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Costa: 'We expect slower economic growth this year'

Hank Hayes • Jan 31, 2019 at 7:30 PM

KINGSPORT — Eastman saw mixed earnings results in 2018 due to a tough fourth quarter, and the company is predicting slower economic growth in 2019.

“We ended the year with a challenging fourth quarter primarily due to reduced demand for specialty products in China, as well as the slow flow-through of higher raw material costs in an environment of customer destocking beyond normal seasonality,” said Mark Costa, Eastman board chair and CEO. “The end result for the full year was adjusted (earnings per share) growth of 8 percent, within our targeted long-term range of 8-12 percent. Equally important, we delivered free cash flow of approximately $1.1 billion despite slowing economic growth and higher raw material costs. Consistent with our strategy, we made progress in a number of areas, including strong new business revenue growth and continued cost discipline. We remain confident in the resiliency of our portfolio and the sustainability of our strong cash flow going forward.”

Sales revenue in 2018 of $10.2 billion increased by 6 percent over 2017, driven by higher selling prices in three of four segments; solid volume growth and improved product mix; and favorable foreign currency exchange rates in the first half of the year. Sales revenue grew in all regions, demonstrating that Eastman’s strategy of driving growth through innovation is helping to offset slowing economic growth.

Reported earnings before interest and taxes (EBIT) increased primarily due to coal gasification incident insurance in 2018 and costs in 2017 and included pension and other post-retirement benefit plans with adjustments in both periods. Adjusted EBIT was flat for the full year, with 10 percent earnings growth in the first half mostly offset by a challenging fourth quarter.

Eastman noted the strong earnings in the first half of 2018 demonstrated the benefits of the company’s innovation-driven growth model and continued cost management, while the challenges in the fourth quarter included higher raw material, energy and distribution costs, the impact on demand of uncertainty from the U.S.–China trade dispute, and increased costs of approximately $25 million due to industrial gas supplier disruptions during the second quarter. Eastman also increased its growth investment by approximately $50 million in 2018.

Reported earnings per share declined primarily due to an estimated net tax benefit recognized in 2017 as a result of tax law changes. Adjusted earnings per share increased despite challenging macroeconomic conditions primarily due to share repurchases and a lower tax rate.

Commenting on the outlook for full-year 2019, Costa said: “We expect slower economic growth this year, with some of the challenges from the fourth quarter to persist in the first quarter. With this in mind, we remain focused on growing new business revenue leveraging our innovation-driven growth model. In addition, we expect to benefit from the flow-through of lower raw material costs, aggressive cost management and returning cash to stockholders through continued significant share repurchases. We expect these actions will more than offset the negative impact of a strengthening U.S. dollar and projected higher pension costs. We therefore expect adjusted (earnings per share) growth in 2019 to be between 6 and 10 percent.”

In 2018, Eastman reported cash from operating activities was $1.54 billion and free cash flow (cash from operating activities less net capital expenditures) was $1.08 billion. Priorities for uses of available cash include payment of the quarterly dividend, repayment of debt, funding targeted growth initiatives and repurchasing shares. In 2018, the company returned $718 million to stockholders, with $318 million in dividends and $400 million in share repurchases. In addition, the company repaid $316 million of debt, with total borrowings reduced by $372 million, including the impact of currency translation on the carrying value of euro-denominated borrowings.

Eastman stock closed Thursday at $80.62 per share, down about 2 percent.

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