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

Thank you, Cody, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; 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 third 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 second quarter 2018 and the Form 10-Q to be filed for the third quarter 2018. Second, earnings referenced in this presentation exclude certain non-core and unusual items and have been adjusted for the forecasted tax rate as of the end of the interim periods. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the third quarter 2018 financial results news release, which can be found on our website, www.eastman.com in the Investors section. Projections of future earnings exclude any non-core unusual items and assume that the adjusted tax rate for first nine months 2018 will be the actual tax rate for the projected periods. With that, I’ll turn the call over to Mark.

Good morning, everyone. I'll start on page 3. During the first nine months of the year, we delivered a 13% year-over-year increase in adjusted EPS growth and our third quarter was in line with our expectations. We delivered strong volume growth with innovation driven mix improvement across our specialties, advanced materials and additives and functional products. We also delivered sequential earnings stability in fibers and stability in CI. The portfolio specialty businesses we've built is showing resiliency in the face of global uncertainty and we remain confident in our ability to deliver sustainable earnings growth. Our innovation programs are the key to our success and we're seeing great progress on a number of fronts. For example, AM delivered 9% volume growth in the quarter and 7% through the first nine months, through attractive premium products like Tritan, Saflex heads up display interlayers and performance films, well above end market growth rates in transportation and consumer durables. In AFP, despite a tough comp from the large solar fills last year, volume growth increased 1% in the quarter and 6% through the first nine months. We continue to have double digit growth in product lines such as Impera tire resins, animal nutrition, water treatment, olefin polymers and adhesives, crop protection, plant growth regulators among others, which were driven by revenue synergies from our acquisitions. And in fibers, we're continuing our trend of delivering excellent revenue growth in textiles. Our innovative product offerings in acetated yarn delivered an exceptional revenue growth of 30% this quarter, giving us confidence that the fiber segment is stabilizing and we continue to be on track to deliver more than $350 million of new business closed this year across the company with the greater than 20% increase through the first 9 months. In a few moments, I’ll highlight…

Thanks, Mark and good morning, everyone. I know it's been a rough couple of weeks in the market, so hopefully, you will sense that Eastman remains calm and is marching ahead with a compelling growth strategy in the face [indiscernible] global uncertainty. So with that, I'll start with third quarter results on slide 5. Sales revenue increased led by Advanced Materials delivering double digit revenue growth. Chemical intermediates also continues to do a nice job, raising prices to more than offsetting rising input costs in a challenging raw material environment. EBIT in the quarter declined, as solid earnings growth in advanced materials was offset by other segments. We’ve continued to make strong progress for the variable margin per unit, which increased in the quarter through mix upgrade and prices mostly keeping up with the increasing raw material costs. This progress was offset by challenging year-over-year volume comparisons in both the fibers and additives and functional products segments as well as we continued to see some investments in growth. Earnings per share increased both year-over-year and sequentially due to solid opportune results, a lower effective tax rate and share repurchases resulting in lower share count. As always, we focus on driving value through every line of the income statement to deliver earnings per share growth. Overall, a strong third quarter. Moving next to the segment results and starting with advanced materials on slide 6, which delivered 9% volume growth in the third quarter. Sales revenue increased due to higher sales volume and continued improvement in product mix across the segment, driven by double digit growth in premium products such as Tritan copolyester, Saflex heads up display and performance films. EBIT increased primarily due to higher sales volume and improved product mix, partially offset by higher raw material cost and increased growth…

Thanks, Kurt. On slide 11, I'll discuss our 2018 outlook. For the first nine months of 2018, we delivered strong volume growth and mix improvement in our specialty segments, but were two times the growth in the underlying markets. We're continuing to benefit from innovation driven growth model. We're making great progress on new business revenue closures, which is up 20% through the first nine months and we expect to continue creating our own growth in the many applications across the company through innovation enabling us to grow faster than the underlying markets. We’re also on track to offset inflation through productivity. And as I mentioned in my first slide, we returned $615 million to our stockholders through the first nine months, including accelerating our share repurchase program. Lastly, we have improved our effective tax rate. At the same time, while we focus on what we can control, we're managing a number of headwinds. We're seeing some pockets of destocking, but no evidence of a broader slowdown, with the exception of autos in China. We've also seen higher raw material and energy prices, although these are volatile as we've seen over the last several days and we have some limited exposure to trade disputes, particularly in fibers. Taking all this together, we expect that the EPS growth will remain at the 10% to 14% range and will likely be towards the bottom of that range. And as Kurt mentioned, we have a path to deliver over $1.1 billion of free cash flow, which is one of the strongest in the industry and reflects our outstanding performance, especially in this inflationary environment. On slide 12, let me make a few comments about our expectations for 2019 and summarize where we are. As we look at 2019, we have a couple of…

Thanks, Mark. We've got a lot of people on the line this morning and we'd like to get to as many of the questions as possible, so I ask that you please limit yourself to one question and one follow up. With that, Cody, we are ready for questions.

[Operator Instructions] We'll take our first question from David Begleiter with Deutsche Bank.

Mark, just on 2019 guidance, when do you expect selling prices to catch up the raw materials in the specialty businesses?

Hi, David. So, we're making great progress on that front already through the third and fourth quarter. AFP has had six consecutive quarters of price increases, making good progress on that and we expect that as we work through the fourth quarter and into the first quarter, we should be in a good position to get our prices to catch up. I mean, the fourth quarter includes normal seasonality and destocking as we've mentioned. So, we'll get some of it then, but the remainder in the first quarter.

Very good. And Curt, just in 2019, how should we think about share buybacks versus debt reduction in terms of the capital deployment for next year?

So it starts with, you should assume that our free cash flow will grow, because we're doing a great job, converting net earnings to cash flow. We’ll be assessing how much de-leveraging. I think our de-leveraging will decline, in part, that will determine based on how much EBITDA growth we expect next year. So if you think about cash flow deployment, it's going to be first to pay that nice dividend that we have, which is yielding even better than it was a month ago. Secondly, it will be doing some continuing leveraging, but less than what we did this year and in absence of bolt-ons, it will be deployed for share repurchases.

We’ll now move on to our next question from Vince Andrews with Morgan Stanley.

Just, you referenced the de-stocking, can you just clarify, are you seeing any destocking outside of something as a derivative of auto production?

Sure, Vince. So right now, it's always hard to know exactly what's going on, especially at the beginning of the fourth quarter. We certainly see some destocking in coatings and tires as you noted that is associated with the auto industry. We are anticipating that there's some potential de-stocking that could be driven by trade concerns in China about our customers’ ability to export back to the US, which would be more sort of specialty plastics, consumer durable oriented. But I’d tell you right now, orders are holding up relatively well in October across the specialties. So, outside of autos, where we can see some de-stocking, it's more about anticipation of these issues more than things we see at the moment.

Okay. That's good to hear. And just as a follow-up, on the cash flow statement, what's the big swing factor in this other items net line?

What you see in the other net just in the third quarter is we did our settlement with our insurance provider for the coal gas incident. That created a $65 million receivable at the end of September, which we've not collected in October. Another way to think about it, as you think about our seasonality of cash flows, as I mentioned, the net impact is going to be roughly $25 million on cash this year. So if you assume that $65 million benefit in fourth quarter, that means our cash flows have been hurt mostly this year and a good part of that was in the third quarter. So that's what you're seeing is the seasonality of cash flows, but that specific item that you're seeing in other is a $65 million insurance receivable at the end of September.

We’ll now take our next question from Frank Mitsch with Fermium Research.

Following up on the destocking question, I believe you said the pace of business in October was holding up well and kind of your guidance is anticipation of these issues, are you meaning to say that you're leaving yourself some wiggle room in terms of the guidance of the various segments or you have pretty clear line of sight that come November, come December, you're going to be hit with these issues.

Well, Frank, I think that any fourth quarter is a tough one to predict. There's always a certain amount of seasonal decline due to normal de-stocking and demand trends. Obviously, we're in a much more volatile time right now when you see what everyone else is saying around the industry. I think our guidance is pretty good. It does include some anticipation. When you think about the fourth quarter, you've got a couple of factors. One is the de-stocking issue as we've identified and it's our best estimation. You've also got raw materials, prices still chasing raw materials I'd say and AM, we feel good, we've implemented some price increases in October that have gone quite well to start catching up to PX. And so I think we're making really good progress there to get to where we need to be by the first quarter with where we think PX prices are going to sort of trend off. And in AFP, we’re still doing the same thing, which is managing our price relative to rise, with the exception of adhesives, where we have been talking about a known coming challenge for quite some time. So when you put those two things together and you've got a bit of a tough comp as well, when you think about the fourth quarter, we have some higher shutdown costs, you have some of those solar fills that were really strong in the third quarter of AFP. It was also about a third of them were in the fourth quarter. So there's a lot of things we're trying to balance in that guidance. But we still feel it's a very good fourth quarter.

And Curt, I couldn't help, but notice a little bit of the [indiscernible] on the dividend yields. To what extent and you outlined what your thoughts were in 2019, but – and you’ve been accelerating your repurchase here in 2018 versus your original guidance there. What should we be expecting, given the decline here in Q4?

Welcome back, Frank. As it relates to the share repurchases, we're going to be disciplined with our capital allocation and we're going to complete utilizing $300 million of free cash flow to de-lever. So, you can do the math off of our 1.1 billion to determine kind of roughly how much share purchases we’ll be doing this quarter and I can assure you what the discipline that our treasury team executes, we've been in the market with 10b5-1 plan. So, we’ve been in the market all year. We’re going to be in the market in the fourth quarter and I can assure you, we’re going to be in market next year as we continue to repurchase share as part of our disciplined capital allocation philosophy.

We’ll now move on to our next question from PJ Juvekar with Citi.

Good morning and good quarter in advanced materials. Your volumes have been growing nicely at high single digits for a few quarters, but prices are not following. Is that just a lag or is that a deliberate strategy, so that you can push classics like Tritan into new applications.

So, there are two different sides of this story as we've discussed in the past. The -- first of all, we're very happy about advanced materials and the strong progress that’s having, delivering very strong growth, relative to the underlying markets across the whole business. So the top line has been great, the mix upgrade has been great. Within the third quarter, PX prices moved up pretty dramatically within the quarter and most of that's clearly pricing. So, you couldn’t really take action on that dynamic until you got to October 1, which we did and we've introduced a price increase that should cover most of that PX increase, as we work through the fourth quarter. So if you look at our history on that side of things and all of our copolyester related products, I think we've actually managed price to rise fairly well. As we said in the last call, on the interlayers business, we have had an intentional strategy of sharing some of the scale up of our high end specialties, heads up display, and acoustics. As we ramp those products out, get more cost efficiency in how we make them, we've shared some pricing on that with them to support their growth, which has been exceptionally strong and we have very high double digit growth in heads up display, strong growth continues in acoustics that drives a significant amount of earnings increase on the mix side that is far more valuable than the modest price declines we've been sharing with them, as we gain efficiency on the fixed cost leverage. So net, there are two different stories and strategies there, both of them working incredibly well and I think we're on track to deliver good growth. It's important to remember that it's not just price to rise as part of the story in the third quarter and the fourth, is the growth investments we've made in this segment, which in the third quarter was around $10 million higher growth costs than 2017. So when you sort of think about those two factors put together, it was actually very strong results for AM.

And just on strategy front, in last three years, you stayed away from big M&A after acquiring solution Taminco, are there smaller bolt-on deals that you're looking at that you can add to the portfolio and at what point do you feel that you can go back and look for a bigger deal after that you’ve grown this portfolio now in last three years?

So, no change in our philosophy, PJ. We've been looking primarily at bolt-on acquisitions. There's things in the pipeline, we're going to continue to be disciplined, as we go through that process, who knows maybe some of this market volatility will create some closure in bid ask spreads that we're encountering in some of our activity out there. So again nothing eminent right now on the bolt-on acquisition front and we're going to remain patient and a disciplined buyer.

Yeah. I would just add that on the large M&A question, we're actually quite happy with the portfolio we have. I think we're well ahead of the industry in being very disciplined in portfolio management. As you all know, we divested a lot of commodity businesses, 3.5 billion in revenue and we did some substantial acquisitions with solution Taminco and a few bolt-ons that got us over 4 billion in revenue, dramatically improving the structural quality of our EBIT margins as well as improving the stability and ability to create our own growth in times like this where economics -- the macro economy is a little less certain. So we feel like we've done what we need to do in improving the quality of our portfolio. We're not looking for large M&A at this stage, because we’ve done the transformation we need, we're not just focused on bolt-on that as Curt said, much more importantly, our growth model is really paying off every day. We're driving a lot of innovation and growth across AM and AFP where we create our own growth and want to make sure we get a good return on investment for these acquisitions, which are a lot of the growth that we're delivering through the revenue synergies with them.

We’ll hear now from Robert Koort with Goldman Sachs.

I was wondering if you could talk a little bit more detail around the tires margin [indiscernible]. It does seem like maybe some of the tire manufacturers and a few other chemical companies in that space have sounded a little bit more somber. Can you give us a sense of what you're seeing on sell-through you think there versus maybe the destocking issue that you talked about?

Hey, Bob, it’s good to hear from you. So, we see the primary demand situation in tires similar, which is it's relatively slow. It's important to keep in mind that tire sales are also about 75% replacement. So, they’re relatively stable as well when you think about it over time in macroeconomic uncertainty, but that market isn't growing that fast. We've been benefiting from a lot of growth above market on things like our tire resins and making sure we’re aligned with the right customers in China who are doing more of the consolidating of the other tire companies and picking up some growth from that. More importantly, we are in a great position right now with launching our new Cure Pro product from our new Crystex technology into the marketplace. It's being very well received and to bring significantly better performance in the products that are currently on the market, including our own by helping tire companies improve mixing efficiency anywhere from 15% to 20 plus percent. So right now, when you're trying to manage costs and be very efficient in our customer base, this is a highly valuable product and we expect to see good growth from leveraging that fixed cost that we have as a headwind this year, turning that into leverage earnings growth next year, but yeah, the overall market is going slow. We don't see it any differently. I would note we're more connected to commercial tires and commercial demand, so that's actually been quite attractive, especially in North America.

And then shifting over to the [indiscernible] business, have you noticed -- there's been some puts and takes around demand trends I guess in active ingredients and what's going on there. Has that business been relatively stable or what's sort of the outlook in the crop chemical part of that business?

So, the business has been stable. There's always been continued regulation in Europe around components of crop protection products or products in total and we continue to have some degree of restrictions on some of those products we have had in Europe, but it's just more of the same. That's been going on for several years. I wouldn't call it anything particularly new. I do -- have some upside that I think we didn't have when we bought Taminco as we’ve worked to help them have a more global reach in their commercial execution capabilities, we've been able to help them create a lot more growth from products like their growth regular products in Canada and North America by bringing a better global reach to that business. So while we have these trends in Europe that have been with us for years, we're now accelerating growth in other marketplaces to sort of manage against that and so the business overall net is very stable and very profitable.

And we’ll move on to our next question from Aleksey Yefremov from Nomura Instinet.

Your preliminary thoughts on 2019 EPS. Does this growth rate include any buybacks?

Yes, growth rate would include the buyback plans we have, yes.

And Mark, on Tritan, following the expansion, I guess your growth here is progressing really nicely. Do you have any thoughts on how soon you could sell out this expansion?

Well, we doubled our capacity. So, the very significant capital investment, which is why the growth headwinds this year are material relative to last year. So in talking to overnight, but with the continued solid and very strong growth we're seeing across the marketplaces in consumer durables, now reading on this medical application environment and a variety of new applications, it's sort of three, four years to fill it out.

We’ll now take our next question from Jim Sheehan with SunTrust.

Regarding the trade dispute with China, can you talk about why you're optimistic this issue will be resolved in 2019?

Well, first of all, we're not trying to predict when the trade issue gets resolved. That's at a better much higher level than my pay grade. But what we're saying is, like all companies, there are mitigating actions you can take to sort of minimize your exposure to some of these trade issues. We’re a multinational company, we have assets around the world, not just in the US. And so, we have options we can work on to mitigate that exposure in fibers and in other products as well.

And can you update us on your access ethylene position?

Sure. So, we continue to sort of do grade work in mitigating our exposure to the ethylene market. As we mentioned in the last call, there are two different things we're doing. So for the back half of this year, we've significantly reduced the amount of ethylene we’re selling by reconfiguring how we run our crackers, the shutdowns that we had, in particular, the unplanned shutdown that we're forced in to buy our industrial gas supplier in the second quarter allowed us to accumulate quite a bit of propylene in inventory. So that allows us to run our crackers in a different way in the back half of this year, minimizing ethylene production that comes out of bit less propylene and storing a bit of ethylene. And so that takes us pretty much out of the ethylene market for the back half of this year. That's not sustainable, which is why we're making the RGP investment to dramatically reconfigure our cracker and give it more flexibility to reduce the amount of ethylene we're producing. So as you look at next year, and how this investment will allow us to operate, we can reduce our ethylene production by about 80%, relative to normal and that allows us to significantly reduce our exposure there. The RGP investment also produces more propylene from the production process as well as reducing the ethylene and then the feed slate changes pretty significantly in how we're feeding our crackers. So, our propane purchases drop in half. Our ethane purchases are about 20% less, we’re buying about 150,000 tons of RGP to get this result. And so what we've done is shift significantly our propylene to propane spread volatility towards PGP to RGP, which is much more stable if you look at history and allows us to significantly reduce our olefin volatility exposure in next year and retain flexibility, if it gets very attractive, we can switch back and take advantage of that. And this is $20 million investment with a payback less than -- in less than a year, so it's just a great investment opportunity for us.

We’ll now take our next question from Jeff Zekauskas with JP Morgan.

Your SG&A costs are now in the mid-170s and in the first half of the year, they were in the mid-180s. Is the decrease a one-off item or is SG&A at a different and lower level? And then secondly in additives and functional products, if you ex out the solar comparisons, what was the volume growth in the quarter?

So Jeff, on the SG&A, I think maybe the way I'd answer that is let me just talk about growth investment. We are seeing growth investments during the course of this year. You see that in SG&A and R&D. That's all a part of our plan of building capabilities, particularly application development activities. So over time, you actually should expect SG&A and R&D to increase kind of throughout the year. Quarter to quarter, there can be variables that change SG&A, you saw some of that in the third quarter. I'd also say that with the current economic environment, maybe we tightened up our SG&A a little bit more in the third quarter. So you should see SG&A growing over time, third quarter was just some variability and let me just close out with a remainder, so our SG&A and R&D is still one of the lowest in the industry as a percentage of sales.

Part of what I like about our strategy and our continued discipline about protecting shareholder value is how we make sure we're getting a good return on every dollar, not just in the SG&A, on the R&D. We have made tremendous success in repurposing or refocusing the R&D resources. So within our spend, we've doubled the amount of people working on application development, reducing what we're working on on some process elements that weren't as critical in creating value for shareholders. And so I think, we have a great track record of being disciplined, but overall for the year, you're still going to see about a $50 million headwind in growth costs on a full year basis, 30 plus of that is in the manufacturing cost and about 20 in the SG&A and R&D, but we do have some productivity offsetting the net spend that you're going to see show up on the P&L.

What will end on the AFP issue, if you ex out the solar comparison, what would have been your volume growth in that quarter?

I roughly thought half and half, Jeff. So about half of the 14% volume growth rate last year was the solar performance. So when you think about that and back that out of the results we have this year, you're talking sort of 8% volume growth year-over-year in AFP and everything else. So, it's a strong story of continued growth in that business.

We’ll now take our next question from Mike Sison with KeyBanc.

Mark, when you think about ’19, I know it’s a little bit early to give specific guidance by segment, but can you maybe gauge how much of the growth will come from your specialty businesses, they were really the key drivers this year and relative to the other segment.

Yes. Sure, Mike. So, as I said in the prepared remarks, the specialty businesses, which is 70% of earnings and we're driving to be a higher percentage of our earnings will continue to be the horses that drive forward and build our earnings growth next year. So, we will continue to see a good growth in AFP and strong in AM. And, I think fibers will stabilize, CI with the investments we're making RGP, have the opportunity to be a little bit better next year than this year, but I think it's way early to call any of these items. But, I do think overall, we're driving towards a pretty solid growth. I’d also sort of remind you not to overly focus on the back half of this year on some of the dynamics that sort of feed into how we go towards next year. You've got a lot of de-stocking going on, as we expect some of that in pockets in AFP and maybe a little bit in AM. You've got prices catching up direct, through the back half of this year and some of these isolated trade issues around fibers that on a full year basis next year really isn't much headwind, because now it's China tow is just so small. And importantly, tough comp in ’17 to ’18 that will now put behind us. So overall, we feel like we're in a really good position to drive volume growth in the specialties, leverage all the fixed cost investments that we've made and generate a lot of free cash flow and even on the price front, to rise if stabilize as I expect they will, given the environment we’re in, that doesn't become the headwind or chasing all year like, we did this year and that's not a drag next year.

Great. And a quick follow-up on fibers, how big is the specialty fibers business and how much of that segment do you think you can convert over time and maybe remind us what are the end markets that that specialty fibers are penetrating and growing in?

So, in fibers growth and repurposing this business to become a specialty business again is just a great story and we're really excited about it. The key markets are textiles and non-wovens and we have a real opportunity here with the change in sustainability and environmental trends about products that are certainly more environmentally friendly, so the timing couldn't be better for us to take advantage of that trend. So, Naia, our ester yarns, it's a biopolymer made from sustainable certified force. And we've made some investments to materially improve its performance in fashion industry, so you're talking about fast fashion and luxury fashion, women's wear applications, intimate apparel applications is where we're going with those textiles and where we have a product that feels like silk at a much cheaper price has better breathability by far than some of the other alternatives in the marketplace and is a biopolymer that can be biodegradable. So for the fashion history, especially the millennials who are driving a lot of these decisions today, this is very exciting to them and I was just at the largest textile show in Paris a couple of weeks ago in a meeting with both textile mills and brands and it was just amazing to see how excited they were about this story and it all focused on sustainability and how we can sort of help them improve their position in the marketplace with it. So that's going great, same story in non-wovens where a lot of non-woven things like facial wipes, baby wipes, things like that are trying to improve their sustainable position as well as biopolymers and biodegradability that we can offer up with our products. So, 30% growth rate, even though it's a small part of the overall fibers business today and we're making great progress. Now, it's up to about 15% of the segment revenue and the margins are good. They're certainly not tow margins, but they're attractive margins and we're excited about where we're going with this business.

We’ll now move on to our next question from John Roberts with UBS.

A quick question on Tritan and then on fibers. I've always thought about Tritan’s strength was in the high clarity applications, is it useful to think about Tritan’s sales, how much is high clearly versus how much are other properties that’s driving the use of Tritan?

Historically, you're absolutely right. I mean, the value proposition we've had historically and continues in consumer durables and some medical applications is high clarity parts very strong, high strength through requirement, chemical resistant requirements, and BPA free and that's been a core part of it. But the story we told you today has actually opened up an entirely new space that is more about compounding Tritan into opaque applications. Obviously, that's not been our historical footprint, but we're now expanding into opening up that entire market to us as well through Tritan and our new Treva, so, those plastic launch. So the housing is replacing all opaque. It's the housings of all these medical devices, you’re typically compounding it with impact modifiers and other performance things or even with ABS or something that adds additional dimensional stability. But it's a whole new addressable market for us going forward.

And then on fibers, margins I think are still higher on [indiscernible] than they are in the new application, so should we expect earnings growth to lag volume growth in the fiber segment?

Certainly, margins are different, but I'd still say they’re reasonably attractive, more like the company average. And in places, it's better than that. It's a relative growth rate issue, but the reality is to drive overall earnings growth, as we push forward, it's possible because you have, Tel is only going down 2% a year at this stage going forward and you've got 30% growth or 20% growth in certain applications. The math is still going to work to get you sort of net earnings growth on this, which is why we're repurposing this capacity to support this growth as we go forward. But it's still going to take a little bit of time. 2019 is about stability and then moving towards growth, as we go into ’20.

We’ll hear now from Laurence Alexander with Jefferies.

Hi. Two quick clarification, you gave in the prepared remarks a little bit of a laundry list of items that helps you on the free cash flow side. As we think about the bridge for next year, do you have similar items to offset or will the free cash flow conversion be a little bit lower. And secondly, I guess two threats today and I just wondered if you could parse a little bit how you're thinking about them. One seems to be that apart from some soft areas of de-stocking, demand is overall okay and the other part is that the portfolio is more resilient. Are you implying that, even given what we've already seen in terms of -- or what you're seeing with customer conversations, we would have seen in the back half of the year, more lumpiness without the efforts you've made in the last few years or do you think it's more just that demand is actually fairly benign and that we haven't really stress tested the new portfolio mix.

Right. So let me just talk to the free cash flow, maybe a way to bring this to life a little bit, let’s just kind of bridge fourth quarter for a little bit. If you remember, fourth quarter of last year, we generated $435 million of free cash flow. In the fourth quarter, we’re going to have an insurance payment that we've already received as well as we’re going to have $50 million of lower CapEx. So in order to achieve our $1.1 billion of free cash flow, we are only needing some 60 million plus of additional free cash flow generation over last year and those are the types of working capital dynamics that we're working through. As you think about the conversion next year, I think we'll still have strong conversion of earnings next year. We might have CapEx, maybe a little less than it is this year. We won't have the net $25 million headwind, the insurance and then it's going to come down to how well working capital evolves, if you assume working capital, raw material cost normalize, that means you won't have the working capital challenges that you’ve had this year. So I see a path where we're going to continue to have good conversion. I don't see that conversion rate coming down.

On the second question, sequentially, I think it’s probably better to go at it, because the ’17 compares are tough in some of the businesses, especially AFP and fibers. But the trends we see sequentially in demand are relatively stable. So, we continue to see solid growth in the specialties. You're always going to see normal seasonality, as you go into the fourth quarter. And then at the AM level, clearly, we had strong volume growth in AFP when you adjust for the solar fills, you had strong volume growth. I think in chemical intermediates, there's always a certain amount of volatility. We saw some demand come off in the third quarter, some of that, which is seasonal in ag and a few others shut down dynamics of customers. Nothing's sort of concerning. But as you sort of go into the fourth quarter, with this inflationary raw material environment that we've been in through the third quarter, it's natural to expect de-stocking, especially in places where demand has moderated a bit like the transportation sector, as we've highlighted in sort of coatings and tires or some trade related caution there. So, I think it's really important we don't overreact to what's going on in the fourth quarter right now. From what we see, it appears to be mostly de-stocking. It's always hard to know exactly what's going on with the primary demand, especially in a fourth quarter when there is normal de-stocking anyway. And so, we're not in a position where we're sitting there, saying that we see a primary demand problem out there and the marketplace is outside of the obvious sort of stuff going on in autos. And it's really important to remind you all about autos in Eastman in the way it works. Overall, we've said our…

We’ll take our next question from Matthew Blair with Tudor, Pickering & Holt.

Do you have any more color on the 15% effective tax rate in the quarter? It seemed a little low. And then your guidance for full year 2018 I think implies Q4 tax should step up. Could you explain why that is?

Sure. That's just the seasonality of the effective tax rate. Earlier this year, we thought we’d be in the 18% to 20% range, due to -- as we continue to evaluate the various moving parts of our effective tax rate, it actually improved to 17% for the year. What you see in the third quarter is just a catch up to that 17% rate on a year-to-date basis. But for the full year of ’18, it will be around 17% and I can assure you we're working towards that rate next year.

And then so if I back out the tax benefit to EPS that you received in 2018, which I think is about 4%, it seems like your 8% to 12% EPS growth target going forward is actually a little bit better than what you're likely to put up this year, which I don't know I guess that's a little surprising, just considering all the talk about the slower growth in the back half of this year. So is that the right interpretation? Is there anything else that we should be taking into account?

So, no, when I think about 2018, there are some moving parts between EBIT and tax rate. So some of our year-over-year growth this year is improvement in tax rate, a little bit better than we thought last year. But when you go in to ’19, the tax rate should not be a headwind or a tailwind and it’s all around underlying performance of the business that Mark already talked about. I’m sorry, Cody, let’s make the next question the last one please.

Absolutely. We’ll take our final question from Kevin McCarthy with Vertical Research Partners.

I just wanted to come back to the capital expenditure profile. It seems to me you've completed quite a few projects over the last 18 months. Tritan most notably, but Crystex and other product lines. As I listen to Curt's comments about CapEx, it seems like you could trend down slightly in 2019. So is it the case that you've got enough capacity across the portfolio at this point or are there other prospective growth projects that you plan to layer in over the next several quarters?

I think, Kevin, your intuition is correct. We do expect slightly lower capital expenditures in 2019 versus ’18. Part of that is, keep in mind, some of the capital expenditures were for the coal gas recovery. So when you think about maintenance CapEx, it’s in that 300 million and 350 million. We showed at the Innovation Day, it could be anywhere from 500 million to 600 million going to ’19, and probably be more towards that low end of that range.

Yeah. I think it also connects back to sort of the fixed cost leverage comment. As you think about next year, under the assumption the world's growing, we’ll have continued variable margin growth next year and a very different fixed cost situation where this year if you think about between the 50 million of growth investment costs and if you look at the sort of planned and unplanned operational headwinds we had this year, there's another 50 million. So you've got $100 million of headwind against variable margin and growing EBIT in ’18 versus ’17. And if you think about how that translates to ’19, some of that annualize, so and that is down to sort of $75 million of tailwind, if you will of variable margins growing and how you have much less headwind in ’19 to ’18. So, there's considerable leverage here, which feeds into our view about how we can continue growing earnings into ’19, as we don't have another step up of these costs.

Okay. Thanks again, everyone for joining us this morning. We hope you have a great day.

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.