Eastman Chemical Company (EMN) Earnings Call Transcript & Summary

Good morning. Again, this is Dave Begleiter of Deutsche Bank's U.S. chemicals equity research team. Next up is a team from Eastman Chemical, Willie McLain, CFO; and of course, Greg Riddle, who runs the Investor Relations and Corporate Communications for the company. So with that, Willie, welcome.

Thanks, David. Happy to be here. Thank you.

Well, maybe walk us around the world from a demand perspective, demand trends by region, by business, by end markets.

Okay. David, I'd just highlight, as we think about how we built our base plan this year, it was highly focused on, I'll call it the absence of destocking, also the fact that roughly 50% of our end markets are, I'll call it stable, so GDP plus. And that was underlying our expectation. Also, as we think about in the automotive space, we were expecting roughly, I'll call it, flat builds on a year-over-year. And the durables, we expected improvement coming off of lows. And then also in building construction, actually slight neutral to down. So as we think about what we were expecting and so as we think about our success in achieving our guidance, what we're seeing here as we continue to go through Q2 is it's broadly in line, whether we look at it from an end market perspective or across our 4 segments. I'll specifically focus on Advanced Materials and Additives & Functional Products. We're seeing, I'll call it, the expected seasonal uptick in durables. Maybe a little -- we're seeing it in building and construction as well, probably just maybe not as positive as the durables space. As I look around the world, obviously, the U.S. and North America continue to be the healthiest. I think probably a little bit of disappointment as people are looking at PMIs and the velocity of growth that are coming out of Asia and China specifically. But we weren't expecting growth and/or recovery from those end markets. So from a demand standpoint, in line with what we were expecting, and we continue to see those trends. I would highlight, obviously, just like Q1, March was important, and that played out well for Eastman. June is critical as well as we think about that seasonal, and everything that we see on the order books continue to support our expectations of approximately $2 for Q2.

Very good. Good news. And looking to the back half of the year, what are your expectations for any demand improvement?

As we think about the back half, a couple of things. One is we continue to make significant progress with our methanolysis project in Kingsport, and ultimately, unlocking the demand for our customers and the product launches. We see the incremental EBITDA that we've talked about there being primarily in the second half, and we can talk a little bit more about methanolysis a little later. Additionally, as we see in the first half of the year, we've had some impacts of volumes in Chemical Intermediates. And we see better performance on that front due to just product availability and overall just demand fundamental. So as we see, at the second half for Eastman, we expect Advanced Materials and Chemical Intermediates to basically have improved volume and demand growth, whereas our Fibers business stable. And there's some seasonality, I would say, in the second half, primarily in our ag exposure within Additives & Functional Products. But as we think about the full year guide, we continue to be confident in the range and making progress again here in Q2. And we'll see the momentum that, that gives us going into the second half and Q3 and here in the near term.

Very good. We know destocking's over. Has there been much of any restocking yet?

I would say, in my view, no real signs of restocking. I think what you're seeing is you're seeing continued discipline from a working capital. The Fed making choices to not lower rates, although the ECB, I think, did today. So people are being disciplined as I would, right? But what you are seeing, as I say, more instances of rush orders and/or restocking. I'll call it getting it to the customer so that they can continue to meet demand. So I think that's what we're seeing broadly. And I think that will continue until there's a true primary demand, I'll call it, confidence. And that confidence will come through lower rates and then also just broader economic stability.

And in China, are you seeing any signs of meaningful recovery yet?

We even talked to our -- we have more people traveling, engaging with our team members there and our customers. I think consumer confidence, I think, will need to continue to pick up for local demand. I think we've all seen instances of where, I'll call it, at least not where we're competing, but as we think about more commodity types, you're seeing their products show up, whether it's in Europe or Latin America and other locations around the world. And I think we need the confidence of the consumer in China to basically absorb that. I think some of that's been mitigated from a trade standpoint just to some of the higher logistics costs. When we compete in Chemical Intermediates, we've seen relatively little impact. We've got a great position here in North America supplying our specialties. And where we do compete, it has not been a significant impact of their exports.

Right. And Europe, sounds like things are stable or stabilized. Any signs of -- is that your view of European market, stable-ish?

I would say stable-ish, but I think you're seeing assets under scrutiny. That's been more and more assets are coming to market or choices are being made with those assets. As I've highlighted previously on some of our calls, as we have moved forward with -- after our tires and adhesives divestitures, that actually reduced our footprint to really more specialty with our Advanced Materials, Additives & Functional Products is our footprint. They compete regionally. They compete on the applications and the value that we create for brands and our customers. And actually, there's not a lot of, I'll call it, labor-intensive or high energy-intensive that -- so I think we have a strong footprint. And you're starting to see, I'll call it, positive trends as you think about personal care, water treatment and those types of end markets that we have served with some of those assets.

And just on durables globally, it's been a source of weakness for you guys the last 12 to 18 months. That has stabilized it appears, the durables demand?

I definitely think it has stabilized. And just as a reminder, we're not competing in large appliances, et cetera. It's kitchenwares. It's even now with some of our sustainable products. It can even be in power tools and cosmetics. So as we think about those types of product solutions, even that we've seen stabilization, and we're actually starting to see reconnecting the primary demand. And we're seeing that, and that's also key to delivering our approximately $2 a share here in Q2.

Very good. On pricing and inflation, are you still expecting, I think, a net price cost negative in 2024? Is that the most recent guidance?

Yes. I would say -- and I think if you look at our specialties and we've talked about that, I think it's evolving. So as we think about that demand coming back, you've also seen lower energy costs. I think it's to be determined. Ultimately, if natural gas and utilities play out lower for the year, that could be closer to neutral. But I would say around neutral to slightly negative is what we've seen year-to-date.

And that point you mentioned, energy propane is down about 25% in February. How does that impact [ benefit ] for Eastman?

Most of our, I'll call it, our propylene, the propane spread. I would call it 80% plus is within our Chemical Intermediates business. And what we've seen here in Q2 I don't think substantially changes our view for the quarter. We'll reassess that. We take demand factors in for the back half, so I would say it's more neutral here because of where propylene is relative to propane. And spreads are similar to expectations and not -- they're just similar from Q1.

Got it. And just one thing back on the guidance. You guided to about $1.3 billion of operating profit in '24. Are the key bridge elements still the same as you laid out back in late April?

I think the key bridge items, as we've talked about, volume and mix, we spent a lot of time on that. Also utilization rates being key and then also the incremental EBITDA from our methanolysis facility.

And on the cash flow, you guided to about $1.4 billion this year, operating cash flow. What's the upside and downside risks to that guidance?

Yes. As we think about that, obviously, reconnecting to primary demand and getting the earnings and the sales growth. One of the challenges will be with a stronger second half from an earnings is the working capital that goes with that stronger -- but our team is highly focused on cash and cash flow and achieving that end result regardless of, I'll call it, the economic and the business curves being different. Also, as we think about on the tax front, the upside could have been, could we get a tax deal done. That's not going to happen this year. But we're still focused on delivering the $1.4 billion.

Very good. Switching to the fun stuff now, circular economy, advanced recycling, the Kingsport methanolysis facility. How is that facility ramping up as we speak?

Well, it's a highlight. The great thing is we're making excellent progress on the mechanical issues that we had with the facility. The reliability is greatly increasing and our ability to learn and adapt of how we operate that. So again, to the operators, the engineers, the technology team, they're making significant and great progress. We're excited about that because what that does is it enables us to work with the brands and unlock the brand launches that we need to deliver the $75 million of incremental EBITDA. And we're still on that pathway based on the results that we've seen since the conference call. I would also highlight early on with the continuous plant, you start the plant up, you're probably operating in the 50% or 60%. We're moving today towards that 70% to 80% utilization rates. And we have a path and a line of sight to achieving that 100% so that we can also then pivot to the, I'll call it, the hard-to-recycle materials. And again, where I sit here today, we're excited that we're making the progress, and that the pathway to $75 million is there in front of us.

So I'd say the [ seat ] is still more cleaner feed, cleaner waste, correct?

Today, that is true. What I would highlight is we used a bridge technology called glycolysis. That enabled us over the last 24 to 30 months to supply brands so that they could test their products on the shelves with consumers and the price point. So by going to the feedstock that we're using now in methanolysis, that's actually already creating incremental EBITDA. And as we work ourselves to the most complex, that can be polyester off of carpet. It can be large chunk ways. We have that ready to go, and we have continued to pilot that, David, so that we're going to methodically work ourselves through that. Sitting here today, I believe most of the key challenges are behind us. It was construction. It was mechanical. It's the learning curve. As we think about the technology, the yield, the on-spec, the product quality is better or as good as fossil fuel is what we're already seeing come out today. And you can think that we put the most robust technology as we have in our pilot facilities to be able to handle the transition to the more complex. But that's what we're focused. And as we said, we will be working ourselves through that during Q2, potentially into early Q3. But the progress to date reaffirms that the pathway to $75 million is still in front of us, and I'm excited about that.

So by Q4, should we -- we'd be feeding in the hard to recycle or the more -- the mixed plastic waste, the harder-to-recycled material? Is that a Q4 timeline? Or is it perhaps by year-end?

It's in the model as we think about delivering the $75 million. So the answer is yes, it will be in there this year.

Got it. Now on the $75 million, you modified your language, your terminology at the Q1 call. The pathway is $75 million. Does that imply -- I wrote a slight shortfall, perhaps $10 million to $15 million. Is that target that's still possible or reasonable?

I think it's just acknowledging that we had more issues with, I'll call it, the transition from operating to achieving the rates and the conversion and an acknowledgment of that, David. Obviously, as we think about also achieving the overall broader results, both corporately, which includes the 75 but also Advanced Materials. You also saw us go from greater than 4 50 to a range that raised that for Advanced Materials. So as we collectively look at the strength of our specialties in that transition, it's also reaffirming that we're confident in the direction and the path that we're headed. It may not be precisely there milestone by milestone, but the direction and the confidence that we have. And we will demonstrate that over the next 6 to 9 months.

And remind us where this material will be going into, what types of products, what types of brands?

Absolutely. As we think about our portfolio of products within Advanced Materials, our Tritan brand, which has been a great growth product development in and of itself to greater than $0.5 billion over a decade. And you take that with our core copolyesters, those products compete on 3 things today. It's clarity, chemical resistance and durability. We're adding a fourth dimension and that's -- it was sustainability and circularity to compete against other plastics and importantly, other polyesters. So we're using those. And as you think about -- we've talked about being in durable end markets. I would add things like personal care, you can think about perfume bottles as an example. You can think about the medical and medical devices. Medical devices, the health care industry wants those to be in service. And with the cleaning protocols, they want those, again, to be durable over the long term. And our product meets that, but it also gives them the sustainability lens. So we're a solution that already adds value to our customers and how they compete on the shelves with their brand against alternative products. And now we're giving them something new to compete with and differentiate. And it's through that differentiation that we create value. And it's in those applications. And that's what I call our specialty plastics model of how we're going to win with the Kingsport plant. It is highly integrated into the specialty plastics business. The other perspective I'll give you is our Texas facility that we announced on the call and the site location and also announced with our being selected for the DOE and up to $375 million of an award for that program and this is what I'll call a circular solution. So you have large packaging needs. Our PepsiCo contract is an example of that. So what the DOE allows us to do is to not only do methanolysis, we're also going to have polymer lines, which could produce PET or copolyesters and bring that close to a 0 carbon compared to fossil fuel. For this project with thermal batteries, roughly 90% lower carbon than producing with fossil fuels. So you've got circularity, you've got a low carbon footprint. And we're actually showing the reality of what can be done with brands in the specialty but also in the packaging, and we're doing that right now. And it's a better way to influence policy and other directions as it's not theoretical business plan. We can come show the processes and affect the direction. So it's really exciting.

Very much. And on your implied EBITDA targets for these plants, what's the implied price premium for this low-carbon recycled polyester or PET?

Yes. So I'll take you back to the $75 million first, which is here in the first half of the year, in Q2, you're going to see the benefits of the project being up and running. And most of that benefit is going to be in our other segments, so roughly $25 million of incremental EBITDA. In the back half of the year, what you're going to start to see is these products and end markets and the brands that we're highlighting, like LVMH and others that those products will start to come to market. We're producing Tritan copolyester today, and those value chains will start to be filled. So that's the incremental that we would get. We've also talked about these being above corporate and segment average as we think about the EBITDA margins. For the 3 plants and the 3 projects total, that number is we've put out there is roughly $450 million. The Kingsport plant is, I'll call it, a high return. So you can expect also the higher margins come along with that, both due to the specialty nature and also in the integration with our Kingsport facility.

And on Kingsport, how should we think about the EBITDA ramp up in '25 and '26 to your ultimate target of $150 million to $200 million from Kingsport?

So we've talked about roughly this year, $75 million of incremental with, I'll call it, 2/3 of that being in Advanced Materials. So if you're roughly $50 million in the back half, you're exiting it somewhere at 75 or a little greater. We've talked about, at least with the line of sight that we have today, that you could be exiting 2025 at 150. That means in '26, you're at 150 or greater from an actual EBITDA. And I actually think that number can be at the greater level, but we'll plan it at that level for now.

Looking forward to it. On the Longview, Texas facility, you have a couple of key elements in place. You have a large DOE funding element. You have PepsiCo baseload supply contract. Can you discuss the elements of those and how they have come together to drive this project to almost FID?

Yes. What we said is as we think about this business model, it had to have several things. One, it had to have contracts because as we think about Longview, Texas, it's about a circular solution. We were in the PET industry, and we're not going back to the PET industry. I actually got to lead the, I'll call it, the sale of the final facility. So this is why it's about a solution. As you think about products and product offerings to the packaging industry, mechanical recycling is a value-added process. But in many cases, it doesn't meet, I'll call it, the product needs or the functional needs. An example this morning is having a product that was mechanically recycled, and it's not clear anymore. It's gray as you're trying to have a beverage. So as you think about different applications also, mechanical recycling will break down. It will not function. So we can take all of these, I'll call it, issues that we're seeing with that and basically make it renewable. You break it down into the 2 key products, ethylene glycol and BMT. And we can make it infinitely renewable. And we're doing that today, but we're going to do it in a solution that enables the brands to, one, meet their carbon footprint; two, meet their -- also their commitments as you think about circularity. And it's also, in my view, a natural hedge versus disconnects. As you go through different policy cycles, different availability cycles is we can give you a solution that has long-term benefit and effectively a price point from a return perspective. You don't have the volatility that you could have being exposed to a market that has disconnect and unknown taxes or cost.

Very good. And for Longview, are you still on track for FID Q3 this year and sort of back half '27, those are still the right date?

So what I would say is the answer is yes. We're currently negotiating with the DOE on the key principles of achieving a $375 million and the time horizon in which those will be impacted. That, along with the PepsiCo contract as well as progressing the engineering I think are the 3 things that enable us to make the decision here in the near term.

Very good. Now on the France project, on the Q1 call, we know you were not delaying it but evaluating the timeline given certain changes in the landscape. Discuss what's caused you to perhaps delay the France project, how those might evolve going forward?

As we highlighted on the call, there's 2 or 3 factors. One of the factors, as I said with Longview, we're continuing to look at the engineering and make sure that the investment level is at the appropriate level to generate the returns and make sure that the cash flow investment is at the appropriate level. Two, in the current environment, as you think about with policy and I'll call it supply demand in general in the European environment, that's created questions for brands and us as we think about the policy. So those are ongoing discussions. We're working together to influence because I think brands and Eastman need more certainty of how these policies are going to be enacted. And so that we're moving forward on the right foot and influencing the policy before we make investments and commitments, which is back to what we said we were going to do, which is discipline. The key thing is we have and developed multiple options. So we will realize the learnings from Kingsport on Longview. We're partnering so that we can -- with brands so that we can be a fast follower from Longview with the France project. Right now, I would say there's not been a significant update since our call, just given the complexity of the environment.

Is there a timeline to resolve these issues in your mind or move forward?

I think we're working to inform timeline through the learnings and the engagement. And we'll update you at some point in the future.

Going forward, this circular economy platform, what's the business strategy? Would you license these plants? Would you bring in partners? Would you build more on your own? What's sort of beyond the first 3 in the pipeline?

Yes. To me, there's 2 solutions, one highly tied to Advanced Materials and Specialty Plastics. And as we continue to win in more markets and win more customers and more brands, that's core to who we are. As we think about circular solutions, what I would say is, one, we want to prove that the model is a business model which gives us then the leverage of as you think about brands and the commitments that they want to make. We will look at models that create the most value for our shareholders. But we're confident that building out the model is most critical for creating the most value and the most optionality. Ultimately, there -- if we're going to be successful like other brands have been with recycling and circularity, including the aluminum industry, we need lots of plants and lots of capacity. There's other technologies that are for olefins and olefin products. We're not focused on that. We're focused on the ones that are polyester. There are complementary benefit of supply chain developing from a sourcing of multiple technologies being successful. So again, we want to reduce, reuse. We also know that a big piece of the solution has to come from Eastman and the industry.

And does M&A play a role in the polyester-focused growth of the circular economy platform?

My belief is that it can in the future as you think about the demands and needs in different applications and different end markets. I would say that's down the road. We're focused right now on creating the value from the strategy that we've outlined.

Very good. Before -- let me stop. Any questions for Willie? Great. Just one second for the microphone.

Just 2 sort of housekeeping questions. In terms of the C&I business, I know it's volatile. You've talked about, well, you've got a maintenance expense this quarter of $20 million. You've talked about a better second half. Are the spreads actually improving such that you get the maintenance dropping out the cost out from the second quarter numbers and then better? Can you do better than $20 million improvement, say, sequentially coming out of the second quarter? And then secondly, when you've got the circular plant up and running in Kingsport, so all that income end up in AM next year. I mean you got the [ 25 ] falling out of corporate this year in terms of expense or benefit, but does that all end up in AM next year? Or is the [ 150 ] run rate split elsewhere within the divisions?

Chris, thanks for your questions, and I'll start with your second question first. So the answer is yes. As we think about the Kingsport facility and the incremental EBITDA from the second half forward, all of that will show up in the Advanced Materials segment. As I think about the Chemical Intermediates, obviously, we talked about the maintenance with the maintenance also is the volume. So I would say volume and mix is the predominant factor as we think about absence of maintenance adds 20. Volume and mix will add on top of that. And then I would say there could be some seasonal spread uplift as well, but that would be the third factor.

Very good. Really a few questions on the segments. I always like to touch on Fibers since it's a uniquely good business. It's a true renaissance. Earnings in '24 should be up almost threefold versus '22. What's driven the earnings renaissance and how sustainable is it going forward?

Yes. So I would say there's 2 or 3 key factors as we think about Fibers and that business team, leading a multiyear strategy to result in where we are. That multiyear strategy also is on how are we advancing our cellulosic initiatives. And it's not only about acetate tow and filter media. It's about acetate flake and how we can create significant value because it's the original biopolymer as you think about wood pulp. And now we can use our carbon renewal technology to combine that, and that's a very strong value proposition. Two, I would say the industry has obviously rightsized the asset around the world. And three, it's, I would say, product complexity and alternative risk products that the brands and the industry have brought about for the filter media. The product complexity actually runs slower. So therefore, it can consume capacity. Our view was to be in this business long term. We're going to get paid for it, and it needs to be at a level where we can be there to support because we're not going to invest in, I'll call it, reinvestment maintenance, et cetera, if we're not getting paid for it. And these alternative products, one that I'm really excited about is a product called Aventa in the cellulosic space. And it's on the shelves. Brands are being tested to date, where you can take cellulosic material that can be foamed. That is a drop in replacement as an example, for polystyrene on grocery shelves where your protein can be or your utensils. That's an example of how innovation and that's a biodegradable product versus the existing product. So innovation is core. And that innovation then puts tension, and then you can achieve those. And what gives me confidence in the tension is 100% of our business is contracted this year, 90% in '25 and roughly 70% in '26. Now our job is to continue to be successful on the innovation front but also to be a reliable supplier because the input cost of our product in a filter is a very small fraction of the overall cost of what consumers are experiencing.

Just on carbon renewal technology, how should we think about the growth of this business from an earnings perspective with some of the key products you're targeting here?

And I didn't mention Naia. So ultimately, the incremental growth that we're even seeing this year in Fibers is because of some of the success that we're having with Naia and textile. With Aventa, I think we will start to see revenue here in the back half. And as we've talked about, with that and the innovation, there is definitely within a view on significantly growing. And as we talked about, the number could be as high as $200 million.

And just very briefly on Tritan. How should we think about this business, now $0.5 billion business, had tremendous success. How should we think about the growth in the margin of this business with the added impetus of the new technology from methanolysis?

The new technology, first of all, is going to help us accelerate the recovery from the destocking and the demand that has occurred. What's key to me is also getting back to restarting accelerating that third investment for the new Tritan mine. And on top of that then, as we think about going to some of these additional applications like medical, personal care, that also offers the ability for a different margin set because of the applications and the application development that we can uniquely differentiate and create significant value. So in that case, again, volume and mix upgrade have been core to the Advanced Materials strategy over the long term. And I think this will be a key component as we go forward.

Is this a $1 billion business in 4 to 5 years, do you think?

I believe it can be.

Very good. With that, Willie, I thank you for your time, and thank you as well for attending. Thank you.

All right.

Thank you.

Sure.

Appreciate it.