Eastman Chemical Company (EMN) Earnings Call Transcript & Summary

Yes. So we have run extensive tests and piloting of that exact question. So we understand what polymers work, which don't and vast majority do. It's more about how you prepare them than it is what kind of polymer it is. And so we have a really good insight on that, and we're obviously going to be very careful on how we scale up, so we don't sort of run into those issues, and we have some additional technical adds that we can do that are not very expensive from a capital point of view to manage that. So we're aware of it. I think that the difference for us is the scale of what we're doing is different because we're taking it to downstream systems of purification and chemical manufacturing that's been around for a very long time, right? And we're the only real gasifier that actually does this in the western world at this point. So what they were doing is actually a pretty different technology.

Okay. Fair enough. And then just the last one on ESG. When you think about your entire footprint, I mean, obviously, your very biggest plant, you take coal, convert it into chemical. So from a carbon footprint standpoint on a lot of the metrics, you wouldn't score well. How do you take that kind of tell a story about either where Eastman is going or what you're offsetting today when you tell the ESG story to somebody who that's what they care about?

Sure. So I think that when we look at any company, it's about the progression you're making from where you were to where you're going. And so I think we've got a very strong story, a very aggressive energy improvement. We've got it 9 years in a row of ENERGY STAR recognition for our energy programs. I think only one of the company has got 2 recognitions. So you start with the fundamentals. How are you efficient with the energy and feedstocks, significant yield improvements, carbon efficiency. You layer on top of that, actions that we took, so we switched half of our site in Tennessee from coal to natural gas. So we've made substantial step changes in converting to more sort of carbon-efficient ways to do the steam and power of our site. And now with this gasification, over time, we could ultimately convert the entire gasifier from coal to waste plastic in the long term. So there's a progression on how we're continuing to drive all of this into a much more sort of circular economy, carbon efficient. And what I'd note about both of these technologies, and it's an important metric to measure is, the carbon footprint of what we do on the 2 technologies, the carbon renewal technology, which is the gasifier and methanolysis is depending on the feedstock, it's 25% to 50% better carbon footprint than fossil fuel. That's a big deal. Because we're not adding on any additional steps, right? We're just repurposing the steps we do with a more efficient -- energy-efficient feedstock because the amount of carbon in a polymer versus a coal is much higher. So the carbon conversion is much more efficient than dirt, right? And so I think we have a very compelling story in what we're doing.

Okay, okay. I'll bring us back because we kind of took a little detour there on ESG. AFP, when you look at that business, last year, it seemed like there's a little bit more cyclicality in some of the parts of it. So can you walk through structurally how you think about that segment? Is that the right format for that segment? Or should we parse it somehow and think about good AFP, less good AFP going forward?

Yes. So I think we made that conscious choice in the third quarter call and reaffirmed that in the fourth quarter call, which is there's now the 2/3 and 1/3 language we have from now. So the 2/3 of AFP, it's not that different from AM, right? It's a great story. Earnings were only modestly down last year, if you put it on a constant currency basis, close to flat. So in this environment, in '19, that's great. And it was driven by good market growth and things like water treatment; Care Chemicals; fluids, as I mentioned. Obviously, we had good price discipline in that space. So the only place where prices were down, we're on sort of cost passer contract, so the margins were constant, but there's a volatility -- high volatility in some raw materials that we sort of mitigate volatility out by using CPTs, so you got spread expansion in that segment. And then you had some offsets because auto and coatings demand was off. So that was a headwind, but net held together fairly well. When you look at -- and that includes your currency headwind when you look at the final numbers. When you look at the 1/3 tires, adhesives in this formic acid facility, obviously, we've sort of been pretty clear about the headwinds we had there, supply-driven, especially in adhesives and formic acid and a mixture of demand supply in tires, where we had some more exposure in those specific areas that caused spread to get compressed to the back half of the year. And what I'd say is the 2/3, when you think about it, part of what makes it structurally different is, one, it has better end markets as far as growth and stability. Second is, is there's a lot more diversity in end markets and applications. So the products in that space is going to a lot of very small niche different applications. So you don't have a high dependency on one application, right? So you're not just going into hygiene for adhesives or tires. So -- and then we also have a lot more proprietary products, where we're the only manufacturer in the world on a number of very high-value products or have -- and have very few Asian competitors in the 2/3s. So that adds to a set of things that are structurally different because I know one of the questions we get is, why are we going -- how do I have comfort there, I'm not going to have a surprise in the 2/3, like the 1/3, right? And it's those reasons, which is you just have a fundamentally better industry structure and the products, the nature of the competition and the diversity of end markets that gives you more stability. And then we've got very large innovation programs coming in that space, which haven't really got that much traction yet because they're sort of earlier-stage than AMs. So you've got that to layer on top. And some of these circular economy benefits will actually show up in the 2/3s for a new application area we're getting into.

Okay, okay. And maybe just a couple of quick comments on the smaller segments. So maybe hit Fibers. Obviously, a business that's kind of structurally shrunk over the last 7 or 8 years, as China has shrunk its inner market. How do you see that playing out? Are there structural things that either you or the industry can do to make it a better business over the next couple of years?

Yes. So I think that in Fibers, the tow business has been relatively stable in its behavior in the last couple of years. So we still have -- the underlying market is declining at some rate. And so you've got to offset that market decline. And our focus is how to replace the tow business, back to an ESG question, with textiles, right? And so our Naia products, which are small relative to tow at this point are growing really well. So in our new markets where we've launched, our acetate yarns, we're growing over 20%, small base, but strong growth. And now we've got recycled content add into it. So it's now 60% biopolymer and 40% recycled content product. In that space than the luxury market that is in very high demand right now. So we see a lot of growth there. Last year was just a tough year because the overall textile market was down 8% to 10%. So the overall market, the long-term applications we've been in for a long time, were down. This new area growing really fast, that curve will cross over into net growth, especially once the textile market stabilizes. So I'd say that business is in good shape. As far as structural actions, we've done everything we can about shutting every plant. We're down to 1 integrated flake in tow plant. So it's more of a question of what our competitors will choose to do at some point because they've got the smaller, higher cost plants. So you'd have to ask them.

Fair enough. Okay. And then just last segment, CI, maybe touch just generally on kind of how you see that the volatility may be playing out over the couple of years? Structurally, where do you think the earnings are today versus what you might average over a decade? And then maybe just a little after-action review. You, obviously, have done a deal to get rid of some of the volatility with some of the olefins there, how is that working in your mind? Is that still the right structure to keep for the business?

Yes. So I think that Chemical Intermediates overall is sort of performed as you would expect in this environment, I'd say if I -- when I look at that division compared to other companies in similar businesses. We're all sort of in the same bucket. I would say that the -- it's important to remember, there's a bunch of Chemical Intermediates, it's not olefins, right? So there's acetyls coming off of our coal gasification integration facility. There's alkylamines that have very good industry structure, very stable pricing, mostly on cost pass-throughs. So margins are good, going into ag, which will be a source of growth in demand this year for us in North America. So those business are stable. And even within olefins, the propylene derivatives are good business. The ethylene is the part that we've been pretty clear, that's not core to us. And so in that sense, I'd say, certainly, the performance in '19 is below cycle average, like for all of us. And we'd expect some recovery in that sense. And I like all the investments we're making to reduce and mitigate the volatility. So our RGP investment to sort of switch to more RGP and much less ethane that creates a lot more propylene and reduces the amount of ethylene that we produce, took a lot of that ethylene volatility out, which has been the largest driver of volatility for us when you look at how that price moves around. So that's been helpful. We also have the things we talked about on the fourth quarter call that we're doing to just create other structural sources of earnings, right? So leveraging our sites down in Texas City as an example as well as in St. Gabriel, gives us a nice steady stream of constant earnings in leveraging those sites. It adds up to quite a bit of money. And then you've got the licensing that adds on another chunk of money, leveraging our sort of core technologies into spaces that are core to us. So that gives us additional stability. And then there are a couple of additional investments that we're looking at right now that would further reduce ethylene and olefin volatility that are not much capital. And so we got a series of actions we can take to reduce that volatility. We're always open-minded about that olefin portfolio with the right market conditions as we have been -- attempted in the past. This would not be those conditions right now. So I think we have a demonstrated tracker, being very disciplined in our portfolio. We got to have all kinds of businesses that were commodities, PET, PE, polypropylene, some other things as well as doing acquisitions that have been really successful. So I feel good about how we're managing our portfolio. And clearly, this 1/3 part of AFP, we're now going to look at what choices we need to make, whether it's partnering or divestiture, et cetera, restructuring to improve that part of the portfolio or -- and if we can't, move it out.

Okay. And then we'll have time for a question hereafter. I've just got just one more. So if you look at the last 5, 6, 7 years, again, roughly, you've been in a band of about $2 billion to $2.2 billion of EBITDA, now the skew has changed dramatically. When you look at the composition of that 7 years ago, again, like, if the point that a lot more of it today is AM, a lot more of it is AFP. And part of the issue has been, as you've done great things in those businesses, you've had some businesses that have fallen apart structurally. So when you look at the portfolio today, I think what a lot of investors would like to know are there things that could move against you again structurally over the next 5 years, it might continue to offset that? Or when you look at what could be bad, most of what's happened has already happened and which would argue then, at some point real soon, we hit an inflection point where the growth of the good stuff with a smaller base of, I'll call it, bad stuff, it's not really bad, it's just less good, doesn't hurt anymore? I mean are we close to that point?

I mean I think we're close to that inflection point. There's a big macroeconomic question that always sits on top of this question. So it's good to look at it in 2 time frames. So if you look at it from '14 to '18, the innovation model was really in gear and doing quite well, right? So as you said, AM, AFP grew well. They grew about $600 million in EBITDA in AM and AFP between '14 and '18. That's a big number. And 1/3 of it was acquisition, 2/3 organic growth. And the innovation in that organic growth wasn't just history in historical Eastman, but driving an accelerated level of innovation growth in what we acquired. And then that was offset by a $600 million of macro trends between the issues in Fibers, currency and oil. And so that was on track. And as you looked through the first half of '18, that inflection point was happening, right? The earnings growth were really kicking in, the valuation had dramatically improved or getting -- moving towards 10x EBITDA and changing valuation lanes in a meaningful way where the structural problems, which have been predominantly more in the historical Eastman part of the business, Fibers, olefins was becoming smaller and stabilizing and specialties grew. Now obviously, you have got a trade war and the coronavirus to sort of work your way through, that's actually masking the strength of those specialty businesses at the moment. So I think inflection point is, you get to a stability here. We don't need strong growth to come back like you do in a commodity to get your spreads back. We don't need that, right? Because our commodity exposure is really small now. We just need demand to be stable and going sort of moving upward. And we even saw that in January, frankly, where that inflection was sort of moving in our direction. So I think that -- we get past this virus, and I think you can start seeing the power of these 2 specialty businesses.

Okay. And again, I've run us over a little bit, but if there's time, we've got a question in the audience, we can do that. So right up here in front in the middle.

Just an ESG-related question. You had talked here during the presentation about progression and also actions that Eastman is taking. What's the company's position with respect to reporting, whether considering using the SASB framework or otherwise as it relates to ESG?

Well, that's a technical question. So we're still evaluating all the formats. The problem that ESG has right now is everyone is making up their own set of criteria in their own format. So we're looking at that one and a variety of other formats. It's turned into a large industry of consultants creating different ways to sort of measure and promote it. So I don't have a specific answer to your question on that. But we are constantly working on improving our disclosure and being very metric-driven in everything that we commit to doing so that we can be tracked and held accountable for delivering results on the environment. Greg, would you want to add anything to that?

Greg is like, I'm glad I wasn't up on the stage.

Terrific. Any other questions? Okay.

Perfect. Mark, well, again, thank you very much for coming out.

Thank you.

Appreciate the chat as always. Thank you guys.