Good day, everyone, and welcome to the Eastman Chemical Company Second Quarter 2018 Conference Call. Today’s conference is being recorded. This call is being broadcast live on the Eastman’s website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.

Thanks, Margaret, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Curt Espeland, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Before we begin, I’ll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the Company’s second quarter 2018 financial results news release, during this call and in the accompanying slides, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2018 and the Form 10-K to be filed for second quarter 2018. Second, earnings referenced in this presentation exclude certain non-core and unusual items and has been adjusted for the forecasted tax rate as of the end of the interim period. 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 second quarter 2018 financial results news release, which can be found on our website, at www.eastman.com in the Investors section. Projections of future earnings exclude any non-core unusual items and assume that the adjusted tax rate for first six months 2018 will be the actual tax rate for the projected periods. With that, I’ll turn the call over to Mark.

Good morning and thanks for joining us. I’ll start on slide three. We continue to make great progress in executing our strategy with strong second quarter operating results, consistent with our expectations. Our results demonstrate the strength of our specialty portfolio with 8% volume growth in Advanced Materials and Additives & Functional Products, combined, during the quarter. As I said many times before, we are creating our own growth through innovation and leadership in specialty markets. We’re seeing excellent progress in converting our top innovation programs into commercial orders across AM and AFP. In a few moments, I’ll share a couple of examples of the ways we’re winning the customers through innovation and our enhanced commercial capabilities. In addition to this especially volume growth, we are making good progress stabilizing our Fibers business, as results during the quarter and in the first half of the year demonstrate. In particular, we’re making excellent progress in accelerating growth with our textiles innovation platform, leveraging our total assets into new market applications. During the quarter, acetate yarn volumes increased by about 30%. We are expecting continued growth in the back half for the year. We continue to be disciplined in our cost management with productivity offsetting inflation, while we ramp up our investment and growth programs which are delivering above market growth. Cash flow remains the strength as we remain on track to generate $1.1 billion of free cash flow for the year. And we allocated our strong free cash flow in a disciplined manner and in line with our priorities during the first half of the year. We returned $410 million to shareholders with $250 million of share repurchases and $160 of dividends. And we remain committed to make progress improving our ratio of net debt to EBITDA. Our second quarter results…

Thanks, Mark, and good morning, everyone. I’ll start with our second quarter corporate results on slide five. Sales revenue grew across all segments as we did a nice job driving volume growth in our more specialty product lines. This continues to demonstrate the power of our innovation-driven growth model, enabling us to deliver 2 to 3 times underlying growth in the market, and demonstrating we can grow around the globe with our specialties. EBIT increased as higher EBIT in Advanced Materials and Additives & Functional Products more than offset a decline in Chemical Intermediates. We are continuing to invest in growth across most of our portfolio and seeing the positive impact of those investments. Solid earnings performance during the quarter was partially offset by $20 million of planned maintenance in our Longview site as well as $25 million impact of industrial gas supplier disruptions at both our Texas City and Longview, Texas sites. Overall, we remain on track for strong EPS growth in 2018, reflecting the growth in our specialty businesses, stabilization of Fibers and the impact of our compelling free cash flow. Moving next to the segment results and starting Advanced Materials on slide six, which delivered strong 10% EBIT growth in the first half of the year. For the quarter, sales revenue increased due to higher sales volume across the segment, including premium products such as Tritan copolyester, Saflex heads-up display and performance films, as well as a favorable shift in foreign currency exchange rates. EBIT increased primarily due to higher sales volume and improved product mix as well as a favorable shift in foreign currency exchange rates, partially offset by increased investment in growth in higher raw material energy costs. We continue to invest in this business, accelerating our growth spend in premium product lines like Tritan…

Thanks Curt. On slide 11, I’ll discuss our 2018 outlook, which is consistent with what we told you before. As you’ve seen from the strong volume growth in our specialty segments in the first half of the year, we continue benefit from the high-value innovative products with leading positions in attractive niche markets. We are also delivering revenue synergies of our acquired businesses, through improvements in our commercial execution capabilities and leveraging our combined technical capabilities to accelerate new product introductions. Our continued aggressive productivity is expected to more than offset inflation, and we’re investing a portion of that savings in our growth initiatives. Our refinery grade propylene investment to improve our cracker flexibility significantly reduces our exposure to ethylene price risk, while keeping the upside available. And the improvement in our tax rate is also contributing to growth. Finally, disciplined capital allocation has allowed us to accelerate our share repurchase program in 2018 compared with 2017. Putting this all together, our expectations for EPS growth remain the same at 10% to 14% compared with 2017 and will likely be in the middle of this range. Our underlying performance is strong as we focus on the things that we can control. And as Curt noted, third quarter is a tough comp to last year. One sensitivity is trade and the tariffs that could be implemented by the U.S. and China in the coming months. At this point, we see no exposure to any of the U.S. tariffs that have been implemented or proposed, which highlights another benefit of our vertical integration for most of our raw materials. Regarding the proposed tariffs, we see some modest but manageable exposure with our mitigating actions. When we consider this potential impact, we expect to be safely in the range of our guidance. Last,…

Thank you, Mark. As usual, we’ve got a number of people on the line this morning. And we’d really like to get to as many questions as possible. So, I ask you to please limit yourself to one question and one follow-up. And Margaret, with that, we are ready for questions.

[Operator Instructions] We can now take our first question from Vincent Andrews from Morgan Stanley. Please go ahead.

Thank you and good morning everyone. So, just curious on the adhesives competitive activity, just if you have any more visibility into that yet. I know, these plant start-ups can move around and what you have. But, is it proceeding as anticipated?

We -- the plant that was completed by our competitor, effectively came on line towards the end of the second half -- first half of the year, so sort of recently. So, we are expecting some impact there as they bring that capacity on line. But, I would remind you that while they added a lot of capacity, demand growth has been incredibly strong in this business, underlying market is 5% to 7%. There is a lot of pent-up demand because the market was -- capacity wasn’t available. So, we are seeing sort of leap in demand just because there was a need to use this product. And then, rosin to resin conversion is accelerating as the market is looking for an odor-free water-white kind of adhesive which you can’t get with rosins. So, it’s important to keep in mind, the rosin market is as big as the resin market. So, all those things combined together to give us confidence that demand will fill this point out relatively quickly. But, there are some limitations on how we can manage price upward right now relative to an increasing raw material environment with oil increasing. But overall, it’s actually playing out as we expected.

Okay, great. And then, Curt, if I could just ask you on the free cash flow, just looking at the cash flow statement, I cannot recall this either happened last year or 2016, I can’t remember. But your cash flow from operations is actually a bit lower this year versus last year, and it looks like from working capital, receivables, inventories, but what -- sort of one, sort of why is that happening? And then, two, remind us of the mechanism of how you make that up in the second half of the year? Is it just seasonality or what’s going on?

Sure, Vince. No problem. Yes, it’s normal for our seasonal increase in working capital the first half of ‘18; it’s probably little more dramatic this year than last year just because of the rising raw material environment, as well as stronger sales, which is a good problem to have, by the way. So, as you think about those stronger sales and higher input costs flowing to the system, that did have a kind of a net negative impact on free cash flow first half of the year as well as some lingering negative impact from the coal operational incident in the first half of this year. So, if you think about the trend in the second half of the year, cash flows will be expected to improve. One, as you expect, working capital needs will reverse, especially in the fourth quarter. The net proceeds from the insurance, from the operational incident, we do expect some of that more in the second half or as the costs are pretty much now behind us. And also don’t forget, we expect a reduction of capital expenditures of a $100 million for the year. You only saw $30 million of that in the first half of the year. So, you will see a $70 million impact of reduced capital expenditures in the second half of the year, on a year-over-year basis. So, again, we remain on track to generate $1 billion of free cash flow in 2018, continuing to demonstrate the quality of the portfolio and our capabilities. There has been no material change in our free cash flow goals, and we’re excited about what we can deliver.

And just to be clear, that was $1.1 billion?

I’m sorry. Yes. To be clear, $1.1 billion is free cash flow.

We can now take our next question from David Begleiter from Deutsche Bank. Please go ahead.

Mark, since you last gave guidance back in April, FX, and spot ethylene margins have gotten worse. So, could you tell us, in terms of your second half guidance expectations, what’s the negative impact -- or the impact of the deterioration, both those metrics since your last guidance?

Well, thanks, David. So, first of all, I think we’re on track for tremendous earnings growth for the year, 10 to 14%, middle of that range is great results, improvement in tax to help a bit as well in the back half. So, we feel great about what we’re doing on earnings growth. And the second half is a bit different than the first half. As you noted, with ethylene, the prices of ethylene are quite low right now. And we’ve made all these investments and changes to avoid basically participating on spot market and not incur those negative margins. So that’s actually quite helpful, but of course you have less volume we’re selling relative to last year. So, that’s a change from where we were in April. When you think about the specialty businesses, very much on track, consistent with everything we said. We see strong volume and variable margin growth. Some of that’s tamped down a bit by the growth investments we’re making, and that are accelerating as we go through the year. So, that weighs a bit more on margins in the back half versus the first half. So, you see a bit of that dynamic going on. But, overall, it feels like we’re much on track and that ethylene headwind is not as material on that.

And David on the currency, you think about that, that’s predominantly the euro. The currency was a tailwind for us first half year-over-year. But we see rates -- if they stand where they are now, it’s neither a headwind or a tailwind for the second half of the year on a year-over-year basis.

Understood. And Mark, just on Advanced Materials, you didn’t get any pricing any Q2. So, where do you stand in that segment price versus raws?

First of all, Advanced Materials had a great first half of the year with 10% earnings growth and very much of strategy. We’ve told you all along that our focus in this business is driving volume and mix upgrade every year, consistently for many years now, and we demonstrated another strong performance on that front. So, as you look at the margins in AM, you have margins actually improving as that mix upgrade delivers value year-over-year and sequentially. That’s then been offset by the increased gross spend. And just to step back to corporate level for a second, we’ve told you that we are increasing our growth spend between the new operating assets we’re bringing on line like Tritan and PVB assets in AM as well as Crystex plant and ketones expansion in AFP. So, overall, we’re at the high end of that range of about $50 million of growth spend for the Company, on an annual basis. That actually divides out across the segments, roughly $25 million in AM, $20 million in AFP, and about $5 million in Fibers of additional spend. So, when you take that sort of $25 million and realize it’s ramping up, so not much of that was in the first quarter, but it’s ramping up in the third through fourth. The margins of mix improvement that we delivered year-over-year and sequentially, were offset by about a 100 basis points of higher gross spend in the second quarter. So, that sort of nets each other out. And the great thing about that is the trends in the fixed cost leverage as we forward. So, we don’t expect the same step up in investment -- growth investments next year across the Company that you are seeing this year. There’ll be some carryover from this year of course, but there is no big next step in terms of gross margin lever. So that sort of deals with some of the margin story. On the actual pricing side of the equation, David. We had great success in increasing prices with raw materials on the polyester side of the equation and they are doing just fine. The spreads are holding in quite well. The place where we offset that is as we discussed at Innovation Day, we intentionally had some price concessions in the interlayer business in the annual contract negotiations last fall to achieve significantly improved mix on our heads-up display and acoustic sales that are much higher margins than our standard. So, while we gave up some price, we gained significantly on the mix and earnings as a result of that, which is consistent with our strategy. So, everything in AM is playing out exactly as we intended, driving a lot of earnings growth. And from both the first half of the year or on a full year basis being at the high end of our guidance range is very attractive growth.

We can now take our next question from Jeff Zekauskas from JP Morgan. Please go ahead.

Thanks very much. In your commentary, I think, you said that because of some supplier difficulties that cost you $25 million and maybe there is some another 25 from turnaround. So, basically, are you saying that you would have earned $50 million more in the second quarter, if you hadn’t had these events? And maybe you can place that in context. In other words, what’s the normal maintenance spending or the normal outage costs, such that we can gauge whether this is a normal event for Eastman or this is above average?

Sure. So, to answer your question, if we take second quarter by itself that the supplier disruption was -- cost us about $25 million and the maintenance spend would have been -- was 20. So, if you didn’t have both of those events, yes. Our earnings would have been up 45. But normally, if you look at total maintenance for the year, for this year compared to last year, it’s about the same. So, this is more about timing within a year. And so, that’s why it was more $20 million in the second quarter. Greg, do you want to add something?

Just from a planned maintenance standpoint, it was about the same, the supplier prior disruption was certainly in addition to what would be normal for the year.

So, for my follow-up, the conceptualization of Eastman by management is that the quality of the business is getting better. But, there really hasn’t been any material change in the overall gross margin of Eastman. Is your idea that the quality of the business is going to be better and that your gross margins are going to rise to -- I don’t know, 30%, instead of 25, or is the idea that the natural rate of volume growth will be faster because of new initiatives you have, so there isn’t really much margin difference?

So, Jeff, no, the idea is very much that the gross margins are going to get better. And certainly, if you exclude the operational outages, we are -- I am just going to make this on a full year basis, Jeff. When you exclude the operational outages that we’ve incurred and think about that $50 million of gross spend that we are investing for future growth this year, the gross margins this year are quite better. And so, as you move into next year, you are going to see that happen because obviously we don’t intend to have the same operational problems as well as the fixed costs are going step up again next year. So, the variable margin grows, creates leverage, fixed gross margins will improve. So, there is every intention that those gross margins are getting better as we move forward.

And if I could add, Jeff, two things. Yes, we do expect that volume better than market because of innovation program. I would also remind you, because it works the opposite way as input costs came down, so did revenue. In the future, revenue is going to up and thus by nature even as we grow gross margin dollars, the fixed percentage could move around a little bit on it just because of that inflationary pressure. We really look at it as a gross margin as a per unit basis, and we are seeing good growth in that per unit basis.

We can now take our next question from Aleksey Yefremov from Nomura Instinet. Please go ahead.

Could you give us an update on your Crystex technology project, where does it stand currently?

Sure. So, Crystex is on line, producing inspect material with our new Cure and Cure Pro products that provide far superior performance to what’s available in the marketplace from any one, including our own historical technology, much better thermal stability, much better dispersion. Customers are verifying and validating significant improvement in their manufacturing efficiency using the product. So, we feel great about the program.

Thank you, Mark. And then, just to follow-up on comments on refinery-grade propylene. Are you -- what are you actually doing there? Are you adding capacity to convert refinery-grade to chemical-grade, is it some new capability that you are adding? And could you just explain what’s happening there?

Sure. So, it’s been enabled by the shutdown we just completed. So, we are modifying the front end of our cracker and refining capability on the front end to be able to add RGP to the mix instead of just using ethane and propane. And the great thing about this story is we had to make some large capital investments as all of you know in our two smaller crackers for safety reasons. And this was the second cracker that we just finished modifying. It made available equipment that was being used historically, now not needed. And we can modify that equipment to now be the refining capability for RGP to include in the mix. So, it’s a modest capital investment that normally would have cost significantly more amount of capital, taking a lot longer time to do. But now, we can do it quickly and have it on line by the end of the year. And so, it’s a great flexibility. So, now, we can move some of our exposure to an RGP, PGP spread, which is much more stable than where olefin prices and propane have been, reduce the ethylene dramatically that we produce which we’ve never wanted to make. You have to remember, our entire strategy is based on making propylene and specialty propylene derivates. So, it sort of gives us the flexibility to be out of that market. But, it’s very flexible to switch back. So, we can move back towards ethylene, if the prices get attractive. And as you look at it, when the ethylene export capacity comes on line in 2020, it probably will be attractive again.

Next question comes from PJ Juvekar from Citi. Please go ahead.

Mark, as ethylene prices fell, you’re taking some downtime at the crackers, you’re investing in CapEx to change your feedstocks. How does it impact your sale process of the crackers? And have you thought about shutting down the smallest cracker?

I’ll start with the sale process, PJ, this is Curt. Just a reminder, again, I want to reemphasize what Mark’s already said. Our crackers are still good, reliable assets that have created that competitive advantage for our high-value propylene derivates by leveraging shale gas. And so, the primary objective of our recent efforts was to monetize our excess ethylene position and then potentially certain ethylene derivates to eliminate their earnings volatility that came from those products. Over the past few years, we’ve engaged with multiple parties on a variety of options to sell or otherwise monetize this excess ethylene. However, current marketing conditions, combined with the current geopolitical environment on trade have made it very difficult to move forward at this time. Until conditions improve, we have taken these steps then to such that spot ethylene prices will not have a material impact on the earnings the remainder of this year and going into 2019.

And then, for your question on the crackers, we are shifting the mix hard, we are going to reduce rates on the crackers. And until this investment is in place for next year, because we accumulated so much propylene inventory and have some storage available for ethylene, we’re able to mitigate the need to buy much additional propylene than normal, which is great, even though we’re reducing the cracker run rates and avoid selling ethylene in the market at these prices.

Thank you. And just as a follow-up, in Advanced Materials, you had 9% volume growth, but pricing seem to have lagged for last couple of quarters. You talked about price introduction in heads-up display products. What’s going on with pricing in Tritan and Saflex and other products in that segment? Thank you.

Yes. As I mentioned earlier, we’re managing a complex mix there, right. So, mix improved dramatically, as it has for years now, improving margins in that segment. We have offset that with about 100 basis points increase in growth investments. So, those sort of net out and prices didn’t increase. What I said is, they increased across the polyester spectrum. So, we are increasing prices there and keeping up with raws, no issue there, doing a great job by the commercial teams there. But, we did intentionally reduce prices on the interlayer products. So, that sort of netted out.

We can now take our next question from Arun Viswanathan from RBC. Please go ahead.

Just curious on the outlook here, you have a slightly lower tax rate. I guess, that’s on our math around $0.03 to $0.05 or so. You’re still guiding to the midpoint of the range. So, I guess, would you characterize potentially some of the swing factors may be for us? I guess, is it mainly FX and then I guess some raw material headwinds or how do you kind of look at that?

So, just to clarify, you’re asking about the outlook for the second half of the year and those factors and how it impacts it?

Yes. Thank you.

So, from a second half, your point of view, first of all, it starts with the tough comp. So, last year, we had incredibly strong volume in some areas of the Company. So, the solar fills that we mentioned to you in the higher -- the share gain we got in the last, the second half of last year due to environmental enforcement in AFP. As well as we noted, the customer buying patterns being a bit high in the third quarter last year in tow, which won’t repeat this year. And then, of course, we’re not selling ethylene. We sold a bunch of ethylene last year at some margin and this year we’re not selling it. So, those all create a tough comp relative to last year. So, that’s the largest difference year-over-year. Second is you’ve got the higher gross spend this year that’s been accelerating through the first half of the year and continues into next -- into the second half. And then, you have some margin coming off in adhesives, as we’ve discussed a few moments ago. So, those all sort of play into why the second half doesn’t grow as fast as the first half. And as Curt noted, currency isn’t the tailwind. So, they’re all dynamics, they don’t give us any concerns. We still feel we are on track to deliver very strong growth this year and well-positioned to grow into next year. You got to remember the operational problems, unplanned and the growth investments are all fixed cost leverage next year as we continue to grow variable margin.

And if I could add on top of it. When I think about the second half of the year, Arun, the way I look at that is that some moving parts that Mark described, but generally speaking, our outlook for the second half of the year hasn’t changed. And then, on top of that, you have about $0.05 benefit from tax. So, that’s how I look at the outlook for the second half of the year.

Yes. We think we’ll hold on to that benefit on the tax side.

And then, just wanted to get your thoughts, I guess longer term. Would you consider something potentially more creative on the ethylene side, either an asset swap or something, or would you even consider maybe down the line at some point, looking into constructing a PDH unit?

Well, if we look at -- the good thing is that I would argue we’ve come up with a pretty creative option to deal with ethylene right now. And so, that kind of takes care of that ethylene volatility risk, which as a reminder is the primary driver of volatility within the Chemical Intermediates group. So, we’ve done a pretty creative thing now. That buys us time to see how market conditions improve and see whether the sell option goes back to life or other options maybe available to us. But right now, I think we’ve been pretty creative in dealing with our excess ethylene issue.

No. I understand. I just wondered if you’d potentially consider constructing a PDH unit. Thanks.

We are not looking at capital deployment on the Chemical Intermediates side. We always develop [ph] that construction capacity but no Greenfield expansions. Our strategy is growing, investing in specialty businesses. We are delivering tremendous volume and mix improvement across AM and AFP and accelerating growth in Fibers. So, that’s where our capital is focused, plus bolt-on M&A, if it’s not share repurchases.

We can now take our next question from Bob Koort from Goldman Sachs. Please go ahead.

One of the giant guys over in Germany had some comments today that I thought were kind of interesting. I am curious about the Eastman philosophy. And the question or the comment was basically, there are some specialty markets where if you react too aggressively to raw material inflation, it sort of comprises or could compromise the value-add approach to a product line. And therefore, when the raws go the other way, you start get back some relief. Just curious when you think about your portfolio, how do you differentiate across that portfolio and the ability to get price to recover some of these raw materials?

So, Bob, it’s a great question and a really important one when we really get into the nuances of running a great specialty business which I think we’ve built. You have to be very thoughtful about how you manage prices with your customers because you want to capture the value for the products that you have, you want to treat your customers with respect because they are aware of how raw materials change both up and down. But most importantly, you want to keep them highly engaged to continue to working with you on innovation, right? The vast majority of innovation isn’t with new customers, it’s with existing customers helping bring them additional new products. So, you have to -- in the tires business, the coatings business, the glass business, you got the same set of customers of a very long time. So, that has to be a very collaborative relationship that includes working on innovation. So, yes, you are careful about how you manage price, and you want to provide price stability to them. So, when raws go up, you increase prices but you do it carefully and you don’t be abusive about it. And when raws go down, you hold on to some of the value but ultimately you have to share some of it. And if you go back to our transcripts over the last three years, I think I’ve been pretty consistent in talking about that and how we’ve managed it, both in ‘15 and ‘16 and how we’ve managed it over the last couple of years. But, what I would highlight is we have done a great job in managing price relative to raws. Especially in CI and AFP right now, we’ve done a -- we’ve been able to keep pace with raws and distribution costs. And I think, I fairly covered the AM discussion on that topic where we are doing great in polyesters and made some intentional choices to improve mix with our customers. So, yes, you got to think about that and be very careful in what you do.

And then, you acknowledged that there has been some price down on your auto interlayer business. Is that a one-time event, is that something that we should expect to continue and then you offset it as you are saying by seeking out mix benefit? Is this one-time correction, because they’re under a little bit of pressure? Can you give us some help there?

Sure. So, the nature of that business is, as we shared with you at Innovation Day, the price difference between our premium products and our sort of standard products in that segment are quite different. So, as you gain scale and efficiency in making these premium products, you tend to give back a little bit of price on those premium products as they are buying significantly more volume, and your cost efficiency is also higher from a fixed cost leverage point of view as they grow. So, from a margin point of view, you are not taking much of a hit, but you do have to share some of that -- sort of value created by them, buying a lot more with some price reduction. So, there is always a natural amount of that that occurs, happened last year, happened this year. There will be a little bit of it next year. The tricky part is, if you put these annual contracts in place and if you go back to what we were negotiating in the fall, raws of our -- come in a bit higher than we expected this year. The key drivers of raw material prices for interlayers is international ethylene prices, not local, and acetic acid prices, because we’re buying them and PVOH. So, you can imagine that’s created some pressure relative to where we thought we were last year. That part of the story that it’s -- the key thing is focus on the 9% volume and mix that is a significant upgrade in margins. And when you back out the gross investments, the margins are great.

Next question comes from John Roberts from UBS. Please go ahead.

Thank you. Good morning. In Chemical Intermediates, you noted higher pricing in acetyl derivatives. Celanese has this initiative in their acetyls business to connect producers and customers, which they talk about in network terms like activating nodes. Are you participating in something similar and is that contributing to the higher pricing that you’re talking about?

So, first, acetic acid is not a priority business for us. We have a huge acetyl stream that is focused on producing acid anhydride. Acetic acid is a co-product of our downstream derivative operations that we have to sell to sort of clear the system. So, we’re not in the global acetyl business like some other people are. We’re really in a sort of North American centric acetic acid business where we’re clearing up the co-product in our operations. So, just entirely different business model relative to what Celanese referred to. The reality is just prices are higher in acetic acid right now due to decent demand growth in that business as well as a number of supplier outages, both here including us for a while and BP and people in China. So, that’s really driven the improvement in acetyl pricing for us versus the very different business model that Celanese has here, because our acidic anhydride isn’t about selling it, right, it’s about converting it, all the specialties downstream and we sell what’s left over. So, it’s just entirely different business model.

And then, secondly, do you need to make bolt-on acquisition at some point in specialty ag chemicals? Today, you highlighted the growth stimulation, growth regulation products; earlier you highlighted the animal nutrition additives you have. But, it doesn’t seem like you have critical mass and it’s much smaller than many of the other Eastman businesses?

Yes. It’s a great business, and it was under invested in, especially in the animal nutrition side. So, we’ve been able to add a lot or organic capability and commercially taking it from a European to more of a global business and accelerating product development by combining our technology people with theirs. So, we feel good about what we’re getting done in organic. You’re right. We’re not a big player in that space. This is an area where we’d be open to sort of bolt-on M&A. But we’re very-disciplined. So, we’ll have to see if there is M&A out there in the marketplace here and other places that we’re looking that meet our financial criteria, not just our strategic one. And we continue to look for those opportunities, but we’re going to be careful we don’t overpay.

Next question comes from Jim Sheehan from SunTrust. Please go ahead.

Good morning. Can you talk about the tone of business so far in third quarter? Are there any changes, positive or negative?

Business is continuing as expected. So, demand -- primary demand is -- in the marketplace continues to be solid around the world. Obviously, things like tax reform and less regulation here, recovering Europe helps. Tax -- concerns around trade are creating some caution, but overall that’s good. Most importantly, we’re focused on creating our own growth and have demonstrated our ability to grow sort of two to three times the underlying industrial production rates. And so, we feel great about how we are continuing to create our own growth and drive growth and how that continues into 2019. That’s been the center of our strategy. I think, our growth model is alive and well and demonstrating value every day.

And can you talk about the BP distribution agreement that was announced? What was the strategic rationale for that and how do you expect it to impact your business?

As I mentioned, acetic acid is not a on-purpose business, it’s a co-product, and we already relationship with BP at our Texas City site, and we’re able to find way to work with them to sort represent and sell our non-specialty acetic acid in a more efficient manner, it gives us some earnings upside relative to what we could do with our position in the market. So, it just made sense.

Next question comes from Lawrence Alexander from Jefferies. Please go ahead.

Good morning. Two questions. One, can you quantify the spread between price in raws, excluding Chemical Intermediates or in aggregate? And secondly, do you see any signs of an inventory overhang in either crop chemicals or automotive and I guess on automotive particularly in Europe, but I guess any perspective on those two markets?

I’ll answer your second question first and then ask for clarification on the first. So, on your second question, Lawrence, we don’t see any inventory overhang in the marketplace that we are aware of. I am not sure I understood your first question. Could you repeat it?

I might have missed it earlier. Did you -- have quantified the spread between your realized pricing in your raw material cost inflation in Q2?

No, we don’t provide that kind of detail. What I can tell you is AFP and CI they’ve done a great job of managing price relative to raws and distribution costs. In fact, their margins per KG are up a little bit. To remind you, as Curt noted, when raw materials go up and you hold your spreads constant, your margin percentage goes down because just of the math. But, we’re doing a great job in those two areas. And as -- and I think we have fairly discussed the AM topic and how we’re managing the total margin there. So, overall, I feel like we’re in better shape than we ever have been on how we’re managing price relative to raws.

Next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.

Yes. Good morning. So, Mark, you’ve got a lot going on at Longview. You mentioned throttling back on the cracker, operating rates changing the feedstock mix to be increasingly geared to propane feed, and then the RGP investment. If we were to boil all that down, what is the net impact on your net short position in propylene going forward?

So, for this year, it has no impact. We have to incrementally increase our propylene purchases relative to last year with all the actions that we are taking. So, even though we’re obviously reducing our cracker run rate to some degree and not selling ethylene through the combination actions we’ve taken, we’re not incurring a material increase in purchase propylene costs, which is great. And second, with the RGP investment next year, we would buy less propylene than this year because of leveraging the RGP to make propylene. So, it mitigates some of that exposure for us, improves our spread exposure by getting into the RGP, PGP game versus propane to propylene and reduces ethylene production. So, it’s a win on all fronts.

And Kevin, if I could add, just, as you think about that change of mix, most of the benefit of that change is going to felt in Chemical Intermediates. There will be a little hurt moving to AFP as we see some of the additional costs from the crackers running at reduced rates. But generally good, positive, mostly in CI, a little hurt in AFP going forward.

That’s helpful. And then, as a follow-up, I think, you mentioned that you anticipate operating earnings in CI in the second half to be roughly equal to the first half. Can you help us out a little bit with the expected quarterly cadence? For example, was there any spillover in July from the various supplier disruptions that you indicated and the actions you are taking in Longview? How should we think about kind of 3Q versus 4Q there?

Yes. I think, if you look at the seasonal trend, Kevin, yes, there is some spillover, but we are expecting some of that to moderate. And you will see most of that seasonal impact in the fourth quarter.

I think the last question or the next question -- excuse me, the last one, please?

Last question from Matthew Blair from Tudor, Pickering, Holt. Please go ahead.

I am not sure if I heard this correctly. But, was there a comment that you are looking to accelerate share repurchases in 2018? And if so, could you share your target here? I know, you have the $2 billion share repurchase target for 2018 through 2020. And then, may be related to that. In our slides, you mentioned a $300 million debt reduction target for this year. I want to say that that used to be more like $350 million. So, is this just a case of a little bit less debt reduction this year, a little bit more repurchases?

Yes, Matt. So, first of all, it starts with $1.1 billion of free cash flow. But, what Mark was talking about acceleration was we’re doing more share repurchases in 2018 than we did in 2017. Part of that is less de-leveraging. So, we are targeting $300 million this year versus we did $350 million last year. So, you’ve got the combination of growth in free cash flow, little less de-leveraging, and attractive dividends, that leaves a lot of free cash flow available to do share repurchases in absence of a bolt-on acquisition.

I would just emphasize the $1.1 billion of free cash flow, as we wrap things up. But, no, we feel great about strategy, we feel great about the progress we’re making on the volume and mix improvement driving earnings growth this year and positioning us really well for growth next year, and obviously cash has been great and we will continue on the track that we committed to at the beginning of the year.

Okay. Thank you. And thanks everyone for joining us this morning. There will be a replay online this afternoon. Thanks again.

That concludes today’s conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.