Eastman Chemical Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 16 speakers on the call.

Operator

Good day, everyone, and welcome to the Q1 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle of Eastman, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

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 William MacLean, Executive Vice President and CFO and Jake LaRoe, Manager, Investor Relations. Yesterday after market close, we posted our Q1 2024 financial results news release and SEC 8 ks filing. Our slides and the related prepared remarks in the Investors section of our website, www.eastman.com.

Speaker 1

Before we begin, I'll cover 2 items. 1st, during this presentation, you will hear certain forward looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our Q1 2024 financial results news release, during this call, in the preceding slides and prepared remarks, and in our filings with the SEC, including the Form 10 ks filed for full year 2023 and the Form 10 Q to be filed for Q1 2024. 2nd, earnings referenced in this presentation excludes certain non core and unusual items.

Speaker 1

Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the Q1 2024 financial results news release. As we posted the slides accompanying prepared remarks on our website last night, we'll now go straight into Q and A. Lydia, please let's start with our first question.

Operator

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

Speaker 2

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 those issues will be resolved?

Speaker 3

So good morning, Vincent, and thanks for the question. Overall, we're incredibly excited about the Circular platform, excited about how we're operating the first plant, proving out this technology works and have a lot of engaged customers and also excited about long view with the DOE grant and Pepsi contract that gives us a lot of confidence. And we believe long term, the European market is going to be structurally an extremely attractive market to serve. But there are sort of 2 issues we're working with that we mentioned in the prepared remarks. There's a sort of regulatory uncertainty and there's just continuing to do the work we always do in dealing with inflation and getting the CapEx number to where it needs to be for good investment.

Speaker 3

And on the CapEx, we feel good about

Speaker 2

how we

Speaker 3

can manage that. So it really comes down to customer contracts and EU policy. And what I'd say is, the European Union has been far ahead of the world on recognizing both the carbon issues in this world of climate change and having aggressive policy that and also recognizing that they've got a packaging waste problem like we do everywhere else and wanting to have policy that really drives the brands, suppliers, the market to sort of address that packaging waste, which also includes a lot of carbon emissions. And so they developed a policy that is quite comprehensive, that has some reduced and reused goals that will be sort of help the problem, but really focused on how do we get all of this material recycled. And it's still being finalized, but they've got aggressive targets like 25% content in beverages next year in 2025 and everything being at 30%, very high local recycling rates required in Europe, EPR taxes on people who don't do it, strict definitions of what is a recyclable polymer, etcetera.

Speaker 3

And so all that is I think is headed to be in policy and makes sense. But there was one recent change that created some uncertainty on how the brands can achieve the recycled content targets. And there's a problem they face, especially as you go from this year to next year, which is they're only recycling about 12% of PET back to bottles at the food grade level. They've got to be at 25% next year. So they will struggle to achieve that, pretty significantly as well as there's some WTO issues that come up around imports.

Speaker 3

And so they changed the policy from requiring everything to be made from local material to allow imports to be included. Now they put a bunch of restrictions on what imports would qualify around, how it's being made from a sustainability point of view as well as quality standards. And there's still a lot of complexity and trying to understand that, but it would probably make it very difficult to import from most countries in these equivalency requirements. And it really creates a huge amount of complexity, both for the implementation of policy as well as and achieving the goals of high recycling rates and really issues around consumer brand equity when you're using imports, right? Because if you bring imports into the country, you're replacing local demand for recycling, which increases incineration, which also violates the carbon emission goals of the European Union.

Speaker 3

The recyclability targets, which is your material considered recyclable requires a very high recycling rate in the European Union, which is also a problem. And then consumers don't want to be solving China's waste problem. They want to see policy driving up recycling locally, to address a local problem. So this creates some uncertainty and really goes back to why we had the circular contracting model of we're in this business to be a service provider to the brands to solve their plastic waste problem. We're not getting back in the commodity business.

Speaker 3

So we're sticking to our guns as we've told you we would around long term take or pay contracts that provide stable margins. And so we're still highly engaged with customers, still very much working with us. But this has slowed down the discussion on how to structure these contracts in this market context. I'd also note that we are targeting a lot of applications that can't even use mechanical recycle material because of performance requirements in the package. And long term Macauro cycling won't work anyway because it's going to degrade without chemical recycling sort of keeping it refreshed.

Speaker 3

So we're very confident of long term market structure. We believe this is a facility that should get built. But we got to stick to our milestones and our requirements around getting the contracts in place like we told you we would do. Okay. And what about on the cost side

Speaker 2

of the equation? You seem like you're still working on that as well.

Speaker 3

I mean inflation, I think has been an issue for every project out there that I've seen in our industry. The supply chain crisis has driven up the cost of everything from labor to equipment, etcetera. So all projects have had some amount of escalation to it. We have a good plan to get the capital to where it needs to be on the Longview plant. And we have developed a plan on how to get the capital down on the French plant.

Speaker 3

But it's going to take a little more work on some of the elements of doing that. And so while we're working on getting these contracts, we're taking that extra time continue working on reducing the CapEx. But we feel that we have a pathway to manage that issue. Okay.

Speaker 2

Thanks very much. Appreciate

Speaker 4

it. Yes.

Operator

Our next question comes from Aleksey Yefremov of KeyCorp. Please go

Speaker 5

ahead. Thank you and good morning. Mark, just to follow-up on this, do you have any idea to what degree this delay in France could maybe help you load Kingsport facility for specialty applications?

Speaker 3

So we have a lot of different flexibility. That's the beauty of how we manage all of our polymer lines and how we optimize value. Today, we do it from Triton to co polyesters to medical PET. And every line we ever build, the ones in France as well as the Texas project, we'll have the flexibility to make both PET and specialty products. So we're always going to be optimizing value and mix.

Speaker 3

That's the heart of our business model and we're very good at doing it. So in that sense, it doesn't really matter which project gets built first. We'll sort of optimize value between specialty and PT as we sort of build out our sort of our global position. The first plant is already very much focused on specialty applications. So we'll be driving into Triton into cosmetic packaging into shrink packaging into a variety of different applications and levering that up.

Speaker 3

And there's things we're working on to expand, extend the capacity on the first plant as we get it up and running, while we sort of work on building the 2nd and third plants. And so whichever plant gets built first between Texas and France, we'll optimize value between PET, which we have the contract with Pepsi on and specialty to maximize value as we build out the portfolio.

Speaker 5

Thanks, Mark. And on the annual guidance, nice beat in Q1. You have just a lot of details in the press release. But in general, 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?

Speaker 5

Or is it more conservative than anything else?

Speaker 3

It's more the latter. When you we're very proud of the beat we had in Q1 and the fact that it was volume driven, which is the key element of the challenges we had last year, frankly the whole industry had last year. To see that volume come back better than expected gives us confidence, especially because it came back in the specialties, which is where our highest value is generated for the portfolio. So we feel good about that. And as you look at our guidance, clearly we have confidence in AM and AFP and we have confidence in fibers doing better.

Speaker 3

CI is always a little uncertain. But the main reason we didn't upgrade the range is, it's the Q1. There's a lot of macroeconomic geopolitical uncertainty that we're all living with every day. And we want to really stick to our approach in January, which is this is a economy neutral forecast, right? We're not projecting fundamentals getting better in the back half of the year to deliver this range.

Speaker 3

We're also not projecting fundamental market underlying demand is going to get worse in the back half of the year. We're saying it's neutral. If you believe fundamentals will get better in the back half, then that would be upside in our forecast. If you have concerns about geopolitics, then there's some sort of there's risk to the midpoint our forecast. But at this stage, I think it's just prudent to be a little cautious until we see how things develop.

Speaker 5

Thanks, Mark.

Operator

The next question comes from Duffy Fischer of Goldman Sachs. Your line is open.

Speaker 6

Yes, good morning. Can you just give us some more details around the methanolysis plant that's been running, let's say, for a month now? I'm sure some stuff you can't, but things like what's the premium looking like? What's the breadth of feedstock that you've been able to run through? Maybe just kind of an update on how the plants running and how you'd expect it to ramp from here over the next couple of quarters?

Speaker 3

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 owners, but in solving a pretty significant environmental problem. And we're really excited that we're on spec with the material and we're serving our customers. And it's pretty amazing when you look at basically garbage going into the front of the plant and sort of on spec material coming out the back end.

Speaker 3

And it is a very complicated technology and plant. So it is non trivial to start up compared to if you're building a commodity asset. The good news is that we have fully confirmed that the process chemistry works, which was always the biggest question that I think people had and we can confirm that's working. We've validated all the unit ops are functioning as designed and can run continuously. So we feel really good about the sort of design and the structural aspects of the plant.

Speaker 3

The challenge has been just on getting the plant to run reliably. And we're certainly about 4 weeks behind schedule, as we mentioned in the prepared remarks on that front. And really, we're still focused on reliability. So we haven't moved into a broad feedstock slate or ramped up the capacity a lot until we've actually addressed some of these mechanical issues. So all the issues we're facing have nothing to do with the process chemistry is literally mechanical issues.

Speaker 3

Some of it was in the beginning construction errors, so leaks and improperly installed equipment. We believe we've addressed most of those issues, actually all of those issues at this stage. Then there's been sort of more than normal early failure of some pieces of equipment like instrumentation, valves and some other equipment. This is not unique to us. We see all of our peers having the same challenge globally where just equipment wasn't as made as well as we would hope in this supply chain crisis.

Speaker 3

And we're all sort of dealing with these kind of sort of annoying little issues. They're simple to solve, but they just slow you down as you have to sort of pause to address them. And we've also had some reliability issues on rotating equipment, especially pumps. And that is a little more complicated. It's a mixture of quality of assembly, some design issues and some operating learning.

Speaker 3

We've done a total root cause analysis on that, feel we have a very clear understanding what's causing it and we're very close to completing all the actions we need to address those issues. So I'd say from a mechanical point of view, we feel very good about where we're at. The plant is running. Our priority right now is serving customers, which we're doing. And we're just in the phase of ramping up production and sort of expanding our feedstock slate to sort of try out those issues.

Speaker 3

But 70% of the output of the plant is a moniker called DMT and that's always clean no matter what. So the process chemistry around sort of yield and impurities really is just about EG, which is a smaller part of the plant. So as we ramp up, test that other material, we feel very good about supplying customers this year because their demand that we're projecting is not close to capacity this plant. And so we've got plenty of ways to keep them served and supported. So we still feel good about the $75,000,000 of EBITDA that we've got out there as having a pathway.

Speaker 3

It's obviously a little more challenged with how we've had a slower start. We feel good that we can achieve it for the year. What I'd say as far as progression goes, our plan was always to do what we're doing right now is run at a steady state to make sure mechanically everything's fine. Then you ramp up as well as start buying the feedstock, which we'll be doing through this next quarter. So we'll have a lot more to tell you about that when we get to the Q2 call.

Speaker 6

Great. Thanks. And then in the market, it seems like there's been an inordinate number of PDH unit issues over the last couple of quarters. Maybe just bigger picture, how has that impacted your business? You obviously take a lot of propylene and make derivatives, but have you seen that as a positive or a negative across your whole portfolio?

Speaker 3

Well, 1st 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 drills that go into, AFP as well as AM. So there's parts of the propylene stream that goes across the whole integrated complex. When the outages occur and the price of PGP goes up, that's good for us obviously. But it's always a question of how does PGP move relative to the price of propane that gets us to that spread. And through the Q1, we certainly saw PGP move up, but we also saw propane prices come in much higher than expected.

Speaker 3

So those sort of netted out to some degree. And as we go into this quarter, those spreads look like they're going to contract a bit from the Q1 with the way PGP prices have come off as outages have been resolved. So it's the nature of these, open businesses where there's a certain amount of up and down in spreads and that's just factored into our guidance.

Speaker 6

Great. Thank you, guys.

Operator

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

Speaker 7

Thank you. Good morning. Mark, I do appreciate the color on what's going on in France. And I'm trying to reconcile how the consumer brand companies are out there. They're making promises about what percent they're going to have recycled by what year.

Speaker 7

And reasonable minds believe that they're not going to hit those targets. And so here is an opportunity to get on board with a recycled content with you and yet it seems like they're waiting for government subsidies or mandates or something before they sign contracts. I mean, it almost seems hypocritical on their part in terms of making these statements. So it begs the question, how committed are they in terms of recycled content? And given where we are right now, how do you feel about the potential of if things don't work out the way that you anticipate walking away from the France project?

Speaker 3

Hey, Frank. 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 knew this is important.

Speaker 3

I do think there's a reality, which is there is a significant lack of recycling infrastructure in this world and in mechanical recycling today. And I think most of the brands understand that a lot of what they do in packaging, mechanical recycling won't even work properly. So the need for chemical recycling is absolutely necessary, in the long term. There's just I haven't run to anyone who thinks that both mechanical and chemical aren't necessary. So demand conditions very clear.

Speaker 3

The question is how do they meet those conditions, right? And at the moment there's been a ramp up if you go look at the data of imports of ARPET into the U. S. And Europe, that is affordable and that's a way for them to manage costs and hit their targets in the short term. The dilemma for that is it doesn't really solve the actual problem, which is U.

Speaker 3

S. Consumers, European consumers want the waste out of their environment, right. They don't want to be a solution to China's trash problem, right. So they've got to work their way through that, on the economics versus what the real goal is, which is addressing local recycling. And so as they're sort of in this situation of where ARPA prices are relatively low right now and imports are available versus the long term, which regulation is certainly going to drive a requirement for higher recycling rates within the U.

Speaker 3

S, within Europe, how do they sort of make those choices and decisions. So it's just taking us longer to work through these contracts. I'm confident in the end, these brands will focus on what is the correct thing to do for the U. S. And Europe sort of waste issues.

Speaker 3

But it's just taking us longer to negotiate the contracts than we expected.

Speaker 7

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. Just one other question in the prepared remarks you talked about a Patagonia partnership where you're recycling its unusable apparel. Unusable apparel, what is that?

Speaker 7

Is that like off spec products? And is this something that can you provide a little more color on that? And is this something that you're looking to expand with other consumer brands?

Speaker 3

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.

Speaker 3

So it's actually a genuine circular program to prevent textiles being thrown away. The 2nd largest source of plastic waste in landfills or incineration are textiles after packaging. It's a huge problem. And so they are truly forward leaning when it comes to anything environmental way ahead of anyone else, and they really do their science on it. So they're taking back all these garments and then we're shredding them and recycling them, and putting it back into fibers, in this case, Naya Fibers, for some of their products.

Speaker 3

So it's a genuine circle for the textile industry. So it's a program we certainly want to expand and do with other companies. If you think of all the fashion brands out there where their whole business model has been centered on buy things and then throw away and buy new things with the regulations that are coming in Europe around that waste, which is the next round after packaging regulation, as well as the consumer pressure on waste that exists here as well. This is another great circular story. We can take ultimately this back into our CRT to make nya fibers or we can take the textile back into the polyester plant to make polyester fibers, chips for polyester fibers.

Speaker 3

So it gives us a lot of opportunity to work on there. These are complicated programs. I wouldn't say that the volume is going to be particularly high anytime soon. But it is a model that has to be developed to build a future where we have waste out environment. And with the new technology, when you think about the Texas project, 90% lower carbon footprint, almost close to a 0 carbon footprint plan.

Speaker 3

That's extremely compelling, not just on the waste side, but on the decarbonization side. So we're very excited about what we can do for the marketplace.

Speaker 7

Very helpful. Thanks so much, Mark.

Speaker 4

Yes.

Operator

Our next question comes from David Begleiter of Deutsche Bank. Please go ahead.

Speaker 8

Thank you. Good morning. Mark, on the Longview project, if you could reach FID in Q3, what's the timeline from there for construction and startup?

Speaker 3

Yes, that would have the plant sort of coming online in the second half of twenty twenty seven.

Speaker 8

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

Speaker 3

The capital costs are different. The methanol, so you've seen it, it will be much cheaper than the Kingsport plant to build because there's a lot of sort of lessons we learned as we've shared in past calls around, how to sort of be more effective in building a plant, right. So we certainly don't intend to have the construction issues that we ran into and there's a lot of learning both in the construction as well as operating the plant now that gives us much better insight on how to improve some aspects of the plant, all of which will make the plant cheaper to build. So we feel good about that part of the plant coming in lower than Kingsport by a meaningful amount. But the difference is Kingsport had a huge amount of polyester lines and all the infrastructure for handling materials into the plant and out of the plant that we can leverage as well as energy infrastructure that was already in place here that was, leverageable.

Speaker 3

We didn't have to add energy and steam, infrastructure. So when you go to the Longview plant or the France project, the methanolises one part is cheaper, but you're adding polymer lines, you're adding and you have a lot of infrastructure you need to build around this facility that doesn't exist in either of those locations. So the total capital cost turns out to be higher. Fortunately, we've got great incentives with the DOE grant that $375,000,000 is extremely helpful in supporting the economics of the project offsetting inflation and paying for this add of scope that we did to the plant with this thermal battery and solar facility that allows us to get to that 90% reduced carbon footprint I mentioned. And then the French plant, same thing, it's cornfield.

Speaker 3

So there's infrastructure you're having to add that's sort of more and there you've got a biomass steam plant you're building as opposed to leveraging energy infrastructure at the Tennessee site. So each project is quite different in scope in what it's building and both projects have a lot of incentives to support it. We haven't disclosed the full amount from France, but it's an attractive amount of support as well. I mean, I have to say the French government through everything has been incredibly supportive on incentives, on permitting, helping make sure the policy makes sense in Europe as much as they can. So we really appreciate all their support and everything that they've done to enable that project.

Speaker 8

And Mark, if I could ask just on fibers and obviously strong top line driven by Naya. I read your prepared comments. How should the top line trend in fibers as you move through the rest of the year?

Speaker 3

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.

Speaker 3

The order pattern of the customers is a little bit unpredictable across the year. So it's just that. But the textile side will continue to grow and provide earnings growth, the tow volume, will obviously as I just said, will come off a bit and the back half will be a little bit lower in the first half.

Speaker 8

Thank you very much.

Operator

Our next question comes from Jeff Zekauskas of JPMorgan. Your line is open.

Speaker 9

Thanks very much. What's the depreciable life of the Kingsport Methanolysis plant?

Speaker 4

Hey, Jeff. Good morning.

Speaker 10

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

Speaker 9

Great. And in terms of the volume growth in the quarter, additives and functional products shrank 1%. Which of the subcategories declined in volume in the quarter? And in Advanced Materials, where you were up 4%, how would you compare what happened in specialty plastics to interlayers to performance films? Did they all grow?

Speaker 9

Did some of them shrink?

Speaker 3

Sure, Jeff. And nice compound question. We got 2 segments in 1. So on AFP, we were sort of net down 1%, which I call mostly flat. And there are meaningful moving parts in that, Jeff.

Speaker 3

Coatings and Care Chemicals actually had very good growth sequentially into the Q1. And then we had much lower specialty fluid bills and heat transfer fluids. And those 2 sort of offset each other. Ag was its own unique dynamic, right. So year over year, there's still destocking relative to last year, so demand is down.

Speaker 3

But we did see more than expected sequential improvement in ag demand from Q4 to Q1, which was just less it turns out they didn't need to destock as much as they thought. They had confidence about the ag season this year. So in North America, I would say destocking is over. There is still some residual destocking in competitive dynamics for our customers, not us, but for our customers going on in Latin America. So there's still some of that destocking to come to an end in the future.

Speaker 3

But the vast majority of our business is focused on North America. So for us, we're feeling pretty good about the ag business and how it played out. Regarding AM, we had a very strong recovery in the durables space. So sequentially, sir durables were up 15% from Q4. They were up significantly relative to last year.

Speaker 3

So that was a great improvement. We saw also shrink in cosmetics sequentially grow, shrink up 15% and cosmetics also have a good sequential growth. So those were all good. But there's still a lot of destocking offsetting some of that growth in medical that's still going on. And there's a tough comp on the performance film side.

Speaker 3

Last year, we had a very strong loading of channels in China orders. And with the auto markets basically being flat globally, but down in China, the demand was not nearly as good in performance films this year as it was last year against that tough comp. And the inner layer part was sort of flattish with builds.

Speaker 9

Okay, great. Thank you very much.

Operator

Our next question comes from John Roberts of Mizuho. Your line is open. Please go ahead.

Speaker 11

Thank you. 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?

Speaker 10

Good morning, John, and thanks for the question. Just as a reminder, as we've highlighted earlier, we're on a pathway to the $75,000,000 in incremental EBITDA. I would point out, obviously, in 2023, we had a net investment in the other and an expense of roughly about $25,000,000 So you can think about EBITDA growing from roughly consuming 25 to about 50 positive for the year. As we've highlighted, it took us a little longer to start up here in Q1. And that's the reason that other ran over on the EBIT view.

Speaker 10

As we transition into the second half, we expect mostly all of the EBITDA growth to occur in the second half And that will be primarily within Advanced Materials. And that's also why you see our confidence in the range that we provided AAM overall. As I look at it in total, basically the EBITDA is still about 2 thirds advanced materials, 1 third and other for the full year. On the margin basis question, I would say it's above segment average margins on both EBITDA and EBIT basis in Advanced Materials.

Operator

The next question comes from Kevin McCarthy of Vertical Research Partners. Your line is open.

Speaker 12

Yes, good morning and thank you. Just to follow-up on Advanced Materials, Mark, it's nice to see your quarterly results. And I guess if I look at the annual guide, you're looking for a 40% growth rate at the midpoint versus 2023 annual EBIT for AM. So maybe just if we zoom out the lens, the last couple of years have been kind of dislocated for that business. You're now seemingly coming back and regaining traction into a better place.

Speaker 12

What is your view of the likely growth rate or how do you see the puts and takes for that segment over the next couple of years? You had a few years where you did north of $500,000,000 Now you've got some methanolysis related earnings flowing into the segment as was just discussed. So how do you see the glide path for AM in 2025 and 2026? Maybe some color there would be helpful.

Speaker 3

Sure. So first of all, we're extremely happy to have Advanced Materials back on a track of sort of recovering out of an extremely bad demand environment and getting back on track to deliver very attractive growth and very attractive margins for our owners. At the end of 202223 was obviously sort of the worst demand environment we've ever seen. When you think about how demand came off and we had over 5 quarters of destocking along with very low demand in all the discretionary markets, whether it be B and C or durables or even destocking in great markets like medical. I mean, we literally didn't every market destock out except for auto through the entire year last year.

Speaker 3

So the volume mix headwind because those were also the highest value markets was pretty significant. So getting volume back, which is just destocking this year, remember we're not forecasting any improvement in this forecast for end market growth in the discretionary markets. We're going to as we've guided, start recovering earnings in a pretty substantial way versus last year. So as you look forward into 2025 and 2026, we believe we'll certainly get back above where we were in 2021 and continue to grow from there, right. So we don't have any market growth yet in this outlook for this year.

Speaker 3

So that's upside as the markets stabilize and recover. You've got just getting started on the Kingsport methanolysis plant, where the asset utilization is quite low and the volumes are not that high this year. So you've got the fill out of that plant, creating a lot of value. So that can take that $75,000,000 to $150,000,000 of EBITDA and that still has additional upside from there, but that's just in 2025. We got wins going on in our traditional innovation model and other parts of specialty plastics that's creating growth.

Speaker 3

We've got circular economy driven growth in eyewear with our ReNu recycled loop for all the eyewear companies and you've got automotive continuing to deliver innovative growth above market. They will do that this year and they'll keep doing that as we go forward. So you've got all these different sources of volume growth, that help get back above 2021 and keep going. You've got asset utilization tailwinds that will come with this, especially the methanolus plant, which is a pretty large chunk of new cost into this year relative to last year and then leveraging that. I would say on the spread side, I would assume things to be relatively neutral.

Speaker 3

So we got our margins to an attractive level to support investment in this business from some of the challenges that we had as we caught up to inflation. And prices will probably come off a bit over time in line with how raw material and energy costs are coming off a bit. So I would say, as you think about the modeling, I wouldn't assume an expansion or contraction in spreads. I would assume that we've got attractive margins now and you're leveraging all that volume against those margins to create pretty attractive earnings growth.

Speaker 12

Thank you for that. And then just as a brief follow-up, I think your commentary cited some new application wins in Advanced Materials. What are those? And do you see yourself as gaining share relative to competitors' broader market growth rates?

Speaker 3

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 Triton forever as well as other co polyesters. So I'll just give you a couple of examples. 1, growing a lot in hydration bottles in China, wasn't a market for us.

Speaker 3

They're using Triton, and we're seeing growth in those kinds of products. We're seeing getting into a broader set of Triton was really successful and now they're expanding into a broader set of tools. We have a new product for shrink packaging that's patented, that is a recycled code 1 product. So it's fully recyclable where the historical products were not. So that's gaining a lot of traction for us both in volume and margin as we just win with a more recyclable product.

Speaker 3

Obviously recycled content would add more value to it. So there's always these wins we have in all kinds of places in the portfolio that sort of has allowed us to deliver attractive growth. And as much as we're very excited about methanolysis and that is a huge priority of capital deployment and innovation effort, we wanted to remind investors that our core model is still active and winning business every day and we're adding methanolises on top of that.

Speaker 1

Thanks, Mark.

Operator

The next question comes from Patrick Cunningham of Citi. Your line is open.

Speaker 13

Hi, good morning. You seem to be fairly confident that we're reconnecting to primary demand levels here. But do you get the sense that any of the volume improvement in the Q1 came from maybe some modest restocking? I know I've heard that 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 Q1 and expectations into 2Q?

Speaker 3

Yes. I'd say on the margin, there's probably a bit of restocking that's occurring. I mean, it's almost impossible to really know the answer to that question. When you get into destocking or restocking, your customers are not exactly that clear on what's going on. But I can definitely point a few examples where Red Sea logistics concerns would cause some has caused some customers to buy ahead of that risk, in a few places, as an example.

Speaker 3

But at this stage, I think it's really hard to call lack of destocking, a little bit of restocking or maybe even a little bit of market growth. I mean, there's just no way to know precisely what that is. But I can tell you it's not a material driver of our earnings at this stage based on what we know from the customers. We're not seeing large orders come in where people are restocking in some sort of noticeable way.

Speaker 13

Got it. That's helpful. And then just on the expanded scope for the Longview facility, is the funding you're receiving there from the DOE simply just offsetting that expanded scope? And how should we think about economic returns given this expanded scope? And would you expect additional premiums or maybe are we reliant on some price for carbon abatement in the future?

Speaker 10

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, it is

Speaker 14

the way I look at it

Speaker 10

as 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 $375,000,000 as we've talked about. And we're currently negotiating those exact terms of the award, but we're targeting to have line of sight to that over the next 3 to 6 months.

Speaker 10

And it is definitely an offset to the additional as we talked about thermal batteries, as we think about the green energy source that this will offset that as well as the additional inflation on that. So it's back to the and we're confident that we'll have greater than 12% returns on the project.

Speaker 3

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 content. It's 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. Carbon is still not exactly clear what premiums people are going to get for just decarbonization.

Speaker 3

So I think there's upside as there becomes a cost to carbon, as policies start getting implemented on that front, but we're not assuming any premiums associated with the carbon side of things in our core economics. But we are going to we are as we go forward with this project now that it's very compelling to see what the value is with consumers on that front, I mean with the brands.

Speaker 10

Great. Thank you.

Operator

The next question comes from Josh Spector of UBS. Please go ahead.

Speaker 14

Yes. Hi, good morning. Two questions I wanted to ask on volumes. So on my math, when I look at the Q1 volumes versus 2019, it was it appears to be your easiest comp. You were up 3% year on year.

Speaker 14

So the first piece is how do you think the year on year comps on volumes progress through the year? Do you do better or worse on where that comp is versus the 2019 baseline? And related to that, I guess, there's a lot of choppiness in some of the numbers. Where would you say your core volumes are in your plan for the year versus 2019? Thinking about that in terms of what's the benefit if you see a stronger demand improvement or a full reconnection versus just improvement?

Speaker 14

Thanks.

Speaker 3

Sure. So I think it's easiest to sort of separate our revenue portfolio between what are stable end markets and what are sort of discretionary end markets. The stable end markets have consistently sort of grown through 2019 to now at very modest rates, call it 2% to 3%, whether it's medical, personal care, etcetera, those kind of markets. But there was a dislocation that even in those markets there was destocking last year that played out depending on the market 1, 2, 3 quarters to sort of finish their destocking in those markets. And then they've reconnected back to sort of demand and are growing again, which is true for this year.

Speaker 3

Medical being sort of the worst, ag and medical being the most stable markets that had the biggest destocking because of fears of not having inventory in 2021 to 2022. On the discretionary markets, as everyone knows by looking at housing data or automotive build data, well, harder to see it, but appliances, electronics, etcetera, same story. Demand is relative to 2019, not great. We're at a 28 year low in existing home sales in the United States. B and C Construction in China is off dramatically still and also off a lot in Europe.

Speaker 3

So B and C prior demand is extremely challenged. When you think about the materials world, existing home sales to something to Eastman is more important than new homes because of all the appliances, electronics, more painting, etcetera. So that market is very challenged. It will come back. It's obviously, I don't think coming back this year, but that's upside to getting back to what is normal from where we are now and then growing from there.

Speaker 3

So there's pretty big gap there relative to 2019. When it comes to auto, same thing. There's a huge backlog of increasingly older cars that need to be replaced around the world. And first was semiconductors limiting the ability for consumers to buy cars, then interest rates now slowing down the rate of buying cars. But the demand for that will certainly recover and be a significant amount of upside for us.

Speaker 3

Same thing with durables, big shift to service lifestyle post COVID. At some point, people rebalance back to some blend of buying material discretionary items and seeing Taylor Swift. So I think that all those are still well below sort of 2019 levels in one form or fashion relative to where they should be. So as you look at this year and the way our guidance is built, all we have is a lack of destocking, some innovation driven growth, starting to deliver real value out of methanolysis, stable markets being okay. And all that recovery that I just described is upside to 202526.

Speaker 3

I'm not about to tell you which year it's going to happen, but there's certainly a lot of upside in places that are most challenged are also our highest value markets from a variable margin per unit basis. So, as those markets went down, it was a significant headwind. As those markets come back, it's going to be a significant tailwind.

Speaker 14

Thanks. I appreciate that. I guess if I try to wrap that altogether, I mean, I struggle with if your volumes for 2019 versus 2018, are you flat? Are you down high single digits? Just considering the 2 offtakes, is there a way to quantify that at all?

Speaker 3

I don't have that answer for you in that at a sort of integrated company basis. We look at everything on a market by market basis. And so what I told you is sort of how to view it. Half the revenue is very stable and growing, half the revenue has a huge amount of upside at very high value.

Speaker 8

And but

Speaker 3

we I'm not going to try and quantify that on a weighted average basis.

Speaker 10

Okay. Thanks a lot.

Operator

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

Speaker 11

Given the feedback you're hearing from customers around the recycling plants, now that you've started 1 up and you have you're making progress on the next 2. And also kind of that consumers increasingly see that alternatives are available. Is that changing the way you think about managing the balance sheet and the cadence of projects over, say, the next 5, 7 years?

Speaker 3

I don't think so. I just want to make sure I understand the question correctly before I try and answer it. We have the normal core business that has maintenance, right? So there's always CapEx around that, call that in the 3.50 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.

Speaker 3

And that takes you to with maintenance $500,000,000 to $600,000,000 range on CapEx. When you go beyond that, then you're starting to make choices around how much am I doing in share repurchase versus how I'm deploying capital to the circular economy. Obviously, we've got one plant behind us at this stage. So there's a question of when you build France and Texas, how do you stagger them? Are they going to be right on top of each other?

Speaker 3

And how the CapEx for those two programs net of incentives sort of add together. And we believe we have a balance sheet and a cash flow in place to fund all that. So we don't have to take on debt to do it, just to answer that question. And how we're going to I mean by just nature, I think as opposed to intention, these projects will end up staggered one way or another. It would be extremely unusual if they both start at the same time just based on getting permits and contracts and everything else.

Speaker 3

So they'll be staggered to some degree. That's all factored into our analysis about how we work through 2025 and 2026. I don't know if you want to add to that Willie.

Speaker 10

Yes. So what I would just say is we're confident that we can keep a strong investment, great balance sheet through that. You're seeing that as we update our guidance on capital this year of being $700,000,000 to $750,000,000 and expecting share repurchases of $200,000,000 to $300,000,000 And as Mark has outlined, we've always been agile between our growth investments and then using any excess cash for bolt ons and then returning cash to shareholders. We will continue to be disciplined in that capital allocation and we expect to generate the cash flow to fund our strategy.

Speaker 11

Thank you.

Operator

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

Speaker 15

Hey guys, nice start to the year. Mark, when you think about maybe a 26%, 27% sort of longer term earnings potential. Your methanalysis facility in the U. S. Is ramping up well, it sounds like.

Speaker 15

And if you add that the potential scale up there plus potential volume, is there sort of EBITDA potential you think you can get back to or get above? I think you peaked about 2.2 in 2021. Just framing up what the earnings potential is if volume does recover over the next several years?

Speaker 10

Mike, let me start with last year we had $1,600,000,000 of EBITDA. This year our guidance is $1,800,000,000 And what I would say as we've talked about normalized, that's going to be north of 2,000,000,000 dollars As we think about adding $150,000,000 to $200,000,000 for the Kingsport plant, that puts us in that $2,400,000,000 range. And then there's upside as we think about adding the Longview project and the France project on top of that. But we're obviously highly focused right now on delivering the growth in Advanced Materials and Additives and Functional Products with the investments we've done to date. As Mark just highlighted from an end market, ultimately we're leveraged to a recovery in the economy now that destocking is substantially behind us And that's what we're focused on delivering.

Speaker 3

And if you do look at it on a historical comp basis, it's more compelling because we sold off $175,000,000 of EBITDA in adhesives and tires and use 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.

Speaker 1

Great. Thank you.

Operator

Our next question comes from Arun Viswanathan of RBC. Please go ahead.

Speaker 11

Hey, thanks for taking my question. I had a similar question to Mike here. So if you think about your bridge to EPS, it looks like you're on a path to do about $3.60 or so in the first half, and that would imply about $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 $8,000,000 to $8.80, which would kind of fall in line with your maybe 10% EPS growth targets or $8,000,000 to 12. Is that how you guys are thinking about how you kind of progress from here?

Speaker 11

And if that is the case, would that be mainly kind of volume recovery and maybe some methanolysis? Or how are we thinking you guys are feeling about kind of where you are in the evolution here with the return of some primary demand and some volume growth? Do you see that target of 8% to 12% EPS growth back in view? Thanks.

Speaker 4

Yes. I

Speaker 10

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 on the volume mix line. With the combination of Advanced Materials and the leverage, we talked about how that volume mix drops to the bottom line with the fixed cost structure that we've had in combination with the growth. In the back half of this year, we see that leverage for the application growth as well as the back half EBITDA growth for the Methanolysis facility. When we look into growth in 2025, we've talked about another $75,000,000 of EBITDA growth from methanolysis and the application wins that we'll have there, as well as we're at solidifying our contract structure on fiber. So you can consider that stable in this period.

Speaker 10

And we will have growth as ag recovers, as building and construction recovers in AFP. And I would say we're at sort of trough levels in the intermediate space. So 10% growth at the midpoint is reasonable as we go forward.

Speaker 3

I'd just add AFP also as growth. We're at exceptionally low level of heat transfer fluid fills this year. We have a clear order book to that $30,000,000 drop from $23,000,000 to $24,000,000 to recover that as we go into $25,000,000 Not to mention B and C having any kind of market recovery would be upside. So there's upside in AFP, there's a lot of upside in AM, stability in fibers, CI is at the bottom of the market. So at some point, start coming off of that and recovering from a spread point of view.

Speaker 3

So there's multiple ways you sort of combine that together to get to growth next year versus this year.

Speaker 4

Thanks. Let's

Speaker 1

make the next question the last one, please.

Operator

Thank you. So our final question comes from Salvator Tiano of Bank of America. Please go ahead.

Speaker 4

Thank you very much. So firstly, I want 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 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 feed circles. So does this mean that there could be that the Trans project may have elevated OpEx because of that?

Speaker 4

Firstly, and secondly, why so far you haven't signed agreements with for more domestic supply? Because I would think that in Europe with our single stream PET recycling, it would be the ideal location and yet you still have to go as far as France and Italy to get feedstock?

Speaker 3

So this is a large scale project, in 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 has a huge opportunity to improve in collections and sortation. It's part of why they want to really support this project. Currently, we have about 70% of our feedstock under contract, which is a mixture of France, Germany, Italy, Spain, as you noted. Logistics costs were always factored into our economics for this approach to the marketplace.

Speaker 3

So that's all built in. But the last 3% is not signed because we want to work with the French government and the local municipalities across France to sort of get that feedstock closer in as they develop that infrastructure. So that's sort of where we want to go. That's why we're not signing up for any more from other places, because we're focusing on how to get more out of France for that last remainder. But that's all built in.

Speaker 3

And the actual logistics cost per kg is not significant in the economics for this plant.

Speaker 4

Okay, perfect. Then the other thing I want to clarify is about what do we expect for this year fibers volumes because Q1 was down 7% sequentially. You talk about Q2 being similar to Q1 and then another step down in second half. So that pretty much seems to imply a very big annual decline, which I don't think is what we were expecting.

Speaker 10

On the volume, what I would say is, there's only we've talked about Naya growing and we expect that to grow. On the at the pay 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 declined.

Speaker 3

On a full year basis, gets a little complicated when you're doing looking at sequential and year over year numbers for this. The Till volume is relatively flat to last year, when you look at it on a full year basis.

Speaker 4

Okay, perfect. Thank you very much.

Speaker 1

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

Operator

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

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Earnings Conference Call
Eastman Chemical Q1 2024
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