Eastman Chemical Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 28, 2022

Key Takeaways

  • Eastman secured a long-term Pepsi agreement to anchor its third methanolysis plant, validating the economics of its molecular recycling platform and circular-economy strategy.
  • Q4 volumes and revenues are pressured by global destocking (notably in retail discretionary), but management expects more than half of destocking to end by year-end and sees 2023 volume tailwinds from fewer outages and automotive/EV market growth.
  • The company is targeting ~$150 million of cost savings in 2023, including ~$100 million of structural manufacturing efficiencies (overtime, contractors) and ~$50 million of discretionary nonmanufacturing cuts, along with fewer planned shutdowns.
  • Eastman’s pricing teams have offset ~$1.4 billion of raw-material and distribution inflation in 2022, and the company aims to restore specialty spreads to 2019 levels through disciplined, value-based price increases.
  • Advanced recycling investments advance with a key feedstock deal in France (Enterzero) and three methanolysis plants expected to deliver a combined ~$450 million EBITDA, reflecting strong brand partnerships and high feedstock demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Eastman Chemical Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

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 Please go ahead, sir.

Speaker 1

Thank you, Maxine, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO Willie MacLean, Senior Vice President and CFO and Jake LaRoe, Manager, Investor Relations. Yesterday, after market close, we posted our Q3 2022 financial results news release and SEC 8 ks filing, Our slides and the related prepared remarks in the Investors section of our website on www.eastman.com. Before we begin, I'll cover 2 items. 1st, during this presentation, you will hear certain forward looking statements concerning our plans and expectations.

Speaker 1

Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our Q3 2022 financial results news release, during this call, in the proceeding slides and prepared remarks And in our filings with the Securities and Exchange Commission, including the Form 10 ks filed for full year 2021 and the Form 10 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 Q3 2022 Financial Results News Release. As we posted the slides and accompanying prepared remarks on our website last night, We'll now go straight into Q and A. Maxine, please let's start with our first question.

Operator

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

Speaker 2

Thank you and good morning everyone and congratulations on the announcement with Pepsi, very exciting news. Maybe you could just talk about the balance of the customers at the facility. I don't know if you can name any of the other ones or just sort of tell us How many there are and are they contracted similarly at this point or what's left to do there?

Speaker 3

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 baseload 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 great economic value for our shareholders at the same time. So we're excited about working with them going forward.

Speaker 2

If I could just ask a question, get your point of view on all the destocking that's going on. I know from the prepared comments, there's some thought that Hopefully, it will end by the end of the year. But what exactly are you hearing from customers in that regard? And how do you think we'll know that It's over other than it just being over. Like what signpost are you looking for?

Speaker 3

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 U. S. 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, travel, leisure from sort of just buying consumer goods in the COVID situation.

Speaker 3

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 Q2, you saw Walmart, Target, Best Buy, etcetera, have a huge problem on retail inventory to sales Yes, that continues to now. Fortunately, 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.

Speaker 3

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 this Q4. 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 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 No COVID policy constraining consumer behavior in a B and C industry that's been in trouble for over a year.

Speaker 3

In The U. S. 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 Q3 GDP number. That impacts a lot of demand across our portfolio. The BMT is not off as much, especially in North America.

Speaker 3

It's quite There's a lot of momentum in that market of houses still being completed and painted and appliances being bought forward, but you can see that coming off as you go into next year. And then you even have even stable markets that like the P and G and other markets out there who are doing well, 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. You have the U.

Speaker 3

S. As more of a 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.

Speaker 3

You've got Recovery that we're already seeing as a benefit in the 3rd quarter and sequential improvements into the 4th quarter. You've got EV trends where we make an Certainly large amount of money relative to an ICE car, 2.5, 3 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 the financial consumers in the financial system are still relatively healthy. That sort of balances out some of these trends.

Speaker 3

So we think that a good amount, greater than 50% of destocking Plays itself out through the end of this Q4. And so that means as you look at next year, With the destocking being more behind us and we're turning to sort of what we're thinking about as mild recession terms, Demand improves in a meaningful way as you get past the Q4 from a primary market demand point of view. And then on top of that, As we look at next year, you've got 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 $100,000,000 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.

Speaker 3

So, it's a lot of reasons that as we get through this quarter and put some of this destocking behind us that volume next year will be better, Even in a mild recession.

Speaker 2

Sounds good. Thanks so much.

Operator

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

Speaker 4

Thank you. Good morning. Mark, on the $150,000,000 of costs you've targeted for next year, how much is structural and how much is somewhat temporary? Does that include the lower shutdown cost or turnaround cost next year versus this year?

Speaker 5

Morning, David. Thanks for the question. This is Willie. As we think about the $150,000,000 I would look at it in 2 buckets, So roughly $100,000,000 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 twenty twenty two, along with the outages, that's driven a lot of inefficiency.

Speaker 5

And we expect that to be a large component as you think about contractors, as you think about the level of overtime. So I do view that as structural as we get back to operating in 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 turnaround. That will be, I'll call it, a smaller portion of that $100,000,000 that we see in the manufacturing space. As it comes to the non manufacturing, That's about a third of the actions that we see.

Speaker 5

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 can expect to continue to invest in the growth programs. As was just highlighted, with the 3rd project gaining momentum with our Circular investments, We will balance that out of 150 structuraldiscretionary to ensure that we can continue those investments.

Speaker 4

Very good. And Mark, I guess, in Slide 12, looking at initial 23 guidance perhaps, Okay. It looks like you're looking at perhaps modest, maybe 5% type EPS growth year over year. Is that in that ballpark? Yes.

Speaker 3

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 or the Ukraine war or inflation, etcetera. There's a lot of uncertainty and the uncertainty goes back to a trade war in 2019 and a pandemic in 2020.

Speaker 3

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 $400,000,000 of new business revenue closes on innovation. We've got a lot of tailwinds, whether it's the multifunctional layers growing in EVs, the tremendous success we're having in our paint protection films, Growth we're seeing in TETRA SHIELD and food and beverage cans are really seeing a lot of growth continuing even in the semiconductor environment for our high purity solvents We expand the product portfolio there and sotiable coating items, etcetera.

Speaker 3

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 Less planned outages obviously helps as well. So that's one component. An equally important component is spread improvement, So when you think about what we've been through in the last two years, right, you had about $1,300,000,000 of inflation in 2021 And we had pricing employees that caught most of it, but we still had some spread compression in the specialties in the back half of 'twenty one.

Speaker 3

So when we started this year, we had a view that we were going to have $500,000,000 of inflation this year. We have pricing in place to deliver a much greater than $100,000,000 of spread improvement in the specialties. We didn't plan on having another $900,000,000 of inflation through the rest of the year, so a total of $1,400,000,000 when you sort of take our view of the Q4 here, there's a significant headwind. And the teams have done a phenomenally good job of keeping pricing going with the strength of our value propositions in the specialties to keep pace with All of that inflation and of course chemical intermediates is 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 twenty twenty one.

Speaker 3

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 Yes, 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 There's 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 2022, and that's pushed our margins down Pretty significantly.

Speaker 3

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. 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. 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.

Speaker 3

And then as we just discussed, you got the $150,000,000 of cost reduction. So a lot of Tailwinds that offset those headwinds that we have with pension costs and gross spend and currency So in 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.

Speaker 4

Very helpful. Thank you.

Operator

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

Speaker 6

Thanks very much.

Speaker 7

What are the

Speaker 6

financial terms of your agreement with Pepsi? How do you price the material to them or how do they buy it from

Speaker 3

Thanks, Jeff. So we're very excited about this commitment with Pepsi. And We don't discuss the specific contract terms of 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 is aligned with our circular contracting strategy that we've discussed with investors in the past.

Speaker 3

These agreements really demonstrate that molecular recycling It's an essential part of solving the plastic waste crisis in sort of collaboration with mechanical recycling industry. And we really view this in the 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 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.

Speaker 3

So we can see a clear vision of the cash flow necessary to And 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 1,000 SSOs are ready for our first plant. We're going to be starting up in the spring of next year on a wide range of specialty products.

Speaker 3

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 lower carbon footprint And make sure that we have 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.

Speaker 3

And if we don't use plastics, then we're going to have a huge impact negatively on climate if we Moving to glass, aluminum and some of these 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.

Speaker 6

Okay. And then for my follow-up, in chemical intermediates, Are you closing one of your smaller crackers permanently? Or what are you doing with your closure? And can you discuss what's going on with propylene spreads in that it doesn't look like People can make money taking propane to propylene at this particular point in time. How is the Propane, propylene dynamic affected Eastman during the year relative to last year or now relative to previous quarters.

Speaker 5

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 You have 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 Yes, both from an energy and raw material front and get that through this year, so that we're better positioned in 2023 from Both in operations and supply chain and working capital standpoint.

Speaker 5

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 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.

Speaker 3

Yes. I'd also add, Jeff, that our teams On the commercial side, we're doing just an excellent job of pricing discipline. So we don't sell propylene, right? We sell derivatives and those prices, We were able to hold those prices flat to Q2 sequentially through the Q3. There will certainly be prices coming off and some of these Customer contracts or cost pressure contracts were tied to propylene that so you'll see prices starting to come down in the Q4.

Speaker 3

But our view is pricing discipline in times of sort of economic transition like this is incredibly important Versus chasing demand that's frankly not there because they're destocking anyway. So from an earnings and cash point of view, we're managing our trade off Volume and price in a market where we're waiting to see where primary demand really settles and holding on to value as long as we can.

Speaker 6

Okay, great. Thanks so much.

Operator

Our next question comes from Duffy Fischer from Goldman Sachs. Please go ahead. Your line is now open.

Speaker 8

Yes, good morning. First question, Mark, when you look at what your expected sales are for the Q4 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 Q4, if the numbers hit the budget you have planned?

Speaker 5

Duffy, we are expecting this is Willie. We're expecting a decline in sequential revenue and volume numbers. We're adjusting our operating rate not only for that, but we're looking to take our inventory quantities down somewhere between 5% 10% on top of that. Obviously, we've highlighted the steps that we're taking within our olefin streams, but we're managing that across the enterprise The portfolio, the utilization rates and the impact on our P and L from that is Based into our guidance, at this point, what I would also highlight is what we see here in October From an order and demand pattern is basically in line with our expectations as we've outlined.

Speaker 3

Yes, we made a decision that cash is an incredible 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 this Q4 and taking the It's necessary to do that as our priority and positions us well for next year And how we sort of drive forward and run our plants next year well as well as position for lower costs raw materials that we're going to be purchasing that we I believe we already see the trends now in the marketplace of raw materials coming off that we'll see already flowing through in the Q1 and how to position ourselves even better for that in January.

Speaker 8

Okay. Thanks. And then the issues you've had with shipping out of the East Coast, the port issues, What's the resolution to that? Have you found kind of alternate routes, but maybe more expensive ones doing trucking or rail to get to other ports? As we get into the first half of next year, is that something that's going to continue to be a headwind for you guys?

Speaker 8

Or do you have solutions outside of Again, hopefully, the ports themselves are just getting better over time.

Speaker 3

First of all, the ports themselves are getting better. And with the Reduction in demand in the U. S. As well as in other economies, the amount of trade occurring on a lot of what we were shipping in containers out of those to see a significant distribution cost tailwind for us next year relative to this year for two reasons. 1, with demand as Tight as it was and all the challenges we had in keeping customers supplied, we used a lot of different expensive modes of transportation to make sure we honored to our customers.

Speaker 3

And so those modes were higher cost to us, some of which we passed on And pricing, but some of which is something we're not going to use next year and pick up much cheaper position And how we transport products from a mode point of view. And then of course distribution rates are coming already 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 It 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 sort of softer environment. Great.

Speaker 3

Thank you, guys.

Operator

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

Speaker 9

Hey, good morning folks. One of the more surprising things, I want to come back to the fibers contracts for 2023 because That seems impressive that you're able to drive that much profit growth already signed up for next year. And also in the prepared remarks, it said that it's going to bring the levels back to sustainable investment Levels, are you indicating that perhaps we might see capacity expansions in this business? And any other color you could give us in terms of why we're seeing such a step change for 2023 would be helpful.

Speaker 3

Yes. 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 talk 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 decline 2% to 3% And so year over year, and it's now changed to being sort of flat to down 1%, partly because the overall market just isn't It's declining as much as people thought.

Speaker 3

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 toe. And so I'm thinking hadn't included how that would offset the tow decline in sort of 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. 2nd, and this is unique to Eastman is, Textile growth has been fantastic, and we continue to see strong interest in our product.

Speaker 3

When you think about a Product is made from half certified sustainably certified forest Wood pulp and the other half now being recycled plastic, it's just a great 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 got growth in that, that's more than offsetting the decline in tow that we see. So our assets 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, right?

Speaker 3

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 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.

Speaker 3

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

Speaker 9

Well, they say there's no business like co business.

Speaker 3

Yes. 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.

Speaker 9

Got you. Got you. And I also wanted to ask about, in this environment, it's very helpful to have an asset footprint that views more towards the U. S. Than Europe, but you still have a lot of assets over in that part of the world.

Speaker 9

We're starting to see some other companies talk about Rationalizing capacity in that part of world and I'm wondering what your thoughts are on the long term viability of your assets over in Europe?

Speaker 3

So first, when it comes to Eastman, about 75% of our production From a volume point of view, it's in the United States, right? So that's a significant advantage for us on an energy cost basis Relative to other markets and you have to remember that 55% of revenues outside the U. S. And most of what we sell in Europe and China in particular are our specialties. So we and how we serve our global markets are in very strong cost position.

Speaker 3

Obviously, currency is not helping at the moment, but long term, 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 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 is based in Europe.

Speaker 3

And so they're seeing a pretty significant energy headwind. If you just look at the Q4, it's probably a $20,000,000 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 fuel that we'll get the natural gas supply that we need through the winter. So on top of it, lots of teams working to make sure everything has got supply agreements in place, so we don't get rationed.

Speaker 3

And we don't I have a concern around the economic impact from a viability of the assets.

Speaker 8

Got you. Thank you so much.

Speaker 3

Yes.

Operator

Our next question comes from Matthew Deo from Bank of America. Please go ahead. Your line is now open.

Speaker 10

Good morning, everyone. So I believe you have some euro denominated Debt maturity is 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?

Speaker 10

And Does this kind of shift your commitment to the buyback?

Speaker 5

Okay. What I would highlight is To your point, we've got roughly €750,000,000 coming due in May of next year. I would say, treasury team is proactively looking at how we will manage that. You can expect us to probably Put some things in place here in Q4 and finished things off in early Q1. As we've seen rates move compared to that, it's Probably, call it roughly a $25,000,000 to $30,000,000 headwind on a year over year basis based on the rates that we see now.

Speaker 5

As we think about this year buyback, we're still committed to the $1,000,000,000 that we outlined for this year. And also as we think about cash flow and strategic cash available as we look into 2023 with what Mark outlined, I see operating cash flow in a normalized working capital environment and also with The ability to increase our cash earnings potentially being $300,000,000 to $400,000,000 higher on an operating cash flow basis. So absent with that less our dividend, that puts us at $1,000,000,000 plus of strategic cash for Our organic growth strategy as well as bolt on and share repurchases in 2023. And you got to believe in 2024 that we're back to that $1,600,000,000 worth of operating cash flow.

Speaker 10

Thanks, Willy. And I guess, following the agreement with Enterzero, What percent of your France facility is now feedstock locked in or contracted or secured?

Speaker 3

So We've said the inter zero contract worth about 20,000 tonnes and we're building in 2 phases 150,000 tonne plant. So it's a good step, But it's not a huge percent of the plant. I would say we have other agreements under discussion right now That would get us close to what we need for start up and feel very good about that And the progress we're making, it's pretty remarkable when you think about that we're locking in contracts for when these plants start out in the 2025, 2026 timeframe And getting these commitments. And most importantly, what I'm most excited about is The fact that these conversations with these mechanical recyclers are coming to a viewpoint that we need to collaborate together. Mechanical recycling is vital To solve the plastic waste crisis, they have a low energy footprint and where they can take waste back mechanically Into applications is great and that's what should happen.

Speaker 3

Unfortunately, there's a huge amount of packaging waste out there As well as textile and carpet waste that cannot be easily mechanical recycled, especially when I'm talking about going back to food grade. There's real limitations on what you can do in mechanical recycling back to food grade. And so we've become an essential partnership to really create a circular economy in that sort of High value packaging market. And they see that also there's a long term viability question with mechanical recycling Because the polymer degrades over time and really has some sort of performance quality issues after several heat cycles, and we can take that degraded polymer and bring it back to life Through our facility. And so it's a partnership that really allows mechanical recycling companies to have a long term future, Allows plastic to have an infinite life, and how it can be recycled at a much lower carbon footprint than the current process.

Speaker 3

They see InnerZero sees that a couple of other announcements you'll hopefully see before the end of the year. It is an acknowledgment that this system requires collaboration to really bring and keep the most carbon efficient Material in use in a way that doesn't impact the environment.

Operator

Our next question comes from Aleksey Yefremov from KeyBanc Capital Markets, please go ahead. Your line is now open.

Speaker 5

Thanks. Good morning, everyone. Could you discuss What share of the 3rd methanolises facility is covered by the TAPSE agreement? Is this enough for you to Make FID and if so, when are you planning to break ground?

Speaker 3

So we're not going to disclose the volume. As I said before, we don't discuss sort of specific contract terms with our customers. In this case, What I can tell you is this commitment was the key milestone we needed to achieve to feel we could have confidence in the economics This plant in the U. S. So both the contract terms, the length of the contract and the size of the contract Give us confidence to start aggressively moving forward in the construction of this third plant.

Speaker 3

So That's where we needed to be and we're excited about this partnership. And I would also note that there's a lot of other customers who are very interested in this capacity. So we'll be accelerating those conversations now that we've got the sort of base load position set to get you some additional customer announcements.

Speaker 5

Thanks, Mark. And, stainless 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 The feedstock and also with potential customers for your recycled materials in any way, basically the current market conditions.

Speaker 3

Yes, I don't think it's changing anything significantly. There's obviously going to be ebbs and flows with supply and demand in the packaging industry, which Compared to consumer durables, there's a far more steady industry. So what I also like about the Circular platform is it improves our revenue coming from Much more stable in markets from a demand point of view, which is a nice upgrade to

Speaker 9

our portfolio.

Speaker 3

But when it comes to sort of the trends in prices, Especially in the economic chaos we've had of extreme inflation and then now companies hoping for cheaper prices in the future, you're going to see a lot of short term volatility that We don't see any of our customers getting distracted by it because they're looking at how do they hit commitments in 2025 In 2030, right? That's what all these discussions are about. It's not about what is my composition of Virgin versus ARPET In 2022, right? That's just not how they think about it. They think about how I build a roadway to 2025 and hitting those commitments.

Speaker 3

In the short term, if I need to save a little money, I'm going to make trade offs on what I'm buying today. But they're not they can't back off of their commitments. And in Europe, it's not a choice for the brands, right? It's a mandate in government legislation. So in Europe, if you don't hit your recycling targets, you're starting to pay some pretty significant taxes.

Speaker 3

And that's a real bad look for brands of not solving the recycling content and solving it by paying a tax Coming up short on their targets. So in Europe, you've got very sort of structural reasons that they have to stay committed to How they're going to solve this problem and mechanical recycling infrastructure is not remotely capable of providing enough recycled material To the packaging industries, that's where our value proposition shows up.

Speaker 5

Thanks

Operator

Mark. The next question comes from P. J. Juvekar from Citi. Please go ahead.

Operator

Your line is now open.

Speaker 11

Yes. Hi, good morning. 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 $500,000,000 hit.

Speaker 11

So I guess my question is, how much of that is from your actual cost Going up for raw materials and how much of it is from level of inventory is 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. Thank you.

Speaker 5

Thanks, P. J, for the question. What I would highlight, as we went into the second half of the year, we had some large Turnarounds as we've highlighted here in both Q3 and Q4. So we were building inventories going into the second half. I would highlight at that point, there was probably roughly half raw material energy inflation and half quantity.

Speaker 5

We brought those quantities back down through Q3 and we'll be expecting that by year end I believe the entire increase is raw material and energy inflation. So bringing our DQO, DIO numbers back in line with the Prior year

Speaker 3

end. I mean, if you think about the 1st 8 months, we were trying to ship things as fast as we can make it and 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 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.

Speaker 11

Thank you. And appreciate your discussion of a mild recession in your prepared comments. You mentioned amines, acetic anhydride and plasticizers to kind of hold up even if olefins decline. Amins and plasticizers have been cyclical in the past. So why do you think they'll hold up in a mild recession here?

Speaker 11

Thank

Speaker 3

you. Yes, sure. So one of the things that's been an important evolution of our portfolio in CI is the growth in functional means. 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, Yes, we are tied to ag demand, but has phenomenally attractive and very stable margins because most almost all that business is in cost master contracts. That business didn't have market tightness driving spreads up in the last 2 years and it's not going to have market looseness driving spreads down because they're CPTs.

Speaker 3

So that's just a great business and really quite attractive, Just like the Care Chemical Business in AFP. When it comes to acetyls, you've got a business, acetic anhydride Relative to other asset yields, it's 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, just the nature of those end markets like pharma and food applications are more stable and 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 NASA fuel production because we had some significant planned shutdowns.

Speaker 3

And then the outages impacted their production run rates as well. So without the plant 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 to be relatively stable to this year. And then specialty plasticizers, which are sort of benzoic derivative products, again, historically very stable And reliable. And we put those 3 together, that's 50% of the EBIT of the segment, right? So general plasticizers, in our case, DOTP, As well as all the other olefin derivatives is the other half.

Speaker 3

And when you look at that part, The 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 And the bulk ethylene are already incredibly low. We've 1, reduced it as much as possible as Willie said using RGP to sort of minimize ethylene production. But the margins are sort of cash costs 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 20 So it's you're now whittled 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.

Speaker 3

The bulk ethylene headwind is behind us to a large extent. So the amount of decline you can have in the orphan derivatives, Even if it's significant, it still allows us to be at that sort of normalized $300,000,000 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 And the total portfolio sales will be offset by fibers, which allows the Specialty to drive recovery earnings growth.

Speaker 11

Great. Thanks for the color.

Operator

Thank you. Our next question comes from Laurence Alexander from Jefferies.

Speaker 7

So just wanted to flush out the discussion on pricing and So the price initiative driven spread expansions, are you seeing any change in The volume elasticity of demand in response to price initiatives, particularly in Europe, where I guess this slowdown has been going on the most?

Speaker 3

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 in 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. Yes. When you get to the price of our product 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.

Speaker 3

When it comes to share loss, We're keeping a very close eye on is our pricing driving any share loss in the specialty or 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 them just pulling inventory down or shifting share? It takes a few quarters to sort of figure all that out.

Speaker 3

But what we can see right now based on the end market information we have is our what we're seeing in demand draw aligns with What's happening at the market and what 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 $1,400,000,000 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 same on the distribution costs.

Speaker 3

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.

Speaker 7

Okay. Thanks. And then just the couple of years ago, like one of the debates around the green premium was that as You brought up the aim to bring on larger facilities that premium would compress and it doesn't sound like that's happening. Is that right? Can you characterize how resilient, if anything, is green premium increasing as the CPG companies realize how tight their Supply renewable or recycled product is going to be?

Speaker 3

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 microeconomics demand can be a lot greater than supply for quite some time. So the value proposition of recycled content And polymer is a true specialty product for some period of time here, and what it uniquely brings to the marketplace. At some point, is it possible that people had a lot of capacity? Sure.

Speaker 3

But that's Way out in the future for when that starts sort of exceeding demand.

Speaker 7

Thank you.

Operator

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

Speaker 12

Yes. Good morning, everyone. Would you discuss your capital budget profile for this year and next? It looks as though you took $100,000,000 out of the plan for this year. Are there any projects that you're rethinking in this environment?

Speaker 12

Or is that more timing issue, whereby it would shift into 2023.

Speaker 5

Good morning, Kevin. So And 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.

Speaker 5

Additionally, again, we've reduced and focused our portfolio. We're investing to ensure that, 1, that the safety and We maintain our plants well. 2, that we continue to grow our core specialties. And then 3, as we spent time today talking about our And I'll use that to bridge into 2023 expectations. So what I would say is, In a mild recession scenario, a range of where we are currently at $600,000,000 or it could be as As much as $100,000,000 or $200,000,000 higher as we make progress on all three of our projects.

Speaker 5

So as Mark highlighted, The fact that we'll be completing, we can't be complete here at the end of the Q1 of our Kingsport methanolysis facility And as we make progress on both our France project and our 3rd project here that will be in the U. S, 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.

Speaker 3

The key to winning at times like this is Staying focused on how you're going to create value long term and making sure you're positioning yourself for the other side of an economic correction To be the winner. So we're not losing sight of that. We may adjust the timing of some projects relative to when we expect the demand necessary. And frankly, the softening economy will make construction costs cheaper. So it will actually help us out in some of Inflationary element of CapEx costs.

Speaker 12

Okay. That's helpful. And then secondly for Willie, on Slide 12, You referenced a pension and OPEB headwind of $100,000,000 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 and L

Speaker 5

So let me first start with our pension plans are well funded. 2, there's no near term cash requirements that we would expect our large U. S. Pension plans are still today roughly 100% plus funded. The key factors here are really about the accounting.

Speaker 5

At the end of the day, discount rates and interest rates have gone up. So we'll have a gain at the end of the year in our mark to market that comes back in

Speaker 3

as a

Speaker 5

higher interest cost in 2023. Additionally, with investment performance this year, the asset base will has deteriorated, but Ultimately, that will result in lower return on asset. So bottom line is from a cash and from a funding standpoint, there are no issues. I would just attribute this to mark to market accounting and the volatility that we're seeing in both interest and assets here in 2022.

Speaker 12

Got it. Thank you very much.

Speaker 1

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

Operator

Thank you. Our final question today comes from John Roberts from Credit Suisse. Please go ahead. Your line is now open.

Speaker 7

Thank you. Two quick ones here. One is since IntuZERO is burning the waste You're going to pay something just over fuel value for that waste. And then secondly, in your 2023 guidance, you've got pension costs going up. I don't think I've heard of anyone actually talking about higher pension costs in 2023 yet.

Speaker 7

So maybe you could tell us how that's coming about?

Speaker 3

So the interzero, we're not going to disclose the price we're paying for the material, but it is a very attractive price that supports our economics. And there's a whole spectrum from things that go to waste, things that go into park benches to some modestly higher downcycled applications. And so it's a Portfolio managing on price to make sure the average comes out and we're seeing that very much on track with the economics of These platforms delivering $450,000,000 of EBITDA across these three projects when they're all up and running. So The pricing that we're getting as well as where the feedstock prices sets. And then on pension, I'll let.

Speaker 1

Yes, John, I thought the last question was on the pension. So just the image of your pension, it has been answered.

Speaker 7

Okay.

Speaker 1

This concludes our call for this morning. Thank you very much for your time and for joining us and your interest in Eastman. Have a great rest of your day.

Operator

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

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