back half of the year are you seeing competitor shutdowns.
I hope, we improved the prospect wouldn't spreads or is it purely tied to your perspective on end market demand.
[laughter] Okay. Good questions. So the first one of the circular economy.
At this point with the trends in the marketplace, it's not as much about competing against the price of oil or fossil fuel feedstocks. The trains left the station right you've got <unk> legislation in Europe and coming in multiple other jurisdictions of bank banning single use plastics are putting what they call nprs enhance produced responsibility.
Which is basically taxes on single use plastic so the drive.
For recycling and the value that it's putting on it is creating a real cost choice not just a consumer preference choice.
For you know brands around the world, even China now as you know banning plastic bags and all major cities by into this year for for groceries and things like that so.
So the recycled content part, we're really excited but what we're doing is a critical differentiator for us. Fortunately, we got out of this end use plastic business. So we're not trying to defend it.
When we got rid of the PT business in 2011, we're more focused on how we provide solutions to customers around the actual recycled content as well as a put our recycled content and finished products and durable so a whole another differentiation back to vinces questions earlier.
Is you know not to have a lot of product differentiation that performance the product.
We now have only vector of growth and specialty plastics as well as over in textiles, and fibers by putting recycled content in these products, which is you know very significant demand and we do think that you know we will get a premium.
Relative to fossil fuel based products for providing these solutions to the marketplace or you can look at our pet.
Through last year in Europe penetrated at roughly a 60% premium to P.T. a in the marketplace I think thats a bit high but we do think a on a long term basis and we do think our technologies provide real solutions because we can access.
Feedstock that is going to landfill not compete against some mechanical recycle stream. So the cost structure for us would be more advantaged.
For our feedstock because it has no alternative value and that's an important differentiator for what we're doing so we feel really good about that we feel like.
We're in a good a differentiated position to sort of moved those programs forward in both the A.M. and fibers.
The second question friends or was on spreads in the back half of last year. As we said he knows spreads declined through the back half relative to the first half of 19.
As a people realize that economy, it was not going to improve with a settlement of the trade war and so that you know elongated economic stress led to more competitive behavior and in particular in that went through the peak.
In Sai, we do see prices pretty much stabilizing out.
Relative to competitors, who are hitting their cash costs in Asia.
So we have seen that and we are seeing people start moderating run rates or potentially shutdown plants temporarily I'm not sure I think any these plants, they're gonna start shutdown permanently.
So when the market recovers you know some of these people come back in the marketplace, which is why we've been.
You know cautious on how we.
Think about spreads this year and we're assuming spreads do not improve this year.
And so I think we're in a good place there.
Thank you.
Yeah.
And though next question comes from John Roberts, you'll be at please go ahead, Sir your line is open.
Yes, and best wishes curtain welcome Willy.
I assume most of the lower raw materials for the overall company or purchase para xylene and Glycols, but.
Could you talk a little bit about asset deals and propylene.
Did the advanced materials in fiber segment benefit from the lower asset yields prices and how does lower propylene play out between CDAI an ASP.
So that it you're correct polyester benefited from lower PX prices, the olefins benefited from lower ethane and propane prices as well as a propylene supply contract. That's a formula to propane. So we saw raw material benefits you know the olefin chain on the asset fuel chain, where coal based and how we make our.
Our asset deals with our Gasifier coal prices have been relatively stable. So there wasn't any tailwind there.
Thank you.
Yes.
And though next question comes from much of live from Tudor Pickering Holt. Please go ahead, Sir your line is open.
Hey, good morning, a really could you quantify the currency impact on EPS in 2019.
Yes, it's basically consistent with what we were saying in Q3, which is about 30 cents a share. So it was slightly up I'd also remind you that about 85% of all within our advanced materials online additives and functional products businesses.
Great and then could you provide any color on on the overall trajectory of the business during Q4.
You do come in a little bit above the midpoint guidance provided in October does that imply that the things were picking up a little bit in December .
They did so we had a good October we had a week November that gave us some concern about what might happen in December .
In both volume came in better than expected and costs came in.
Quite a bit better than expected on the raw materials side.
Great. Thank you.
Let's make the next question or last one please.
All right. So the last question comes from Michael sees from Wells Fargo. Please go ahead your line.
Hey, guys current congrats and a great working with you <unk> in terms of your outlook for after he had just trying to make sure I understood you know flat to down for company for EBIT on that's especially side the two thirds grow pretty.
Yeah, there's a grow next year to their you know maybe mid single digits and the one third that's more challenged down double digits, just something can you just.
Give us a little bit of color on each the pieces.
Yeah. So first of all through through 19, a the two thirds did quite well as as Curt laid out prices were relatively flat outside of the cost pass through contracts. We expect that continue this year, where prices will be stable and we saw raw material benefits. As a result, we saw volume growth and we had this headwind, especially.
In these high value additives for automotive in China.
Net out to being modestly down for last year. So as we look at this year, we see volume. We see you know raws are stable as well as pricing. So that's going to deliver some growth as well as some cost reduction. So you do see some up earnings growth in the.
Two third side of the portfolio and you're correct. The you know but potential for down a net earnings for the S.P. segment is in the one third.
Segment as we take in those lower spreads for the back half of last year.
We do we're getting some volume so as we had good discipline in pricing through the first half of 19, we lost some volume and adhesives and tires regaining that with some pricing in the fourth quarter. So we'll have a volume improvement.
But some pricing down you know net in the one third as well as a but you're going to have some earnings challenges. There just given where spreads are at this point.
So I think here you know you are directionally correct.
Great and then one quick one on Triton and a good growth business or several years. How are you. There. How are you on capacity do you need to add capacity or do you have enough to sort of support the growth that you're seeing.
We're well positioned and capacity, we need to double the capacity that in 2018, because we had run out capacity the volume growth have been so strong. This was one of several plants that we brought on line in 2018, where volume was really great across a pan am.
A unit with a with the growth we've been having a until the trade where hit.
So we're well positioned support growth there and if I could add Mike. That's an example for this business not only you get volume growth to get mix upgrade and I get fixed cost leverage as well.
Great. Thank you.
Thank you everyone. Thanks again, everyone for joining us. This morning I. Appreciate your time I have a great data will be a a replay of this available on our website. Later this morning. Thanks again.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect [noise].
Oh.
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