Eastman Chemical Company (EMN) Earnings Call Transcript & Summary

And if you -- on methanolysis, if you dream a little bit, can that change the balance between polyester and other plastics at the end of the day and other fibers, where because it's -- well, with something that's easy to recycle, would you actually see an outsized growth rate just for that fiber, that polymer because it's better in ESG qualities?

Yes, for some -- to some degree, it's yes on both, right? So on the methanolysis side, our whole business model for the last 2 decades has been replacing other polymers, right, because we don't really have much competition that makes the exact same product, right? We only have one competitor. So we're always replacing ABS or SAN or polycarbonate, some other polymer in our traditional model, whether it's BPA-free, or try replacing polycarbonate or a variety of other sorts. So this is just a continuation of that story, right, where the recycle content allows us to accelerate and replace even more of those other polymers because we're going into durable applications, we're not in the PET business, right? We got out of that back in 2011. So we're not trying to defend an existing SUP business, right, we're trying to take plastic waste and put it in reusable products that are more durable for the environment. So I think that growth will continue in this -- is opening up new markets. So electronics, automotive, toys, a bunch of applications that are opaque that we normally don't play in are now very interested in our products because of this recycle content play on top of the polymer's performance. So accelerate growth in existing applications like hydration, appliances, et cetera, cosmetic packaging and then new markets also being opened up, and we get a reasonable premium for the value we're bringing into these applications, right, so a lot of growth. And that is the same thing, right? We're very small today in the textile market, and we're replacing -- we're going to replace viscose or polyester or silk. A lot of companies replace silk, which is incredibly expensive, and we can -- the quality of our fabric feels like silk. It's incredibly soft and breathable, but a lot more affordable than silk. And so even for that reason, it's been growing.

Okay. And then maybe jumping back to CRT for a bit. So when you think about the ramping up this year, what are the bottlenecks? Is it you need to find customers to take the product? Is it you need to actually do the physical reengineering of the plant? Is it that you need to build out the sorting and sourcing of the raw material? Kind of how should we think about what the bottlenecks of that process to ramp are?

Yes. At this stage, the bottleneck is just customer adoption, right? We've worked out how to process the polymer and get access to the waste polymer and run the gasifier. That is well positioned to enable growth. You just have to go through the process of getting customers willing to switch to a new fabric that's new to them, right, so there's all the testing and qualification that normally goes into a new product in textiles before they're willing to adopt. And then they want to make sure they're really clear about the quality of the claims that you can make around the impact on the environment that that's going to be durable and hold up well as they launch the product. There's a lot of people making a lot of claims out there around what their products are, what they're made of and all that. And so we want to make sure there's no greenwashing with our products, and they want to do the same thing. And so it just takes time to work that out. But H&M adopting the product, as an example, which is pretty iconic in fast-fashion and really trying to be a very forward-thinker about improving the environment, which is fantastic because they've got a great leadership position to do it, and collaborating with them and having them use our product is a great example of what we hope to have more of in that space on the textile side. The thermoplastic is a little bit easier because a lot of where we can grow our polymers are already established, right? And it's not like totally new to them like the Naia fiber is. So there, you can move really fast because you're just adding recycled content into the exact same polymer it always was, right, because with molecular recycling, there's no difference. Mechanical, the product is actually different because you're blending, sort of melt the plastic. Here, we're taking it back to the ingredients and rebuilding it, so it's identical. So the technical adoption is really a lot easier. It's more to that latter about environmental claims and making sure that they feel good about what they're going to do.

Okay. Okay. Maybe jump into a couple of the businesses. So surprisingly, we've actually gotten a number of calls this quarter on the Fibers business. I think some of it has to do with maybe what you can do on the green side. But I think some -- maybe because it seems like cigarettes have kind of plateaued maybe in China after we went through that kind of that step-down, or maybe it's just people are smoking more with the COVID stuff going on, who knows? But how do you see -- where we sit today, I think you've come up with a plan how to offset some of the lost volumes on the tow side from cigarettes with the fiber side for textiles. But what does that mean for like sales and margins as we go forward? I'm assuming that in textiles -- I mean, the fiber, in total, is just awesome margins, right? You can't replace that. But how does that, over a long period of time, 5 to 7 years if this works, what does that look like from a P&L standpoint for Fibers?

Yes. So first of all, the tow business, I think, has been stable for a number of years now. Volumes were quite stable in '20 relative to '19. And there's going to be a 2% to 3% market decline that is something that you ride sort of carefully down. And then you're replacing it with textiles and some other applications we're not ready to talk about yet, that can sort of load all those assets. And honestly, a lot of the textile business is not that bad. The margins are actually close to tow. So it's a good business. It's just small and has to grow to get to relevant scale. But we feel good about where that's all going to play out, where Fibers should be stable with the success in textiles and some of the other things that we're looking at doing. We just need a little more time and COVID recovery to get textiles back in here. But it's a great source of free cash flow. It doesn't require much capital. Even CRT investment doesn't require much capital. So we feel like we're in a really good position in how we're sort of growing that business. But we have an additional hedge, where some of our specialty plastics also go into the reduced-risk products. So as that's growing, you've got growth in specialty plastics over in Advanced Materials that's offsetting, if you will, at a corporate level, some of the decline in tow.

Okay. Well, certainly an area you would get multiple gold stars over the last couple of years is on the free cash flow that you've delivered. And again, assuming that, that stays, which it should, I think given everything, when do equity guys get to enjoy a little bit more of that? I mean we've been wound up for a while. I think that process has taken longer than we originally thought when you go back to the big deal. But how should, the next 3 years, I mean, is there a period where the vast majority of that free cash flow in some form or fashion ends up coming back to equity holders? Or are there some other things that you have got your eye on that maybe that would end up going towards?

Yes. So I think that just to go through the normal ladder, right, so it starts off with great free cash flow and stable lock-in. If we deliver what we intend to do of greater than $1 billion of free cash flow this year, that will be 5 years in a row. So let's just start with that. Then you've got an increasing dividend every year. So that will continue. So then the question is what happens from there. There is still some delevering we need to do, but not that much to get back to our 2.5 target because you have to remember, it's a ratio, right? So as the EBITDA goes up, that's how you also get your delevering, which we think will be complete this year. So as you get to '22 or even the back half of this year, to some degree, you can see some -- the allocation shifting more towards shareholders or both on M&A, right? So we always say that it could be buying our stock. It could be buying attractive bolt-on M&A. But if we bought -- if we do M&A, the accretion has got to be better than buying back stock or we're not going to do it. So either way, from an EPS point of view, you're going to land in the same place. And that's where I think this certainly goes, which is it's certainly not '23 or '24, it's somewhere in the back half of this year, depending on how things go, or in the beginning of next year, when that really starts to swing towards shareholders.

Okay. And then maybe a more philosophical question. I mean the current Eastman today was built on 2 relatively large acquisitions in the not-too-distant past. But we've now gone a period of time with not much meaningful M&A. When you handicap both what you did, and going forward, is there really an opportunity to do something along the size of a solution type going forward? Or you just think you've got your core business big enough now and you've got the right scale, that that's not interesting to you?

Yes. So I certainly don't think we need to do another big acquisition for greater scale than we are today. I think we are at a really nice size. We're still very nimble and agile in how we work as -- together as a team to still be really close to what's going on in the market, be part of the team making critical decisions and driving results. I think, smaller than us, you're subscale to do innovation in our industry. I've talked a lot about that in the past, which is some amount of scale really is necessary to do fundamental R&D and tech analysis to really solve complicated problems. So we're happy about our size. There's portfolio optimization we're looking at doing, as we've clearly said, around tires, adhesives, and is there way to partner or should we divest those businesses to get that sort of volatility out of the company because that impacts valuation, of course, for our owners. But I don't think there's a big change that we need to make. I think the big question that you started with is I think there is an option that we're ahead of many in the industry to really be an actual ESG play, an environmental technology play with what we're doing, in circular with the fact that, for the last decade, almost every product we've launched is for one sustainable reason or another, right, whether it's BPA-free or phthalate-free or new acoustics and interlayers to help lightweight glass in cars, to BPA-free coatings for can packaging, animal nutrition, et cetera, right? I mean it's a portfolio. It's not just a one-off circular story. But circular is a big deal, and it's a pivot point to sort of drive more attention to all that we're doing that I think is great for people and the environment at the same time. And so there's a lot of time we're going to spend sort of looking at where that can take us. But we're not looking at just big M&A at this point.

Fair. And I guess I should have said in the beginning, if anybody on the line has a question, there's a tag on the bottom, but you can send it to uschemicals@barclayscapital.com. And we've got a couple here that I'll just read off quickly. First of all, Mark, was just the big freeze that we saw in the Gulf Coast over the last couple of days, has that had any impact on your assets that's down there, suppliers of your assets or customers? Do you think you'll see any meaningful disruption from that?

Yes. We've seen an impact. As I understand it, the Governor is actually -- of Texas has told every industrial operation to turn down to minimal operating state to make sure that natural gas is going for critical heating for residential, which is appropriate. So we're doing that. So our facility is effectively turned down at this point as of yesterday. And we've got 2 down there. So Texas City will likely come back sooner as that area warms up first. Longview will come back a little bit later based on the current forecast and the weather improving. But yes, we're turned down like pretty much everyone else over there. So it's going to have an impact. It's a little hard to say how it nets out because while you've got the lost volume and just the cost of slowing things down and starting them back up, it's also going to create a tight market condition. So we'll have to see where pricing goes and how that all nets out.

Fair enough. Then the next one is just, over the last 7 to 10 years, while some stuff has grown very nicely, there's always been -- or not always -- what do you see -- there's been periodically a business or 2 that slips and kind of fades. So when you look through the portfolio today, is there anything in that bucket that you would say is kind of over-earning today or maybe as a new entrant coming in or an existing entrant that's building capacity, something that would cause kind of a meaningful downdraft in any of the markets you're in or any of the businesses you have?

At this stage in the specialty world, we don't see that. I think we're in very good position in the businesses that we're in, in Advanced Materials. And the circular economy gives us a whole another dimension of differentiation in our polyesters and cellulosics. And we have a lot of next-generation product development launching and getting orders now as we speak in interlayers and performance films, et cetera. Fibers, I would say, I've already covered that and what we're doing in textiles. And we're very unique in what we offer to the market of bio recycled content and biodegradable. We're, I think, pretty much the only fiber that has all 3 claims in the marketplace. So I think we're pretty good there. In AFP, I think we've covered the 2 places where we see vulnerability, which is adhesives and tires, and we're already taking action. In Chemical Intermediates, it is what it is, right? And then if you think about where we've taken the portfolio, we've made a dramatic improvement, right? 2013, AM and AFP together was about 45% of our EBITDA. In '19 or in '21, skip over '20, it's more like 70%, right? So we've made a huge churn in our portfolio to a much higher quality, although the earnings aren't nearly as high as we would like them to be because of something, these different macro headwinds that tend to show up. The quality of the mix is dramatically better, which is why the cash flow is so good and why the stability is so good. We held up really well last year, much more in line with the specialty peers when you look at revenue, earnings, cash flow, any metric you want to pick.

Okay. And then just the last one I have on the line here. Obviously, EPS and EBITDA are growing faster this year than free cash flow on your guidance. And it's just kind of saying that's logical given the inventory that came out of business last year. But once we get through this year, should you think about EPS, EBITDA and free cash flow kind of growing in sync in the years going forward? Or will -- they could be kind of countercyclical to each other in that countercyclicality?

Yes. I would think about it this way, which is we're still going through recovery, right? I think it's fair to assume that 2021 will be a recovery year in trying to get back to whatever we want to call is more normal, right? But once we get back to this recovery, where you have pretty accelerated earnings for the reasons you just said, Duffy, I would think about our growth math goes right back to where we were in 2018, right? So we had a math that said we can grow the specialty sort of 2x underlying growth markets. We can, through volume and mix and asset leverage, continue to sort of improve our EBITDA margins. And that, combined with our free cash flow, gets us to this 8% to 12% EPS growth rate. There's no reason that I can see where that sort of algorithm of growth, from top line to bottom line, isn't our long-term strategy and what we can do. I mean trade war and a pandemic sort of takes you off track, that you've got to get through in those environments. But I think that, that structure that logged, just frankly, that whole presentation, I think still holds true as we get past the recovery. And then you can just add a circular economy on top of that.

Okay. Well, terrific. We are at the top of the hour. Mark and Greg, thank you as always for joining us. Hopefully, next year, we can do it with a cocktail on the veranda afterwards, but...

I'm looking forward to that more than you know. It would be great for us all to get out of our homes and back into physical interaction and traveling the world and doing what we all do. So I look forward to it. Thank you, Duffy.

Great. Stay safe, guys.

Take care.

Bye-bye.