Eastman Chemical Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 12 speakers on the call.

Operator

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

Speaker 1

Thank you, Jordan. Good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO Willie MacLean, Executive Vice President and CFO and Jake LaRoe, Manager, Investor Relations. Yesterday, after market close, we posted our Q3 2023 financial results news release and SEC 8 ks filing. Our slides and the related prepared remarks in the Investors section of our website, which is www.eastman.com.

Speaker 1

Before we begin, I'll cover 2 items. 1st, during this presentation, you will hear certain forward looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to our future expectations are or will be detailed in our Q3 2023 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 2022 and the Form 10 Q to be filed for Q3 2023. 2nd, earnings referenced in this presentation excludes certain non core and unusual items.

Speaker 1

Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, Including a description of the excluded and adjusted items are available in the Q3 2023 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. Jordan, please let's start with our first question.

Operator

Thank you. And please ensure you're unmuted when speaking. We'd ask all participants to limit themselves to one question with an additional follow-up. Our first question comes from David Begleiter of Deutsche Bank. David, the line is yours.

Speaker 2

Thank you. Good morning. Mark, thanks for the comments on 2024 in the prepared comments. Can you provide a little more color on the potential you think for 2024 earnings in this macro?

Speaker 3

Sure, David. Great question. We're obviously spending a lot of time focusing on putting this year behind us and Focusing how we recover and deliver a lot of earnings and growth next year. When you think about it and the way we built our forecast or if you will, a scenario Was to intentionally be somewhat neutral on where markets recover or don't recover or what oil prices or energy So we wanted to serve a neutral case to focus first on what are the things that are more in control or math That deliver a better year next year than this year. And the biggest driver, of course, in the decline in earnings this year was volume and mix.

Speaker 3

And when you look at the extent of that across the portfolio, we're probably down about $450,000,000 in volume and mix From a variable margin point of view, excluding capacity utilization. And then as we look at how that can recover next year, we sort of think of it in 3 buckets. First is obviously a lack of destocking. There's a lot of conversation around that. And it was certainly a very significant element to our business.

Speaker 3

And we generally think destocking was probably about 40% of the decline in volume this year. But let's be conservative and we'll call that sort of 1 third It comes back next year from destocking, so $150,000,000 there on variable margin. And that's just a lack of destocking. So it doesn't include restocking. It doesn't include any Market's getting better.

Speaker 3

The second element is innovation. We are very excited about our innovation portfolio. It's been the center of our Growth story as a company, and the biggest element, of course, will be the Kingsport methanolysis plant coming online, delivering an incremental $75,000,000 in EBITDA to next year relative to this year. And that's all in with costs and revenue and margins considered. So that's pretty considerable.

Speaker 3

So you've got that on top of the lack of destocking. And then you've got innovation that's happening across our portfolio. It's not just Kingsport, methanolysis. We've had great success with Premium Interlayers delivering a lot of value With the growth in the automotive market and extreme leverage of 3.5 times the material per car and EVs versus ICE cars, so that's a great business And we'll continue to deliver above market growth. We've got the Aventa products we've been telling you about where we've had great success, adoptions and straws and Some brands going national as well as now making great progress in our polystyrene replacement for Protein Packaging and Food Packaging, etcetera, and you're going to see some real nice growth out of that business.

Speaker 3

The textile business has been great this year and will continue. TetraShield is picking up more business in food cans and we're starting to move into the beverage side. So there's a lot of growth happening throughout the portfolio through innovation even in a flat market. And we're going to see more benefit really next year when you're in a more stable market situation and people are focusing on new launches. The 3rd element, of course, is the markets.

Speaker 3

And as you saw in our guidance, we're being pretty cautious about where the markets might go. I think there's Lots of debate around markets could recover, markets could go down. I think it's fair to say none of us really know. But I think it's reasonable to expect that our stable markets will probably stabilize The end market demand there is sort of not as discretionary. So pharma, personal care, packaging for food, Those kind of markets are all going to stabilize medical and probably have some modest growth when you look at those dynamics.

Speaker 3

Automotive is expected to grow, and we think that's a reasonable assumption. Building construction, we think, is flat to down a little bit. So when you put all this together, you've got some additional volume growth out of that on top of those numbers from destocking and Kingsport Methanolysis. So considerable value there. The second part is asset utilization.

Speaker 3

So we've been extremely aggressive in Managing our assets and pulling the utilization rates down to free up cash. We saw great success in over $500,000,000 of cash generated in the 3rd quarter by the actions we Unfortunately, it comes with accounting headwind. It's not a cash headwind, but you take a $75,000,000 utilization headwind hit in the 3rd quarter alone For that, dollars 75,000,000 really on a full year basis. When you think about the tailwind for next year, so you're going to add that back if volumes are flat. That comes back.

Speaker 3

Obviously, there's actions we're taking to keep our cost structure flat. So all that revenue growth we're talking about above And the volume side of things flows straight to the bottom line. So the incremental margins on the recovery are going to be quite strong. So all that creates a good situation. Offsetting that could be some specialty pricing starting to moderate in a few places.

Speaker 3

We still have a lot of raw material in inventory That is lower and still needs to flow through. We're about 50% FIFO in our company. So you're going to see some benefits Of that flowing through into next year, that will sort of offset specialty pricing. So we don't really see raw materials as a tailwind, But we also don't really see it as much of a headwind. So all those factors put together delivers quite a bit of improvement in earnings And earnings from our operating in the cash side as well.

Speaker 3

So we're pretty excited about focusing on all these actions that we Can control this uncertainty and delivering success for our owners.

Speaker 2

Very, very helpful. And just lastly, in the areas where you are still seeing destocking like crop protection, when do you think it will end or how long do you think it will persist? Thank you.

Speaker 3

On the ag market, which is more than crop protection, but a number of different products, Obviously, the destocking didn't start until the Q2 of this year. Very different timing stories like consumer durables or building construction I didn't either aggressively in the Q4 of last year, but ag didn't start until the Q2. So the destocking started, it got more From the second to the third quarter, and it continues into the 4th quarter. Do think it will be played out by the end of the Q4 from what our customers are telling us as they start looking to the next planting season. But normally you have a build in inventory, starting in the Q4 and through the Q1 for the planting season.

Speaker 3

This year, we're going to see destocking through the Q4 and then a ramp up of building inventory in the Q1 of next year. So that's part of that headwind relative to what is normal for a 4th quarter is that delta between building versus pretty aggressive destocking.

Speaker 2

Thank you very much.

Operator

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

Speaker 2

Good morning. And I did appreciate the video on methanolysis. So thanks For giving us the link there. Mark, Advanced Materials has had a difficult 2023 on the backs of 22 where you're now expecting 23 to come in below $400,000,000 of EBIT. I took a look back the last time that happened that you were below 400,000,000 of you was back in 2014.

Speaker 2

So I know it's been a difficult couple of years. What sort of confidence might you have that that business can get to $500,000,000 or better in 2024?

Speaker 3

Yes. So Frank, we feel very good about, really do what you just said, in getting this business to come back, considerably from where it is now. The bridge I just laid out at the corporate level is very true at the AM level and all of those elements. So if you think about this year, Just as context before we get to next year, the extremity of the demand decline was more than anything we've ever seen before. So we've seen difficult demand environments in 2009 in 2020, but those were over in 3 quarters in 2009 and 2 quarters in 2020.

Speaker 3

We're now in our 5th quarter of low demand and in some applications Continued destocking. So this is something we've never really seen before. But it is all demand related and it's a lot of destocking Where people got out of control in building inventory during the supply chain crisis. And some of the markets that we're in Very long supply chains. When you think about consumer durables, we're making the polymers here, having to ship it all the way to China, go through multiple steps to get an appliance or TV or something made and then shipping it back to the U.

Speaker 3

S. And the Europe, you've got 6 to 10 steps. It's a long supply chain to deplete. When there's such a significant step down in demand that's as bad as 2,009 when you think about consumer durables or housing for that matter. And so the good news is we can see some markets bottoming out and recovering really well.

Speaker 3

So durables was down 40% in the Q4 of last year, was even worse The Q1 came back 30% in the 2nd quarter relative to the first, another 15% back in the 3rd quarter. Now it's going to be a little softer in the Q4 because of normal seasonality of activity and what customers do, but you can see that that's the bottom of That market was the Q1. And it's certainly in better shape as the destocking has definitely played out We think at the end of the Q3. We have some other markets where the destocking is also still pretty extensive like medical and packaging. It didn't start like ag Q2 of this year and it's finishing out through this quarter as we can see it.

Speaker 3

So there's different timing and different levels of drop across the segment When it comes to specialty plastics, but we are pretty confident that the destocking part will be over by the end of this year. And when you think about that $450,000,000 Of variable margin down from volume and mix, about half of that is in the AM segment. So you can start seeing how that on the destocking part comes back. That's just on the destocking part. Then you've got the $75,000,000 of EBITDA coming from the methanolises to add back to next year on top of this year.

Speaker 3

Remember only 50 of that's going to show up in AM and the other 25 in other. And then you've got a lot of these stable markets, that are going to have some amount of very modest growth in the Packaging, medical, all we're going through this year is in a decline in demand in medicals. Surgeries are steady enough. It's Just a lot of destocking, but it's very high value and painful while you get past it. So we feel good about that, about $40,000,000 $75,000,000 of the asset utilization headwind from inventory management comes back as a tailwind.

Speaker 3

$35,000,000 of FX is a headwind this year. I don't know where currency will go next year, so that could be up or down, but it's a significant headwind this year when you think about Looking at the total decline. So you've got the destocking coming off, you've got the markets, you have the utilization tailwind, Kingsport, you've got innovation, You have the auto market, which we expect to continue to grow and a lot of the innovation that's happening in there. There's a lot of innovation throughout the portfolio in AM that will Great for our growth once the market stabilizes and customers are confident doing new launches. So we feel great and the incremental margins will be impressive because we're going to keep the cost structure flat.

Speaker 2

Very helpful. If I could follow-up on the asset utilization. Just a clarification, in the appendix, The updated number on the headwinds is $100,000,000 on the lower asset utilization. It says first half 2nd half versus the prior $75,000,000 and you're expecting a $75,000,000 benefit in 'twenty four. Shouldn't we be expecting 1,000,000 benefit in 2024 on asset utilization, if it's a headwind for 2023 is higher.

Speaker 2

I mean, I wouldn't assume are you assuming That you're going to run at lower asset utilization as we start 2024?

Speaker 4

Frank, this is Willie. So You've got it correct on the first half, second half that increased from $75,000,000 to $100,000,000

Speaker 5

And sequentially, as Mark has highlighted, it was

Speaker 4

a $75,000,000 headwind to As Mark has highlighted, it was a $75,000,000 headwind to Q2. With that momentum, we would expect it to improve quite a bit as we go from Q3 to Q4, but the full year, obviously, you're taking into reference 2022 and that doesn't come into effect as you look 23 to 24. So 75 is a reasonable estimate. It may be a little bit higher, but right now 75 is close enough.

Speaker 2

Good to see you.

Speaker 3

We're not in Hey, Frank. Part of it was we built a little inventory in the Q1. And so you got to offset that to the 100 That's the first half, second half. So 75 implies we're running our assets in a similar manner next year and get that tailwind.

Speaker 2

Okay. Thank you so much.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley. Vincent, please go ahead.

Speaker 6

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

Speaker 3

So, yes, the Inflation Reduction Act is a great program for investing and Inspiring sustainable investments and we certainly see several of our projects that we're doing available for credit. When it comes to the 2nd, methanolysis plant here in the U. S, the one that we're doing with the Pepsi baseload, That funding could be about $350,000,000 of capital Is what's in the application? That doesn't mean that's what we're going to get. That's what we're asking for.

Speaker 3

And so the good news is we've been through a couple of rounds now and we

Operator

.:]

Speaker 3

There's also some tax credits that we're pursuing as well. And we should have insight on what they choose to give all of us out of our requests In the Q1 of next year is what we've been told. But you never know it's a government process. So who knows how the timing will work. But it's significant.

Speaker 3

It's a considerable help. We're also pursuing additional incentives in Europe with our project there in France, Not at that scale, but some additional incentives.

Speaker 6

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

Speaker 4

Thanks for the question. And obviously, we've had an ongoing relationship with INEOS Asset Hills And through their acquisition of the BP Assets for 10 years now. So I would say it's just through that ongoing Partnership that we've had at the Texas City site. As we think about longer term in both Increasing the percentage of Eastman at specialty as well as the highest and best use, INEOS is the best owner for that. And also as we think about strategically Feedstocks for our Advanced Materials segment long term.

Speaker 4

So all in all, all those factors came into play and the team did a great job here and we expect Close that here in Q4 and that provides about $400,000,000 of cash And we expect to use that to pay down debt here in the near term and for it to be basically immediately accretive. Right now, I would say there's no other items like this in the pipeline. We're always evaluating the portfolio, but nothing imminent.

Operator

Our next question comes from Patrick Cunningham of Citi. Patrick, please go ahead.

Speaker 5

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

Speaker 4

Yes, I would again, 2024, we expect it to be similar to slightly below. Our choices on CapEx will be influenced So by the external environment, as Marcus highlighted, we're pretty neutral on the external environment and we can ramp that up or take it down as needed. And I We've demonstrated that discipline over time. We are committed to beginning construction for the France project as well as the second U. S.

Speaker 4

Project Also, we have some other specialty growth investments within the year and we're waiting on the macro environment to ultimately set the pace of those. So I think what you're seeing and hearing from us is we're going to be disciplined. We're finishing the year strong with The cash flows that we just talked about from the divestiture, also we expect to have about $250,000,000 of free cash flow here in Q4. So we're positioning ourselves to be disciplined on capital allocation, which will be a mix of organic growth as well as share repurchases as we look into 2024.

Speaker 3

Yes, we feel good about our organic growth strategy. We think that kind of growth Clearly creates a lot of shareholder value with great returns on capital. It's unfortunate the macro environment A turn on us, just as we were launching, into the Circular programs and a lot of other specialty growth. But as we've talked about with our view of 'twenty four and The expectation that markets will normalize as you go into 2025 and 2026, we believe earnings and our cash will come back Significantly, as we move forward, you got to remember this year, a lot of our headwind in earnings to 2022 is non cash, dollars 110,000,000 of pension, dollars 70 $1,000,000 of asset utilization to generate cash. So when we're just looking at earnings, a lot of it is a non cash hit relative to 2022.

Speaker 3

So we feel very good about our cash earnings and how we're doing in this environment, as well as how we look forward, to the future.

Speaker 4

And maybe just to build on that, Mark, on the cash. As we think about 2024 cash, as Mark highlighted, our Starting at approximately $1,400,000,000 of operating cash flow. That's through the combination of higher cash earnings, Call that roughly $250,000,000 We always assume working capital is flat, so that would be a reduction of about $100,000,000 year over year. And then we've got higher cash taxes, which also include some of the taxes on the Texas City divestiture.

Speaker 5

Got it. That's very helpful. And then I appreciate that the sort of forward outlook doesn't have any restocking expectations embedded. But Based on your conversations with customers coming out of the destocking, do any end markets have precariously thin inventories? Or you get

Speaker 2

the sense that this has just been a

Speaker 5

trimming of safety stocks built over the last couple of years?

Speaker 3

No, it's definitely both. There's definitely safety stocks that were built up in supply chain crisis more than customers were sharing with us. And so there hence the sort of destocking We're seeing this here. But we're seeing signs where suddenly we get an order from a customer, some of our big customers where they've You brought inventory down so low, they can't actually make product and they didn't get urgent shipments sent to them. So you're starting to see sort of people hitting bottom, which is encouraging.

Speaker 3

If you look at all the data we put together here around destocking and the underlying markets, you definitely can see that we're turning The back half of this year, where the destocking has played out. As you look at next year, When you get into this question of restocking, we want to build a really conservative view of how we could perform next year Because the macro economy, frankly, is so uncertain. So we don't have any restocking in there, but it's reasonable to expect that some restocking is going to have to happen with some Customers if the markets start to stabilize and grow at all. And so that will happen. That would be upside to sort of how we look At next year.

Speaker 3

It's certainly going to happen in ag as I think about it. That's one place we know for sure that we build it into our locker.

Operator

Our next question comes from Jeff Zekauskas of JPMorgan. Jeff, please go ahead.

Speaker 7

Thanks very much. How much did the methanolises plant in Kingsport cost?

Speaker 4

So Jeff, on the methanolysis in Kingsport, I think as we've highlighted earlier this year, we had a range of 700,000,000 to €800,000,000 as we started the year. And we went to the higher end of that estimate. We've been able to manage the increase For the Kingsport Methanalyses within that disciplined budget that we've been able to demonstrate through the year. That's how I would summarize that.

Speaker 3

We don't disclose specific project capital for competitive reasons.

Speaker 4

The additional things that I would continue to highlight, Jeff, is As we think about $450,000,000 of EBITDA, also the fact that we're going to be generating $75,000,000 of EBITDA on the Plant here from a year over year basis in 2024. I think that demonstrates That velocity of EBITDA and we think that that's at $150,000,000 by the end of 2024. That sets us up well for strong returns on this investment.

Speaker 1

So

Speaker 7

My memory is that you had planned to expand your Triton capacity in Kingsport with the building of the methanolises plant, but chose not to do that. In your Normandy

Speaker 3

No, we didn't choose to I'm sorry, go ahead. So finish your question, I thought you were done. Sorry, go

Operator

ahead, Jeff.

Speaker 6

Thank you very much.

Speaker 7

Yes, in the Normandy plant, I thought that there was also a Triton component there Well, since you didn't build the Triton the extra Triton capacity in the United States, are you still going to build the Triton capacity in Normandy, in that I would think that Triton would be more favorably made in the United States. That is, Are you going to scale back whatever it is that you thought you were going to build in Normandy given the way that economic conditions have evolved?

Speaker 3

So, yes, let me clarify a couple of points there, Jeff. First, with the Kingsport methanolysis plant And the Triton expansion that we intend to do here at Kingsport, we're still doing it, right. We've just pushed the construction timeline of that plant out To better align with the macro economy. So our intention here is to still have 85,000 tonnes of capacity being brought online Of additional Triton capability. It's just going to come online more in 2025 than in 2024 because The durable market where a lot of that Triton is sold is obviously down.

Speaker 3

So there's no change in our strategy whatsoever. It's Adjustment of timing and that's part of what Willie was getting at in sort of how we adjusted our spend rate On capital this year to make room for the higher cost of finishing methanolises by pushing that capital on the Triton project out until next year. And so that's what we've done here. So no changes at all in how we think about the value creation From the first investment, it's just a shift a little bit in timing in the short term. The good news around our assets in Tennessee is they're flexible, We can swing our Triton lines between Triton and making copolyester.

Speaker 3

We can make PET. We can assign that recycled content to whatever products we want across our integrated system. So that allows us to monetize the value of the recycled content As quickly as we can make it as we ramp up the facility. So that's not going to be hindered by the macroeconomic environment in durables, Because there's plenty of packaging out there, that we can make both in our co polyester applications like our shrink or in some PET. So we'll be monetizing the full value of all the DMT as fast as we can make it, and driving that utilization rate up as fast as we possibly can.

Speaker 3

And then as higher value markets like Triton come back, we'll shift the mix and how we assign the recycled content to the higher value markets. So we've got a great flexibility that's created a huge amount of value and mix upgrade over the last decade as we grew freight on the same assets that once made PET over a decade ago. And we can take advantage of that now. In regards to the French plant, we're not changing anything there either. So the design of that plant Is to have 2 polymer lines, both of which are flexible between making PET or textiles Or what we said is specialties, but that's actually copolyesters, not Triton.

Speaker 3

To your point, Triton is much more economically made here in the U. S. With the integrated systems and monomers that we have to make that very unique polymer. So this will be just more PETG Products that go into packaging, cosmetics, bottles and things like that and a variety of other applications That we make into with our traditional PETGs. So nothing's changed in our asset strategy whatsoever From a product mix point of view, Kingsport's all specialties, France is half PET, half specialty and the second U.

Speaker 3

S. Plant here is all PET

Speaker 7

Okay, great. Thank you.

Operator

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

Speaker 6

Yes. Thank you very much.

Speaker 8

Firstly, I want to ask a little bit about your plasticizers footprint. How much would you say of Your total sales for earnings was coming from the Texas City facility that you're selling. And can you discuss a little bit what are the economics of the agreement where Enel actually operate the asset, but technically you're still the owner of it?

Speaker 4

Yes. So we retain the ownership of the Texas City Plastic Sizes that was the original strategic intent of buying the Texas City's facility along with, I'll call it, the structure that the site had. So first, we're retaining the ownership and the sales. 2nd, I would say the economics around that Are substantially the same as it operated today within Chemical Intermediates. So the only thing that you're going to see is reduced Sales of acetyls out of the Texas City site within Chemical Intermediates, the remaining plasticizer business and remains intact.

Speaker 6

Okay, perfect. And I also want

Speaker 8

to ask About pulp prices, I think there has been some traction with increases in the past 1 or 2 months max. What are you seeing there? And could this be a headwind in the end for 2024?

Speaker 3

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

Speaker 3

It's not perfect, but it's a significant improvement from where we were in the past.

Speaker 6

Perfect. Thank you very much.

Operator

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

Speaker 6

Great. Thank you. Good morning, guys. First, Mark, I want to follow-up on Fibers. In January, when we started the year, when you had the annual prices sort of locked And you're expected to make about $275,000,000 this year in EBIT.

Speaker 6

Now we're looking north of $410,000,000

Speaker 2

So can you maybe just

Speaker 6

talk about what's changed Versus starting the year is largely cost and just help us with your confidence in the sustainability of this higher levels here.

Speaker 4

So what I would highlight is the fact that, one, we're confident in the base of Where we've gotten to at this point in time. So we're at greater than $410,000,000 for this year. The business team has done A tremendous job of getting the contract structure in place. That's what Mark just highlighted. From Our confidence of both the margins within this business, also as we think about fibers more broadly with the textiles and the Sales growth as we go from 'twenty three to 'twenty four.

Speaker 4

I guess I would just highlight that right now, we're substantially complete with the contracts for 2024 and had a high commitment level as we highlighted in the prepared remarks for 2025. Going back to the first part of your question, ultimately part of that was growing in confidence. We do have Lower energy cost than we had expected at the beginning of the year. And as we gained momentum and seeing how the contracts and the contract structures were working, We just reconfirmed that as we grew the earnings and grew the confidence by year end.

Speaker 3

A lot of it is Great

Speaker 4

business and we're happy with where it's headed and will be a From a contributor to your cash as we go forward.

Speaker 3

The cost structure and utilization benefits, and we are being conservative about how well Some of the investments we were making in running the plant efficiently, we're going to play out until we had that proven out. And so all that came together. So it's Not just price, we've made investments and are operating our facilities a lot better. And that we didn't want to sort of Count on until we've proven it to ourselves.

Speaker 6

Great. That's super helpful. And then second, I just want to follow-up on the Trajectory of CapEx, obviously, you've given us some numbers about CapEx going somewhat lower next year. But when I just think about your large growth projects, We've got about 2 more methanolises projects on the horizon. You mentioned earlier to Jeff about the new timing on Triton.

Speaker 6

So just High level, should we expect CapEx to roughly stay around this $800,000,000 range the next few years? Should it trend higher or lower overall?

Speaker 4

Yes. What you would expect is, again, that we expect around 800 or less in 2024. To your point, obviously, we're in the detailed engineering phases right now. And then France would be 1st out of the gate on Longleede and then construction, closely followed by the second U. S.

Speaker 4

So we would expect 2025 you would be building CapEx and it's just going to depend on the timeline. So what I would say is It will be above $800,000,000 and we'll give you more firm answers on how we see $25,000,000 when we actually get the project schedule set.

Speaker 6

Great. Thank you.

Operator

Our next question comes from Josh Spector of UBS. Josh, please go ahead.

Speaker 2

Hey, guys. This is James Cannon on for Josh. Thanks for taking my question. In AFP, you called out in your guidance some raws increasing in the 4th quarter. I believe you transfer some propylene from the CIE segment.

Speaker 2

I'm assuming that might be a big part of it, but is there anything else we should be thinking about And in that body?

Speaker 3

Yes. So we buy methanol, we buy ammonia, we buy And we do have propylene derived specialty products and coatings. So all those products obviously are impacted by Oil and overall market dynamics and creating some headwinds as those are increasing, Especially from the oil change, it flows through and there's just a lag in how the contract prices Catch up to it. And so you'll have a headwind in the Q4 and that sequentially will then turn to a tailwind in the Q1 from the Q4

Speaker 2

All right, great. Thanks. And then just on the Specialty Fluids that you called out some pull forward. Can you give a little bit more color on what you saw there and kind of how much you expect to

Speaker 5

get pulled out of Q4?

Speaker 3

Yes. So our original guidance was we had some great fills on some LNG plants in the second quarter. We had originally expected that to be a bit more in the 3rd, at the beginning of the year. So that those sales were made. And so when you looked at the sequential drop from Q2 to Q3, we thought it'd be about $30,000,000 But we had some additional fill show up in the Q3, so that drop turned out to only be about $20,000,000 But the fluids sales for the year are changing, so that just means now that there's an additional $10,000,000 drop Of that 30 that will happen from Q3 to Q4.

Speaker 3

So that's part of why AFP is declining sequentially into the 4th quarter. But overall, great business, and we really like these LNG fills. There's obviously a lot of construction Sure. Traditional chemical construction activity uncertainty, especially with PT plants in China where a lot of these fills go. And it's been great to diversify our exposure to that cycle with these LNG plants that also use a lot of heat transfer fluids.

Speaker 3

And I think as we look at that side of the markets, see a lot of LNG facilities being built with the Ukraine Russia situation and are very well positioned with our products Those fills, which also turn out to be pretty high value products, for what they need to do, and we continue to really diversify our Exposure into these places that are not as connected to what's going on in China, which is great.

Speaker 2

Great. Thanks.

Operator

Our next question comes from Kevin McCarthy of Vertical Research Partners. Kevin, the line is yours.

Speaker 9

Yes, good morning. Mark, I didn't see anything in the Paired remarks that you released on the subject of the UAW strike. Can you speak to whether or not that's having any material Impact and if so, what you might be baking into the Q4 or any auto related commentary in general would be welcome.

Speaker 3

Sure. So specifically UAW, the math on that is it's a pretty limited impact on us. About 20% of our auto and auto business globally is in the United States. So just overall exposure is not that high. And then you're just talking about 3 brands of many that are in the U.

Speaker 3

S. That are being impacted by the UAW. So It's not a material impact. I would say that overall, the auto business obviously has been a solid business for us. We've seen a lot of growth in the business, in the U.

Speaker 3

S. And Europe, in particular, for the Airline business as well as the Films So I would note that China has been a challenge all year long, so we haven't seen the growth we expected. We definitely thought we'd Some improved growth in the back half of the year, and that's one of the things that didn't play out as we thought from July to now in how we've adjusted our outlook down a bit. I mean that's particularly impacting our Performance Films business, which has an important business in China. We're not seeing as sort of the growth that we expected there and even some contraction right now at the sales level in some parts of that Chinese business.

Speaker 3

So overall, I'd say it's been a great business. We expect it to be better next year than this year, but it's There's a lot of ups and downs going on across the different markets.

Speaker 9

Thank you for that. And then secondly, if I may, perhaps For Willie, I think earlier this year, you had guided to a cost headwind related to pension and OPEB Of $110,000,000 if my notes are correct. Is that still the case? And more importantly, what happens to that Line item moving forward into 2024, does it come back down? Or would you point to a different trajectory?

Speaker 9

Yes.

Speaker 4

So, ultimately that number is set for the year at the beginning of the year. So the 110 is just coming through quarterly As we expected, that gets mark to market at the end of the year. So there will be a gainloss from Asset returns as well as interest rates. And right now, as we look at where rates are, assets and returns, It's probably a modest headwind if you were to market to market right now, but again, we'll give you an update. We don't expect anything material, But we'll update you at year end.

Speaker 9

And any insight on 2024, Willie?

Speaker 4

From a pension standpoint, we expect it to be a Modest headwind if we look at it right now. That will change a lot depending on how Great. Finish up for the year.

Operator

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

Speaker 10

Hi, good morning. This is Dan Rizzo on for Laurence. Thank you for taking my question. I don't know if I missed this or not, but so for the 2nd plant in the U. S.

Speaker 10

And the plant that you're building in France, do we think of those as when they are up and running to be $150,000,000 in EBITDA additions as well? Or is it greater scale or less than that? Or how should we think about it long term?

Speaker 4

Yes, we've never given, I'll call it, plant by plant. We said greater than 450. And as Mark highlighted earlier in some of The first plant is more specialty with our Triton portfolio. So you can expect it to be higher than the other 2.

Speaker 10

Okay. Thanks. And then if we think about you saying medical demand There being some destocking, but it getting back to more, I guess, normalization. I was just wondering if that end market is at pre COVID levels in terms of elective

Speaker 3

Yes. The elective surgeries That are occurring are certainly growing roughly 5% a year and definitely above Sort of pre COVID levels, if you look at it, not a lot, but a little bit. The issue we're having in medical is not about demand at all, right? Consumer durables, laptops, TVs, appliances are not being sold nearly as much as they were. Medical is really stable in market.

Speaker 3

The customers though We're very nervous during the supply chain crisis about having enough material and so they built a lot of inventory to be Safe, and because you cannot have a problem in getting medical devices delivered in our packaging to the marketplace for obvious reasons. So they finally got calm that there's plenty of supply and reliability and started destocking in the Q2 of this year. And then they're still doing it through this quarter. But it's Just a destocking event. The markets are solid and expected to be better next year than this year.

Speaker 10

Thank you very much.

Operator

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

Speaker 5

Hi, this is Richard on for Mike. So just a question on the 2024 outlook. Are you assuming any price improvement next year? We've seen prices come down in the Q3 and Q2 despite higher raw material pressures. So just wondering if there's any price mix improvement that That we should expect new product launches, that type of thing.

Speaker 3

Well, so from a price on an existing product Sold this year versus next year on the specialties, we're not really expecting much price increases except for where we have cost pass through contracts And the prices will adjust up or down based on where raw materials are going. Now obviously, for an increasing raw material environment, we will increase prices across the specialties. But in our scenario that we gave you where raw materials are relatively flat next year to this year, I would not expect to increase prices in the specialties. I do expect prices probably to go up in chemical intermediates, because right now we're at the bottom of the market, right? We're at the cash In the olefins derivatives, we're at the cash cost of the marginal producer in these markets.

Speaker 3

It's a pretty It's a very challenging market situation right now in olefins. And so there is an expectation of some normalization Of those prices, you're getting better. I mean, the value of the price of propylene relative to oil is about 40% lower than Normal. That's extreme and never seen and never ever seen before in the past. So that's a lot of the compression that we're facing due to just excess amount of capacity being added as well as very low demand in a number of applications that use propylene.

Speaker 3

So there's some balancing of that, that will occur even with just the end of destocking and some stable markets growing. So that's one place where I would expect some prices to improve and margins to improve, sort of how we look at it at this stage. I would say the teams have done a phenomenally good job of holding prices at very high levels in this very challenging market that's created a lot of Improvement in our price to variable costs ratio offsetting some of the volume challenges.

Speaker 5

Great. And then as a follow-up, any update on terms of the market for pricing For the product from your Kingsport plant and circular products, how is that progressing moving forward with As we move to develop the other

Speaker 6

large projects.

Speaker 3

Yes. So pricing is holding up really well. We're having no issues with The premiums that we need to get for the recycled content related products on the specialty side And having good conversations with our customers on the PET side for the premiums that we need to get that go in line with the economics We've provided to you. So we feel really, really good about that. It's an exciting time right now with the methanolus plant Being completed and starting up, we have a phenomenal number of people working hard and making sure that startup process goes well.

Speaker 3

Back to Frank's comment, the video It's a great marketing tool with customers. It's an outstanding story when you see these huge piles Garbage, multi colored garbage, all kinds of types of garbage that we're taking and running through our process and Customers are very surprised and impressed by the low quality material that we're using That is headed to cannot be reused with mechanical recyclers at all. This is going to go to landfill or incineration or really low end applications. And they're just very impressed that we can take that garbage and turn it into a clear food grade quality pellet. And so the customer engagements around That story of getting things truly out of landfill and incineration, not just using a clear bottle that It was from a that could have been mechanical recycled, is driving a lot of engagement.

Speaker 3

The other thing that's important to keep in mind is A lot of the applications we're targeting with this recycled content, both in the specialty but especially in the PET are applications where mechanical recycling Is not really able to meet the specifications in performance because the quality is just not good enough, right? Our product is Identical to virgin material made from fossil fuels. Mechanical is not. It's got integrity issues, color issues. So we are really targeting those applications where mechanical is not a choice.

Speaker 3

That allows us to command a better premium than mechanical and in support of economics.

Speaker 7

Thank you.

Operator

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

Speaker 11

Thanks. Good morning. And staying with methanolises. So there have been many projects in the industry where Capital cost estimates have been revised higher over the last year or 2. And I believe you presented your return on capital for the 2 additional methanolences plants a couple of years ago.

Speaker 11

So is it reasonable to assume CapEx probably needs to go up Versus your initial expectations? And if so, how are you mitigating return on capital on that?

Speaker 3

Yes. So it's an important question and one we're very focused on. The capital headwinds that we encountered And the project here in Kingsport, we're really isolated to construction quality and productivity issues around pipe installation. And that was a very specific issue. It had nothing to do about the design of the plant or the scope of the plant And what we're trying to do when we got into these issues here in the last 6 months.

Speaker 3

And The way we're approaching the next two projects, we're taking a very different approach, using very large contractors that are very capable of So we feel we're in a far better shape. Also, We're not trying to build a new plant, right? So this is a new first time 100,000 tonne plant that we're building. The plants we're going to build in France and the second one in the U. S.

Speaker 3

Basically, the same plant we built here with some sort of modest improvements. So we're not going into this Without already knowing what the capital cost is for the methanolysis unit and the polymer lines are built all the time, well established, understand Those capital costs are going to be, infrastructure is also pretty straightforward that surround the plant. So we feel good that we can come up with a high quality estimate for the next two projects and we can manage the Structural process far better than what happened in Kingsport. And so we're still working those numbers. They're Still in line with what we expected to deliver a 12% return or greater for the France And the 2nd U.

Speaker 3

S. Plant, remember the first plant here is greater than 15% even with the higher capital costs. So we feel good about sort of where we are on the capital side of this. And of course, we're pursuing these additional incentives for both projects as I discussed earlier. And obviously, if we get those, that's going to help manage capital risk as well as improve returns.

Speaker 11

Thanks, Mark. And you pre processed a fair Amount of materials for the Kingsport plant, any lessons so far versus your initial expectations in terms of how Does front end technology works and what the costs are?

Speaker 3

So far the processing has gone well. I mean there's always hiccups. It's a proprietary new process that we developed that takes a lot of steps out of the sortation compared to a mechanical recycler. We're excited about taking that approach. Chemical recycling allows you to do that because you're not meeting perfect clear material to sell back to the market as the big pile suggests in the video.

Speaker 3

But the process is up and running and working well at stage, and we feel good about how that's going to work. Our overall cost when we think about sourcing material and processing it into the front of the plant It is a little bit better than we expected. So we're feeling really good on the feedstock side here. You're great about having 70% of feedstock already In long term contracts in France as well. So I know feedstock was a big question in the beginning of this whole process as a risk.

Speaker 3

We've actually Managed that one reasonably well. Customers are going well. Now the final step is starting up the technology, improving its economics and its effectiveness as sort of the final big milestone in front of us here over the next 2 months. So we're really excited to sort of check all those boxes, keep going forward with this plant, use it to help improve earnings next year In a difficult environment and get these next two projects underway and create a lot of value for our owners.

Speaker 11

Thanks. Makes sense.

Speaker 1

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

Operator

Thank you. Our next question our final question comes from Duffy Fischer of Goldman Sachs. Duffy, the line is yours.

Speaker 2

Yes. Good morning, guys. If we could, let's stay on methanolises. If we assume we're

Speaker 3

kind of at the run rate

Speaker 2

of our $450,000,000 EBITDA from the 3 plants, how volatile would that $450,000,000 be over A typical, let's say, 7 year cycle. And then talk about the volatility you may see on the pricing side and the volatility you may see on the feed Dockside over that 7 year cycle?

Speaker 3

That's a great question Duffy and one that's been a big focus for us. As we've told you from the beginning, The approach we're taking with this plant is to be more of a industrial gas type project in how we deliver very stable margins and attractive margins when you look at the economics So on the PT side, we're doing contracts that pass through the changes in feedstock and energy costs, Delivering stable margins for us. We have no intention of getting back into the merchant PET market and going forward. And if we don't get those contracts, as we've said, we won't build the plants. But we're getting the contracts and we're feeling good about it.

Speaker 3

So those margins will be stable in the PT side. On the Specialty side, we have demonstrated great pricing power around our Specialty products and managing The price to variable cost ratio really well and keeping those ratios stable. From a demand point of view, What I'd say is the PET market, the packaging market is a lot more stable than some of the other more discretionary markets. So we think that will actually add stability from these projects as well as to the company portfolio. The other thing I'd note is it's a regional business, Right.

Speaker 3

So when you're taking packaging waste out of the environment, the brands and even more so the regulators want to solve the local Packaging waste issue in Europe or the U. S. So we want that waste taken back into polymer and then provided back So this disconnects us from China. We're not trying to solve China's waste We're trying to solve the European and the U. S.

Speaker 3

Waste problems. So it becomes more of a regional business. The brands will have to be really careful about making sure they're sort of focused on solving the local impact to protect their brand equity. The regulators are writing Policy, especially in Europe, it's already written that the polymer has to be made from packaging placed on the European market. That regional aspect of this business has been a core reason we've been interested and excited about making these investments.

Speaker 3

So it's not perfect. You still have macroeconomic demand uncertainty, But it's going to be very stable EBITDA.

Speaker 2

Great. And then just One technical question about your acetic acid sale. Did you sell the technology for acetic to them as well? Or If you chose to, you could build a plant or you could do something like that SIPChem licensing deal that you did before where you actually kept the technology.

Speaker 4

Duffy, the sale of the Texas City facility is that is not part of I thought the strategic focus for Eastman, as Mark has highlighted, we're about anhydride and anhydride derivatives and cellulosics. So the key thing here is this is great for INEOS Acetyl Business and for Eastman as we go forward With our focus on circular and a circular economy.

Speaker 3

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

Speaker 2

Great. Thank you, guys.

Speaker 5

Thank you, Duffy. Okay, everyone.

Operator

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

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Earnings Conference Call
Eastman Chemical Q3 2023
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