Operator:

Good day, everyone, and welcome to the Second Quarter 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead, sir.

Operator:

Thank you. We'll now take our first question from Patrick Cunningham of Citigroup. Please go ahead.

Mark Costa:

Sure, and good morning, everyone. Love to talk about sort of where we are with methanolysis plant. I'm going to give a little context of the journey we've been on and then answer that specific feedstock question. We're very excited to be operational with the world's largest chemical recycling facility and we've made tremendous progress on this project and really showing what's possible in the world when it comes to recycled content and dealing with this challenge that we face. We are very excited that we're making on spec plastic from the output of this facility. We've actually produced on spec food grade Tritan with 75% rDMT and that's the most difficult product we have to make, the highest standards on clarity, a wide range of performance specs, and we're making these products with no materials of concern getting through the purification process. So a very safe product from garbage and that's an incredible accomplishment and a great job by our team in operating this plant and overcoming a series of challenges. We have had a lot of successes. As I said, we're making on spec product now. We are doing all of this with hard to recycle waste. Mechanical recyclers can't take back the food grades and send to landfill. We validated all of the unit ops and they can run at very high rates. We've had, as I mentioned, sustained rates in our prepared remarks of around 70% when you're running all the units together. And there's been one sort of small mechanical thing limiting us getting to 100% and we just recently made the change this week actually in fixing that one mechanical issue and we're ramping up to full rates. We have made a lot of progress on improving the mechanical reliability issues that we were facing in the startup of the process that we shared with you in the first quarter call. So when we took a variety of corrective actions on the early failures around instrumentation, valves, routine equipment, especially pumps, that has been effective, and we've seen much higher reliability across the plant. So as you said, the next step, as we're now moving to higher rates and a broader set of hard to recycle feedstock, we encountered some plugging issues. So to be clear, from the beginning of this process, we've been using hard to recycle material that can't be made back into food grade bottles mechanically. True to our strategy of dealing with this waste that doesn't have an alternative life. But we've been broadening that spectrum of different types of HTR recently, and we encountered some plugging issues in the front of the plant. I want to be clear that this is not about chemical impurities. It's not about processed chemistry. It took us a few weeks to really understand what was going on, but we realized that it was in the feedstock preparation and some of the fitness for use aspects of a few sources of material. Fortunately, the issues were relatively straightforward to address once we interested them, which just involves sort of optimizing sort of the feedstock form that we're using and dealing with some of the non-polymer waste that was in a few select sources of feedstock. So we're now implemented all those changes. We're ramping up, as I said, with the change also run at full rates and are confident all these changes will be effective and we'll be running very hard with the facility as we go through Q3 and Q4. The thing I would note is, this has been a journey. This is an incredibly complex plant to take garbage and turn it into clear, on spec polymer that doesn't have any materials of concern that can exist in that waste feedstock. So we've made a lot of investments in purification and how to manage all these different feedstocks. And we've learned a lot over the last five months, six months of startup. That I think is a huge competitive advantage for us. And frankly, there's a lot of strategic intellectual property we're gathering through this process. And then look back on it, I just can't reinforce enough the power and success of our team in enabling us to have this kind of success. I can't even imagine trying to build these kind of technologies and plants without the depth of technical expertise and the scale we have to throw at these kind of challenges. So, a great shout out to the team in overcoming these things. We're feeling very good about how we're moving forward and excited to serve customers as we ramp up volumes in the back half of the year.

Mark Costa:

Yes, good question. So when you look at sort of where we are with the Tritan market, a lot of that goes in consumer durables as everyone I think in the industry has called out that market's been weak. It continues to be weak. But we did see a significant amount of return in volume with the end of destocking. So a huge amount of the hit that we took in 2023 was associated with destocking. That volume has come back and the very high margins that go with it are certainly very helpful this year and will be going forward. We also continue to have a lot of wins just on the traditional value proposition of Tritan. So when you look at the compelling attributes of its heat resistance, its chemical resistance, its clarity, it being a safe product that's BPA free. We've always had a lot of volume wins in applications that's driven tremendous growth in this product area for over a decade. That engine's back in gear this year. We're winning on those value propositions a variety of places on top of end of destocking that's giving us good momentum. And then on top of that, we're now layering on recycled content. And for a lot of brands, that's really important. We have a lot of customers that have been with us for a long time that are using this recycled content claim as a way to enhance their product offering or drive new volume growth like P&G, NowGene, [indiscernible], LVMH, and L'Oreal, Estee Lauder, etc. You've seen the icon chart of all the customers we've had who are using in one form or another. And then we've -- what's really exciting is also opening up new markets for us to serve that wouldn't have originally been available for our value proposition. This is not a cheap polymer, so you really have to have a compelling value proposition and now you have people like Black & Decker doing a trial run as we told you about in tools and seeing that go very well with recycled content and expanding to a broader product line or [indiscernible] which is the leading supplier of housewares for food service type products for airlines and food service and them going to this product with the recycled content claim. So, lots of volume engagement. Customers are paying the premiums that we expect to make a return on this investment that we've made here in Kingsport. And so, as we looked at the volume bill this year and as we go into next year, we see the need for this additional capacity so we don't short the market, right? So we're moving to get that product, that line online in the sort of third quarters of next year as a way to keep on growing that business. So we feel good about it. Certainly, it's a tough economic time, but when the market recovers, that'll just be additional volume we have to serve. So, we feel like this is the right time.

Operator:

Thank you. The next question is from Josh Spector of UBS. Please go ahead.

Mark Costa:

We're actually in the process of ramping back up to higher rates. That sort of small mechanical change we made in the middle of the plant that was limiting rates, we just implemented and we're ramping up towards those higher rates right now. So we're not there yet.

Mark Costa:

Yes. So, I'm not going to repeat all the answer I just gave you, but we have a lot of customers obviously out there in the durable space as well as packaging cosmetics that are very interested and committed to using Tritan. Maye be they were buying it last year at certain premiums or continuing to buy it this year and we're accessing new markets. So the demand out there is real. The issue we face that I think everyone in the industry faces right now is that, it's a really tough economic environment. We have some version of stagflation. We have inflation still impacting consumers and demand being quite weak in many sort of discretionary markets. And durables is very connected to B&C, so when you see all that challenge, that's very real. And its duration, it's not just demand's weak, it's been weak for over two years now. And so that weighs on companies and their economics. So while they're very committed, we haven't seen anyone sort of cancel a program. They're also focused on managing their cost structure like everyone is right now. And so, the rate at which they're ramping up volume on some of the programs that we've won with these customers is going a bit slower than we thought. To be clear, that's a modest part of the overall adjustment we made in the $75 million of EBITDA incremental to last year down to $50 million. More than two-thirds of that adjustment is the cost of the conversation we just had about sort of run rates in the second quarter as we worked through some different issues. But there is a sort of modest adjustment we've made in our expectations around sort of volume ramp. I don't think it has any impact on next year. When we look at the number of wins we're having in different applications, the fact that at least the end market is now stable and destocking is behind us. Company that are now looking for ways to grow and create their own growth, just like we are trying to create our own growth with better value propositions in the marketplace. The brands are now switching to thinking about how do they do that as well. And so, I think those collaborations will be there. So we still feel like we're on track to go from our incremental $50 million of EBITDA this year to a run rate of $150 million of EBITDA by the end of next year. Otherwise, we wouldn't be starting to completing the Tritan line if we didn't see that volume coming.

Operator:

Thank you. The next question is from Frank Mitsch from Fermium Research. Please go ahead.

William McLain:

Yes, Frank, good morning and thank you. As we think about the guidance, obviously, we focused on keeping the midpoint at the guide of where we had it to start the year. Also, at the segment level, you saw some modest improvements in the AFP midpoint, as well as the midpoint decline in AM as Mark already highlighted around our view of the benefits of methanolysis and the ramp there. So as we think about it, we're driving strong growth year over year, 20%, narrowing the range we think was appropriate at this point in time. As we started the year, there's no significant primary demand increasing in the second year. We're doing well with driving our own growth. And we think, again, as we enter the second half, we're doing it from a strong position. And it's the factors of the $0.15 beat in Q2 being offset by the reduction in our methanolysis expectations.

Mark Costa:

Yes, so when you think about the variables on that, Frank, the biggest factor is demand. That's true for the impacts we had last year through how we had good results in 2021, 2022. And so, it's a macroeconomic question around just where does demand trend. I think we went out at the beginning of the year with a very sort of neutral approach about end markets being sort of similar to last year from an end market point of view, but benefiting from de-stocking. That seems to be playing out as we expected at this stage. So if the economy gets better, that'll be upside. If the economy gets worse, obviously, there'll be some risk within the range that we've given you. But I think that's the main factor. I mean, we feel good about our price management and feel confident in our commercial excellence to maintain our sort of price-cost relationships across our specialties. Obviously, there's a certain amount of spread and predictability in olefins and acetyls where you could get some volatility that's in the CI sector. Cost structure, we're very much on track to manage our costs. So the element that's material is really about the economy. We feel good about how we're creating a lot of our own growth this year with all the application wins that we've had in the sort of traditional specialty model plus the growth we expect in the circuit platform.

Mark Costa:

That's correct. We're assuming -- to be clear, in consumer discretionary markets, whether it's autos, B&C, durables, we're assuming that there's no improvement in the end market demand relative to last year. And that's been true how we've built our forecast every quarter. The stable markets, we do have a little bit of modest growth, call it, 2%, 3% in there that we've already seen in the first half of the year and we expect that to continue in the second half of the year. Those markets are like ag in its normal sort of cycle and pattern. Personal care, water treatment, those kind of more special sort of stable markets, which is about half of our revenue. So half of revenue has modest growth in it and half our revenue has no end market growth. But we have completely confirmed that the theory of a lack of de-stocking adds a lot of volume back is very true. We told you that we had a $450 million hit in variable margin last year from 2022 to 2023 when volume and mix declined. And part of our guidance, as we said, about $150 million of that, call it a third, would come back as a lack of de-stocking. And we very much have seen that in the first half and see that in the order books and in 3Q. So that sort of logic is playing out and that's sort of where we've built our midpoint of our guide.

Operator:

The next question is from Jeff Zekauskas from JP Morgan. Please go ahead.

William McLain:

Yes, Jeff, happy to clarify. So, as we think about the second half versus first half higher plant shutdowns, Q3 is primarily our acetyl cellulose extreme, which is about half, and then in Q3 and then in Q4 would be our polymer turnaround. And again, that represents about half. Yes, the transaction has closed last year also -- so that impact is not in our guidance. That's a headwind as we think about in our chemical intermediates business. The combination of, I'll call it, the Texas City divestiture as well as the key customer shutdown that we've highlighted was roughly $30 million headwind on a year-over-year basis.

Jeff Zekauskas:

Okay. You have another segment that's now losing a couple of hundred million a year, roughly, and that line used to lose $50 million a year. Is 200 -- Can you talk about the difference between $50 million in the old days and $200 million in the new days? And does that just extend out in time as the normal run rate, $200 million? And then going back to acetyls, what's the total acetyl year-over-year penalty?

Mark Costa:

So in addition to just the pre-production expense and efforts around the first plant, the engineering expense and project development expense around France project and Texas project, those costs are in that segment. So that's sort of been driving it. We would also note the pension costs are non-cash, so it's a headwind, but it's not a cash headwind. Jeff, I didn't understand your acetyl question. Could you expand on your question just a bit?

William McLain:

Jeff, I would highlight as we think about asset sales in whole, I think it's the $30 million plus the increased logistics cost that Mark has highlighted. We're not going to be more specific in that at this point.

Operator:

Thank you. The next question is from Aleksey Yefremov from KeyCorp. Please go ahead.

Mark Costa:

Yes. Great questions. So we're not going to get into our specific operating strategy, but we certainly intend to run above 70%. This is a new plant, new technology as we just discussed, a new set of feedstocks that vary significantly from one source to another, right? That's the significant difference in the circular economy versus the linear economy that's making products out of very consistent feedstock when you think about fossil feedstocks every day. So, we have been using a wide range of different sources of hard to recycle material. Some are better quality than others. When I talked about the 70%, that was running representative feedstock in what we think of -- what we call HTR, hard to recycle material. The limitations in run rate through really the first half of the year have been more mechanically related, or these sort of feedstock processing related issues about what we're putting in the plant that were sort of easily addressed. But when the plant, is it having some mechanical issues that we had to resolve, it runs really stably, right? We had this one issue about, once again, how to move some of the product from the middle of the plant to the back of the plant mechanically that took several improvements to address, the last final improvement we implemented this week. And that should get us into the sort of 90 plus percent range and how we can run the plant. But it's -- there are going to be times it's down for another issue that pops up, and we have a plant shut down for some sort of normal maintenance. But we feel like the forecast that we've built has us running much better in the back half than the first half, well in excess of customer demand. So we're confident we can serve customers with the ramp up in the volumes with the actions that we've taken.

Mark Costa:

Yes, it's a mix of both. So we certainly have loyal customers who've been buying Tritan for a long time that see a lot of value in the recycled content value proposition. But there's also -- we've been actually surprised by the number of application wins we're having with new customers and new end markets. So, if you ask me, from where our plan was in January to where we are today, we're actually growing volume in new wins and new customers more than I thought. And the upgrade of recycled content of some existing volumes is a bit slower for the economic reasons I mentioned. And so, we feel good about how we're broadening our customer base and our actual market base and where we can sell as we go into next year.

Operator:

The next question is from David Begleiter from Deutsche Bank. Please go ahead.

William McLain:

Good morning, David. Yes, I would say that this year is a normal level of maintenance. Obviously, we go through each of our streams. We talked about the polymers turnaround, the acetyls, and then -- and next year we will also have an olefins turnaround, in addition to that with our crackers. But at an overall expense level, I would say this year is normal. There could be a little bit of favorability on a year-over-year basis. Additionally, in the fourth quarter [Multiple Speakers] David, I would say, as we have the polymer shutdown here in Q4, we've got the additional....

David Begleiter:

Got it. And just two things, Mark, in methanolysis. The $50 million this year of EBITDA, can you break out between advanced materials and other? And just in the France project, reading the prepared comments doesn't seem like there was much progress the last three months. Can you provide any more color on what's happening with that project?

Mark Costa:

Yeah, when it comes to the next two projects, first we feel great about the Texas project. We're really proud to have Pepsi as such a large contracted and committed partner with that project. And that combined with the DOE grant helping offset capital inflation makes us feel great about that project. And we really think that project is going to be a great example of scalability of this platform where we can solve a plastic waste problem, use green technologies on the energy side to get the carbon footprint down up to 90%. And so, we're really helping customers with Scope 3 as well as on their mission, as well as solving this plastic waste problem. The French project, as we said before in this the first quarter call is moving along a bit slower than we originally expected. It's predominantly due to these customer contract conversations that we've had being slower than what we had expected originally. And then, of course, we're still working on the capital inflation on that project too and trying to lower the capital costs. We do have incentives in Europe too, but not quite at the same size as the IRA. So, it's really about those customer contract discussions, and it's similar to the conversation we just had. All the brands are very committed to recycling content goal, right? And dealing with the plastic waste crisis, as well as we are a significant contributor helping them lower their Scope 3 carbon emissions in Europe. That's equally, if not, more important win in most conversations with brands when you come down to -- continue to have very high recyclability goals, which by the way means the product is recyclable, but you can't actually keep that status for your product unless it's actually recycled. So they also have to deliver high recycled content goals in order to deliver that value. So that's, I don't think changed. They're not on track to hit their targets for 2025, partly because the economic situation had them moving a little bit slower, just like I explained with specialty customers where they're trying to manage costs in a difficult environment, partly because mechanical recycling isn't available to solve the problems. There isn't enough capacity to get to the targets that they have, especially in Europe, which starts for beverage bottles at 25% next year. And there's a lot of products and packages that they make that's not a clear water bottle, and those opaque colored trays, etc., different forms of PET. You can't -- in many of those you cannot actually use mechanical recycling to actually make those products. So they've got a challenge on how they're going to actually get recycled content into some of those products. So all that context is still very much intact and the conversations are still going on with all the customers. But you've got a market -- the PET market's at the bottom of the cycle right now, prices are incredibly low, economic times are tough, and so the regulations are a little unclear in Europe right now on what counts as recycled content and how that's going to work, that's causing the conversation to go slowly. But we fortunately don't see anyone dropping their engagement with us. It's just become slower in getting the contracts done.

Operator:

The next question is from Michael Leithead from Barclays. Please go ahead.

William McLain:

Yes, Mike. As Mark just highlighted, we're still working towards milestones on our circular projects, both in Longview and France. And France specifically, that's pushing the time lines out. So as we think about the CapEx required to achieve the growth, we've got the Kingsport project behind us here in first quarter of the year as we transitioned Also, as we highlighted, we're starting some of our other growth projects back up as we see the end of destocking and look forward with our innovation wins. So as we balance both of those out $650 million to $700 million, we think, is appropriate to achieve what we need to this year. And obviously, with that, we're not going to let cash sit on our balance sheet, and we increased our expectations for share repurchases for the full year to $300 million.

Mark Costa:

So the interlayers business is having a good year and delivering meaningful earnings growth relative to last year in a flat to slightly down auto market. So it's a great testament to our innovation strategy and delivering results, as well as operational excellence in running our plants well. So the earlier business is about a third of the revenue of the segment. And it's predominantly focused on auto, but it also has B and C in it, which is sort of flat to last year. But on the auto side, we're seeing a lot of earnings growth as we're creating our own growth. We're very much leveraged to two end markets, the luxury end market and the EV market is still growing better than the overall average auto build. So we're getting leverage out of that by being in the right market segments. And then within that, we're selling more and more premium products. As we highlighted in the prepared remarks, we've had a great story around HUD and multiple generations of that product that we've been offering to the marketplace in the future we're building for it. So that's being adopted for better security and safety driving reasons in the car. And so, that has a lot of market upside. Also, when you get to the EVs, as we said, there's about 3 times as much square meters of interlayer of laminated glass in an EV relative to an ICE car. And they're buying very high-performance products. They want to have a very technology-forward car in most EVs, especially in the luxury in the market where we're focused. And so, they want HUD. They've got solar control that they need to have. And so, all of that is driving high value at times a lot more square meters. And even though EVs are not growing as much as I think many people expected, still growing better than the ICE market and giving us leverage. So you've had, for example, HUD, 20% up year-over-year in volume at very high margins. And we've had solar control up about 12% year-over-year. So these markets are growing fast in a market that's challenged. It's a great story.

Duffy Fischer:

Yes, good morning, guys. First question is just again around methanolysis. So my understanding was the long pole in the tent has always been the cleanup on the back end and getting the impurities out. So were you able to -- when you're running at 70%, were you able to prove out that technology so that, that no longer is an issue? Or you still have to push it harder or get the MAX complexity of the H2R feedstock higher before you can kind of check that box and say that, that's a done deal?

Duffy Fischer:

Great. Thanks. And then just on the base business, two end markets you called out is kind of doing better on coatings and the other one, ag. So on ag, where are you now kind of on a run rate relative to when it started to fall off? Are you still well below kind of that normalized level? And then on coatings, what are you seeing there in volumes because your customers still seem to be putting up pretty weak numbers, but your volumes seem to be stronger than that?

Duffy Fischer:

Great. Thank you, guys.

Vincent Andrews:

Thank you. Mark, is there sort of a go/no-go date in terms of France? Or is there a plan B in case we're sitting here a couple of quarters from now and you still haven't made any progress on either the gating issues to move forward?

Vincent Andrews:

Okay. Good to hear. And if I could just get your thoughts on -- Obviously, I don't know what's going to happen with the election. But on one side of it, we could be entering back into a world with tariffs and things like that. And so, maybe you could just help us understand what your view on that would be? And what sort of the learnings for Eastman was from sort of that original tariff period of 2017, 2018 and what the impact could be this time around?

Vincent Andrews:

Thanks so much.

Operator:

Thank you. The next question is from John Roberts from Mizuho. Please go ahead.

Mark Costa:

So 80% of our revenue is tow. And obviously, that market has changed pretty substantially over the last two years as the utilization rates have become very high and customers have been focused on security supply. So we expect that market to continue to be stable. As we've mentioned, we have 100% of the business sort of contracted this year, 90% next year and 70% in 2026. So we feel pretty good about the contracts in place. There are obviously our provisions for natural market decline in the volume in those contracts, because it is still modestly declining industry when it comes to tow. And it does have pricing structures in there to adjust for changes substantial changes in raw material costs. So we're providing stability to both our customers as well as to us. So that part of the market, I think we feel pretty good about. When it comes to the textile business, it's been great. We've seen tremendous growth in the textile market. This is also another very challenged end market. If you go look at the fashion industry, it's not exactly growing. But yet our volumes have grown materially relative to that underlying market. The Naia fabric is just a great story. It's got half bio content and now with replacing coal with waste plastic. We can make the other half of the [indiscernible] to make the tow from wood pulp with waste plastic. So you got a very strong beginning of life story. And then this is going to become increasingly important is the microfibers that break off of clothing in the washing machine that end up in the ocean as microplastics, if it's a synthetic garment, ours will fully biodegrade. So we have plenty of certifications and studies that prove that our fibers will just naturally degrade at the same pace as cotton and have no sort of life in the environment. So that's exceptionally important and that's going to become a bigger and bigger value proposition because textiles is by far the number one source of microplastics in the ocean or water waste. And having a product that biodegrades, I think, is going to increasingly have a significant value proposition on that end-of-life proposition, not just the beginning of life. So we feel great about that business and expect it to continue to grow.

Operator:

Thank you. The next question is from Kevin McCarthy from VRP. Please go ahead.

Mark Costa:

Yes. [indiscernible] is going really well. We've had a great successful launch with Sealed Air in the marketplace. And we're now in a large grocery store that's doing a lot of trials where the product performance in the counter, if you will, is going really well. For those who are not as familiar with Aventa, we can replace polystyrene, expanded polystyrene, whether it's trays or clam shells in this case, trades for a protein like your chicken and pork and everything else that goes in the grocery store. We replaced all that as a drop in replacement to the existing polystyrene equipment with our cellulosic polymer, and it will get to the same low density as polystyrene and it is fully certified to biodegrade in home or industrial composting. And even if it ends up in landfill, it can biodegrade pretty much similar to paper. So it's a great story of end of life. It's got the same beginning of life story I just told you from Naia and how we can make it. But there's compostability where all these different food service products can just be thrown away with food and biodegrade is exceptionally important. There's a number of states that are now banning it, polystyrene from being used other states or companies willing just to have a natural -- sort of natural position. It also makes by the way, a phenomenally good straw, which is also compostable in rolling out in some major food chains right now as we speak. So the program is going well. The volume is ramping up. We have meaningful sort of commercial sales this year and expect a step up next year as we prove out this value proposition in these early trials. To answer your question about size, it can definitely be bigger than the Naia business. There's a significant amount of volume potential in this space, as you can imagine and the margins of this product are better than the company average. So as it grows, it's an upgrade for corporate earnings. It's an alternative market because it's made from the same exact [indiscernible] assay flake that we make tow out of or Naia out of and this uses the same polymer. So you've got flexibility to optimize value across tow, Naia and polystyrene off the same sort of fixed asset base. And when we look at it all together, we think that the growth curve of this will allow us and support us in expanding our [indiscernible] flake business over time. We look forward to telling you a lot more about this in the sort of circular day that Greg's scheduling. Because it's -- we'll cover the whole cellulose experience, as well as the polyester circular stream as we hope we better understand that when we break it down here at Kingsport. We're very much looking forward to getting all of you down here in Kingsport to see all these different products and assets in action.

Mark Costa:

Yes. So our guide is basically a similar -- from an earnings point of view, a similar quarter in Q3 to Q2. And we've got, the methanolysis coming online, as we said, where the volume is now ramping up into 3Q and in 4Q. So you'll see that pick up on the advanced materials side. We'll continue to have innovation driving growth above underlying markets in the automotive sector, [indiscernible] win sort of applications across the portfolio on our innovation like we do every year in our past in the more traditional sense, if you will. So we see all that sort of volume helping us as we go into the back half of the year. You will, obviously, see some normal seasonality drop in demand in the fourth quarter. We expect that to be not as much as you would normally see net because of the ramp-up in methanolysis and everything else. So the fourth quarter will be better than typical because of methanolysis and some of these other end market ramp-up of innovation sales. So I think that all that will sort of come together to sort of help. There's also spread tailwind that helps in the back half of the year. When you look at some of the trends in energy costs that are still the lower energy cost at the beginning of the year still flowing through inventory and PX is a bit lower now than where it was in the first half of the year. So those are all tailwinds. Then the headwind is about $25 million higher shutdown costs in the back half of the year, but that's mostly in Q4 than the first half, right? That nets off some of that volume growth.

Operator:

Thank you. So the final question we have today is from Laurence Alexander from Jefferies. Please go ahead.

Mark Costa:

So the first question, I'm going to answer. And the second question, I'm just not sure I understood the question. So the first question on heat transfer fluids, timing is everything in that business, and it's very hard to predict by quarter. So we've had a great year last year, $30 million lower this year. A lot of that $30 million will come back next year, specifically in the LNG space that are very high-value fills for us. But I would just think about it on an annual basis, it's very difficult to sort of predict exactly when fills occur quarter-by-quarter. On the second question, I apologize, but…

Laurence Alexander:

Thank you.

Operator:

This concludes today's call. Thank you for your participation. You may now disconnect.

Operator:

Good day, everyone, and welcome to the First Quarter 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com.

Greg Riddle:

Okay. Thank you, Lydia, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations.

Vincent Andrews:

Mark, if I could ask you on the France project, could you talk a little bit about what you think the scope of the timing delay might be? It sounds like they're still committed to going forward there, but have some issues to iron out on the customer and the cost side. So what type of timing delay are we talking about? And what's your confidence that both of those issues will be resolved?

Vincent Andrews:

Okay. And what about on the cost side of the equation? It seems like you're still working on that as well.

Aleksey Yefremov:

Mark, just to follow up on this, do you have any idea to what degree this delay in France could maybe help you load the Kingsport facility for specialty applications?

Aleksey Yefremov:

And on the annual guidance, a nice beat in Q1. You have a lot of details in the press release. But in general, a strong start of the year, why not raise the full year? Did anything change in the rest of the year to keep the guidance the same? Or is it more conservatism than anything else?

Operator:

The next question comes from Duffy Fischer of Goldman Sachs.

Mark Costa:

Sure, Duffy. It's great to get that question because we're really excited about having this first plant up and running. This will be the world's largest chemical recycling facility, and we're really excited to show the world what's possible, not just in generating earnings and growth for our owners, but in solving a pretty significant environmental problem.

Mark Costa:

Well, first and foremost, the sort of propylene derivatives are predominantly going to show up in CI as far as the value goes, but there are propylene derivatives that go into AFP as well as AM. So there's parts of the propylene stream that goes across a whole integrated complex.

Frank Mitsch:

Mark, I do appreciate the color on what's going on in France. And I'm trying to reconcile how the consumer brand companies that are out there, they're making promises about what percent they're going to have recycled by what year. And reasonable minds believe that they're not going to hit those targets. And so here is an opportunity to get on board with recycled content with you and yet it seems like they're waiting for government subsidies or mandates or something before they sign contracts.

Mark Costa:

So one, every customer we have that we're meeting with, I think, is highly committed to addressing the recycled content question and making sure that they're making their packaging with higher rates of recycled content. And frankly, many of the top brands have 100% goals on a lot of their packaging. They're way above any sort of regulatory policy that's out there. So I don't think there's any lack of commitment that they know this is important.

Frank Mitsch:

I appreciate that. I mean it seems like a slam dunk. You guys seem to be the best game in town for them to get to that chemical recycling, which is superior to mechanical recycling and yet it's taking a little bit slower.

Mark Costa:

It's a great story. And Patagonia is by far the leader like Europe around recycling. Patagonia has a take back program. So it's an active program with their customers to say when you're going to -- instead of throwing your garment away, your fleece vest or whatever it is you have, drop it off at a store and we'll take it back, so it doesn't end up in landfill. So it's actually a genuine circular program to prevent textiles being thrown away.

David Begleiter:

Mark, on the Longview project, if you could reach FID in Q3, what's the time line from there for construction and start-up?

David Begleiter:

And would the cost -- how would the cost compare to Kingsport?

Mark Costa:

I think that the Fibers trend from a volume point of view is a bit less in the back half of the year than the first half. So volume and earnings will be a little bit less in the back half of the year. And it's just timing of customer orders. It's sort of normal. We've always talked about this business. The order pattern of the customers is a little bit unpredictable across the year. So it's just that.

Operator:

Our next question comes from Jeff Zekauskas of JPMorgan.

William McLain:

The depreciable life, you can just think about around 20 years for the Kingsport facility. And honestly, that would be true for each of the large circular recycling plants that we're building.

Mark Costa:

Sure, Jeff, and nice compound question. You got two segments in one. So on AFP, we were sort of net down 1%, which I'd call mostly flat. And there are meaningful moving parts on that, Jeff. Coatings and care chemicals actually had very good growth sequentially into the first quarter. And then we had much lower specialty fluid bills and heat transfer fluids. And those two sort of offset each other.

John Roberts:

Sounds like the new Kingsport plant at the EBIT level will be modestly above breakeven in the second half. Do you still expect to get to corporate average or higher EBIT margins for that facility? And what happens with the other segment here as Kingsport moves out of other and you begin spending on Longview?

Operator:

The next question comes from Kevin McCarthy of Vertical Research Partners.

Mark Costa:

Yes. The model of this business has always been growing above end markets because you're winning in applications relative to some other material, right? And that's been true for Tritan forever as well as our copolyesters. So I'll just give you a couple of examples. One, we're growing a lot in hydration bottles in China. It wasn't a market for us. They're using Tritan, and we're seeing growth in those kind of products.

Patrick Cunningham:

You seem to be fairly confident that we're reconnecting the primary demand levels here. Did you get the sense that any of the volume improvement in the first quarter came from maybe some modest restocking? I know I have heard the potential that, that's happening on -- from paints and coatings producers or maybe there's people building safety stocks ahead of geopolitical disruption. So I'm just wondering if you've seen any of that in the first quarter and the expectations into 2Q?

William McLain:

Patrick, thanks for the question. The DOE program, as it's designed, basically provides a series of cash payments based on what we negotiate there that basically is providing an investment offset to the CapEx as we move along. So yes, the way I look at it is a direct offset to the capital. Basically, it will be progress payments across the almost 3 years of construction. So you've got that matching. And it's up to $375 million, as we've talked about.

Mark Costa:

I think it's too early to tell on the sort of premiums associated with decarbonization. It's very clear, people are willing to pay premiums for recycled content. It has very -- like product safety, plastic waste in the environment is a very emotional issue for consumers, and they're really, really not happy about it. And so they're not happy with the brands about it, and they're putting pressure on their politicians to address it.

Operator:

The next question comes from Josh Spector of UBS.

Joshua Spector:

I appreciate that. I guess if I try to wrap that all together, I mean, I struggle with if your volumes for 2019 versus 2018, are you flat? Are you down high single digits just considering the two offtakes? Is there a way to quantify that at all?

Operator:

Our next question comes from Laurence Alexander of Jefferies.

Mark Costa:

I don't think so. I just want to make sure I understand the question correctly before I try and answer it. We have three -- we have -- the normal core business that has maintenance, right? So there's always CapEx around that, call that in the $350 million range. And then there's always specialty investments we're making in growing our capacity to serve all the different specialty markets we have, which has always been part of our core model, and that takes you to -- with maintenance, $500 million to $600 million range on CapEx.

William McLain:

Yes. So what I would just say is we're confident that we can keep a strong investment grade balance sheet through that. You're seeing that as we updated our guidance on capital this year of being $700 million to $750 million, and expecting share repurchases of $200 million to $300 million.

Operator:

Our next question comes from Mike Sison of Wells Fargo.

William McLain:

Mike, let me start with last year, we had $1.6 billion of EBITDA. This year, our guidance is at $1.8 billion. And what I would say, as we've talked about normalized, that's going to be north of $2 billion. As we think about adding $150 million to $200 million for the Kingsport plant, that puts us in that $2.4 billion range.

Mark Costa:

If you do look at it on a historical comp basis, it's more compelling because we sold off $175 million of EBITDA in adhesives and tires and used the proceeds of that to reduce share count, basically neutralizing what we sold off in the EBITDA. So when you get to an EPS level, the leverage of that EBITDA number that Willie just told you is much more significant on the EPS and stock price basis.

Arun Viswanathan:

I had a similar question to Mike here. So if you think about your bridge to EPS, it looks like you're on the path to do about $3.60 or so in the first half and that would imply about to $4 to $4.40 for the second half, depending on where you land in the range, the midpoint to the upper end. And so that $4 to $4.40, maybe if you annualize that for next year, that's $8 to $8.80, which would kind of fall in line with your maybe 10% EPS growth targets, or 8% to 12%.

William McLain:

Yes. I think you framed it well, and I think it fits into the end market lens and the leverage to the volume growth that we've seen since 2019, which is it's basically been roughly flat to slightly negative since that timeline at the corporate level and the volume/mix line.

Greg Riddle:

Let's make the next question the last one, please.

Salvator Tiano:

So firstly, I wanted to ask a little bit about the France project and setting aside CapEx and regulations. How do you see the OpEx there? And especially because I think a couple of months ago, you signed an agreement with a recycling company to import PET waste from -- as far away as Italy and Spain, which obviously, it would mean pretty high feedstock [ costs ]. So does this mean that there could be -- that the France project may have elevated OpEx because of that, firstly?

Mark Costa:

So this is a large-scale project and aggregating feedstock from a wider range than just France, given the state of the current infrastructure in Europe for collection and sortation is the appropriate thing to do, right? France is a huge opportunity to improve in collections and sortation. It's part of why they want to really support this project.

William McLain:

On the volume, what I would say is -- there's only -- we've talked about Naia growing, and we expect that to grow on the -- as the date front, we would expect, I'll call it, flat to modestly down, but we also provide intermediates and flake, and we would expect that's where some of the volume would be declining.

Greg Riddle:

Okay. Thank you, everyone, for joining us today. I really hope you have a great day and a great weekend. Thank you.

Operator:

Good day everyone and welcome to the Fourth Quarter Full Year 2023 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead.

Mark Costa:

Before I jump into the Q&A, I do want to take the opportunity to recognize the team that's been working on the methanolysis plant. There's a huge team out there that's been working tremendously since our last call in October to commission and start up this facility and get us to the point where we're introducing feedstock. And that's a real remarkable accomplishment when you look over this time frame. They've worked incredibly hard through the holidays. They've made a lot of personal sacrifice and they've got us to this stage. And it's a real testament to their dedication and belief in the company and the excitement that every owner of this company has around building the circular economy. And it's also a real great example of the power of our Tennessee site. Its scale and integration has really enabled this start-up process to go this quickly and well. Because we have such a huge vast set of resources and capabilities, it literally allowed us to swing a lot of those people from different parts of the plant into this start-up process and make a significant difference. So I just wanted to express my thanks to all of the people who've been involved in this process. It's been a tremendous program and one that they really did make a lot of sacrifice and we deeply appreciate it. With that, we'll open it up to Q&A.

Josh Spector:

I actually wanted to follow up on the methanol facility first -- the methanolysis facility. So you're near getting on-spec product out. But I was wondering if you could talk through kind of the milestones as you go through this year. So when do you get to the point where you say yields are as expected? Do you think you can get to the full operational capacity and the cost structure and therefore, the EBITDA becomes in line with your long-term expectations?

Josh Spector:

And maybe just quickly, so as you go through all that, you made some comments that you wouldn't FID the next plant until this plant is done. I guess, is that just on-spec product? Or is there at some point, production yield or some other metric you're looking at to say we're good; the design is fine, there's -- like we're going to move ahead with that project? Because you seem pretty bullish about getting the customer commitments that second plant soon, so I'm just wondering what's the limiting factor there.

Operator:

Our next question comes from David Begleiter from Deutsche Bank.

Mark Costa:

Certainly, David. What I'd say is we are seeing stable -- I mean stabilization, absolutely. So our guidance is built on thinking that primary demand this year is going to be similar to last year in the sort of discretionary markets. And in the stable markets like personal care, water treatment, consumer packaging, et cetera, we would expect sort of modest growth from last year. Now to be clear, last year's demand -- primary demand was low. We're not predicting an improvement in any meaningful way from those sort of low levels we were at from -- through last year. What I would say is -- and automotive, we actually are -- was growing last year and we think it's going to be more flattish this year. So that's sort of where we are in the primary demand as we sort of showed on the slide that we supplied to you guys. The key driver for pretty significant volume increase for us this year versus last year is really the sort of lack of destocking when you think about the sort of volume mix impact of last year, driving earnings down about $450 million. And what we said in October, I think it's still true. You assume about 1/3 of that is destocking, it's probably a bit more than that but to play it safe, we'll call it 1/3. That's $150 million of a lack of a demand headwind from last year relative to this year. It's like an easy comp. And we can see the evidence of that playing out already in the fourth quarter in some markets and certainly into the first. So for example, the durables business which -- consumer durables business which is the one that was most impacted from a demand drop last year. The second half of last year was 40% higher in volumes than the first half of last year. So you've already seen a lot of the -- into destocking that's occurring there. We're still not where we want to be, of course, from a market demand point of view but it's very clear destocking is over. Same is true in a lot of the stable markets, right? Destocking occurred in personal care, water treatment, things like that in the first half of the year. By the tentative back half of the year, we're already getting to sort of some modest market growth. So for the overall year, demand was relatively flat to '22 in some of those markets. Building construction, I think, is probably still the most challenged. It was tough last year. The expectation is it's going to be tough this year, maybe even slightly down in primary demand. And -- but again, I think most of the destocking in that market has played out. By the end of the fourth quarter, there may be little pieces and parts into the first quarter, so you still get that lack of destocking lift in coatings and interlayers across AFP and AM. So I think that, that sort of on a full year basis, sort of how we look at it. And I would note of that $150 million of lack of destocking, 2/3 of it is in Advanced Materials. And the progression, I would say, through the quarter is looking good. So we had a soft start to January, February is already stronger orders in January and March looks good at this point with what we can see. So that's another point to keep in mind is the first quarter is a pretty slow start, as you can clearly see in our guide. But there's a lot of upside as you move into the second quarter from seasonal build. So we do expect a normal seasonal pattern to demand this year. So even though -- we're not saying primary demand is going to be a lot better. First quarter is always softer. Second, third quarter, stronger fourth quarter obviously comes off in a normal pattern for us. And that is how we've built our forecast around that. So that helps a lot for why things get better in the second quarter. And then there's some timing issues as we've identified in Fibers and fluids where -- particularly low orders in Fluids for especially heat transfer fluids. And then Fibers is a customer buying pattern thing. So those orders get a lot better in second quarter. So there's several things come together along with some better spread improvements that make second quarter a lot better than first quarter, because I'm sure a lot of people have questions on that as you look at our forecast.

Mark Costa:

So first of all, the spread management last year was great in AFP. So we do have a lot of business on price sort of cost pass-through contracts to give us very stable margins. So it was very helpful in '22 as raw materials were shooting upward, our prices kept track. And then as prices came off last year, raw material prices came off, the price contracts follow but there's a lag. So we had an improving spread last year for AFP for the year. And so that was a helpful tailwind to offset some of the volume headwinds we had in that segment. When you look at this year, there's just a bit of that lag problem again. So you've now got prices sort of stabilizing off. And so if you look at spreads this year relative to last year, there's going to be a bit of a headwind just in the way those sort of cost pass-through contracts work. So that's the primary driver of the sort of modest spread compression we expect this year relative to last year on AFP.

Frank Mitsch:

And if I could follow up in general on pricing. As you indicated in terms of the cost through, the pass-through contracts, '22, was a very good year. And as we're ending '23 here, pricing has been taking a bit of a hit. So how are you thinking overall about Eastman's pricing ability in 2024 for the overall enterprise?

Frank Mitsch:

Got it. All right. And then perhaps if you could -- I took a look year-over-year, Europe actually declined less than the United States. Is that really -- is that just a function of Europe entered the year in a worse position? Or is there anything that you can talk about in terms of perhaps any sort of green shoots or what have you in that part of the world?

Operator:

Our next question comes from Patrick Cunningham of Citigroup.

Mark Costa:

So first, given sort of the challenges we've had in Advanced Materials with pretty rough demand in the fourth quarter of '22 and the full year '23, we're starting with earning our way in our recovery and getting back above $450 million and then working to make it better than that. But just to give you the sort of key tailwinds that go with it, the biggest driver for Advanced Materials recovery is volume and mix, as I sort of pointed out. The corporate level, the story is pretty much an AM story. So 2/3 of that $150 million of a lack of destocking is sort of in the outlook for this segment. I told you durables has already had significant recovery. Medical has great underlying growth. It just had a lot of destocking from a lot of caution in the supply chain crisis that's still finishing itself out in the first quarter here but we can see that it will be less in the second quarter and then we'll just have the growth in the back half of the year. So you've got markets that have done a lot of destocking or stabilizing in the lack of destocking helping. Then you've got the return to seasonality. So even though the first quarter is still in recovery mode, when you look to the second quarter and beyond, you've got this return to normal seasonality to this segment. So Q2, Q3 is always stronger and we expect that to be there. And that order pattern I was talking about, about January, February, March is very much through in Advanced Materials where you can see that progression getting better. You've also got the ramp-up of the methanolysis plant, as you noted. So that's going to get you that incremental $50 million of EBITDA that you just mentioned that shows up in Advanced Materials. The other $25 million is a benefit for corporate other, just to be clear which is where the pre-production expenses of last year have been sitting. And then, you've got the automotive market that even though it's going to be flat, we have a tremendous track record of growing above that market with our great strength in HUD going into more and more cars, great strength of other premium products, the acoustics, et cetera. And then importantly, even though EV is maybe not growing as fast as everyone hoped, they're still growing much faster than ICE cars. And we get over 3x the amount of square meters in an EV than we do in an ICE car, very high-value products because there's a lot of functionality in those products that we sell to them -- so there's a lot of leverage there that goes beyond just destocking where we're creating our own growth through innovation in circular and automotive that will drive it. And as I said earlier, we expect the sort of price cost relationship to be somewhat neutral to last year. So that won't be a source of a tailwind but we don't expect it to really be a significant headwind either. But all that volume shows up and then with that, you get utilization, right? So you've got $100 million asset utilization headwind for managing inventory last year, that becomes a $50 million tailwind this year with this segment. So that also will be a driver for how you get above $450 million. So if you put all that math together, you can get to $450 million, you could get something greater than that. But I'd like to see proof in how the market is recovering and ramps up into the spring before we start getting beyond that.

Patrick Cunningham:

That's very helpful. And maybe just a follow-up on EVs, how much outperformance relative to the market did you see from EV and premium volume mix impact? And given that we've seen some of that headline deceleration in EVs and maybe sort of looming consumer weakness, do you see potential that, that mix improvement, outperformance is decelerating into 2024?

Operator:

Our next question comes from Vincent Andrews of Morgan Stanley.

Mark Costa:

Yes. So Vincent, you're absolutely right, that's an inflation environment. Certainly, if you go back to Investor Day in December of 2021, the capital estimates we had there for both Kingsport as well as these projects have gone up which is true for every construction project I've seen in the chemical industry and probably everywhere else. So we're all managing and dealing with that inflation. And a lot of what we saw happened in Kingsport went beyond just normal inflation, right? So we had a huge issue with the contractor not having skilled -- properly skilled labor and that productivity issue was the biggest issue we faced. We also had just an endless series of severe weather events along the way. And there was a lot of engineering work we were doing in that project, in outing of how to optimize the design of the project, why we're building it which is never ideal but allowed us probably to get 2 years ahead of the market and getting the product online. So we have a lot of learnings from the methanolysis project here that we're incorporating into France and second, U.S. projects, where we're very clear on how to build them a lot more efficiently than this first one. So what I'd say is, from a CapEx point of view, there is inflation that's occurred. There is some deflation that's now in front of us in materials, even contracts -- contractor. Labor availability is improving, as we sort of are in this sort of more recessionary cycle for the materials industry. They'll help sort of offset or slow down or maybe even decline some of that inflation. We are building the same plant again. As I said earlier, same scale, same design. Obviously, whatever learnings we have in Kingsport, we'll incorporate into it. But we're not trying to build something new, we're just building the same. And you get a lot of capital efficiency when you're building serial number 2 and number serial 3 at the same plant. So there will be benefits in controlling capital, both the cost and the predictability from that. Scopes will be completely locked up before we start building and that will help us control CapEx relative to what I just described in Kingsport. And we're using great firms, Technip, Fluor, for this -- these projects. And they've got access to an excellent set of contractors to do this. So we feel good about controlling the capital cost. They will certainly be a bit higher. And that's why we're also pursuing more incentives in both France and in the U.S. as part of the projects. So I think we feel good about that. What I would say is when we when we came up with the original economics and talked about returns on these projects, we gave ourselves some room for inflation and other challenges we might encounter. So the Kingsport project is still at 15% return on capital despite the capital increases. And these projects are still with the proper customer contracts and incentives, above 12% return on capital. So even with inflation, we feel good about the returns and feel that we're on track to get these 2 projects started this year, assuming we hit our requirements that I mentioned earlier, we've got to still get those 3 things, customers, incentives and finalize the capital number.

Michael Leithead:

First question, I wanted to circle back on the EPS outlook. I think the last number of years, the first quarter is roughly 25% of what Eastman's full year EPS turns out to be. This year, 1Q is maybe 18% or so, the full year guide. So can you talk through why this year's 1Q is a bit different? Is it mainly the lingering destocking that gets you a bit better into 2Q there?

Mark Costa:

I would just add, there's a couple of unique elements of Q1 beyond just the seasonal pattern where you've got oddly low orders from Fibers customers. No volume risk on the contract. They're just not buying as much in Q1 as they will do in Q2, Q3. And so that's sort of putting some pressure on there that's sort of beyond seasonality. Same is true in just timing of fluid fills, not much going on at all in Q1 but we have more in Q2. So there's a few aspects beyond just sort of normal that's sort of impacting the continued destocking in ag and medical, beyond just the seasonal pattern that mostly will play out in Q1.

Mark Costa:

I know -- with the schedule on now, we're more into '27 than '26 for when these projects will start, if you go back to sort of our original estimates. There's certainly efficiency and timing we're pursuing that will allow us to build these plants more efficiently but we're also building a lot more plants in this case, right? Because it's not just a methanolysis point we're building. We're building infrastructure on our greenfield side in France. We've got polymer lines that we're also building all at the same time. So when you put it all together, it just takes a certain amount of time to get it done. But the key is the markets are certainly very eager for the product. They have very significant deadlines in 2030 that they have to hit. So we're certainly well within making sure that we're ramping up and helping them get to their targets. But we want to make sure we've really learned everything we can from Kingsport before we start the construction. And so that's sort of that 6-, 9-month delay that's sort of occurred from what we were originally thinking.

Jeff Zekauskas:

I think in the Advanced Materials discussion, there was some noting of weak fourth quarter's amount. And Asian auto production is always very strong in the fourth quarter, especially EV production. So is it the case that your EV exposure in Advanced Materials is more with domestic in European companies rather than with Chinese companies?

Jeff Zekauskas:

I think in the original idea for the methanolysis project, you were going to spend $250 million for the project itself in Kingsport with an additional $175 million for Tritan. And I don't know if you partly built the Tritan plant or the Tritan plant wasn't built at all. But in the non-Titan piece, the original idea was $250 million. What did you spend? And in the future plans, I believe the estimate was $600 million to $800 million. What is the estimate now, in that what you say is that you have a good return on capital? Or you think you can work that out with your customer base? But the customer -- you need to have an expectation of what the capital expenditures are in order to negotiate a level of a good return on capital. So I think originally, all of this was supposed to cost $1.8 billion. What's the number now? Can you help us?

Mark Costa:

But -- there's no question that the capital numbers -- I'm sorry, just the capital numbers are up. We're also pursuing a lot more incentives to offset some of those capital numbers. So until we get that all finalized, I don't want to just keep updating numbers. So once we have clarity on them and the total economics as well as what we achieved with customers on the pricing premiums, we can get to fund it. We will be able to sort of give you a more clear answer on your questions. I mean the incremental $30 million of depreciation, a good portion, if not all but a good portion of that is Kingsport plants, so you guys can work out what the project costs. I'm sorry, you were saying something, Jeff?

Mark Costa:

Sorry, yes. We started the construction of it, the early -- yes, Jeff, we started the early construction part of the Tritan line and then paused it. And we're going to restart that as we align it with our outlook on Tritan demand which is improving a lot this quarter. So we'll see how we judge the Tritan demand in this next quarter or when we need to get that going again to make sure we don't short the market.

John Roberts:

Are the sig tow contracts working as expected in 2024? And do you think you get to a point where the decline in sig tow volume is offset by the new products in Fibers so that the overall segment has flat to up volume?

Operator:

Our next question comes from Mike Sison of Wells Fargo.

Mark Costa:

Yes, it's a great question. I think that we'll certainly turn the quarter in Q2 and the back half of this year. It's a much closer call in Q1 because of some of these unique things I've talked about overall. These timing on fills and customer buying and Fibers is a bit bumpy. And you still have some destocking going on in ag and medical, those kind of things that are certainly weighed on Q4 and will weigh on Q1 to some degree. But we are seeing volumes improve in sort of the core businesses, are the -- ones, especially the ones that all started destocking earlier, whether it's consumer durables, building construction, et cetera. You can definitely see that destocking is over. We just don't have everything done with that topic. I'll be happy to see it. It is extraordinary when you think about it. We're sort of in the sixth quarter of destocking. 2020 had like 2 quarters and 2009 had like 3 quarters. So we are in unchartered territory on this destocking thing and we all need to own that. But you can definitely see it's coming to an end and we're happy to get our production volumes connected back to markets. And that will give us a nice recovery this year.

William McLain:

Mike, this is Willie. As Mark highlighted, as we get the benefits of the fixed cost leverage as well as we get the mix upgrades with our circular solution. We definitely believe both AM and AFP can grow back to those and towards those 20% type margins.

Aleksey Yefremov:

Are you likely to stagger construction of methanolysis number 2 and number 3? Or do you think you're in a strong enough capital position and confidence in this business to build the two simultaneously?

Aleksey Yefremov:

And staying on the same topic, do you have any significant number of customers who might be on the fence right now telling you they'd like to see the Kingsport plant start-up and then if that works well, there could be a lot more customers willing to sign up for the other two?

Operator:

Our next question comes from Kevin McCarthy of Vertical Research Partners.

William McLain:

Kevin, this is Willie. What I would highlight is as we've talked about, roughly $50 million of EBITDA will come in the Advanced Materials segment. That's primarily in the second half. So as I think about where we'll be, effectively we'll be at greater than a $75 million EBITDA run rate within that business. We've got a strong pathway to exiting 2025 as we think about brands and being able to connect them to even more brand launches in '25. That will be at roughly a $150 million run rate as we exit '25. And then ultimately, we expect greater than $150 million of EBITDA from this facility on an annual basis.

Mark Costa:

Yes. So the sort of the commitments we have in '25 and '26 with the market is both on price and cost. It covers both. Now there's ranges in the volume side, right, so they have a min and a max on volume. But the pricing formula which in most cases include -- these prices will then adjust based on changes in energy and raw material. So it's sort of cost pass-through, if you will, to some degree. So these margins, if we get a tailwind, we'll share that with the customers. If costs go up, we'll raise our prices formulaically. But that is the nature of most of these contracts, not all but most have some version of pricing it, a lot of it includes the CPT. So no, that's -- but there's always a little bit of potential volume decline in the market that we have to accommodate with them. So that part has room for sort of changes in market demand.

Laurence Alexander:

Can you -- on the renewable side, can you discuss how the policy landscape is shifting in terms of the potential incentives you may receive for this second and third plant compared to what you had initially expected or broader policy shifts that might be incentivizing customers?

Laurence Alexander:

And then just as we start looking towards 2025 and 2026, to what extent have you pulled forward productivity that would make it more difficult to get sort of incremental productivity gains over the next few years?

Laurence Alexander:

Yes, the kind of structural productivity gains you've been delivering kind of fairly consistently. I guess my impression is that effort ramps up in the more recent period. And so I'm just curious as to have you pulled things forward? Or should we be thinking about there's another leg of structural productivity getting over the next couple of years? Just what's the next piece of that story?

Greg Riddle:

Let's make the next question the last one, please. Alex?

Salvator Tiano:

I just want to ask about the M&A landscape. What are you seeing here? And now that it looks like things are finally improving, are you more incentivized to go out and look for specific targets?

Greg Riddle:

All right. Thank you, everybody, for joining us. I hope you have a great day.

Operator:

Good day, everyone, and welcome to the Third Quarter 2023 Eastman 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 this call over to Mr. Greg Riddle of Eastman, Investor Relations. Please go ahead, sir.

Operator:

Thank you. [Operator Instructions] Our first question comes from David Begleiter of Deutsche Bank. David, the line is yours.

Mark Costa:

Sure, David. And a great question. We're obviously spending a lot of time focusing on putting this year behind us and focusing how we recover and deliver a lot of earnings and growth next year. When you think about it in the way we built our forecast or, if you will, a scenario, was to intentionally be somewhat neutral on where markets recover or don't recover or what oil prices or energy prices can do. So we wanted sort of a neutral case to focus first on what are the things that are more in control or math that deliver a better year next year than this year. And the biggest driver, of course, in the decline in earnings this year was volume and mix. And when you look at the extent of that across the portfolio, we're probably down about $450 million in volume and mix from a variable margin point of view, excluding capacity utilization. And then, as we look at how that can recover next year, we sort of think of it in three buckets. The first is, obviously, a lack of destocking. There's a lot of conversation around that. And it was certainly a very significant element to our business. And we generally think destocking was probably about 40% of the decline in volume this year. But let's be conservative and call that sort of one-third comes back next year from destocking. So $150 million there on variable margin. And that's just a lack of destocking. So it doesn't include restocking, it doesn't include any markets getting better. The second element is innovation. We are very excited about our innovation portfolio. It's been the center of our growth story as a company. And the biggest element, of course, will be the Kingsport methanolysis plant coming online, delivering an incremental $75 million in EBITDA to next year relative to this year. And that's all in with costs and revenue and margins considered. So that's pretty considerable. So you've got that on top of the lack of destocking. And then you've got innovation that's happening across our portfolio. It's not just Kingsport and methanolysis. We've had great success with premium interlayers delivering a lot of value with the growth in the automotive market and extreme leverage of 3.5 times the material per car in EVs versus ICE cars. So that's a great business and we'll continue to deliver above market growth. We've got the Aventa products we've been telling you about where we've had great success, [adoptions and straws] (ph) and some brands going national as well as now, making great progress in our polystyrene replacement for protein packaging and food packaging, et cetera. And you're going to see some real nice growth out of that business. The Naia textile business has been great this year and will continue to touch your shields, picking up more business and food cans, and we're starting to move into the beverage side. So there's a lot of growth happening throughout the portfolio through innovation, even in a flat market. And we're going to see more benefit really next year when you're in a more stable market situation and people are focusing on new launches. The third element, of course, is the markets. And as you saw in our guidance, we're being pretty cautious about where the markets might go. I think there's lots of debate around markets could recover, markets could go down. I think it's fair to say none of us really know. But I think it's reasonable to expect that our stable markets will probably stabilize because the end market demand there is sort of not as discretionary. So pharma, personal care, packaging for food, those kind of markets are all going to stabilize. Medical probably have some modest growth when you look at those dynamics. Automotive is expected to grow, and we think that's a reasonable assumption. Building construction we think is flat to down a little bit. So when you put all this together, you've got some additional volume growth out of that on top of those numbers from destocking and Kingsport methanolysis. So considerable value there. The second part is asset utilization. So we've been extremely aggressive in managing our assets and pulling the utilization rates down to free up cash. We saw great success in over $500 million of cash generated in the third quarter by the actions we took. Unfortunately, it comes with a counting headwind. It's not a cash headwind, but you take a $75 million utilization headwind hit in the third quarter alone for that or $75 million really on a full year basis when you think about the tailwind for next year. So you get to add that back if volumes are flat that comes back. Obviously, there's actions we're taking to keep our cost structure flat. So all that revenue growth we're talking about above in the volume side of things flows straight to the bottom line. So the incremental margins on the recovery are going to be quite strong. So all that creates a good situation. Offsetting that could be especially pricing starting to moderate in a few places. We still have a lot of raw material in inventory that is lower and still needs to flow through. We're about 50% FIFO in our company. So you're going to see some benefits of that flowing through into next year that will sort of offset, especially pricing. So we don't really see raw materials as a tailwind, but we also don't really see it as much of a headwind. So all those factors put together, delivers quite a bit of improvement in earnings and earnings from -- our operating in the cash side as well. So we're pretty excited about focusing on all these actions that we can control on this uncertainty and delivering success for our owners.

Mark Costa:

On the ag market, which is more than crop protection, but a number of different products. Obviously, the destocking didn't start until the second quarter of this year. Very different timing stories like consumer durables or building construction started aggressively in the fourth quarter of last year, but ag didn't start until the second quarter. So the destocking started, it got more aggressive from the second to the third quarter. And it continues into the fourth quarter. We do think it'll be played out by the end of the fourth quarter from what our customers are telling us as they start looking to the next planting season. But normally you'd have a build-in inventory starting in the fourth quarter and through the first quarter for the planning season. This year, we're going to see destocking through the fourth quarter and then a ramp up of building inventory in the first quarter of next year. So that's part of that headwind relative to what is “normal” for a fourth quarter is that delta between building versus pretty aggressive destocking.

Operator:

Our next question comes from Frank Mitsch of Fermium Research. Frank, please go ahead.

Mark Costa:

Yes, so Frank, we feel very good about [indiscernible] what you just said, getting this business to come back considerably from where it is now. The bridge I just laid out at the corporate level is very true at the AM level and all of those elements. So, if you think about this year, just as context before we get to next year, the extremity of the demand decline was more than anything we've ever seen before. So we've seen difficult demand environments in 2009, in 2020, but those were over three quarters in 2009 and two quarters in 2020. We're now in our fifth quarter of low demand and some applications continue destocking. So this is something we've never really seen before. But it is all demand related, and it's a lot of destocking that where people got out of control in building inventory during the supply chain crisis. And some of the markets that we're in have very long supply chains. When you think about consumer durables or making the polymers here, having ship it all the way to China, go through multiple steps to get an appliance or TV or something made and then shipping it back to the US and Europe, you've got six to 10 steps. It's a long supply chain to deplete. When there is such a significant step-down in demand that's as bad as 2009 when you think about consumer durables warehousing for that matter. And so, the good news is, we can see some markets bottoming out and recovering really well. So, durables is down 40% in the fourth quarter of last year, it was even worse in the first quarter, came back 30% in the second quarter relative to the first and another 15% back in the third quarter. Now, it's going to be a little softer in the fourth quarter because of normal seasonality of activity and what customers do. But you can see that -- the bottom of that market was the first quarter. And it's certainly in better shape as the de-stocking has definitely played out we think at the end of the third quarter. We have some other markets where the destocking is also still pretty extensive, like medical and packaging. It didn't start like ag until the second quarter of this year, and it's finishing out through this quarter as we can see it. So there's different timing and different levels of drop across the segment when it comes to specialty plastics, but we are pretty confident that the destocking part will be over by the end of this year. And when you think about that $450 million of variable margin down for volume and mix, about half of that is in the AM segment. So you can start seeing how that on the destocking part comes back. That's just on the destocking part. Then you've got the $75 million of EBITDA coming from the methanolysis to add back to next year on top of this year. Remember, only $50 million of that's going to show up in AM and the other $25 million in other. And then you've got a lot of these stable markets that are going to have some amount of very modest growth in the sort of packaging, medical, all we're going through this year is a decline in demand in medicals. Surgeries are steadying up. It's just a lot of destocking, but it's very high value and painful where you get passed it. So we feel good about that. About $40 million of the $75 million of the asset utilization headwind from inventory management comes back as a tailwind. $35 million of FX as a headwind this year. I don't know where currency will go next year, so that could be up or down, but it's a significant headwind this year when you think about -- looking at the total decline. So you've got the destocking coming off, you've got the markets, you have the utilization tailwind, Kingsport, you've got innovation, you've got the auto market, which we expect to continue to grow, and a lot of the innovation that's happening in there. There's a lot of innovation throughout the portfolio in AM that will create growth once the market stabilizes and customers are confident doing new launches. So we feel great, and the incremental margins will be impressive because we're going to keep the cost structure flat.

William McLain:

Frank, this is Willie. So you've got it correct on the first half, second half. That increased from $75 million to $100 million. And sequentially, as Mark has highlighted, it was a $75 million headwind to Q2. With that momentum, we would expect it to improve quite a bit as we go from Q3 to Q4. But the full year, obviously, you're taking the reference 2022, and that doesn't come into effect as you look 2023 to 2024. So $75 million is a reasonable estimate. It may be a little bit higher, but right now $75 million is close enough.

Frank Mitsch:

Okay. Thanks so much.

Vincent Andrews:

Thank you. Good morning everyone. Mark, your prepared comments talked about the potential for some state or federal incentives for the US methanolysis plant. What's the sort of order of magnitude and what might be available and when will you know?

Vincent Andrews:

Okay. And could you just talk about the sale of the plant assets to INEOS. Is that something that you've been working on for a long-time? Or is it something that just sort of came up this year? And is there anything else like that, that's being contemplated?

Vincent Andrews:

Thanks very much.

Patrick Cunningham:

Hi, good morning. You told your 2024 CapEx guide is relatively flat with this year and I'm curious what this means for your additional recycling facilities. Do you expect any meaningful CapEx to be deployed towards site construction next year or -- and is there any sort of updated timeline on site selection for the second facility?

Mark Costa:

We feel-good about our organic growth strategy. We think that kind of growth clearly creates a lot of shareholder value with great returns on capital. It's unfortunate the macroenvironment took a turn on us just as we were launching into the circular programs and a lot of that are specialty growth. But as we've talked about with our view 2024 and the expectation that markets will normalize as you go into 2025 and 2026, we believe earnings and our cash will come back significantly as we move forward. You got to remember, this year a lot of our headwind in earnings to 2022 was noncash, $110 million of pension, $75 million of asset utilization to generate cash. So we are just looking at earnings. A lot of it is a non-cash hit relative to 2022. So we feel very good about our cash earnings and how we're doing in this environment, as well as how we look forward to the future.

Patrick Cunningham:

Got it. That's very helpful. And then I appreciate that the sort of forward outlook doesn't have any restocking expectations embedded, but based on your conversations with customers coming out of restocking, do any end markets have precariously thin inventories or do you get the sense that this has just been a trimming of safety stocks built over the last couple of years?

Operator:

[Multiple Speakers] Our next question comes from Jeff Zekauskas of JP Morgan. Jeff, please go ahead.

William McLain:

So Jeff, on the methanolisus in Kingsport, I think as we've highlighted earlier this year, we had a range of $700 million to $800 million as we started the year. And we went to the higher end of that estimate. We've been able to manage the increase for the Kingsport methanalysis within that disciplined budget that we've been able to demonstrate through the year. That's how I would summarize that.

William McLain:

The additional thing that I would continue to highlight, Jeff, is, as we think about $450 million of EBITDA, also the fact that we're going to be generating $75 million of EDITDA on the first plant here from a year-over-year basis in 2024, I think that demonstrates that velocity of EDITDA and we think that that's $150 million by the end of 2024. That sets us up well for strong returns on this investment.

Mark Costa:

I know, we didn't choose to -- I'm sorry, go ahead. Go finish your question, I thought you were done. Sorry, go ahead, go ahead, Jeff.

Mark Costa:

So, yes, let me clarify a couple of points there, Jeff. First, with the Kingsport methanolysis plan and the Triton expansion that we intend to do here at Kingsport, we're still doing it, right? We've just pushed the construction timeline of that plan out to better align with the macro economy. So our intention here is to still have 85,000 tons of capacity being brought online of additional Triton capability. It's just going to come online more in 2025 than in 2024, because the durable market where a lot of that Triton is sold is obviously down. So there's no change in our strategy whatsoever. It's just an adjustment of timing and that's part of what Willie was getting at in sort of how we adjusted our spend rate on capital this year to make room for the higher cost of finishing methanolysis by pushing that capital on the Triton project out into the next year. And so, that's what we've done here. So no changes at all in how we think about the value creation from the first investment. It's just a shift a little bit in timing in the short term. The good news around our assets in Tennessee is, they're flexible, right? We can swing our Triton lines between Triton and making copolyester. We can make PET. We can assign that recycle content to whatever products we want across our integrated system. So that allows us to monetize the value of the recycled content as quickly as we can make it as we ramp up the facility. So that's not going to be hindered by the macroeconomic environment and durables, because there's plenty of packaging out there that we can make both in our co-polyester applications like our shrink or in some PET. So we'll be monetizing the full value of all the DMT as fast as we can make it and driving that utilization rate up as fast as we possibly can. And then, as higher value markets like Triton come back, we'll shift the mix in how we assign the recycled content to the higher value markets. So we've got great flexibility that's created a huge amount of value and makes upgrade over the last decade as we grew Triton on the same assets that once made PET over a decade ago. And we can take advantage of that now. In regards to the French plant, we're not changing anything there either. So the design of that plant is to have two polymer lines, both of which are flexible between making PET or textiles or what we said is specialties, but that's actually co-polyesters, not Triton. To your point, Triton is much more economically made here in the US with the integrated systems and monomers that we have to make that very unique polymer. So this will be just more PETG products that go into packaging, cosmetics, bottles and things like that and a variety of other applications that we make with our traditional PET cheese. So nothing's changed in our assets strategy whatsoever from a product mix point of view. Kingsport's all specialties, France is half PET, half specialty, and the second US plant here is all PET or textiles.

Operator:

Our next question comes from Salvator Tiano of Bank of America. Salvatore, Please go ahead.

Mark Costa:

Yes, so we retained the ownership of the Texas City plasticizers. That was the original strategic intent of buying the Texas City's facility along with, I'll call it, the infrastructure that the site had. So first, we're retaining the ownership and the sales. Second, I would say the economics around that are substantially the same as it operated today within chemical intermediates. So the only thing that you're going to see is reduced sales of acetyls out of the Texas City site within chemical intermediates. The remaining plasticizer business is and remains intact.

Mark Costa:

No, we're not expecting any headwinds from pulp. Part of what we did in our tow contracts is, improve our pricing, obviously, to get our margins back to being able to reliably supply our customers, because this is an extremely valuable product for them and reliability is a priority for them. But we also change the contracts. It used to be fixed price contracts, and we had to ride the benefit or the headwind associated with pulp prices or energy. We've now adjusted those contracts to be more like our [indiscernible] business where they're more cost pass through and adjust for changes in energy or pulp. So that's not a concern as we go forward. It's not perfect, but it's a significant improvement from where we were in the past.

Operator:

Our next question comes from Michael Leithead of Barclays. Mike, please go ahead.

William McLain:

So, what I would highlight is the fact that, one, we're confident in the base of where we've gotten to at this point in time. So we're at greater than $410 million for this year. The business team has done a tremendous job of getting the contract structure in place. That's what Mark just highlighted. From our confidence of both the margins within this business, also as we think about Fibers more broadly with the textiles and the textiles growth as we go from 2023 to 2024. I guess I would just highlight that right now, we're substantially complete with the contracts for 2024 and have a high commitment level as we highlighted in the preparedness remarks for 2025. Going back to the first part of your question, ultimately part of that was growing in confidence. We do have lower energy cost than we had expected at the beginning of the year. And as we gained momentum and seeing how the contracts and the contract structures were working, we just reconfirmed that as we grew the earnings and grew the confidence by year end. [Multiple Speakers] so we're happy with where it's headed and will be a strong contributor to cash as we go forward.

Michael Leithead:

Great, that's super helpful. And then second, I just wanted to follow-up on the trajectory of CapEx. Obviously, you've given us some numbers about CapEx going somewhat lower next year. But when I just think about your large growth projects, you've got about two more methanologist projects on the horizon. You mentioned earlier to Jeff about the new timing on Triton. So just high level, should we expect CapEx to roughly stay around this $800 million range the next few years? Should it trend higher or lower overall?

Michael Leithead:

Great. Thank you.

James Cannon:

Hey guys, this is James Cannon on for Josh. Thanks for taking my question. In AFP, you called out in your guidance some [ROS] (ph) increasing in the fourth quarter. I believe you transfer some propylene from the CI segment. I'm assuming that might be a big part of it, but is there anything else we should be thinking about in that bucket?

James Cannon:

All right, great. Thanks. And then just on the specialty fluids that you called out some pull forward, can you give a little bit more color on what you saw there and kind of how much you expect to get pulled out of Q4?

James Cannon:

Great. Thanks.

Kevin McCarthy:

Yes, good morning. Mark, I didn't see anything in the prepared remarks that you released on the subject of the UAW strike. Can you speak to whether or not that's having any material impact? And if so, what you might be baking into the fourth quarter, or any auto-related commentary in general would be welcomed.

Kevin McCarthy:

Thank you for that. And then secondly, if I may, perhaps for Willie. I think earlier this year you had guided to a cost headwind related to pension and OPEB of $110 million, if my notes are correct. Is that still the case? And more importantly, what happens to that line item moving forward into 2024? Does it come back down or would you point to a different trajectory?

Kevin McCarthy:

And any insight on 2024, Willie?

Operator:

Our next question comes from Laurence Alexander of Jefferies. Laurence, please go ahead.

William McLain:

We've never given a plant by plant. We said greater than $450 million. And as Mark highlighted earlier in some of our conversations, the first plant is more specialty with our Triton portfolio, so you can expect it to be higher than the other two.

Mark Costa:

Yes, the elective surgeries that are occurring are certainly growing roughly 5% a year and definitely above pre-COVID levels if you look at it. Not a lot, but a little bit. The issue we're having in medical is not about demand at all. Consumer durables, laptops, TVs, appliances are not being sold nearly as much as they were. Medical is really stable in market. The customers though were very nervous during the supply chain crisis about having enough material. And so they built a lot of inventory to be safe, because you cannot have a problem in getting medical devices delivered in our packaging to the marketplace for obvious reasons. So, they finally got calm that there's plenty of supply and reliability and started destocking in the second quarter of this year and they're still doing it through this quarter, but it's just a destocking event. The markets are solid and expected to be better next year than this year.

Operator:

Our next question comes from Mike Sison of Wells Fargo. Mike, please go ahead.

Mark Costa:

Well, so from a price on an existing product sold this year versus next year on the specialties, we're not really expecting much price increases except for where we have cost passthrough contracts and the prices will adjust up or down based on where raw materials are going. Now obviously for an increasing raw material environment we will increase prices across the specialties. But in our scenario that we gave you, where raw materials are relatively flat next year to this year. I would not expect to increase prices in the specialties. I do expect prices probably to go up in chemical intermediates, because right now we're at the bottom of the market, right? We're at the cash -- in the olefin derivatives, we're at the cash cost of the marginal producer in these markets. It's a very challenging market situation right now in olefins. And so, there is an expectation of some normalization of those prices getting better. I mean, the value of the price of propylene relative to oil is about 40% lower than normal. That's extreme and never ever seen before in the past. So that's a lot of the compression that we're facing due to just excess amount of capacity being added, as well as very low demand in a number of applications that use propylene. So there's some balancing of that that'll occur even with just the end of destocking and some stable markets growing. So that's one place where I would expect some prices to improve and margins to improve sort of how we look at it at this stage. I would say the teams have done a phenomenally good job of holding prices at very high levels in this very challenging market that's created a lot of improvement in our price to variable cost ratio, offsetting some of the volume challenges.

Mark Costa:

Yeah, so pricing is holding up really well. We're having no issues with the premiums that we need to get for the recycled content related products on the specialty side and having good conversations with our customers on the PET side for the premiums that we need to get -- that go in line with the economics that we've provided to you. So we feel really, really good about that. It's an exciting time right now with the methanolysis plant coming -- being completed and starting up. We have a phenomenal number of people working hard and making sure that startup process goes well. Back to Frank's comment, the video is a great marketing tool with customers. It's an outstanding story when you see these huge piles of garbage, multi-colored garbage, all kinds of types of garbage that we're taking and running through our process and coming out with a clear pellet. Customers are very surprised and impressed by the low quality material that we're using that is headed to -- cannot be reused with mechanical recyclers at all. This is going to go to landfill or incineration or really low end applications. And they're just very impressed that we can take that garbage and turn it into a clear food grade quality pellet. And so the customer engagements around that story of getting things truly out of landfill and incineration, not just using a clear bottle that could have been mechanically recycled, is driving a lot of engagement. The other thing that's important to keep in mind is, a lot of the applications we're targeting with this recycle content, both -- especially in the PET, are applications where mechanical recycling is not really able to meet the specifications in performance because the quality is just not good enough. Our product is identical to virgin material made from fossil fuels. Mechanical is not. It's got integrity issues, color issues. So, we are really targeting those applications where mechanical is not a choice. That allows us to command a better premium than mechanical and support our economics.

Operator:

Our next question comes from Aleksey Yefremov of KeyBanc Capital Markets. Aleksey, please go ahead.

Mark Costa:

Yes, so it's an important question and one we're very focused on. The capital headwinds that we encountered in the project here in Kingsport were really isolated to construction quality and productivity issues around pipe installation. And that was a very specific issue. It had nothing to do about the design of the plant or the scope of the plant in what we're trying to do when we got into these issues here in the last six months. And the way we're approaching the next two projects, we're taking a very different approach, using very large contractors that are very capable of controlling those costs in a much better way than what happened here. So we feel we're in a far better shape. Also, we're not trying to build a new plant, right? So this is a new first time 100,000 ton plant that we're building. The plants that we're going to build in France and the second one in the US are basically the same plant we built here with some sort of modest improvements. So, we're not going into this without already knowing what the capital cost is for the methanol system unit. And the polymer lines are built all the time, well established to understand what those capital costs are going to be. Infrastructure is also pretty straightforward that surround the plant. So we feel good that we can come up with a high quality estimate for the next two projects and we can manage the construction process far better than what happened in Kingsport. And so, we're still working those numbers. They're still in line with what we expected to deliver a 12% return or greater for the France and the second US plant. Remember, the first plant here is greater than 15%, even with the higher capital costs. So we feel good about sort of where we are on the capital side of this. And of course, we're pursuing these additional incentives for both projects as I discussed earlier and obviously if we get those, that's going to help manage capital risk, as well as improved returns.

Mark Costa:

So far the processing has gone well. I mean, there's always hiccups. It's a proprietary new process that we developed that takes a lot of steps out of the sortation compared to a mechanical recycler. So we're excited about taking that approach. Chemical recycling allows you to do that because you're not needing perfect, clear material to sell back to the market, as the big pile suggests in the video. But the process is up and running and working well at this stage. And we feel good about how that's going to work. Our overall cost when we think about sourcing material and processing it into the front of the plant is a little bit better than we expected. So we're feeling really good on the feedstock side here. Feel great about having 70% of the feedstock already in long-term contracts in France as well. So I know feedstock was a big question in the beginning of this whole process as a risk. We've actually managed that one reasonably well. Customers are going well. Now the final step is starting up the technology, improving its economics and its effectiveness as sort of the final big milestone in front of us here over the next two months. So we're really excited to sort of chuck all those boxes, keep going forward with this plan, use it to help improve earnings next year in a difficult environment, and get these next two projects underway and create a lot of value for our owners.

Unidentified Company Representative:

Let's make the next question the last one, please.

Duffy Fischer:

Yes, good morning guys. If we could, let's stay on methanolysis. If we assume we're kind of at the run rate of our $450 million EBITDA from the three plants, how volatile would that $450 million be over a typical, let's say, seven-year cycle? And then talk about the volatility you may see on the pricing side and the volatility you may see on the feedstock side over that seven-year cycle?

Duffy Fischer:

Great. And then just one technical question about your acetic acid sale. Did you sell the technology for acetic to them as well or if you chose to you could build a plant or you could do something like that [SIPCHEM] (ph) licensing deal that you did before where you actually kept the technology.

Mark Costa:

It has no effect on our rights to use our technology or license our technology.

Mark Costa:

Thank you, Duffy.

Operator:

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

Operator:

Good day everyone and welcome to the Second Quarter 2023 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. I'll now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead, sir.

Operator:

Thank you. [Operator Instructions] Our first question today comes from Josh Spector with UBS. Your line is open.

Mark Costa:

Good morning Josh and thanks for the question. So, there's a lot embedded in that question about the back half of the year and how that indicates where we go into next year. So, first of all, I'd start with -- we obviously, in April, thought demand was going to be better in the back half of the year, which was principally an assumption based on destocking really being complete by the end of the second quarter. Obviously, we and everyone else in the sector has come to a different point of view that, while demand at the primary level, I don't think is changing that much. It's not getting worse in our perspective, and I haven't heard anyone else suggest that. We are expecting that there's a lot more destocking that continues to go on in some end markets, which has really been the impact to our outlook in the back half of the year. So, some areas, whether it's this year or next year, for example, automotive, we have solid growth in this quarter. We expect that to continue to be solid through the back half of the year. And there's so much pent-up demand. And when you think about 2024, I would expect it to continue to be a next year relative to this year. So that market, aviation, same story in very good shape. You have a lot of sort of stable end markets where demand has been off in that sort of 3%, 4%, 5% range. When you look at all the fast-moving consumer goods companies out there fully recognizing that they're holding price and being very disciplined to expand their margins that way with the raw material tailwinds, and accepting that they probably wouldn't gain much volume if they reduce price. So, disciplined, like we're maintaining, frankly, in our specialties. But in addition to that, they're managing cash too. So, we saw an additional sort of 8% to 12% destocking on top of that demand in the fourth quarter, first quarter. But fortunately, as we go into the second quarter, lessening on that destocking and expect much less destocking in those kind of stable markets like packaging, personal care, water treatment. So, that feels like it's moving in the right direction as we go to the second half and of course, that would continue also into 2024. When you look at the consumer discretionary markets -- actually, I would take two other stable markets just to deal with them. So, there's a couple that also took some sort of extreme negatives in additional destocking in Q2, which was packaging and medical in the Advanced Materials segment. And that's -- they were carrying a bunch of safety stock from last year. Demand wasn't improving as they expected. And so they really started destocking in the second quarter, but they also seem to have addressed their issues predominantly in the second quarter. So, that's also expected to get a bit better as we go into the back half of the year, as that destocking reduces through the third quarter and certainly seems to have run its course in by the fourth. So, again, improvement relative to next year, especially when you think about all these markets had a certain amount of destocking that won't repeat in 2024, that's a tailwind. So, the two bigger markets that drive a huge amount of value for us on a profitability point of view, like automotive that had the most demand impact is sort of in the consumer discretionary area as well, like durables and building construction. When you look at the durable market, that's the one that's gone through the most extensive destocking of any market. And it really goes all the way back to last May of last year when the retailer sort of got 2x the amount of inventory they needed because they were buying everything they could think of to -- because of supply chain prices, and then they started destocking over 14 months ago. That bullet finally hit us in the fourth quarter of last year, really knocked us down about 40%, when the underlying market was only down 10% to 15%. So, a lot of destocking. Got even worse, 10% worse into the first quarter. And then fortunately, we saw that destocking start to abate in the second quarter. Got 22% better in the second quarter versus the first quarter. So, we saw momentum there. You just don't see it in the results because of the medical and packaging destocking that occurred. So that destocking will continue to lessen as we go into the back half of the year and be another tailwind as you go into it. And then, of course, Building & Construction, I'd say, is one that's been doing some destocking this year. Demand is down. And we expect that to be sort of flat to the first half, because that market still has more action taken. There's also maybe some more help with first home builds. So, there's a spectrum of things going on when you look at it, but it's -- each of them sort of add up to less destocking. But it's not as much as we had hoped for in April, and that's really the predominance of how our volume forecast came down, which is the entirety of our earnings reduction when you combine that with the need to take inventory actions for this lower demand outlook to make sure we hit the $1.4 billion of cash. So, all those then feed into a year next year that's going to look better, right? When you don't have all this destocking going on, which we're assuming for 2024, you have some normal seasonality coming back into the demand outlook for next year that's going to help improve things. And you've got the recovery of all this volume almost, and sort of down markets are our highest value markets, right? So it's been a huge mix hit to us this year. And as we've shown in past recessions, when the mix comes back and if there's a little bit of restocking, the high value of these markets drops to the bottom line pretty significantly, especially with the costs we've taken out of our fixed cost structure. So it all comes together, which is building momentum in the second half to having a much better year in 2024.

Mark Costa:

You're saying what is our specific volume forecast that we've got as a combined company for the second half relative to the first half? Is that what your question is?

Mark Costa:

So, as we look at, I think it's -- altogether, the volumes in the back half of the year are going to be a bit less than the first half of the year, but I don't think we're going to provide a quantitative number to it. it's basically just a little bit down when you put it all together. The real headwinds in the back half of the year is the -- from a sequential point of view, first half, second half, the entirety of our earnings decline is the inventory management, right? So, that $75 million sort of additional headwind sort of aligns with sort of where our earnings outlook has now moved. So, volumes are relatively stable when you put all the ups and downs, right? So, some down in AFP, some up in stability in AM, stability in Fibers and CI, sort of a flat volume number from a sequential point of view.

Greg Riddle:

And if I just add one more point, which is third quarter year-over-year, the volume mix decline would be less than what you've seen in the first half, but still meaningful. When you get to the fourth quarter, again, on a year-over-year basis, the comp is a little bit different. And so you get to a point where that decline in volume mix is even less still than it was in the first half of the year.

Operator:

Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open

Mark Costa:

That's a great question, Vincent. And I mean I'll try and keep it simple, since my last answer was rather long. But it's very different by end market on what's going on, on the stability of underlying demand and then what they're trying to do in destocking, right? So, a lot of these stable markets. it's more fine-tuning, right? They -- everyone built safety stocks last year through 2021 and 2022, and they're trying to generate cash and adjust those inventory levels to different perspectives on end markets. So, if you're in the personal care world, medical world, these markets are stable at the end. They may be down a little bit, but they're very stable. So, destocking is clearly the entirety of what's going on there. In many of those sort of end markets. When you get to some of these other markets, where the supply chain is incredibly long, like durables, we're making things that go to China, that get made to products and come back to Europe or the US. Really understand just how much inventory is out there through that entire chain is difficult for everyone in these markets. And exactly where end market demand is on these more discretionary markets, I think, is a little bit more difficult to judge. But what I'd say we've seen is a couple of cycles, right? So there's a lot of destocking in the fourth quarter. Demand was really low in January. Got a bit better through March. And then there was a realization that the banking crisis, people got nervous about what's going on in the broader economy. And so they went into a really low level of demand in April, which was probably the low point for the year. And then started to do a little bit less destocking -- or a lot less destocking in durables through the second quarter. So, as we get into the back half of this year, I think what happened with customers in the June time frame is everyone assuming the back half was going to be a bit better in our downstream customers across most markets, especially maybe the more sensitive ones. That things would stabilize, destocking after 14 months, to your point, who would have played its course more -- back in June after 12 months. And they realized they all have that built in their plans, they sort of said that's not going to happen. Demand is going to be flat, which is all of our collective assumption now and everyone is in destocking mode to that assumption relative to things getting better. But it's not because the markets are getting worse, Vincent, it's just they'd assumed things would get a little bit better. They're not and they're sort of correcting for that. And it's important that it's a lack of expected growth as opposed to, I think, things are getting worse. I don't see anyone saying things are getting worse at the -- in the primary demand level. Does that make sense?

Operator:

Our next question comes from Frank Mitsch with Fermium Research. Your line is open.

William McLain:

Good morning. Frank, it's Willie. Yes, so as we think about inventory levels, I'll call it from Q1 to Q2, inventories are about flat. So as we think about the level of the supply chains and the demands that Mark has just outlined, we have about $300 million that we would expect inventory to decline in the back half of the year. That's also essential to getting us to generating roughly $100 million from working capital on a full year basis. And I'm confident that our business teams and supply chain that we have a plan in place that we've already activated to execute and deliver that cash flow.

Mark Costa:

Yes. So, I think in Advanced Materials, we're certainly seeing some pretty meaningful raw material benefits, Frank. If you remember last year, we had a tremendous spike upward in VAM and PVOH prices that created a pretty significant headwind for the Interlace part of that business. Those prices have now collapsed and dropped in price pretty significantly versus last year, and that's seen translated into a tailwind for us to recover our margins there. PX has not been as much of a tailwind. Those prices have been holding up relative to last year. There's been a bunch of outages in that industry. New plants having trouble starting up. Alternative fuel value, all those typical explanations with PX. So, not as much of a tailwind there, but we're still well over $100 million of spread tailwind in that segment for the year. And I think that is obviously helping with some of the demand challenges and building us into a very good margin position as we go into next year when mix comes back and how that flows through -- how that -- those margins will flow through to the bottom line in our fixed cost leverage. In AFP, again, we've got good raw material tailwinds in that business as well. But the spread improvement is not as significant because we really have a lot of cost pass-through contracts, especially in the means business. So, we had very stable margins last year. That means they're also going to be stable this year by the nature of those contracts. But those spreads are also coming in relatively good when you think about ammonia, methanol and some of the olefin-related propane, ethane type products going into the specialty. So, overall, spreads are better there as well as -- on a full year basis, helping this year and will, of course, build momentum as volume comes back with better margin as we go into next year.

Operator:

We now turn to Aleksey Yefremov with KeyCorp. Your line is open.

Mark Costa:

I just want to -- you broke up a little bit, Aleksey, I just want to make sure I understood the question. You're asking what's happening with the pace of contracting in France given the current market conditions? Was that the question?

Mark Costa:

Yes, sure. So, first of all, the commitment and desire to get recycled content and products remains very strong. So, when you look at the specialty businesses we're in right now from our Kingsport plant, the demand commitment, which is global, not just in North America but across the world for products and durables, cosmetics, packaging, for recycled content, remains very strong. We've got 70% of our potential output, where customers are very committed, as you saw in the prepared remarks. When it comes to these PET or textile contracts that are the long-term sort of take-or-pay kind of structures for those markets, like the Pepsi contract. We are having great engagement and good discussions with a number of companies about those contracts. Like Pepsi, it takes a long time to negotiate these. They're very complicated contracts. And the current market conditions, I would say, are sort of slowing those discussions down a little bit. So, if you're looking at the PET market, whether it's VPET or RPET, those market prices have come off in a pretty significant way, which is purely just the story of everything else in the current macro, right? Demand is off and beverages -- people are downscaling to sort of cheaper water bottles that have less material. A lot of that RPET also goes into carpet and textiles where demand is down 20%. So, that's just a temporary thing. The key thing to keep in mind in these contracts is we are targeting applications within these brands where mechanical recycling doesn't really work. So, if they want recycled content in those applications, they're going to have to use chemical recycling because the performance requirements in a variety of different technical aspects, the mechanical is just not going to actually work. And I'm not going to get into details of that because I think that's a competitive advantage for us given our deep polyester expertise relative to other companies out there, but that's definitely a key part of how we're going to win. The second part is the degradation of polymer is already becoming clear in some markets, that you can't mechanically get to 100% recycled content. So while regulatory requirements may be only 25% in 2025, a lot of brands have set targets for some key applications to be 100% recycled content. And to maintain quality, they're not going to be able to do that with mechanical. So, we feel very confident that these contracts will get resolved, and we're going to get them in place. The engagement is high. And the regulatory requirements, especially in Europe, are going to require people to have recycled content. And when you look at the market situation there, right now only about 12.5% of PET is sort of recycled. Mechanical industry does not have the ability to double that capacity between now and 2025 when that number needs to be 25% recycled content or you can't put the packages on the shelf. So, we feel like we're in a good position, and working really productively with our customers and we're aiming to have those contracts done by the end of the year.

Operator:

Our next question comes from Mike Sison with Wells Fargo. Your line is open.

Mark Costa:

Sure, Mike. And yes, we still think that's the destination for this business. Obviously, it's been a pretty volatile time over the last few years, from the pandemic to supply chain crisis to a recession. And as I said a bit earlier, the extremity of what's happened in this switch from a COVID life to an experiences live and the impact of inflation, interest costs, and how people can afford to spend on goods when they're just trying to afford everyday life and maximize their experiences at very high prices when it comes to hotels and everything else, has created a short-term constraint in how people can afford goods. And consumer durables, as an example, is one of the places that is most discretionary especially after they bought a lot during COVID. So demands are way below anything normal in consumer durables, and then you've got this huge amount of destocking on top of it on a very high-value mix product. So, as that market stabilizes, you'll see some recovery coming in the back half of the year, especially if you back out the inventory utilization headwinds. And we'll build good momentum into next year from an underlying market point of view. And then you add on top of that recycled content, allowing us to add additional incremental value and substantial new volume from those applications. As we said, just getting started, it's a $75 million adder to next year in EPS for the Advanced Materials segment. So that obviously is going to be significantly helpful. The fixed cost leverage in this business, as we've demonstrated in the last 10 years, is significant, right? This world is always growing double digits for us, and the underlying markets are typically growing 3% because we win so many applications because of better value proposition just because of product performance and product safety. And now you're adding on recycled content to further accelerate that curve. The problem is, in a market like this, there's not a lot of new product launches, right? But we're continuing to win new business. Even now that's going to help volume in the back half of the year on top of just waiting for destocking, we've won a lot of applications. But they'll really ramp up next year when things stabilize and they start launching new products. So, all that sort of brings in better value from that side. And then, of course, the last couple of years, the inflation has been really high. We've been trying to keep up with it. But now we're finally recovering our margins in this space. So, you've got better margins on top of this volume recovery to sort of lever you to better earnings. So as you go through 2024, 2025, driving towards that $700 million is very much what we expect to do.

Mark Costa:

Well, first of all, I think what happened from April to now, the whole industry, from us all the way down to retailers, have gone to group think that it's going to be bad for the rest of the year, right? And everyone is acting under that assumption and pulling inventory down, managing in that context. But there's a limit to how much destocking can occur. At some point, warehouses go empty, right? And in some of these markets, especially like durables, it's been emptied out for a long time, where automotive, there's a huge amount of pent-up demand because we're talking about demand being better this year, but it's from a really bad level last year. right? So, there's still plenty of pent-up demand there and there's going to be plenty of pent-up demand and building construction with the dynamics of what's going on this year, constraining both demand and production of homes. There's a lot of upside across the whole corporation, when you think about it, from both a demand point of view. And you got these destocking levels that are huge, right? So, destocking is two or three times more than the underlying demand. And if that goes away, that's all volume recovery at some point, even if the underlying market demand doesn't improve. And then to your question around inventory, I think it's -- with the actions that we're taking and everyone else is taking, you can see people driving inventories at very low levels. It's more likely than not that they're going to go below what they -- in an improving demand environment. And so there will be some amount of restocking. Now, our back half, just to be clear, has no restocking assumed in the guide that we gave you. So, that happens. That's upside. But if you look at 2024 and say destocking has got to run its course eventually, so that you don't have that as a headwind for next year, and then some -- just a little bit of restocking just to get to levels to serve that demand, I think you can get a much better picture of volume next year than this year.

Operator:

Our next question comes from David Begleiter with Deutsche Bank. Your line is open.

William McLain:

Thanks David. First, I'd just highlight that the operating costs are going to be approximately neutral on a year-over-year basis. If you think about the preproduction that we're incurring this year, as well as the start-up expenses, and also as we're using our bridge technology with glycolysis to seed the market, that's at a higher cost to bridge. So, on a year-over-year basis, the way I think about this is revenue growth is actually accretive to EBITDA. And as we outlined within our guidance on the $75 million of EBITDA on a year-over-year basis, roughly $50 million of that will be in Advanced Materials, and the absence of the preproduction and start-up costs in our corporate other. So, as I see it, that's roughly where we're getting the $75 million. Also, if I think about our CapEx this year, we started the year at roughly $700 million to $800 million for the project. We took that up to $800 million. You can think about the combination of that and how we're managing our overall CapEx as the increases in of the project this year for the Kingsport project.

Greg Riddle:

Yes, I don't think at this time we're giving the capital cost for the Kingsport project. So, we're not going to provide that at this time, David.

Mark Costa:

They don't have price increases embedded in them for next year versus this year, David, if that's your question. Obviously, prices have gone up considerably from last year. But the idea of these contracts is to prove our margins and profitability to a level where we can continue to reinvest in this business to be a reliable supplier to our customers. And we've achieved that type of pricing with our customers in these contracts. We've also put formulas in them to adjust for changes in energy cost to give stability for us and for our customers, which we have not had in the past. So, we feel great about what we've achieved in improving our sort of ability to support our customers and our current profitability. And these contracts are now in place, where about 75% is fully contracted now through next 2024. Many of those are multiyear contracts. Hopefully, by the end of the year, we'll have that number up to 90%. So great improvement in this business from its performance last year, and we're very focused on stabilizing it on the tow side to provide very attractive cash flow to support our growth investments across the company. I would also note the textile business continues to do great on top of that. Where, even in a 20% down market that we have this year in textiles, we're growing that business. So, we're winning a lot of market share versus other materials because the value proposition of Naia is very compelling. It's a great beginning of life story being based on biocontent and recycled plastic. And importantly, and a bigger issue going forward now is microplastics, which are the fibers breaking up and getting into the ocean. And our fibers are fully certified to biodegrade when they do end up in the environment. And so that's a very significant positive, as the world is becoming more concerned about that as well. So, it's just a great business.

Operator:

Our next question comes from John Roberts with Credit Suisse. Your line is open.

Mark Costa:

We're nothing more slowly in any significant way, John. I mean right now, what we're doing is really focusing. We haven't made a site announcement, so you could ask that question, too. Because we're really looking at the incentives across several states. We've got three the sites that are all very attractive, and the engineering work is continuing for whichever site we pick. And so we're just trying to get those incentives in place. We feel great about our partnership with Pepsi as a significant baseload customer in that project, and we are sort of moving forward with that project to make sure we can serve the needs and put that together with the French project in Kingsport to get that $450 million value for our owners, which is a great return on the capital required across those three projects.

Mark Costa:

The contracts are quarterly. So, a little bit of a step-down from Q2 to Q3 is just the prices adjusting for a lower energy environment.

Operator:

Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open.

William McLain:

So, Kevin, I think we highlighted earlier that most of the $40 million headwind on the utilization rate will be in Q3. So, as a result, I would expect it to be similar and slightly down sequentially in Advanced Materials.

William McLain:

Correct.

Kevin McCarthy:

Yes, it is odd, isn't it? That's very helpful. Secondly, I wanted to ask about A&FP. I think you referenced a heat transfer fluid project that cost $15 million to be pulled into the second quarter. Can you just elaborate on what you're doing there and how that is translating to a meaningful earnings swing?

Kevin McCarthy:

Okay, perfect. Thank you so much.

Matthew DeYoe:

Morning everyone. Talking a little bit about Naia in textiles. What's the opportunity for EBIT if we think about next year in growth? I mean I'm just thinking, given the margin recovery in cigarette filter tow, does it even make sense to rotate tonnage from filters to fibers? And is Naia still growing into your excess capacity? Or are you now transitioning filter capacity to textiles?

Greg Riddle:

Matt, are you good?

Patrick Cunningham:

Hi, good morning. Thanks for taking my questions. I know you have no expectations for any sort of restocking embedded in the full year guide. But which end markets do you think are potentially best set up for restocking, whether it be in 4Q or into 2024? And how should we think about this in the context of upside to earnings from the specialty businesses?

Patrick Cunningham:

Yes. That makes sense. And what's driving strength in acetic anhydride, and I think you referenced overall resilience in acetyls? I would have expected some weakness given declining spreads in some of your end market commentary?

Patrick Cunningham:

Very helpful. Thank you.

Laurence Alexander:

I guess just two quick ones. As you think about the dynamics around inventories and fixed cost absorption, should incremental margins next year be above 60%? Or do you think some of the inventory reduction efforts you're doing now will spill over into Q1?

Laurence Alexander:

And secondly, kind of now that your peers are facing kind of more pressure on -- from the credit cycle, you always seem to have a sweet spot in M&A around finding people who are underinvesting in the engineering. Has your M&A pipeline changed? Or can you characterize kind of how actively you're looking at opportunities?

Mark Costa:

Yes. The restate acquisition we did of a manufacturing site in China is a great example. Performance Films business has been performing incredibly well in this auto market last year, in this auto market this year. It's a very high-margin business. And that acquisition allows us to be domestically based on how we support customers in China, which is definitely where the China government wants to go is things made in China. And those are great tuck-in acquisitions. Very highly accretive. Those are the kind of things we're focused on right now, because our real priority is growing our dividend and creating this sort of organic-driven growth story around being a leader in the circular economy, both polyester and cellulosic.

Mark Costa:

Yes. So, I wouldn't say it's accelerating the Christmas necessarily. So -- but what happened, I think, is pretty well discussed out there. Two things really. Last year, with all the Ukraine events around ammonia and other uncertainties around supply chain, farmers around the world were stocking up on safety stock. And their warehouses, the retailers were stocking up on safety stock. Their distributors are stocking on safety stock. All the way back to the big players that make the products like us and Syngenta, Corteva, et cetera. And so demand was really good. That was true through the first quarter. And as this chain started looking at season that wasn't going to quite need quite as much product because of the dry weather and not meeting it as much, and feeling like supply chains were now safe to rely on, sort of in the middle of Q2 kicked in significant destocking downstream of us. So, we started to feel some of that destocking from our direct customers in the second quarter. And it ramped up to full destocking as we go into the third quarter and, to some degree, in the fourth quarter. There's a lot of debate going on, I'd say, about just when does that destocking end and when they have to start ramping up on production to meet the growing season next year. It's important to realize that the final in-demand for the farmers is good this year and expect it to be good next year. So this really is a whole inventory management cycle we're in. And at some point, they'll have to kick back into gear to make sure they have enough supply for next year, whether that's in the fourth quarter or the first -- the beginning of the first quarter. It has to happen sometime around then or they won't have enough inventory for the next growing season.

Arun Viswanathan:

Great. Thanks for taking my questions. I guess I just wanted to go to AM and AFP. There are some markets which you are seeing -- which we're seeing some strength in, notably maybe the aerospace side and maybe the food side. Is that what you're seeing as well? And some of those stronger markets, you'd expect that to persist through the second half? How would you comment on some of your stronger markets? Thanks.

Arun Viswanathan:

And then just as a quick follow-up. Some other markets are notably on the weaker side. You addressed some of the destocking that's going on in amines in the ag side. What are some of the other areas that maybe turned out worse than you expected? And you've addressed a couple on the call already, but if you were to reiterate some of the weaker areas, what would those be? Thanks.

Greg Riddle:

Okay. I believe that was our last question. So thanks very much for your interest in Eastman and for joining us this morning. I hope everybody has a great day.

Operator:

Good day, everyone, and welcome to the First Quarter 2023 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman 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.

Operator:

Our first question comes from the line of David Begleiter of Deutsche Bank.

Mark Costa:

What we're really excited about it. It's just fantastic to see this kind of improvement in the fibers business, which we do think is structural and stable going beyond this year into the future. The key drivers for the improvement were obviously a pretty significant increase in price associated with making sure we're providing enough earnings and cash flow from this business to invest in it and be a secure supplier. So we've got improvements on price/cost relationship. We've got improvements in our operational performance, which has turned out to be better than expected because we've also raised our guide from $275 million to $350 million that price cost being better, our operational cost improvements in this business being better and the textile business, really showing a lot of growth right now. Even though the overall market is pretty depressed, the sustainable value propositions we have are really driving a lot of growth for us relative to the underlying markets. It's just another example of how our innovation model creates a lot of growth even in tough markets. When it comes to the stability question, there are some factors that I discussed in January, and I'll just hit them again quickly. The market structure in the tow business, has fundamentally changed from what we've been facing over the last decade. Part of it is the demand didn't decline nearly as much as we feared over the last 10 years, really declined only about 1% a year decline versus 2% to 3%. And we've had the heat not burn segment really growing quite strongly. That also still uses filter tows, in fact more filter toes than a traditional cigarette growing over 15% a year, creating stability in that market. So the market is only down about 10% when you look at the last decade, and now China is even showing some modest growth in sort of the 1% range, which is about half of the cigarette global market. So that's been really helpful. In addition, our growth in textiles allowed us to focus and fill up our assets and repurpose assets towards textiles in a way to sort of see value not just on focusing on the PI market. On the supply side, we've also seen pretty significant reduction in supply on two fronts. First, about 15% of capacity has been shut down by a number of players in the industry, including us repurposing some of our capacity towards the textile business. And we've probably lost effective capacity in the 10% to 15% range as we've gone to making much more specialty items, the slim tows filters as well as two free, the heat and burn are all more complicated and run slower on the assets. So we've lost a lot of effective capacity. So you're at least a net 15% reduction in capacity, putting us in the 90% to 100% range on utilization. So the markets are tight, and that's resulted in customers being very focused again, on security of supply, the cost of a tow filter is a small percent of the price of the cigarette. So you don't want to be missing out and supplying the market for such a small cost item. And we're working very closely to make sure we've got contracts in place, which we do for this year and by the summer, probably the best between the contracts will be completed for the next 2 years beyond this one. And that sort of puts these kind of improvements in place. So we feel really good about where we're at, and this is a great source of earnings and cash flow to invest in the growth of the overall portfolio.

William McLain:

One I would highlight is I don't expect a significant increase in the gross spend for the full year. I would highlight the key point is we're on track to produce commercial quantities this fall, and we'll have revenue before year-end. So on the cost basis, not a significant impact. I would highlight our overall capital spend expectations for 2023 at $800 million. I'm confident that we'll be able to complete the construction within that level of investment as well. And we will deliver the investment returns that we've committed to for this project.

Vincent Andrews:

Mark, I saw this week an article talking about that you had the successful completion of sort of recycling project for automotive mixed plastic waste. I think they call it automotive shredder residue. Could you talk a little bit about that? And what you think the opportunity set is for you here? Is it similar to what you're doing on the consumer side of the equation? Just where is this in its life cycle?

Vincent Andrews:

And then just as a follow-up in your regular business, you called out auto as being strong in the quarter, and you also anticipate there being growth in the second quarter sequentially. I'm just trying to compare and contrast that some of the other folks that are out there that have a lot of auto exposure, thought that maybe 1Q builds, maybe were a little bit of a pull forward from 2Q. So is that not what you're seeing? Or is your comments reflective more of just your portfolio of products rather than sort of what's going on in the broader industry from a build perspective.

Operator:

We now have Josh Spector from UBS.

Mark Costa:

Sure. So I think it's important to start with the total volume numbers, and then I'll try and sort of bring it down to the specifics on your question. So if you think about the fourth quarter and the first quarter, the consumer discretionary markets like consumer durables, B&C, those kind of markets, electronics have seen a just significant drop in primary demand as well as a significant amount of destocking, and it goes back to the retail channel massively overstocked going from sort of an inventory ratio 1 times to sales to 2 times plus led to a huge amount of change in demand and then pull that apart, that story that we told in January about the markets, this market area being down 40% and retail sales being down about 10%. You got to remember, retail sales is dollars. So if you back out inflation, you're talking about volumes being down 15%, 20% on a volume basis, it's a pretty significant drop in demand for all the reasons I think have been well discussed about, COVID and supply chain, et cetera. And that trend continued, in fact, got a little bit worse in the first quarter from the fourth quarter when it came to the destocking. So we see that playing out and that destocking and durables continuing to go on, there's just phenomenally long supply chains in this space, especially for us because we're manufacturing. We're very -- North American centric and our manufacturing. So all of our specialty plastics are made here, then they have to be shipped to China typically to be made into different components and then go through warehouses and then component makers and the brands and then warehouses and then finally at retail back in the U.S. and Europe. So it's just a very long supply chain to destock. And that's sort of what you see going on. We do see signs of that destocking ending in May. But what we would say about these discretionary markets, whether it's durables or the same kind of story in building construction, those trends on the primary demand, we are now forecasting to stay at these low levels for the rest of the year. It's possible the world will get stabilize and get better and there will be some restocking, but none of that is in our forecast. We just have the end of destocking in these discretionary markets. I would note in building construction, we're assuming things have been bad for a while in Europe and Asia. So that's not really a destocking sort of just low demand. But we do see things decelerate in the U.S. and have factored that in consistent with our coating customers. On the stable markets, I would note that we have a very different situation obviously, they are stable, but they still are under pressure. Low single-digit lower demand when you look at some of the customers in that space in personal care and water treatment, et cetera, because even their demand is off. And yes, they are doing additional destocking and that, I think, has mostly played out in the first quarter. And so we're now moving back to more just sort of lower primary demand as we go into the second quarter. So those are sort of the dynamics across the market, and I just made comments on the auto market, which is obviously a source of strength. I'd note ag is a source of strength and holding up well. And I would note that aviation is recovering well and also a source of strength. So -- there are a few places that things are going well, places like medical and pharma, where things are really stable. And then you've got the story just hit on these demand situations. So as you look at the first half to second half, we've really moved to our new forecasting primary demand is going to stay at these challenged levels for the rest of the year and the only lift in demand in the back half is the end of destocking that's part of the first half challenge, that doesn't continue into the second half.

Mark Costa:

Yes. So I think every story is a little bit different. But to keep it simple, you've got primary demand that's down and probably explaining aggregate, it's a little tough to break that out, but it's a third to half of the -- let's call it, a third of the story, probably 50% story is destocking in the first quarter. And then there is a 10%, 20% of the total decline that is places where we're seeding share. So discipline in price means you don't chase every KG. And in that case, what we have is place like in AFP and CI, very low-value markets where we're just not chasing that share. Architectural in China margins are incredibly low. We're not going to compete with the Chinese on share, we'd rather they serve that market than sort of export their products and it hits volume, but it doesn't actually hit earnings for the values low. Same is true in Chinese exports hitting Europe right now in different products, and we're choosing not to meet some of those very low offers, because in very low -- low market -- low-value market applications for us because we just sort of exacerbate price competition and it doesn't really have that big of an impact on earnings. So some of the volume mix is certainly market driven, as I described, some of it, which is a much smaller portion of that 9% is these kind of choices we make because that's how you have commercial excellence to maintain price discipline and stability in your important valuable markets and customers and regions. So that's how we break down this plan.

Jeff Zekauskas:

With your molecular recycling facility that will come on late this year or early next year, is all of the material that's going to be made Tritan?

Jeff Zekauskas:

So maybe I'll try it again. So I think polyester demand or Tritan demand was negative in 2022. It's negative this year because of weakness in the durable goods market. And now you're going to bring on more capacity, which the market really wants over time, but it may mightn't it be difficult to get up to high utilization rates in 2024, given how weak the durable goods market is or the overall demand for Tritan and other polyesters, maybe it will take you three years to ramp up your capacity. Is that right?

Operator:

The next question comes from Aleksey Yefremov from KeyBanc Capital Markets.

Mark Costa:

No, we're feeling very good about our range and how we think about it. And if you think about the guidance we gave in January, it was a balance of volume recovery, price cost improvement with the trends that we see in raw materials, energy and distribution and the cost actions that we were taking, those obviously changed, but to hit the two positives first you know the price costs improvement is pretty substantial and fibers improvement is obviously substantial relative to our January guidance. And if you look at the strength of what we already have shown in the specialties or on the spread improvement, in the improvement in fibers and think about how that rolls through the rest of the year. That's about $1 -- it's at least $1 per share improvement in our outlook for fibers and spreads in the specialties. So that's a tailwind. So then you get to -- we didn't change our range with investors. And that's due to the conversation we've just had around the weakness in the market on the demand front being pretty substantial. And when you think about how we've sort of adjusted our guidance when you look at the next three quarters, you're about 208 I guess, in the mean. So our midpoint of our guidance range for Q2 is 2. So it's a pretty modest adjustment for some of that demand not being better in the second quarter sequentially being partially offset by better spread netting out to that sort of 2Q number. And then we've really pulled the vast majority of that dollar per share improvement in our outlook into the second half of the year, and that really is predominantly volume and mix and the associated asset utilization headwind that comes with it. And you've got that -- as we're sort of seeing this weaker demand, we're taking actions to reduce our operating rates, full inventory down, make sure we hit our $1.4 billion of cost in sort of cash flow generation. And that led to that $50 million of asset utilization headwind we identified and about half of that occurs in Q2 and the rest in the back half of the year. So that's all sort of fed into this mix. But what it really does is derisk the guidance, you don't have as much of a step-up into the second half of the year that we had in January. So I think it's a much more balanced forecast. I think we feel very good about the range and our ability. We're certainly not at the low end of it anymore, and we'll focus on what we can control. I mean it's a pretty uncertain environment. I think the volume forecast now is pretty conservative or balanced based on how you want to look at the world. But certainly not optimistic. And we're going to focus on controlling our costs, focus on our price discipline, focus on innovation to create value and growth above the underlying markets and make sure we deliver our cash flow.

Mark Costa:

So in the EVs versus ICE cars, they both safety windows for sure. But we've walked through this a couple of times on the EVs and there's a lot of detail on innovation day on this. There's about 3.5 times more content in the EV car than a ICE car when it comes to interlayers. Part of it is you're sitting on batteries, your heads pushed up higher into the ceiling. They can't raise the outside ceiling for aerodynamic efficiency, so they make the sunroof a lot bigger. So you're now ready around the bubble. And so there's a lot more glass going to laminated the summer the side wind, the back wind is because it's also a way to take steel out of the car by getting more structural strength from the glass with the laminate, they want more functionality in it. So they want the heads-up display. They want more solar rejection to reduce the load on HVAC. So we're putting a lot of solar rejection properties so that inside the car doesn't get heated up. They need more specific style colors, et cetera. So all this is leading to a lot more value per square meter in addition to a lot more square meters when you go to an EV. And we've already seen tremendous success with a 70% increase in our sales last year over '21 from EVs and it's now up to sort of 10% of our exposure in that business. So it's just -- it's a great story. And fortunately, we're not losing anything in the transition with the -- being in other parts of the car.

Michael Leithead:

First, just to around inventory and working capital. First, you talked about $50 million of incremental headwinds from lower asset utilization to manage your inventory. Can you just speak to what business or businesses are seeing the most pain there? And then second, Willy, just what's the working capital assumption and your cash flow guide this year?

Michael Leithead:

And then just quickly, Mark, on methanolysis. You mentioned seen revenue before year-end. But just -- when do you think that facility will be ramped up to a point where we'll sort of see a normalized kind of EBITDA run rate from the plant?

Operator:

Your next question comes from Matthew DeYoe with Bank of America.

Mark Costa:

So when you think about the sequential trends, we obviously did a lot better than expected in the first quarter, which was principally driven by price/cost favorability especially from natural gas that we can see continuing sequentially into the second quarter. So that part, I think, is pretty clear. The cost actions we're taking on the $200 million cost reduction program and how some of that certainly showed up and help to the first quarter, but more of that will show up in help in the second quarter, that's pretty easy to see and predict how those elements are going to play out. So the wildcard is purely back to the full year, which is how is volume and mix going to play out? And how does that also impact asset utilization? And that's really where things sit. When it comes to the stable markets, I think we've got a pretty good understanding of that sort of half of our revenue that -- and where the trends in those markets are headed. There's still a little bit of destocking in personal care and water treatment and AFP that's uncertain. And then the big question is an AM associated with what's going on in these more discretionary markets in consumer durables and when that destocking ends and at what rate. I mean we do see if order books being sort of weak and similar to March. So normally, you'd see a real step up in March that didn't play out sort of was steady through the month when it comes to sort of the specialty plastics world. And -- but we do see order books being a lot stronger in May now. So we're finally starting to see some actual turn here in that marketplace, which is encouraging. And that turn is built into our guidance. And then on building construction, I think that's the other wildcard, I think Europe and China were presuming to be relatively stable at the levels not getting worse but not really getting much better. And we do see things getting a little bit more challenging in building construction in the U.S. as that market is starting to now finally face the lower housing starts and existing home sales, et cetera. So I think we feel pretty good about this range with the wildcard is going to be -- we're in a pretty volatile time when it comes to demand and how much destocking really has played out yet or not, et cetera. And that's why we've sort of pulled our sort of view this quarter down a bit. But we feel good about this range, and we're going to pull every lever where we got to head.

William McLain:

Yes. So we're very excited about the bolt-on that we added in our performance sales business in Advanced Materials. To your point, we're always looking for bolt-ons in AM as well as Additives & Functional Products. Our two key end markets within this space are in Asia, specifically China and the U.S., Americas. Now we have a global asset footprint to better serve and to achieve the higher growth rate. Ultimately, this is a premium set of products. And we're really excited about how this is going to help AM grow in the long term and specifically the films business.

Kevin McCarthy:

Mark, you moved your functional amines business for reporting purposes over to A&FP from the Chemical Intermediates segment. Can you talk about why you did that? And with regard to the first quarter, what were the sales and earnings associated with that business? I saw the sort of the retrospective disclosures for 2022. It looks like it was $310 million in annual sales with EBIT margin slightly north of 20%. Are those sorts of run rates reasonable to apply to the first quarter that you just reported as well?

William McLain:

And Mark, if I can add, as we look at our Q1 results and the -- I'll call it the strong performance relative to our January guide. The way I look at that is we beat our expectations of about $75 million. So if you look at that, that's roughly a third, of third, of third across AFP fibers and our Chemical Intermediates business as you look at the guide prior to the resegmentation.

Mark Costa:

Sure. So it's a great question. It's been a long journey for this business. It's always -- if you go back to the history you're talking about was a great source of earnings, margin and importantly, cash flow because it doesn't require much CapEx historically. And so it was just a great part of our portfolio, and it went through a very difficult time when sort of demand came off significantly. And as I said, and I'm not going to repeat it, the trends in demand and supply have changed a lot over the decade to get us back to high utilization rates. And the key here is the customers in a loose market, we're very focused like every department does on how to get the best price. But in the end, security supply is a lot more important than incremental price improvements. And we're now in an industry situation because of the last decade, there hasn't been very much investment in this industry and the need to continue to be a reliable supplier to our customers requires us to make some investments. So we've seen inflation and costs go up a lot. We obviously raised prices to cover that. But we also need appropriate margins in this business to make the reinvestments in asset reliability. And for us, expansion of capacity on our existing assets. So to be clear, not a new plant, but debottlenecking because we have so much growth in textiles and we have so much growth in this event product line that is going to go into food service that we're expecting in '24 and '25. The wholesale list stream as we talked about at innovation days making a pivot to being a growth stream as opposed to an optimization stream, which we're incredibly excited about because not only do we have a lot of huge upside of that $450 million coming out of the polyester recycling with this cellulose 600 products that we have -- we've now got $200 million of growth opportunity in the future on top of this improved fibers business and the margins as you look over the next five years. So this is really exciting new dimension for us to get to this higher altitude on the base and then build on it with growth. But we do believe the margins are at appropriate levels for the importance of this product to our customers. And funding our investment to be a highly reliable supplier. I'd also note, as I said, contracting typically, there's a lot of our contracts that are multiyear contracts. We have added provisions in there to make some adjustments for how raw materials go up and down to provide more margin stability for this business. And so we've got -- we're fully contracted this year and we're making great progress in getting the contracts in place for the next couple of years. And so we'll share more with you about how we've progressed on that through the summer. So we do think the margins are the right attitude there's always some uncertainty of energy costs, for example, that will move the number up and down a bit.

Michael Sison:

Nice start to the year. Market Advanced Materials, your margins did improve reasonably well in the first quarter versus the 4S and you're sitting here in the low teens. Where do you think we can get those margins back to -- it used to be a high teens, maybe 20% business? And is it just simply volumes coming back to get there?

Mark Costa:

And just putting that aside, I think there's a lift in margins that are pretty substantial in front of us from two components, Mike. First is obviously, there's prices we have increased last year where we did keep up with inflation through last year, which was pretty extraordinary inflation when you think of PVOH being up 45%, energy up 70%, PX up 40%. So a lot of inflation in this segment, two-thirds of the $2.4 billion of inflation over the last two years goes into specialty as a lot of it into AM. And we've done a great job. But there was certainly an amount of compression we didn't keep up with in 2021. And so as we hold our prices up and start realizing some cost benefits from that in this segment, we'll see margins improve as a result of that. So that's a big driver of where you'll see progressive improvements in margins through this year. But the other factor here in the short term is demand, right? So when demand is off as much as it is, and we're running our assets slower to control inventory and generating cash flow, and that's just going to have an asset utilization hit to the EBIT margins and a good portion of that $50 million that we called out, lands in the Advanced Materials segment. So the margins will get better this year. But when you go to '24 with the assumption that demand starts to improve and people bring restocking back to sort of normal levels of inventory, you'll see another big step-up in margins next year as we progress. And then you've got the circular economy kicking in through next year. And then we're using the premiums in existing applications and just new sales at much higher prices. So that will continue to drive margins up. And so I think we get back to our old margins and continue lifting the margins from there.

Arun Viswanathan:

So it looks like just given your guidance for '23, we can kind of assume maybe at the midpoint that the second half, you'll be exiting the year at around a $4 EPS run rate. And if you look at next year then, not to just annualize that number, but if you were, that would get you to $8, is that a base case which we can build off of? And maybe if you get some more normal volume growth if you get back into the mid 8s into the 8% to 10% EPS growth range or 8% to 12%. Is that how you're thinking about the main drivers that will get you back into that range? It's mainly volume? Or what else should we be expecting, I guess.

Mark Costa:

No, I think that's right. I mean, when you think about the portfolio, you've got fibers a much higher altitude and it's going to hold there. You've got CI at bottom cycle kind of spreads in margins in this current competitive environment. So stable to maybe up next year. So you've got that carrying in as a solid base to next year. And then the question then focuses on to what degree are we going to have specialties grow versus this year. Well, last year and this year has got an extraordinary amount of destocking and very low demand because in the world we live in materials, we're very much in a serious recession. I mean the service sector with consumers may not be there yet, but our industry is certainly at recessionary levels. So you've got a lot of recovery or just stabilization in some of these markets as upside on volume mix, you've got auto that has a lot of recovery in front of it. So if any version of that where the world is better in '24 versus this year, you're definitely adding on to this back half performance. You got to adjust for seasonality, but it's a very strong improvement in EPS next year versus this year in that macroeconomic scenario.

William McLain:

So just to highlight. First, we're focused on delivering our $1.4 billion of this year. And yes, as we think about a more normalized demand environment and building on the back half of this year, getting back to the $1.6 billion of operating cash flow and above that we committed to at Innovation Day is definitely within our side. And I think, again, we've been focused on discipline with our capital allocation. So one, first, the growing dividend, two, driving our organic growth and the innovation-driven growth model and this new vector of growth with our circular investments. And then bolt-ons, and we will always put cash to use and not when it sit on the balance sheet. So if there's left over, yes, we'll do more than offset inflation with share repurchase or dilution with share repurchases.

Operator:

Absolutely. Our final question on the line comes from John Roberts with Credit Suisse.

Mark Costa:

So John, the interlayer assets that make the auto and the architectural windows are flexible. So they very much can swing between auto and building construction. I would note that the vast majority of our business in laminated architectural glass is actually in Europe, not here. So slowdown in this sort of Europe construction market that's occurred for quite some time, sort of is embedded in our forecast. So we're at lower levels in that part of the industry. They really just isn't that much laminate glass because it's really isolated to commercial here and where the regulations drive a lot more laminate glass to both commercial and residential in Europe. So that's embedded in there. That excess capacity very much will just be redeployed to auto recovery as we see it. And then eventually, you're right, it's long lead the housing market will improve over time. It's honestly held up reasonably well. It's not off that much.

Greg Riddle:

John, there's no delay. We had always anticipated that we would do it in the first half of the year, and the expectation is that we'll make the announcement in the second quarter here.

Greg Riddle:

Okay. That's our last question. Thanks again, everyone, for joining us. We appreciate your time, and I hope you have a great day.

Operator:

Good day, everyone, and welcome to the Fourth Quarter and Full Year 2022 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman 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.

Operator:

[Operator Instructions] We will now go to our first question from Josh Spector of UBS.

Mark Costa :

Sure, Josh, and welcome. The -- we expected that question. I think it's an extremely important one we spent a lot of time on. First, let's just recognize we're in an extremely dynamic time in this world where it is difficult to predict some of the macro. You've got China in a weak situation but likely recover, seen one article saying there's $2.2 trillion of cash out there with Chinese consumers to be deployed and how that impacts both demand and energy. Ukrainian War, you've got inflation at four-year highs and what the Fed is going to do with it. So there is a lot of uncertainty, and the fourth quarter was a little bit challenging. As we look at Q1, many of those challenges continue, whether it's the destocking in durables and B&C that still needs to work itself out, auto not yet recovering and the stable market is virtually getting past destocking, but not growing yet. We will certainly see some raw material benefits in the first quarter, but not much in the way flow-through works and seasonally energy is high. So the first quarter has a number of challenges, not to mention pension and variable comp. So as we look at the step up into the second quarter and through the rest of the year, there's really three key elements. To your point, the one that's most directly in our control is taking out $200 million of cost net of inflation. And not much of that is really helping us in the first quarter. There are some of the unmet manufacturing activities that we're executing on, but even that is being implemented through this quarter and the operational improvements flowing the inventory, and those benefits won't flow out until they start moving into the second quarter. So the vast majority of that $200 million gets spread across the three quarters. So that's a big step up Q1 to Q2. The second one is how will spreads improve. Now we've had tremendous success in being disciplined and successful in managing our pricing with just great commercial excellence across all parts of the company. It's pretty extraordinary when you think about the amount of inflation that we faced. Last year was about $1.3 billion of inflation where at the beginning of the year, we didn't really expect that much inflation if you go back to our January call of last year. And if you look at it on a two-year basis, it's $2.4 billion of inflation, if you even go back to 2019 to '22 $2 billion of inflation. So a significant amount of inflation, and we've caught up with most of that and across that multiyear timeframe. We certainly kept up with it through last year. So as you go to each segment, the story is a little bit different. So Advanced Materials is probably the most important one to start with because it has a pretty significant tail when in spread. When you think about it, they had one of the most challenging raw material and energy environments across our segments with VAM and PVOH up 45% relative to '21 PX, up 40%; energy up 70%. Now they kept up with that inflation with 13% increases in price, but they did improve spreads. And if you go back to where we were at the beginning of last year, we had the intention of recovering spread compression in '21 of about $100 million. Now we didn't get that, but we did keep up with inflation. And we're starting now into this year at a much higher altitude with the prices that we've achieved in keeping up with this inflation. So as we look at this year, we see that this segment is going to have a pretty substantial tailwind in raw material and energy. And we're not trying to be too optimistic about this. If we just use the -- where raw materials have already come down in VAM, PVOH and PX for the first quarter of this year and think about the energy off of the natural gas forward curve for the year, that's actually quite a bit more spread tailwind than what we would have thought last year of that $100 million because of the higher altitude. So that's part of it. And again, that shows up as a step up as you move into the second quarter. There's a bit of it that flows through in the first quarter, but most of that is in the second quarter through the fourth. With Fibers, much shorter cleaner story, which is you had a lot of challenges in inflation here as well, both especially in energy and the market, the customers have moved to being worried about security and supply. So you've been very successful in increasing prices last year as well as contractually securing much higher prices this year to make sure that margins are back to sustainable levels to support our customers. And that's $275 million outlook to earnings this year, which is a significant step-up in fact, enough to offset the spread normalization in chemical intermediates that we expect this year. And then A&P will have modest spread improvement as well, but not as much because they managed spread quite well last year, so they have less upside this year. So you put it all together, that's a lot of spread improvement and a lot of it flows in sequentially into the second quarter. So that's a big step up. The third segment is volume and mix, and this is more of a mix of what happens with the economy versus what's in our control. Destocking at some point is going to end. We're assuming right now that it predominantly ends by the end of this quarter for durables and B&C. And so you get a step up of demand going from destocking levels, which are pretty severe to something less than that. In the stable markets, we can see moving past that some amount of growth from those markets. Importantly, innovation is something in our control, and we've had a lot of success last year despite our challenges in the economy and securing a lot of new business wins that are going to help this year. And again, that doesn't really happen during destocking. So you got to wait to get that past you to start seeing some of that benefit. And then, of course, there's China recovery. But we're being very conservative in not assuming much of that in our sort of outlook that we've provided until we see more proof of it. So the bottom line is there's a lot of step-up across these three factors. Many of it is in our control. But as you look at the guidance we gave you for the year, given the outlook for the first quarter, I think it's appropriate to sort of look at the lower half of that guidance for how we're going to perform until we get past this quarter and have more insight on all these factors.

David Begleiter :

Mark, just on Fibers, can you talk to the sustainability of this higher level of earnings going forward?

David Begleiter :

And just on cash flow. You mentioned increased to $1.4 billion this year due to a number of actions you're taking. Can you just sort of on patty taking and specifically working capital release this year?

Operator:

Our next question today comes from Aleksey Yefremov with KeyBanc Capital Markets.

Mark Costa :

So a good question. We haven't seen any real change in people's interest when it comes to recycled content. If you think about it, the brands have set out very aggressive goals in '25 and 2030. And the pressure out there for why they set those goals is just increasing, not decreasing when it comes to plastic waste. So consumers are very sensitive to this topic. There's obviously a lot of environmental NGOs putting a lot of pressure on this and politicians, both in Europe and in the U.S. are doubling down on sustainability, climate impact, plastic waste and the policies that they're putting forward. In Europe, you've got extensive policy around plastic waste reduction and recycling that was passed a couple of years ago and the rules are being implemented now that requires you to have 30% recycled content in your packages, if you want to put them on the shelf in '25 in taxes for whatever it does in every cycle content in it. So there are significant economic drivers in Europe that are driving brands to be committed to that. In the U.S., the NGO pressure, the social media pressure on brands is pretty high. And you now have at least five states already passing some version of legislation that's driving change like what's going on in Europe and some of those are quite big states like California. So the policy pressure and almost requirements to do it are there versus pay a tax and from a brand that's easier to be sustainable than pay a tax from a choice point of view. So the brands have these commitments. The other challenge I've got is the mechanical industry is not remotely capable of supplying the recycled content that's needed by this 2025 timeframe back into food grade, while material gets recycled down into other applications like textiles and park ventures, et cetera. But they -- but to get it back to food grade that quality mechanical recycling just can't meet these goals. So the need for our capability is very much there. The brand engagement is very strong. And we've seen tremendous success already on the specialty front, as we've shared with you with the 1,000 opportunities that we're pursuing with customers around our first plant here in Kingsport. But on the PET side, like the Pepsi contract that we just accomplished, we see that the central part of actually solving this crisis. The other thing I would note that a drop in demand in short term. Yes. I just forgot to mention one thing on the rPET, if you're looking at short-term demand and it's dropping, that's actually not about packaging. It's the carpet people and the textile people having such low demand. They were also buying clear bottles, and they're not buying those clear bottles anymore for their feedstock. And so that's why short-term demand is coming off is purely what's going on in the durables and building construction sector has nothing to do with packaging.

Mark Costa :

Yes. On the spread assumption that we've got and how Advanced Materials improves, we're assuming that we don't have another inflation crisis like we did last year, right? So VAM and PVOH prices were extraordinarily high because the VAM producers, half of them in the U.S. were unable to operate for five months. So we had prices for some periods of the spring and the summer were double because of that extreme market tightness. And we had to buy a lot of very high-priced material from the spot market out of Asia to continue to supply our customers. So getting rid of all that market tightness, which is where sort of VAM and PVOH prices have now gone to some degree, I think there's still more coming down, but we're just using where we are today for this quarter and how we project spread improvement versus last year. Same with PX. We're not assuming a dramatic improvement relative to where PX is now. You could look at 6 million tons of PX capacity coming online this quarter in China, and PX prices could get lower, but that would be upside. We're not banking on that in our outlook. We are assuming energy costs get lower, as I said, we're using the forward curve on natural gas for that. But that's what's in the sort of outlook we're giving you for this base case. Could things be higher? Sure. But that would require a pretty significant move up in oil from the sort of $80, $90 range we're in. And I think we feel good about this base case given sort of the world that we're in and the macroeconomic challenges that we face right now.

Michael Leithead :

First question, just on the circular plastic build-out, a bit of inflation so far, and you still need to break ground on the second and third facility. So can you just talk about what you're doing today to help make sure we don't get further CapEx creep year over, say, the next year or so?

Michael Leithead :

Great. And then second, just on Fibers and the new contract there. If I remember, most of your tow business was moved to long-term contracts a few years ago. So is this new pricing just reflective of a portion of your current business that we'll see further resets over the next two years? Or is this a big reset for almost all of your business here today into '23?

Operator:

Our next question today comes from Vincent Andrews with Barclays -- sorry, Vincent Andrews with Morgan Stanley.

Mark Costa :

Sure. So both very relevant important questions for us. The consumer durable business is incredibly important markets where we sell our Tritan at very high margins and have had tremendous growth over the last decade. What I can tell you, and we've been doing a very deep dive on what's going on in the fourth quarter, as you would expect, it's entirely market-driven. When you look at some of what's going on in the specific parts of the market we're in, which is small appliances, housewares, electronics, that part of the durables world, it's just been declining really for quite a long time, right? So the underlying market started declining in the second quarter of last year modestly. And then as people started switching to travel, leisure versus buying a lot of durable goods, you saw that in the announcements from Walmart and Target, if you go back to May. And what we didn't really fully appreciate is just how much overstocking the retail sector was doing in ordering from everyone who could supply them because they were so short of material and then suddenly it all showed up and they had a lot more inventory to get to get out. And with inflation being so high, the consumer durable sector is the first thing people stop buying. And you can see that in the semiconductor data, you can see that in the electronics where they're dramatically down. So when we look at what's going on in the end market, you can see a lot of evidence at the primary demand level of demand being off, but not nearly as much as us, right? So the retail sales data will show our direct end markets might be off 10%, 15%. And we're off 40%. So the rest of that is, by definition, destocking. And that's because of these retail inventory channels that are so overstuffed, and it just took a while to get that momentum to try and pull down production through the entire chain. So it's challenged. And it's continuing into the first quarter, and we expect it to be equally challenging this quarter as the fourth. But at some point, it's going to end. And from what we can see so far, we think they will get this under control mostly by the end of this first quarter, and then you've got a big step up in demand when the destocking is over to sort of lower demand than what is normal but still a lot better than 40% down, and that's part of the step-up in earnings for Advanced Materials as you move into the second quarter. On the auto side, demand, we're being, I think, conservative probably a little bit more conservative than what the consultants would say about demand being slightly down in the fourth quarter -- in the first quarter and not improving much for the year. So if we're wrong about that and production improves more, that's a lot of upside because those are very high-value markets that we serve in our earnings. But the shift in the market, to get at your question, Vince, is really important. That shift is very favorable to us. So we now got about 10% of our sales going into at very high margins. You have to remember that EV is about 3.5x more value for us than an ICE car. There's a lot more glass in an EV car and a lot more functionality. They're putting in it from acoustics to solar rejection, to heads-up display, et cetera. So the value capture there is tremendous on a mix lift basis. So the EV trend, and we are aligned with the top players on this with our products is a significant opportunity. I'd also say head-up display in general, not just in EVs, but all cars have a lot of growth momentum. It was a big mix uplift last year and even though down market, and we think that trend is going to continue and accelerate into this year as a result of the semiconductors, there's a lot in the HUD. There's a lot of times if you were trying to buy a car last year, they would let you order the HUD because of semiconductor limitations, that's going to resolve. And so we see the HUD market picking up. I'd also note that, that's in large. The paint protection business and the performance films business is doing fantastic, very strong growth, very high margins. So we got a lot of mix uplift relative to the underlying market in auto that helped us offset some of the challenges last year and certainly will be a significant lever versus last year into this year.

Jeff Zekauskas :

Of the $200 million in cost savings, how does it split between SG&A and cost of goods sold?

Jeff Zekauskas :

Okay. And so these are net reductions. So does it mean that SG&A should go down $75 million all-in in 2023, exclusive of the $110 million lift in pension expense? And can you explain what the event was that caused the $110 million lift in pension expense?

Mark Costa :

So Jeff, one way to think about sort of the waterfall across the businesses and the cost actions is, the cost reduction actions are sort of equal to offsetting both the pension costs and the return to variable comp and inflation, right? We put all that sort of together. So sort of the fixed cost structure, if you will, is flat. The Fibers improvement offsets the normalization in CI. So you have to have a point of view that the two specialty businesses are able to deliver earnings growth over the annualized FX headwind for this year. That's another way to sort of think about how we get to sort of flat EPS, including pension is those specialty businesses have to offset basically inflation this year and growth relative to last year. We've given you a waterfall on sort of where that growth comes from.

Willie McLain :

It is noncash. So there's no impact on our cash flow.

Operator:

Our next question today comes from Frank Mitsch with Fermium Research.

Mark Costa :

Yes, our expectation is the cracker starts to come back up in Q2. Any way you can do the math on sort of cracking spreads right now last year. Remember, our crackers are a bit different where they're highly oriented towards propane versus ethane. And we're trying to make as much propylene as we can and as little ethylene as we can with the investments we've made in switching into RGP, which we're doing as much as we can because the ethylene market is very economically challenged for basically at cash costs on bulk ethylene. But as the propylene markets are starting to improve, you can sort of see that through January. The spreads, the crackers are recovering as we go through this quarter and that feeds into our expectation that, that is likely to continue or hold and we bring the cracker back up. Demand right now continues to be challenged. So we don't really need as much of the output which is why it's easy to sort of make this decision in the moment for both the demand and the cracker by point of view. But we expect demand to get better in the second quarter as well as the spreads to continue to sort of stabilize at these better margins. So that's sort of how we're looking at it at this stage. You have to remember that propylene prices are well below any sort of historical norm to oil. They're very depressed. If you go run that analysis, it's pretty extraordinary. So we're really just trying to get back to a more normal relationship to the price of oil on propylene.

Mark Costa :

Sure. So we -- first of all, we're really excited to have this relationship with Pepsi that baseloads this facility and gives us the confidence to move quickly on this project. We are looking at multiple sites. As you might imagine, we're looking at existing sites we own and whether we can leverage all that brownfield and existing infrastructure costs down in Texas. But we're also looking at some other brownfield sites in some other states that could be attractive and evaluating the capital efficiency of each of these sites, the feedstock, benefits of each site as well as the incentives that different states are willing to provide to promote investing in the circular economy and playing a role in solving this environmental challenge. And the engagement, frankly, across the states has been really high. And as you said, I think they're all quite interested and excited to sort of participate in this kind of a green project. But we haven't finalized that. I'm hoping within the first half of this year, we'll have that finalized and then start moving very quickly on the -- on this -- so not just incentives, but the permitting and the site development and everything else. The advantage of our new sort of standardized approach in building these plants so allows us to start the engineering now without knowing what the site is going to be. So we're already spooling up engineering for this site and designing it. And then we'll do from what is what we call inside the battery limits, the actual operating units of this plant, the sort of infrastructure will obviously be dependent on which side we finally select.

Kevin McCarthy :

A couple of questions on your capital deployment. So in the prepared remarks last night, Mark, I think you mentioned your methanolysis investments in the aggregate would cost $2.25 billion, which is up about 10% relative to your prior projections. Can you talk about how that flows through? Is it going to be ratable over the next five years or some other shape? And then related to that, are your returns still the same? In other words, are you able to perhaps extract a larger premium to offset the higher project costs? And I guess more broadly for Willie, do you think CapEx will run $700 million to $800 million over the next several years? Or again, is there a different shape to that as you execute on these investments?

Kevin McCarthy :

Okay. And then Mark...

Mark Costa :

Sorry, go ahead. You're talking about the assurance, we didn't answer your question.

Mark Costa :

Yes. So on the return front, to be clear, what we announced in the prepared remarks today around the design of the facilities is the same as what we had in our economics back in 2021 innovation phase. So the first phase was always going to be the -- around this 110,000 tons of waste being processed. And so the $450 million EBITDA has not changed, and we feel more confident in as we're actually securing prices with contracts and securing feedstock, both attainability as well as what it's going to cost supporting those economics. The capital costs being a little bit higher than what we had talked about that sort of 10% increase that we discussed in our prepared remarks don't affect the returns. We said where our returns are above 12% for the second, third project, above 15% for the first project. We said greater than -- or we have room to absorb some of these challenges you always expect them to happen, frankly, when you're doing these kinds of capital construction projects, and we always want to make sure we have robust plans for the economics to deliver returns.

Matthew DeYoe :

One, I have missed this, but if we're looking at the Kingsport methanolysis unit, can we just walk through the progression from cost to profit how much commissioning costs in 2023 numbers? What do we think for how that moves to profit in 2024 and getting that full run rate earnings on that facility?

Matthew DeYoe :

All right. On that end, would that mean that 2024 is just neutral? Or would you see EBITDA? And then I guess just a question, you don't really talk much about buyback for next year. And I know CapEx is going up, but it still seems like maybe you have $200 million, $250 million of after dividend cash flow. Do we assume that goes to buyback or I mean your leverage is fine. Can you do in excess of that?

Matthew DeYoe :

Capital.

Mark Costa :

We always have this debate around best uses of cash in there on a principal basis. When we look at the circular platform, the capital we're deploying there has substantially better returns and valuation potential for the company than buying back stock today, and we think that's the appropriate way to deploy the capital versus buybacks on that front.

Mark Costa :

What?

Willie McLain :

Sure. Well, just to highlight, obviously, we executed $1 billion of share buybacks in 2022, both from our operating cash flow and the divestiture proceeds. So we will have, I’ll call it, EPS accretion as a result of the full year benefit from that. Right now, that's primarily offset by higher interest expense.

Michael Sison :

Mark, just one question. You spent a lot of time over the us last several years transforming the portfolio to more specialty assets. And when you think about the performance in the second half, kind of the start of the first quarter, what can you point out to folks that demonstrate that maybe the performance has the special characteristics or maybe it's more the bounce back in the second half? And clearly, your multiple is where it should be, if it's the case. So just curious what your thoughts on that.

Operator:

The next question comes from John Roberts with Crédit Suisse.

Mark Costa :

So we're not yet constructing that project. We are completing the licensing and the early engineering work around being able to pull the trigger on that project as soon as we feel it's appropriate. We have a lot of requests for capital across our portfolio back to valuation discussion that I just commented on. It's not just circular that has a lot of capital opportunities for very attractive returns on investment. Our whole specialty portfolio has those opportunities as well. And while certainly, the current economic challenges are there, we don't see a lack of growth opportunities across our portfolio on the specialty side. So those get priority call on capital relative to the ethylene and propylene investment. It's one that we will for sure do when it's at the right time, but we're going to have to be thoughtful about how we manage our overall CapEx budget. And to answer your question, if E to P was in place, we would not be -- we would not have left as cracker down. Remember, we had it down for maintenance. We just didn't bring it back up after we completed the planned maintenance. And we would certainly pin down for the maintenance in Q4, but would have been switching to E to P right now.

Laurence Alexander :

Two quick ones. First, on the renewables capacity, will that inventory build show up on your P&L? Or will it be separate? And can you give us a sense for the magnitude? And secondly, on the end market comments that you're hearing from customers, I guess it looks from your presentation is if the overall theme is the industrial recession driven by destocking to recalibrate, but underlying demand is pretty solid -- is pretty stable outside the construction markets. How confident are your customers on that? Or -- and when do you think they need to -- or -- and how much warning do you think you would have if they need to recalibrate?

Willie McLain :

Sure. On the Kingsport methanolysis project, obviously, we've built out the supply chain. We already have the key raw materials and lease cycle materials as part of our inventory here at year-end as we're preparing for a startup next year. So you can think about there's no significant impact of transitioning from fossil fuel feedstocks to recycled content as we go from '22 to '23 as we think about our projects, second U.S. project and the project in France. Again, we could have different operating models in the regions that those are not significant working capital builds.

Greg Riddle :

Let's make the next question the last one, please.

P.J. Juvekar :

So Mark, on methanolysis, you mentioned your CapEx is up 10%, but you don't expect a huge change in the returns you expect. Are you passing on the increased cost to your customers? And also, the plastics are cyclical. And so you -- if you want to get steady returns there, are your customers willing to take the cyclicality of the plastics and volatility so that you can cap steady margins?

P.J. Juvekar :

Mark, the Airgas or the industrial gas model hasn't really worked in plastics. What gives you confidence that this would work this time? Is it because this is such a specialty product and the consumers want it or the customers want it that you can have that kind of contract structure?

Greg Riddle :

Okay. Thanks again for joining us today. We really appreciate it. I hope you have a great day.

Operator:

Good day, everyone and welcome to the Third Quarter 2022 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman 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.

Operator:

Thank you. Our first question today comes from Vincent Andrews from Morgan Stanley. Please go ahead. Your line is now open.

Mark Costa:

So Vincent, great to hear from you, and we're really incredibly excited about the Pepsi contract and their commitment. And it is a significant volume for that plant as the base load for the plant. We have very active conversations going on with several other customers, but we're not in a position at this point to sort of talk about those discussions. But we do believe, the Pepsi agreement, consistent with what we're attempting to achieve with the PET market is a great endorsement and proof point about the value proposition that we can bring to solving the plastic waste crisis and create economic value for our shareholders at the same time. So, we're excited about working with them going forward.

Mark Costa:

So, it's a great question. And it's one that, as you know and everyone knows, it's a little difficult to call in the moment on what's going on in demand relative to destocking. And I think you got to take it market by market. So the place where we have the greatest headwind is in retail discretionary spend around the planet, especially in Europe and the US. What you had happened I think and it's been well documented is, we all knew there was going to be a shift from people moving back to more services probably leisure from sort of just buying consumer goods in the COVID situation. But I don't think anyone really understood the significance of that combined with extreme inflation on how much the pivot could turn into being. So, people stay committed to travel as we all know from the airlines. But with this extreme inflation affordability for everything else in our life, was very constrained. And so they've really cut back on anything that's a discretionary spend. And then you had all these ships loaded with all kinds of consumer goods caught on the ocean, caught in ports and it all showed up in the second quarter and you saw Walmart, Target, Best Buy, et cetera have a huge problem on retail inventory to sales that continues to now. Unfortunately, the wholesale chain supplying it doesn't have that much of an inventory, but you still have a huge amount of destocking occurring at the retail level. And you can see that flowing through and impacting some of our customers like Whirlpool or Electrolux and the announcements that they have out there. So you get a pretty significant decline, that's both the demand and a significant destocking event that's occurring, as we are in the fourth quarter. And I'd say, that's the one part of the market. It's a little hard to call to say, when that sort of combined destocking demand situation plays itself out. When you look at the broader set of what's going on, there are other factors impacting the market. So you've got Europe in stagflation where high energy costs and high inflation is driving a drop in consumer demand, but energy costs are staying high. You've got China with a no-COVID policy, constraining consumer behavior and a B&C industry that's been in trouble for over a year. And the US building construction market is not doing well either as you can see in all the housing data that's been coming out recently even in the third quarter GDP number. So, that impacts a lot of demand across our portfolio. The B&C is not off as much especially in North America. It's quite sort of -- there's a lot of momentum in that market of houses still being completed and painted and appliances being brought forward, but you can see that coming off as you go into next year. And then, you even have even stable markets that -- like a P&G and other markets out there, who are doing well, but they're still looking at their inventory and going to destock high-cost inventory to generate cash for the end of the year and position themselves for lower prices in the future. So, you've got modest destocking going on in stable markets that I think will play itself out by the end of the year. You've got Europe and China which has been challenged for a while, so that destocking I think is largely playing itself out by the end of the year. The US has more in the earlier phase of that destocking and change for what's going on in the marketplace. So, those are sort of the way we see it around the world. And then, you've got positives, right? So the automotive trends are good. You've got recovery that we're already seeing as a benefit in the third quarter and sequential improvements into the fourth quarter. You've got the EV trends, where we make an exceptionally large amount of money relative to an ICE car 2.5, three times as much value. So, as those are becoming more part of the mix that gives us another mix upgrade. And you've got consumers that are still in a financial -- consumers in a financial system are still relatively healthy, that sort of balances out some of these trends. So, we think that a good amount, greater than 50% of destocking plays itself out through the end of the fourth quarter. And so that means, as you look at next year, with the destocking being more behind us and returning to sort of what we're thinking about as mild recession terms, demand improves in a meaningful way as you get past the fourth quarter from a primary market demand point of view. And then on top of that, as we look at next year, if we get innovation happening across our marketplace that's going to drive a lot of growth. And you've got the lack of the outages that we had this year that hit us by about $100 million of missed volume mix that put us well below market demand this year. So, there's a lot of upside in that available capacity and a lower planned shutdown schedule in a meaningful way next year that gives us more volume to sell. So, there's a lot of reasons that as we get through this quarter, some of this destocking behind us, that volume next year will be better, even in a mild recession.

Operator:

Our next question comes from David Begleiter from Deutsche Bank. Your line is now open. Please go ahead.

Willie McLain:

Good morning, David. Thanks for the question. This is Willie. As we think about the $150 million, I would look at it in two buckets. Roughly $100 million, we expect to be on the manufacturing front. And obviously, as we've talked about inflation being a key factor, as you think about the demand that we had in the first half of 2022 along with the outages, that's driven a lot of inefficiency. And we expect that to be a large component as you think about contractors, as you think about the level over time. So, I do view that as structural, as we get back to operating in a call it a more controlled demand environment that we'll be taking a significant amount of that type of cost out of our system. There will be, I'll call it a lower amount of planned turnarounds. That will be, I'll call it a smaller portion of that $100 million that we see in the manufacturing space. As it comes to the nonmanufacturing that's about one-third, of the actions that we see. And in many cases what I would say is, the level of consulting spend discretionary, so that's more of I would say variable versus structural in the current environment as we expect to continue to invest in the growth programs, as was just highlighted. With the third project gaining momentum with our circular investments, we will balance that out of $150 million structural/discretionary to ensure that we can continue those investments.

Mark Costa:

Well, good question, Dave. We're not going to be giving quantitative guidance about 2023 versus this year, which we still have to finish out. But what I would say is, we look at the tailwinds and the headwinds in a mild recessionary environment, we think we're in a good position. It's obviously, a very dynamic time right now whether it's what's going to happen in China, the Ukraine war or inflation et cetera. There's a lot of uncertainty and that certainly goes back to a trade war in 2019 and a pandemic in 2020. What we know is the market is challenged as I just said around the short term in the recessionary environment that the manufacturing world seems to be entering. And I do think, a lot of the destocking will play itself out. So, we're really focused on what we can control. And I think the volume and growth side of things, is in a good position with over $400 million of new business revenue closes on innovation. We've got a lot of tailwinds whether it's the multifunctional layers growing and EVs, the tremendous success we're having in our paint protection films growth, we're seeing in Tetrashield and food and beverage cans. Really seeing a lot of growth continuing even in the semiconductor environment, for our high-purity solvents, as we expand the product portfolio there in sustainable coating items, et cetera. So a lot of innovative growth going. And I do think there's a meaningful tailwind that comes out of the lack of unplanned outages, that we had this year next year, and then less planned outages obviously helps as well. So, that's one component. An equally important component, is spread improvement, right? So when you think about what we've been through in the last two years, right you had about $1.3 billion of inflation in 2021 and we had pricing in place that caught most of it, but we still had some spread compression in the specialties in the back half of 2021. So when we started this year, we had a view that we're going to have $500 million of inflation this year. We have pricing in place to deliver a much greater than $100 million of spread improvement in the specialties. We didn't plan on having another $900 million of inflation through the rest of the year, so a total of $1.4 billion. When you sort of take our view of the fourth quarter here, it's a significant headwind. And the teams have done a phenomenally good job of keeping pricing going with the strength of our value propositions, and the specialties to keep pace with all of that inflation. And of course, Chemical Intermediates has done well in the first half of the year. But while we kept pace, we didn't recover the spreads that we were aiming to get from what we sort of gave up in the back half of 2021. So there's that opportunity that's still in front of us. And with inflation being as high as it is now, that opportunity is much greater in how raw material and distribution costs could fall and what the spread tailwind will be next year, as we're going to continue to have very strong discipline in pricing, because we are committed to getting our margins back to 2019 levels, before all this inflation chaos started. So I think that's a pretty significant upside. I think an equally significant upside, is a real change in the Fibers business. As we've told you, we faced a lot of inflation and increasing operating costs in the Fibers business in 2021 and 2022 and that's pushed our margins down pretty significantly. And there was a recognition, with our customers already this year that those costs needed to be recovered for us to be a reliable and sustainable supplier to them. And you've already seen us have a lot of price increases this year, but it's only covered a portion of that inflation as far as the recovery goes. And we've already succeeded in locking in contracts with a significant portion of our customers with prices that will allow us to significantly improve our earnings relative to this year. In fact, so much so that we believe it would offset what we've said in our prepared remarks about the normalization of Chemical Intermediates. So that's a significant improvement in earnings taking us back many years into where that business will sit and be much more sustainable, more profitable, more cash-driven business. And then as we just discussed we got $150 million of cost reductions. So a lot of tailwinds that offset those headwinds that we have with pension costs and gross spend and currency so – and interest expense. So net-net I think in a mild recession will be greater than this year but I'm not about to quantify how much.

Operator:

Thank you. Our next question comes from Jeff Zekauskas from JPMorgan Chase. Please go ahead. Your line is now open.

Mark Costa:

Thanks Jeff. So we're very excited about this commitment with Pepsi. And we don't discuss the specific contract terms with any of our customers. And in this case in particular, we view our contracting approach for the circular economy as a competitive advantage. What I can tell you is the contract did align with our circular contracting strategy that we've discussed with investors in the past. These agreements really demonstrate that molecular recycling is an essential part of solving the plastic waste crisis in sort of collaboration with mechanical recycling industry. And we really view this Pepsi commitment, which is one of the most significant and most successful brands in the world that they see the value in what we're doing both from an environmental point of view and it also demonstrates that we have an economically viable platform when we meet these terms in this contract strategy. So when you think about the principles that are behind this contract strategy for these types of contracts, we will have margin stability in how the product is sold to them and it's structured relative to what goes on in the marketplace. And these contracts will be long-term and have a in this case a sufficient base load for us to commit to this third plant. So we can see a clear vision of the cash flow necessary to provide appropriate return on investment on this. So it's a really exciting situation we find ourselves in. And I would say that back to Vince's question there's a lot of companies out there who are excited. We have over 1000 SSOs already for our first plant. We're going to be starting up in the spring of next year on a wide range of specialty products. The brand engagement in Europe is incredibly strong both in specialty as well as in PET. And I think it's really a significant proof point when we get this contract, that there has to be a pathway for hard-to-recycle materials back to food grade to sort of truly have a circular economy in that marketplace that we can partner with mechanical recyclers. It's an essential part of solving this problem that we're going to do this at a lower carbon footprint, and make sure that we have a very minimal impact on the communities that we operate in. And importantly, we need to make sure we don't move to other materials. Plastic is by far the most carbon-efficient product out there for these applications. And if we don't use plastic then we're going to have a huge impact negatively on climate, if we start moving to glass aluminum as well as other products. And frankly in many applications there just isn't an alternative material that's going to work for the brands. So for us we think this is a big part of the circular economy and we feel great about working with Pepsi as an anchor client.

Willie McLain:

Okay. Jeff, this is Willie. I'll answer the first part of the question as we think about our operations. So as we've highlighted earlier, given the -- one the amount of inflation that we've seen this year in working capital and through raw materials, we're looking at that in concert with the demand that we see and we've highlighted the destocking that we expect -- have seen in late Q3 and we're seeing here in Q4. So as we're in a planned turnaround for one of our crackers at our Longview Texas site, we're taking that opportunity to keep it down the remainder of the year to ensure that in our olefin stream that we bring our inventories back in line and that we also move through some of the higher cost both from an energy and raw material front and get that through this year so that we're better positioned in 2023 from both an operation and supply chain and working capital standpoint. As we think about propylene and propylene margins, what I would highlight is again, we continue to optimize our operations. We've made the investment in the refinery-grade propylene. That is continuing to play off quite well as we see the current economic environment. And also again, our propylene derivatives have continued to perform strongly in the first half. And while those margins are normalizing some in the second half as we had expected, this is still a very strong part of Chemical Intermediates and is delivering the cash for the company.

Jeff Zekauskas:

Okay. Great. Thanks so much.

Duffy Fischer:

Yes. Good morning. First question Mark, when you look at what your expected sales are for the fourth quarter and look at what your planned operating rates are, did you bring operating rates down enough that you don't think you'll build inventory, or what will you do with your inventory throughout fourth quarter if the numbers hit the budget you have planned?

Mark Costa:

Yeah. We made a decision that cash is an incredibly important part of any company and certainly in our value proposition. And it's obviously very challenging here when it comes to cash with working capital and all the inflation that we're trying to manage. But we are focused on generating cash in the fourth quarter and taking the actions necessary to do that as our priority and positions us well for next year in how we sort of drive forward and run our plants next year well; as well as position for lower-cost raw material that we're going to be purchasing; that we believe we already see the trends now in the marketplace of raw materials coming off that we'll see already flowing through in the first quarter and how to position ourselves even better for that in January.

Mark Costa:

First of all, the ports themselves are getting better. And with the reduction in demand in the US, as well as in other economies, the amount of trade occurring on a lot of what we were shipping in containers out of those ports has lowered itself. So the logistic constraints are not a major factor in the fourth quarter and we don't expect it next year. In fact, we expect to see a significant distribution cost tailwind for us next year relative to this year for two reasons, one with demand as tight as it was and all the challenges we had in keeping customers supplied, we use a lot of different expensive modes of transportation to make sure we honored our commitments to our customers. And so those modes were a higher cost to us some of which we passed on in pricing, but some of which is something we're not going to use next year and pick up a cheaper position in how we transport products from a mode point of view. And then, of course, distribution rates are coming down. You can see it on major routes like the dramatic drop in container costs between China and here. So we really do think this goes from a significant logistics constraint on volume limitations this year that we couldn't serve even though demand was there, and very high modes and rates to a meaningful tailwind next year as we optimize our operations and our distribution to a softer environment.

Operator:

Thank you. Our next question comes from Frank Mitsch from Fermium Research. Please go ahead. Your line is now open.

Mark Costa:

Yeah. So to be clear we're not intending to add tow capacity. So let's just make sure we're clear about that. When we talked about getting sustainable margin levels it's to be a reliable supplier. When you look at the situation we had a view of the market declining 2% to 3% in tow year-over-year and it's now changed to being flat to down 1%, partly because the overall market just isn't declining as much as people thought and equally important the heat-not-burn market is growing phenomenally fast. So companies like Philip Morris and the other brands had these very successful heat-not-burn products, and they still use quite a bit of tow. And so thinking it hadn't included how that would offset the tow decline in the traditional products. So when you put it all together, you've got a much more stable end market situation than I think what people expected. Second and this is unique to Eastman is textile growth has been fantastic and we continue to see strong interest in our product. When you think about a product that's made from half certified -- sustainably certified forest wood pulp and the other half now being recycled plastic, it's just to create value proposition on beginning of life. And in the life concerns about microfibers from textiles ending up in the ocean are certified to biodegrade that's a very strong value proposition for the marketplace and we're seeing just great brand engagement on that. So you've got growth in that that's more than offsetting the decline in tow that we see. So our assets are tight. And then you combine those two facts with less supply being available, because what we have done actually is repurposed some of our tow assets to making textiles. So that took some capacity out of the marketplace. Other companies have optimized their capacity whether it's in Mexico or now because of the Ukraine war in Russia, you've got less supply than existed several years ago. So in that conversation, our customers really want to make sure we're going to be a very highly reliable supplier to them to meet their needs. And for that to be the case we need margins at a better level than where they're at right now. So we're able to get price increases this year and add on pretty meaningful price increases next year to get us back to more appropriate margins for this business. And so it's...

Mark Costa:

Yeah. So just one thing I wanted to mention is that, the contracts also include provisions to adjust for changes in variable cost, which we didn't have in the past. So that makes them a little bit more predictable too on how they're going to perform.

Mark Costa:

So first when it comes to Eastman, about 75% of our production from a volume point of view is in the United States right? So, that's a significant competitive advantage for us on an energy cost basis relative to other markets. And you have to remember that 55% of revenue is outside the U.S. And most of what we sell in Europe and China, in particular are our specialties. So we in how we serve our global markets are in a very strong cost position. Obviously currency is not helping at the moment. But long-term, I think that energy position is going to be a strong competitive advantage. When it comes to Europe, our asset base in Europe is a lot smaller than it used to be after we sold the tires and adhesives business which has significant assets and energy-intensive assets in Europe. So with what's left now, we have our Interlayers plants and a small Performance Films plant which are more electricity driven and not that energy intensive. Our most energy-intensive asset is our Amines facility in Belgium. So the segment that's most impacted by us is AFP when it comes to high energy costs, where for that segment about 35% of their production as is based in Europe. And so they're seeing a pretty significant energy headwind. If you just look at the fourth quarter it's probably a $20 million headwind that they're facing on a year-over-year basis relative to sort of where they were a year ago, for just that segment. But none of these assets are in a position where we were concerned about them being economically shut in because the costs are so high. And we feel we have a very good plan in place especially in Belgium to feel that we'll get the natural gas supply that we need through the winter. So on top of it a lot of teams working to make sure everything has got supply agreements in place, so we don't get rationed. And we don't have a concern around the economic impact from a viability of the assets.

Mark Costa:

Yeah.

Matthew DeYoe:

Good morning everyone. So I believe this morning you have some euro-denominated debt maturities approaching. Does it make sense to take that out with USD debt? And how are you thinking about the term-loan? I guess as well what are the implications for next year's interest expense with all this? And does this kind of shift your commitment to the buyback?

Matthew DeYoe:

Thanks Willie. And I guess following the agreement with Interzero what percent of your France facility is now feedstock locked in or contracted or secured?

Matthew DeYoe:

Understood. Thank you.

Aleksey Yefremov:

Thanks. Good morning everyone. Could you discuss what share of the third methanolysis facility is covered by the Pepsi agreement? Is this enough for you to make FID? And if so when are you planning to break ground?

Aleksey Yefremov:

Thanks Mark and staying with recycling it looks like virgin plastics prices are falling in many cases and so as the feedstock for mechanical recycling, does that change your discussions with potential suppliers of feedstock and also with potential customers for your recycled materials in any way basically the current market conditions?

Aleksey Yefremov:

Thanks Mark.

P.J. Juvekar:

Mark, I have a question -- another question on inventories as it relates to cash flows. Your cash flow from operation is down more than 50%. You pointed out the hit from working capital being $500 million hit. So, I guess my question is how much of that is from your actual cost going up for raw materials? And how much of this is from level of inventories going up? And when -- can you describe where inventories got to in terms of days and where do you think that will go? So that's my first question.

Mark Costa:

I mean if you think about the first eight months, we are trying to ship things as fast as we can make it in serving market demand, really through most of August. Some of that was outage related and raw material availability-related interlayers that constrained our ability to supply markets. But demand was great. It was just a logistics or a production constraint in getting it all served. But the market has obviously shifted pretty dramatically in September and through this quarter in destocking.

Mark Costa:

Yes, sure. So one of the things that's, been an important evolution of our portfolio in CI, is the growth in functional amines. When you look at that business tied to ag, which is obviously having a good year this year and expect to have a good year next year, and so we are tied to ag demand, but has phenomenally attractive and very stable margins because most -- almost all of that business is in cost pass-through contracts. So that business didn't have market tightness driving spreads up in the last two years, and it's not going to have market looseness driving spreads down because they're CPTs. So that's just a great business and really quite attractive, just like the care chemical business and AFP. When it comes to acetyls, you've got a business. Acetic anhydride, relative to other acetyls is actually very stable in its margin. So again, it didn't have a fly-up in margins in 2021, 2022 and it's not going to have a big decrease in margins when the market soften. It's just the nature of those end markets like pharma and food applications are more stable, in what happens with them on a margin basis. But margins will certainly come off a bit there, but they will be more than offset by much higher volume. We had significant restraints on volume this year at acetyl production because we had some significant planned shutdowns. And then, the outage has impacted their production run rates as well. So without the planned shutdowns and sort of better operations, we have a significant volume upside that we're confident, we can place in the marketplace to sort of have acetyls be relatively stable to this year. And then specialty plasticizers, which are sort of benzoic derivative products again, historically very stable and reliable. And when you put those three together, that's 50% of the EBITDA of the segment, right? So general plasticizers in our case DOTP, as well as all the other olefin derivatives is the other half. And when you look at that part, that most volatility usually comes from the bulk ethylene, as opposed to the derivatives. And you can go do the math and see that the margins in the bulk ethylene are already incredibly low. We've one reduced it as much as possible as Willie said, using RGP to sort of minimize ethylene production. But the margins, are sort of a cash cost in the back half of the year and weren't great in the second quarter. So, looking at next year that's not a sequential headwind in 2023 to 2021 -- to 2022, in any meaningful way. So it's -- you're now a little down to olefin derivatives pricing coming off. But when you think about that, half the earnings is in these very good businesses that are very stable. The bulk ethylene headwind is behind us, to a large extent. So the amount of decline you can have in the olefin derivatives, even if it's significant it still allows us to be at that sort of normalized $300 million rate that we talked about. So that's sort of, how we sort of look through all that. And so we feel that's actually great performance in a mild economic recession for this business. And in the total portfolio, so it will be offset by fibers which allows specialties to drive our earnings growth.

Operator:

Thank you. Our next question comes from Laurence Alexander from Jefferies. Please go ahead, Laurence. Your line is now open.

Mark Costa:

Well, I think you have to get clear about what is primary demand in the marketplace, what is destocking and then what may be driven by pricing, whether it's destroying end market demand or losing share to competitors where you have to examine the price question. We're not seeing any sort of specific destruction in demand because of our pricing, at the consumer level. Frankly, when you get to the price of the product on the shelf, our component of almost every customer's cost structure is really quite small. So, we're not really a driver of where they go on the pricing on the shelf when it comes to consumers. When it comes to share loss, we're keeping a very close eye on as our pricing driving any share loss especially around the commodities for that matter, and we're not seeing any of that. Now, it's a little hard to see through that when you've got destocking going on. So you never know quite, is it then just pulling inventory down or shifting share? It takes a few quarters to sort of figure all that out. But what we can see right now, based on the end market information we have is, our -- what we're seeing in demand drop aligns with what's happening at the market and what the retailers are doing in destocking. So we feel being very disciplined on price and holding firm on that while we wait for market clarity is the right strategy. And we have very strong value propositions that allowed us to increase prices to cover $1.4 billion of inflation this year. So we're confident we can hold our prices relative to how raw material and distribution costs decline next year to improve our spreads back to more appropriate levels. So, we're feeling good about that. We just need the raw material declines we're already seeing to continue happening into next year and also the same on the distribution costs. You'll notice, I'm not saying energy as a tailwind, because I think that's a lot less certain on where energy goes. And so we're not assuming a tailwind in energy next year with all the dynamics going on around the world.

Mark Costa:

Yes. So first, I don't think we've ever thought the Green Premium was going to compress over time at least not over the next decade, because the supply and infrastructure needed to solve the plastic waste crisis at a lower carbon footprint. So we're making both climate and waste better. It's just significantly beyond what we and others can add to solve that, right? So, simple macroeconomics demand is going to be a lot greater than supply for quite some time. So, the value proposition of recycled content in polymer is a true specialty product for some period of time here in what it uniquely brings to the marketplace. At some point, is it possible that people add a lot of capacity? Sure. But that's way out in the future for when that starts sort of exceeding demand.

Operator:

Our next question comes from Kevin McCarthy from VRP. Please go ahead. Your line is now open.

Willie McLain:

Good morning, Kevin. Thanks for the question. So, as you think about cash flow progression, obviously, we've evaluated our portfolio of capital and we've taken actions on both fronts. So there's both timing as we've highlighted earlier this year. Some projects were getting pushed out as a result of supply chain issues. Those are resulting in some of those cash flows now falling into 2023. Additionally, again, we've reduced and focused our portfolio. We're investing to ensure that; one, that the safety and we maintain our plants well; two, that we continue to grow our core specialties; and then three, as we spent time today talking about our circular platform. And I'll use that to bridge in the 2023 expectation. So, what I would say is in a mild recession scenario, a range of where we are currently at $600 million or it could be as much as $100 million or $200 million higher as we make progress on all three of our projects. So as Mark highlighted, the fact that we'll be completing -- mechanically complete here at the end of the first quarter of our Kingsport methanolysis facility and as we make progress on both our France project and our third project here that will be in the US that will increase the level of capital. And we're confident in the cash flow that we're going to generate and allocating a significant portion of that strategic cash to our innovation-driven growth model and the circular platform.

Kevin McCarthy:

Okay. That's helpful. And then secondly for Willie on slide 12, you referenced a pension and OPEB headwind of $100 million. What is driving that? And is there any cash attached to it in terms of what you may have to inject, or is it strictly a P&L issue?