Eastman Chemical Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 29, 2022

There are 16 speakers on the call.

Operator

Welcome to the Q1 2022 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's Web site, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Keith. Hello, 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 Cloureault, Manager, Investor Relations. Yesterday after market closed. We posted our Q1 2022 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. Cautionary statements regarding forward looking information and certain factors related to future expectations are or will be detailed in our Q1 20 22 financial results news release. During this call, in the preceding 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 Q to be filed for Q1 2022.

Speaker 1

2nd, earnings referenced in this presentation excludes certain non core and unusual items. 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 2022 Financial Results news release. As we posted the slides and accompanying prepared remarks on our website last night, We will now go straight into Q and A. Keith, please let's start with our first question.

Operator

Thank you. We'll take our first question from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 2

Thank you and good morning everyone.

Speaker 3

Wondering if you

Speaker 2

could talk a little bit about just sort of how the second U. S. Project in molecular recycling and developing. I see you're now mentioning that you're talking to several Global Brands. So I'm wondering if anything is changing about the size, scope or scale of the expected initiative as well as, I I think you'd originally said you might have something formalized in the first half of this year and here we are almost in May.

Speaker 2

So just curious for an update there.

Speaker 3

Sure, Vincent. So on the Circular Economy, we were really excited about how well it's been going across all project, right. So we've got the Kingsport project that's Going to be starting up in the next 9 months and then you've got the looking at the France project. And so a Lot of momentum going on in those two fronts. As we look at the U.

Speaker 3

S. Project, we would expect it to be similar in size to what we're doing in France. It would be focused on predominantly packaging and textiles since we already have a nice, especially play in the Kingsport site. And we do see tremendous engagement from several brands on wanting to be sort of significant off takers of that project. When you think about just the scope and need that these brands have for recycled content in their projects and the targets they've set for 2025, They really need to endorse molecular recycling.

Speaker 3

When you look at mechanical recycling, It just has limitations in truly creating a circular economy because when you look at the packaging waste only about 20%, 30% of it can really be looped back into food grade bottles. And so they have real shortness of how they're going to get this recycled content, right? 70% is going to get down cycled in Strapping or park benches or in the U. S. Landfill or incinerated in France.

Speaker 3

So that's just perpetuating the linear economy and not disconnecting from fossil based feedstocks. So mechanical is great that it's energy efficient, but it's completely insufficient, not to mention it also degrades over time. So they realized that to maintain high quality of their packaging and a long term solution, molecular recycling has to be around To support that, and enable all of the packaging waste to be recycled. I mean, our position is you should reduce and reuse as much as possible, but Much of this, we're still going to be needed in packaging, or in textiles, same story. And we are the required solution To actually eliminate all the waste.

Speaker 3

So they get that, they understand it. They also understand that plastic is a much more energy efficient product than glass and aluminum. So if you first want to assume green energy is limited in the planet, then you should use the most energy efficient product, not glass, that's Four times more energy or aluminum, 2 times more energy to make than plastic. So they're very focused on this. And that's why we've got such good engagement.

Speaker 3

And they understand the sort of cost pass through contract nature of what we're trying to do. So we feel really good about where we're at. But as you know with these Kind of very complicated long term commitment. It takes time to work out the details.

Speaker 2

Sure. And maybe just as a follow-up, I noticed there were no buybacks in the quarter, but you're still committed to doing at least $1,000,000,000 in the year. So how should we think about the cadence during the balance of the year to get to that at least $1,000,000,000 goal.

Speaker 4

Sure. Thanks, Vincent, for the question. We did wrap up The ASR that we launched in December here in early March, completing the $1,000,000,000 or the $1,000,000,000 from last year. We've also, I would say here in April, closed on the transaction. We had the $1,000,000,000 of cash in.

Speaker 4

So I want to Continuing to partner providing transition services on both transactions here through the end of the year. If you think about how we started Q2, page similar to that through the rest of the quarter. For the full year, I expect again to be at the $1,000,000,000 or greater as we deliver on the commitments that we made. And you can look at that on a full year basis as basically providing about $0.75 a share To offset the roughly $100,000,000 of EBIT impact from the divestitures. I would say That's about $0.30 in the first half, growing into the second half as we complete the purchases here in Q2 and Q3.

Speaker 2

Great. Thanks very much. Appreciate it.

Operator

We'll take our next question from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Speaker 5

Yes. Mark, good morning. You affirmed the annual EPS range. I was wondering if you could speak to The seasonality in the back half of the year as you're recovering operationally at Kingsport, Speak to 3Q versus 2Q and then the seasonality in Q4. For example, I think you mentioned you got a plant turnaround in chemical intermediates later in the year.

Speaker 5

How do you see that unfolding through the coming quarters?

Speaker 3

Thanks, Kevin. And a very important question, we spent a lot of time trying to think about how our cadence of earnings and value creation goes through the year. When you think about this year and you look at sort of the guidance we gave for the Q2 And add that together with what the results that we had in the Q1, the Q1 looks to be around $475,000,000 if you look at use the midpoint of our 2nd quarter cadence. So to get to our midpoint of our full year guidance, you're talking about $5 a share in the back half, Which is about 5% higher than the first half to your sequential question or $0.75 a share on a year over year basis. So that's strong back half quarter for us.

Speaker 3

We don't really have it normal that we can look to in the past because we had so many different events that are first or second half floated If you look at 2018 to now, but we can recognize that's a little bit stronger than normal. And I think the easiest way to talk about it is on a year over year basis. And when you really think about delivering that $5 a share in the back half of the year, it really comes down to a question of what is AM going to deliver relative to What normalization in CI occurs because we obviously the streamline event in the Q1, we had So significant setback on that to the first half of the year. So when you look at it and do the math on the sort of the midpoint of our guidance, for the full year of AM of $650,000,000 to $700,000,000 That means we basically have to be $200,000,000 over the back half of last year. Roughly half of that actually probably greater than half of that will come from how we're managing spreads.

Speaker 3

Almost all of the spread compression last year that occurred in this segment was in the back half of last year. We've been incredibly Successful in implementing price increases in the to begin the Q1 and get the spreads that we are aiming to get that we discussed in January and that sequential improvement in spreads is still expected in the Q2. So we have a lot of great momentum in the pricing actions we've taken, Including implementing a whole set of additional price increases in this month, to cover the inflation that occurred through the Q1. So you've got $100,000,000 greater than $100,000,000 really of spread improvement in the back half of last year in the back half of this year relative The compression that occurred in the back half of last year, right. So recovering that compression, if you will.

Speaker 3

So that's half of it Or more than that. And then you've got strong volume growth. And the volume growth in the back half will be a little bit different. First of all, you've got an Incredibly unmet need, especially plastics given how we were not able to serve that market. So markets are incredibly strong.

Speaker 3

No one has inventory, so the likelihood of destocking in the Q4 is much less because there's nothing to destock. You've got the automotive market we're assuming start to get better in the back half relative to the first half. And we expect logistics To constraints to ease, which is really one of the bigger limiters of our ability to sort of serve demand. And then you've got the production catch up, Right. So we lost about $75,000,000 of volume in the Q1 and we think roughly half of that will be recovered through the year.

Speaker 3

But most of that recoveries have occurred in the 3rd Q4 because we're just ramping up production and with logistics these days getting all that out the door And recognized in the second quarter is going to be a bit of a challenge. So a lot of factors that drive volume to be a lot better. So then you weigh that against What's going to happen in CI normalization and I think we've taken our standard approach assuming it's going to normalize at some point and For now we're expecting that in the back half of the year and there's some higher gross spend. So you put all that together you net out, you're going to come up with positive EBIT relative to last year in a meaningful way. And then you've got $0.45 a share from the share repurchase we're doing to replace the divested earnings.

Speaker 3

So $5 is a very reasonable Improvement to get when you think about it and those dynamics and that gets you that sort of 5% sequential improvement versus the first half.

Speaker 5

Great. Thank you for that color. And then as a follow-up, Mark, have auto production forecasts, bottomed At this point, from your perspective, I appreciate any updated thoughts on what you're seeing in terms of order books And expectations for that particular end use market.

Speaker 3

So on the auto market, We had an expectation of demand being relatively stable in the Q1 and the second quarter and then modestly improving in the back half of the year. I'd say Q1 turned out to be a little bit softer than our expectations. And we expect the Q2 to be down a bit Relative to the Q1 principally due to the Ukraine war impact on European auto production and some of the slowdowns we're seeing in the COVID lockdown situation in China. But we do so a little bit lower base than what we started the year with, But we still expect it to improve in the back half of the year as China gets its COVID situation under control is our base assumption, as well as The European situation starts to stabilize, supply chain start to improve. But we're still looking at an annual number In our forecast that's below last year a bit.

Speaker 3

Obviously, LMC is above last year in their current forecast and we're not using that. Just to be clear, we're using Something lower than that, and what's loaded into our forecast. I think we're taking a reasonable approach to what we're estimating and what we're seeing in the marketplace.

Speaker 5

Perfect. Thanks a lot.

Operator

We'll take our next question from Josh Spector with UBS. Please go ahead.

Speaker 6

Yes. Hi, guys. Thanks for taking my question. I guess just specifically on AFP, I'd be curious on the new portfolio if you could comment on a couple of things. How you're thinking about longer term growth in that restructured business now versus GDP or whatever metric you look at from that perspective?

Speaker 6

And then also, you have a relatively strong first half in that business. Your guidance leaves it pretty open ended in terms of where things could be in the second half. And just wondering what drives perhaps a lower second half versus first half in AFP or is that not the right way to think about that earnings trajectory? Thanks.

Speaker 3

Yes. So we're really excited about the new AFP. It's a business that's very focused, has a lot of great End market growth rates that are both stable in things like personal care, animal attrition and has opportunities for accelerated growth in places like automotive and aviation recovery. So and B and C has also been incredibly strong. So the end markets are great.

Speaker 3

Like our innovation is starting to really gain traction. So it's creating the ability to grow faster and nutrition versus just selling the organic acids. The Microbeet opportunity, not really relevant to this year, but significant upside In the future, there's a lot of growth programs that are out there allows us to grow better than the underlying market. And then on the spread side, Similar to AM, there's some spread recovery that's going to be in this year relative to last year. It's not quite as large as AM, but That accelerated path of inflation last year, prices were still catching up in this business as well.

Speaker 3

So you see price implementation being very aggressive in the AFP business to cover all of those raw material Energy and distribution cost headwinds and we did a great job in the Q1, in getting prices up to sort of cover that and improve spreads. That will continue to be true year over year in Q2, but sequentially we'll see the Q2 come off a little bit just because It takes a year for the CPTs I'm sorry, it takes a quarter for the cost passer contracts to catch up. So overall, very strong first half both by strong volume that 10% volume mix that will continue into the Q2 and spread improvement. As we look to the back half, There's some seasonality we're just assuming and how demand comes off in some of these industries like B and C and the Ag Business, Where that will soften up a bit in the second half of the year. And we think that we'll see Spreads continue to improve relative to the back half of last year.

Speaker 3

So it's still going to be a very good second half, but not quite as strong as the first half.

Speaker 7

Great. Thank you.

Operator

We'll take our next question from Mike Leithead with Barclays. Please go ahead.

Speaker 2

Great. Thanks. Good morning, guys. Maybe just 3 quick hitters on the methanolysis facility in Tennessee. So first, it looks like maybe a slight delay with supply chain.

Speaker 2

So can you just flush out what's moving the timeline, whether it's equipment or labor? 2nd, is the $250,000,000 capital cost still the right number for the facility? And maybe finally, if we do get mechanical completion in 1Q 2023, When should investors anticipate, it's sort of reaching kind of full commercial operations there?

Speaker 3

Sure. So when it comes to the sort of 1 quarter delay, we've identified in mechanical completion, it's equipment related. It's just like the automotive industry, Getting all the parts to build your plant isn't the easiest to do this environment. The team has done an extraordinary job of locking down and securing All those components being supplied that just being realistic in the environment we're in right now, we expect about a quarter delay. It's not a labor issue.

Speaker 3

It's just a supply chain issue. When it comes to The capital, we're still on track for the capital. We did a lot of securing, especially on the equipment side before the inflation started, when we were When you go back to when we actually started this production. So we think we're in a good position to manage that and keep that around that number. And then when it comes to startup, we were always going to aiming for a startup in the first half of next year.

Speaker 3

We always assume that there'll be some bumps along the road and how we get there. So we don't think there's going to be a significant delay in the startup of the facility for serving customers. So by summertime, you're making recycled content off of this facility and supplying the market and building to full run rates by the end of And you'll get a full year effect as you get into 2024. You got to remember this is different than a specialty plant and how it ramps up and fills out because Well, the specialties will grow like they normally do and not be a light switch in how you fill out the plant. We have the ability to take all the excess monomer from this methanolsoz plant and make PET or textiles for packaging in the clothing market And so ram the plant full pretty quickly, as the operations come up to full levels in those markets.

Speaker 3

And then we just mix upgrade as we go to the specialties relative to serving those markets from this plant. So much faster ROIC in this kind of facility with that flex than what you would normally get in a specialty plant.

Speaker 7

Great. Thank you.

Operator

We'll take our next question from Aleksey Yefremov with KeyBanc. Please go ahead.

Speaker 8

Thank you. Good morning, everyone. As we get closer to the start up of the smethanolysis plant, Mark, I was just trying to understand how Economics might work in the real world. For example, crude jumped year to date, would it have been a tailwind for your Methanolis' Margins or headwinds were not a factor. So in other words, when oil moves like this, is the cost of your feedstock changing?

Speaker 8

And if So are you able to kind of promptly raise prices?

Speaker 3

Yes. So higher oil prices is very good for methanolises. So the competitive material in the marketplace, which is virgin PT based on fossil feedstocks It's connected to oil. So the price that's in the marketplace for those products goes up pretty consistently every day with the price of oil. So That raises their alternate product on the marketplace.

Speaker 3

The reality though is our product both its feedstock and its And our final price is not really that connected to the virgin PET market anymore, because they're buying it on the value position of recycled content. And right now what we're seeing is those prices both historically and in this environment are holding up to be substantially higher Then the sort of fossil based polymer. If you look at Europe, roughly about a 50% premium For that recycled content value proposition of creating a circular economy versus perpetuating a fossil based linear economy. So the market's changed and structurally so. When it comes to the value of our feedstock, there may be sort of a modest increase In the prices, but the reality is it's going to landfill, right?

Speaker 3

The price of landfills are changing with the price of oil. It's being incinerated, same thing, not really changing dramatically, or these low value applications Like park benches are strapping and where this product this sort of waste feedstock is going, that the mechanical recyclers can't upcycle into good applications. So we're not seeing a significant increase in feedstocks just because the price of oil is up.

Speaker 8

Thanks, Mark.

Operator

We'll take our next question from David Begleiter with Deutsche Bank. Please go ahead.

Speaker 9

Thank you. Good morning. Mark, just on the Q2 guidance in terms of the earnings bridge, you're thinking about the $0.80 impact from the Kingsport incident and the 206 base. It looks like the midpoint of Q2 guide is 275. How do you what are the offsets to that sort of bridge from Q1 to Q2 with

Speaker 10

the Kingsport incident later in?

Speaker 3

Yes. Great. Great question, Dave. And that's exactly how we look at it. We had a phenomenally strong Q1 when you back out the Seamline event at 285.

Speaker 3

It's just Tremendous success well above how we guided in January for the Q1. Unfortunately, the event happened, But the demand for those products was very much there. So that $125,000,000 hit would have easily shown up in the quarter. So We do start looking at saying, okay, from 285, which is the run rate now that the event is behind us, What's the up and down relative to that number in the Q2? So on the upside, the continue we expect continued strong demand that we saw in the Q1 The significant mix improvement that comes with that, that's part of our story and our specialties.

Speaker 3

The pricing actions are doing a phenomenally good job of keeping pace real time with inflation that occurred through the Q1. So spread sequentially will improve from Q1 to Q2, in AM and Fibers. And then CIs holding up and being stronger than So that will be quite stable sequentially from 1st to 2nd quarter. And so all of that leads to a higher number, right? So Then why is it why are we guiding to something a little bit less than Q1?

Speaker 3

First of all, the $50,000,000 of accelerated cost accounting doesn't repeat. So that's a pure tailwind Q1 to Q2, but the $75,000,000 in the streamline event that's related to production. That doesn't catch up in a quarter. So it takes some time to get production back up, to get it on ships and trains and get it delivered through this quarter. There's only so much excess capacity that we have to make up that lost production.

Speaker 3

So that's going to take The whole year to sort of recover that. And we're only expecting to recover about half of it through the year. So You've got a bit of a headwind from the event on the production side. Then you've got in AFP, Remember a good portion of their pricing is connected to cost pass through contracts. We had a lot of inflation in the Q1.

Speaker 3

The Way those contracts work, it doesn't really catch up until July 1. So there's just a lag And that part of AFP and how prices catch it up. They will. You saw the benefit of that in the Q1 based on catching up to 4th quarter raw materials. And this will happen as we go into the Q3.

Speaker 3

So there's a bit of a headwind from that. So AFP will be slightly down relative to Q1. And then You've got a step up in growth spend, as we start ramping up the circular investments. And then there's just macro uncertainty, right? So we've adjusted our outlook, As I said earlier about autos being a little bit softer sequentially as well as China and the COVID lockdowns is Certainly having impact on some of our businesses like performance films and in general how we bring product into the country to get it delivered With all the different various lockdowns, so there's some sort of headwind there that we're trying to estimate, but highly uncertain on how that's going to play out for the quarter.

Speaker 4

Very, very helpful.

Speaker 10

Thank you.

Speaker 3

Overall though, to put it together, it's still a 10% increase year over year. So it's great Momentum to building towards our full year guidance.

Speaker 9

Got it. And just on the CI spread normalization in the back half of the year, Is that more supply driven or demand driven? And which products in particular are you looking for the spreads to normalize at first?

Speaker 3

Yes. So in the spread normalization, we're obviously been in very tight market conditions since the 2nd quarter really since the beginning of Q1 of last year. And CI has benefited from that like many other companies in these intermediates. And the markets remain tight and that's demand driven. Demand is incredibly strong for All of the products or customers that we're serving with those intermediates, and that's obviously holding up in the Q1, expected to hold up in the 2nd quarter.

Speaker 3

And there's also supply driven issues that are creating constraints across both Olefins and Acetyls as you can see in the many announcements of operational issues across the planet. And the third issue that's new now that we're still thinking through is the U. S. Has just picked up a new advantage cost structure relative to the energy costs now in Europe and Asia. So that structural cost improvement It's not yet factored into sort of how that's going to play out for the back half of the year or years ahead.

Speaker 3

But that's Probably, I would call it an upside, if that continues to be true, to how we're looking at our forecast. So it's really a combination of both, right. We're assuming that the economy start to slow down a bit, with all the inflation out there, the China issues, the Ukraine, Russia issues, market softened a little bit. We assume people will get around to running their plants more reliably. And so supply will start to improve and that creates some softness.

Speaker 3

But I think we all know that it's hard to call when this normalization Is going to occur. And so we've put in something to estimate that there's some normalization back to sort of what we call sort of normal margins. But it's frankly anyone's guess when that's actually going to occur. There's no specific data any of us have to make that call.

Speaker 9

Understood. Thank you very much.

Operator

We'll take our next question from P. J. Juvekar with Citi. Please go ahead.

Speaker 11

Good morning, Mark. Good morning. Mark, these mornings, there There's a lot of discussion about inflation in the economy and all that. Where you sit from your vantage point, do you think 1Q was the peak inflation? Inflation could be raw materials, trucking, logistics, truck drivers, all that Do you think inflation has peaked when you look at the second derivative of your businesses and you talk to your own people?

Speaker 11

Or do you think inflation will continue to Go higher.

Speaker 3

Well, I think inflation is certainly going higher as you go into the second quarter. When you look at just all the price increases that we had to implement in April to catch up to the inflation that occurred through the Q1 in And our raw materials and energy costs, that's now higher prices in the second quarter flowing into our customers. And they're going to take all those higher prices They're going to have to flow it into their products, which will go through this quarter into the Q3. So I don't think we're close to How inflation is going to peak downstream of us, because this has all got multiple steps to be passed on Through multiple quarters to get to the consumer. When you think about the inflation of our raw materials and energy costs, What we're assuming right now is we are sort of peeking out in the second quarter and that it doesn't get Worse as we go into the Q3 and Q4.

Speaker 3

In fact, maybe raw material stabilize and come off a little bit in the back half of the year From the Q2. So that's what's embedded in our forecast on our cost side. But if you're asking downstream, we've got, I think, multiple quarters before inflation reaches the consumer. All of what's happening to our part of the industry because we're just so far off the value system.

Speaker 11

Right. So consumer inflation will continue for next couple of quarters is what you're saying? Thank you.

Speaker 3

And my second question. For customers and Consumers, yes. For us, we think Q2 is peak in our guidance. That's right.

Speaker 11

And just you mentioned on methanolysis, you're putting together these contracts to buy raw materials. How do these contracts how are they structured? Is It's a fixed price or the price goes up with energy. And the same thing on the other side, when you sell your product, I would presume that you would sell it at premium because it has lower carbon footprint. And so how does those contracts look like?

Speaker 11

Can you just give us The terms and how this contract is structured? Thank you.

Speaker 3

Sure. So, there's a spectrum of contracts that we're securing when Comes to feedstock based on the source of the material. So there are some contracts that are exactly what you said, where they're going to the alternative value is landfill. And so the pricing on that is set in a very stable manner that doesn't have an alternative value to drive price and value of that material up or down. And we're getting long term contracts with Sources of waste on that front.

Speaker 3

There are other products where you're competing maybe against a park bench or strapping. So Down cycled applications that perpetuate the linear economy. But and so we have to look at the alternative values Of those applications and how that might change. So there will be some connection to where price oil goes or alternative market values go that we have to compare our pricing to sort of secure that. So it will be connected to some either cost or price based index.

Speaker 3

So There's a lot of different sources, but all of them when you look at what drives them up or down, they're actually relatively stable compared to where the price of oil goes every day, on the sort of fossil feedstock based market. And then you have to keep in mind that On the customer side of things, there's 2 models we have in our pricing. So in our specialty business, pricing is going to be based as always on value. As I said earlier, the value of recycled content is quite high, right? So it's not a speculation.

Speaker 3

You can look at just for PT for packaging, which is a relatively low value application compared to our specialties is trading on average 50% premium to the fossil based feedstocks. So plenty of premium there to create the circular economy and get waste out of the environment and lower the carbon footprint impact Our operations and the scope 3 of our customers, when they think about improving their overall carbon footprint. So they are paying a premium for that already. That's not speculation, that's just fact. But you have to remember that and the specialty pricing will just be based on that value and we'll do it like we do pricing today.

Speaker 3

But for the PET and the textile applications, the packaging and textile applications, as we said, We're not taking risk on the difference between our feedstock costs and market price. We're doing cost pass through contracts that give us predictable stable margins. Otherwise, we won't build these plants and invest them because I don't want to get caught in trying to speculate Where the feedstock costs are going to go relative to market prices. That's the air gas model that we're taking for those applications. So We're not trying to exploit the spread expansion or take a spread contraction risk on those high volume applications that base load the second and third plants.

Speaker 11

Great. Thank you.

Operator

We'll take our next question from Matthew DeVoe with Bank of America. Please go ahead.

Speaker 12

Thanks. So as we look at the year over year bridge to 20 23. Maybe it's early, but it seems like particularly for AM, it seems like the add back of 50,000,000 On the accounting side, it is maybe a starting point. But you won't recover the full 100 maybe or the 75 additional, I think you said, so maybe half. But you're also going to get that back through the course of the year.

Speaker 12

So I guess what where do we where should we start when we think about building a bridge for next year.

Speaker 3

I think that with AM, you start with the bridge that occurs every year. So when you look at Advanced Materials, as a segment, its value creation starts with strong volume growth prediction. When we look at the markets that we serve automotive, I think odds are I hope good that supply chain issues get resolved and automotive demand will be better next year than this year. The demand we have in the other end markets like durables, medical, all those have Continued strength that we see going forward, especially medical. So the end markets, we expect to be relatively strong.

Speaker 3

Then we have the innovation that creates our own growth Above these end markets, we've proven that extensively over the last decade. So even in a softer economy, we're still going to create growth over those end markets. And then you've got production catch up, right, with a certain amount of production volume because the steam line event, we're not going to realize this year even though demand is there for it. So that will be upside in volume next year. And there's the cost accounting issue really isn't a year over year tailwind because while The headwind to Q1 sort of comes back if you will to the rest of the year.

Speaker 3

So that's not something I would include in the bridge for 2023. But tremendous amount of volume and then importantly mix upgrade across all these volumes that we're talking about that have high growth are very high value relative to the segment average in AM and certainly well above company average. So that creates a lot of mix leverage as always. So you've got all those drivers that are going to sort of increase success. And then on top of all that, you've got the start of the circular plant That gives you a whole another growth driver and value up on mix because the margins are attractive there.

Speaker 3

That's going to occur in 2023 relative to 2022. That's how we create value every year is control our cost structure, drive volume and mix, spreads my guess are not a source of headwind or tailwind next this year because we're getting our margins back to pre pandemic levels this year. So it's a volume mix story as it always has been to deliver pretty attractive growth in 2023 versus this year. This year is going to be a very attractive growth number relative to last year when you think about $650,000,000 to $700,000,000 That's tremendous growth relative to 2021.

Speaker 12

Thank you for that. And I guess it looked like corporate expense was a 0 for 1Q, part of that looked like insurance proceeds and stuff like that. Is any of that flow into 2Q? Or do we see a more normal rate of corporate cost in 2Q and the rest of the year?

Speaker 4

Thanks for the question. For the rest of the year, we see roughly about an $85,000,000 expense. Obviously, with the steam line incident, we stayed focused and I'll call it to pace our level of investment Eastman and it was the earnings were part of other during Q1. So as we ramp up the circular, as we also look at the start up of the And completion of the 1st methanolysis facility. The cost incurred and related to those initiatives will page through the back half of the year.

Speaker 12

We'll go

Speaker 9

to our next question.

Operator

Yes. We'll take our next question from Jeff Tsakakis with JPMorgan. Please go ahead.

Speaker 10

Thanks very much. So when you talk about the methanolysis project and producing packaging material, is what you're referring Disposable PET bottles, in other words, water bottles and what you have is Essentially a more circular route to making the PET bottles. Is that that's the essence of it?

Speaker 3

Jeff, that's it. So it's not disposable water bottles, it's now circular water bottles, right. So We were in the business of making PET, obviously got out of it because it became incredibly competitive, if you want to go back to 2011. And with the first plant, just to be clear, it's all specialties. The Kingsport plant we're building is feeding over specialties.

Speaker 3

But when we talk about the plant in France For the 2nd plant in the U. S. We are bringing back into our product portfolio making PT Or polyester for textiles. Both of those end markets have a phenomenal waste problem as we all know in the bottles being thrown away. And frankly, Right after packaging waste, textile waste is the 2nd hugest 2nd largest problem going to landfill incineration Across the planet.

Speaker 3

Both of those issues need to be solved in significant ways. That's why we're taking This act is sort of bring the circular economy in the linear economy and eliminate fossil based feedstocks. But the model is going to be very different in how we get back into it, Jeff, versus where we were before. So it was market based transactions compete against China every day in the traditional PET business. In this business, we're not building a plant unless we have long term cost pass through contracts that give us stable margins Relative to wherever feedstock costs go, and not connecting it whatsoever to the sort of Traditional PET market pricing.

Speaker 3

So we get much more predictable and reliable returns on these investments. So that's basically the heart of what we're trying to do in the model to make sure it's different than what we did in the past.

Speaker 10

Okay, get that. And so, in terms of the non packaging applications, What you're doing is you're making a more specialized PET that's more capital intensive In the end rather than people who use, I don't know recycled polypropylene. So What is it about the applications for your specialty PET that makes the customers want to buy a more PET rather than less capital intensive and cheaper polypropylene.

Speaker 3

Yes. Jeff, I just want to make sure we're keeping certain different Conversation clear. So when you're saying specialty, are you talking about our specialty co polyesters and our Triton or

Speaker 4

are you

Speaker 7

talking about?

Speaker 8

Yes. That's

Speaker 3

what I'm talking about. Yes. Yes. So if you look at our sort of first plant that's going into Triton in our other co polyesters, it's the same issue, right? So Innovation Day, we told you a great story about Black and Decker, right?

Speaker 3

It's a drill, but they want to be part of the structure economy. They want to address their scope 3 emissions, the Emissions are occurring in their supply base to improve their impact on climate. And they want to make a contract they want Using something that is getting waste out of the environment, right? It's part of how they're marketing their product and they're getting a premium on their products, Whether it's a Triton water bottle for hydration that's reusable bottles instead of using a PET bottle that you throw away, right? So Sure.

Speaker 3

Reuse in the 3 Rs, or it's a drill or it's a phone case where they want to make it out of recycled content to again improve their impact on climate as well as the branding positioning they get about using recycled content. And all these brands are getting meaningful premiums well above the price way, way above the price that we're charging for the polymer In their final products. So it's a value up for them. And so we get better price for this recycled content. So there's better spread for us as we sell this versus our current products.

Speaker 3

And we're getting significant accelerated growth, not just in locations that we've been in like water reusable water bottles, but also into new applications like phone cases where we weren't before. And there's other electronic applications, automotive applications. So it's opening up accelerated market growth that we can tap into as well.

Speaker 10

Okay, great. Thank you so much.

Speaker 3

It's actually been tremendously exciting because it's The scope and strength of interest in this is well exceeded our expectations. So we're rushing as hard as we can to get this plan up and running.

Operator

We'll take our next question from Mike Sison with Wells Fargo. Please go ahead.

Speaker 13

Hey, guys. In Advanced Materials, you in the January quarter, you gave a $700,000,000 EBITDA Our EBIT outlook and you added sort of a lower part of the range this quarter, dollars 6.50 is that largely Related to the Kingsport shutdown and if it is, what's the impact in maybe 2Q and in that outlook?

Speaker 4

So Mike, this is Willie. What I would highlight is, yes, it is a key component of, I'll start adding a lower end of the range for $650,000,000 to $700,000,000 As we've highlighted, the impact in Q1 related To the steam line incident for Advanced Materials is approximately $100,000,000 Also, we've highlighted that it will take us some time. We expect to get roughly half of the volume mix impact, which is for Advanced Materials about $60,000,000 As you think about pacing that into the back half of the year. So as Marcus highlighted, we remain confident in this business. And ultimately it will put us on a strong pace in the back half of the year as we recover the $100,000,000 of spreads on a year over year basis and get our volume mix back to more normalized levels, which sets us up for more growth as we go into the

Speaker 10

23.

Speaker 3

Yes. Just to add one thing to that. There are really sort of 3 parts of this as we think about it versus where we were in the beginning of the year, We said we were going to be greater than $700,000,000 We obviously had the impact of the Seamline incident that Willie just described. We also have expectation the automotive market being a little bit weaker. And then we have the China COVID kind of Underlying risk here that we're realizing in the moment.

Speaker 3

But the spreads are actually the spread improvement relative to last year is very much on track Relative to where we were in January. So that is held up and we believe consistent with where we were in January. So we went from greater than 700 to this Sort of adjusted range now to reflect these headwinds.

Speaker 13

Got it. And then just a quick follow-up in chemical intermediates. I think you've had 5 quarters now above $100,000,000 in just the EBIT. I mean in the event that Oil stays high, demand stays good. And when I talked about the commodity folks, I don't think a lot of them are seeing So this normalization in the second half of the year.

Speaker 13

But if all that sort of plays out, Would you stay above $100,000,000 Because I think if I model out the segment, you would be below in the second half.

Speaker 3

Yes. So when you think about CI, you have to keep in mind there are sort of three factors that cause the second half to be lower than the first half, Right. So one, we have just normal seasonal volume trend off and functional means in the ag market. So there's some of that that occurs Every year and certainly will happen this year we believe. 2nd is just shutdown schedule.

Speaker 3

So last year shutdown schedule was sort of loaded into the front half. This year the shutdown schedule is loaded into the back half with a big cracker turnaround in the Q4. So there's just that sort of shift in maintenance Expense, that's going to occur. So those 2 will moderate, the second half to be lower than the first half even if the spreads Stayed the same in the back half of the year to the front half. So then you get into this question about sort of markets Softening and going back towards normal versus where the margins are today.

Speaker 3

If you go do the math, you can see there's some headwinds already In the cracking spreads, that it creates a bit of a headwind that you can start Seeing here in the Q2, so some of this is likely to happen. But again, we don't sell ethylene and propylene repucal derivatives and those markets continue to be really tight. So we're not going to see much of the impact on the sort of cracker spreads in the second quarter from what we can see. But we expect this will eventually start finding its way into the market as we get into the second half and some amount of normalization is going to occur. But we've all been guessing at when and how much it's going to occur.

Speaker 3

And as I said earlier, I think we've taken a reasonable or conservative approach to say we're going to normalize. If we turn out to be wrong about that and it stays stronger into the second half, that will be upside.

Operator

We'll take our next question from Laurence Alexander with Jefferies. Please go ahead.

Speaker 14

Hi, good morning. This is Maria Molina for Laurence Alexander. I have a question on the impact of China lockdown and COVID that you mentioned a couple of minutes ago. Do you expect to recapture the earnings after these lockdowns? Or how do you see it playing out?

Speaker 3

It's a good question. So I would say China lockdowns is probably the biggest uncertainty that we can think of at this stage, Especially in the Q2. We've assumed that the lockdowns are continuing through this month and will start to get resolved in May. So who knows what's going to happen, but just that's sort of what we've assumed into our forecast. It's impacting us in a couple of ways.

Speaker 3

1, our ability to impact Import products into China, which is important for all of our segments, including Advanced Materials, where a lot of products are Made from our Triton and then shipped around the world. And then you've got the impact on just demand in the country, Where you've got people buying cars and appliances and everything else and the impact that it has on our business from a direct demand point of view. So we're keeping an eye on all those factors. Automotive seems to be the market most impacted at this stage, Especially for performance films business at the point of sale for those films and paint protection and window films. But I think that overall, What we think is it is still underlying pent up demand, especially on the export business that It's still strong in Europe and in the U.

Speaker 3

S. So we do expect that there could be a rebound in demand When we get past how they're managing COVID, but it's anyone guess on how managing COVID in China is going to go and sort of the pace and breadth of that impact.

Speaker 14

Okay. Thank you.

Operator

We'll take our next question from Steve Byron with Bank of America. Please go ahead. Steve, your line is open. And we'll take our next question from Arun Zavansyan with RBC Capital Markets. Please go ahead.

Speaker 7

Great. Thanks. I guess I wanted to revisit the outlook for 2023 Yes, you kind of laid out earlier. So if you think about your own inflation potentially peaking In Q2, and then you look into the rest of the year, you laid out the 5% increase. When you look into next year, I guess, you will see potentially a moderating feedstock environment as you just noted.

Speaker 7

But do you still expect kind of 8% to 12% EPS growth in that? And if so, Maybe what will be some of the drivers that would get you there? Would you see like a still $0.45 buyback opportunity or how should we think about that as well? Thanks.

Speaker 3

Yes. So, 2023 bridge, I have to admit that's a first for me in the Q1 call. But, Look, when we look at it for 2023, as I said earlier, Strong demand growth in AFP and AM will deliver earnings growth next year relative to this year and we'll have a tailwind because of the Sure, capacity production disruptions we had this year that enable that volume recovery also to be a tailwind for next year. It's a little hard to predict where spreads are going to be next year in the specialties. But if inflation if raw materials come off, That will create a tailwind relative to pricing for next year relative to this year.

Speaker 3

I think that's correct. Then you've got normalization of CI. So how those 2 net out at the corporate level Could be to some degree neutralized as a tailwind relative to this year. So really the volume mix story is the key drivers. As always, we'll manage our cost structure to make sure there's not a headwind there outside of some growth And so we're set up, I think, for improving EBITDA in a meaningful way.

Speaker 3

Obviously, we have a very strong cash flow and that will continue to be Both we invested in organic investments that we're doing for Specialty as well as our circular plants. And as we said at Envision Day, there'll There'll be money left over for share repurchases on top of that, as we go through next year to create that EPS growth, on top of the EBITDA growth relative this year. So we feel good about the 8% to 12%, but it's a little early to start calling numbers.

Speaker 7

Okay, fair enough. And then I guess just wanted to ask as a follow-up back to the strategy on methanolysis. It sounds like initially the plan is to roll out more of the specialty applications, but over time potentially progress towards replacing some of the, as you said, circular water bottles. Is that really the strategy that Eastman wants to pursue. Maybe longer term, do you see this company as kind of 50% specialties and then maybe 50% replacing some of these more commoditized applications or how do you think about strategy and the The strategy you guys have been following for many years of trying to go more downstream and more specialty and squaring that with, the needs to replace some of these commodity size items with Circular Solutions.

Speaker 3

Yes. So from a total company point of view, Obviously, our strategy is very much focused on specialties in AM, AFP as well as textiles, with our very differentiated biopolymers And new applications that we're creating for the biopolymers like microbeads and foodservice packaging, etcetera. So When we think about specialty, let's just be clear what specialty means to us. It's attractive high stable margins Over time where we have good pricing power because of value our products create in the marketplace to manage our pricing relative to our raw material and energy costs. And creating value for shareholders, not by expanding spread over time because the spreads are already very attractive To start off with, but by growing volume quickly and because that is high margins that translates into significant mix upgrade at the corporate level.

Speaker 3

And whether that's especially copolyesters or Triton or coating additives or personal care additives or Circular PET or circular textiles at very attractive margins that are very stable And cost pass through contract, that's all in our category of specialty, where we're bringing very attractive high Margin Growth, right. And you think of the Circular platform, we've told you we're going to deploy $2,000,000,000 of capital across these first three plants. The first one being focused on specialty, France being a hybrid of specialty and PET and textiles And the 3rd being predominantly packaging textiles with I'll call it specialty circular polymers. But that $2,000,000,000 translates into $450,000,000 of EBITDA. So when you look at the ROIC and the value creation from those three projects.

Speaker 3

I call it special.

Speaker 1

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

Operator

Okay. Our final question is from Jajit Pandeya with On Field Research. Please go ahead.

Speaker 15

Thanks a lot. Your first question is really around the circular plastic projects that you have To your point, if you take France as an example, you want to invest $1,000,000,000 for 160 kt plant. So if I just go by the returns numbers that you sort of said, I mean, sort of back of the envelope, it feels like There will be all else equal, you would need almost 3x the price of recycled polymer versus a virgin polymer. So if that is not the case, then what is the inherent cost advantages In the cost structure, which make returns attractive and prices not ridiculously Different from Virgin Polymer. That's my first question.

Speaker 15

And the second question is just around cash flow. Sorry to ask this, but I suppose, Is it really just a raw material inflation why you have changed your wording on the cash flow? Or is there something else to it as well? Thanks a lot.

Speaker 4

Yes. Let me start with the cash flow question first. So yes, obviously, we're we've seen pretty significant Inflation here in the Q1, as Mark highlighted, we expect that to peak in the second quarter. So as we think about that, that's at least $100,000,000 of headwind that we see. And what we're highlighting is the change in guidance.

Speaker 4

I would say our Q1 cash flow Was probably pretty normal compared to pre COVID. If you look back at the 2017 to 2019 timeframe, Our Q1 is pretty representative. We had a couple of headwinds this year in Q1, which one is a higher than normal, I'll call it variable compensation payout as well as the impact of the steam line incident and the divested EBITDA year over year Combining for about $100,000,000 So as we go into the back half of the year, it will be more traditional And we'll use all the levers. We've made investments in integrated business planning to effectively and efficiently manage our inventories as well as again, we look at our net ninety programs in terms and accounts payable as well as other avenues on the accounts receivable side. So again, we've been able to demonstrate and deliver cash flow in multiple environments over the last several years and Remain confident and robust cash flow this year.

Speaker 3

So the first question, I'm not quite sure how you did the math, but it's wrong. So When you look at this plant on France, first of all, we've said that the first phase of the plant is going to be $600,000,000 to $800,000,000 not a 1,000,000,000 The second phase where we're adding more specialty capability down the road is what gets you to the $1,000,000,000 So Capital numbers a bit lower than what you assumed. Second, when we look at the pricing, you got to remember that the value that we're capturing is the price in The marketplace relative to the cost of our feedstock, right. It's a 2 step investment, right. We're building methanolysis and we're building PET and selling in a PET revenue, right.

Speaker 3

So that $600,000,000 is to build the methanolises and the PET plant. So the margins you're generating are a lot more substantial when you're going all the way to the cost of Plastic waste, which is quite low relative to the pricing at the marketplace. So when you do that math and say, okay, what premium do I have to get above The sort of fossil based feedstock market, it's not all that different than the premiums that exist in the market today performance, reliability and safety, the mechanical grade feedstock. So it is a high value product and it is a long term solution because we can infinitely recycle plastic waste. We don't degrade sort of after 5 laps like Mechanical does.

Speaker 3

By the way, that makes us also a necessary complement to Mechanical To keep it a viable stream in the long term because we can revitalize what is degrading through our technology. So lot of value we're bringing to marketplace, not just in what we provide, but enabling mechanical recycling to exist in the future, which it will not do without molecular recycling. So There's a lot of value we can get, but we're taking a pretty reasonable pricing approach relative to the market and generating the sort of $450,000,000 EBITDA to $2,000,000,000 capital, so good returns.

Speaker 1

All right. Thanks everyone for joining us today. Very much Appreciate that. And I hope you have a great day. This concludes our call.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.

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Earnings Conference Call
Eastman Chemical Q1 2022
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