Eastman Chemical Company — 2024 Q1

Thanks for the question. Overall, we're incredibly excited about the circular platform, excited about how we're operating the first plan, proving out this technology works and have a lot of engaged customers and also excited about long view with the DOE grant and Pepsi contract that gives us a lot of confidence.

I mean inflation, I think, has been an issue for every project out there that I've seen in our industry. The supply chain crisis has driven up the cost of everything from labor to equipment, et cetera. So all projects have had some amount of escalation to it. We have a good plan to get the capital to where it needs to be on the Longview plant, and we have developed a plan on how to get the capital down on the French plant.

So we have a lot of different flexibility. That's the beauty of how we manage all of our polymer lines in how we optimize value. Today, we do it from Tritan to copolyesters to medical PET. And every line we have built, the ones in France as well as the Texas project, we'll have the flexibility to make both PET and specialty products. So we're always going to optimizing value and mix. That's the heart of our business model, and we're very good at doing it.

It's more of the latter. When you -- we're very proud of the beat we had in Q1 and the fact that it was volume driven, which is the key element of the challenges we had last year, frankly, the whole industry had last year, to see that volume come back better than expected, gives us confidence, especially because it came back in the specialties, which is where our highest value is generated for the portfolio. So we feel good about that.

Sure, Duffy. It's great to get that question because we're really excited about having this first plant up and running. This will be the world's largest chemical recycling facility, and we're really excited to show the world what's possible, not just in generating earnings and growth for our owners, but in solving a pretty significant environmental problem.

Well, first and foremost, the sort of propylene derivatives are predominantly going to show up in CI as far as the value goes, but there are propylene derivatives that go into AFP as well as AM. So there's parts of the propylene stream that goes across a whole integrated complex.

So one, every customer we have that we're meeting with, I think, is highly committed to addressing the recycled content question and making sure that they're making their packaging with higher rates of recycled content. And frankly, many of the top brands have 100% goals on a lot of their packaging. They're way above any sort of regulatory policy that's out there. So I don't think there's any lack of commitment that they know this is important.

It's a great story. And Patagonia is by far the leader like Europe around recycling. Patagonia has a take back program. So it's an active program with their customers to say when you're going to -- instead of throwing your garment away, your fleece vest or whatever it is you have, drop it off at a store and we'll take it back, so it doesn't end up in landfill. So it's actually a genuine circular program to prevent textiles being thrown away.

Yes, that would have a plant sort of coming online in the second half of 2027.

The capital costs are different. The methanolysis unit will be much cheaper than the Kingsport plant to build because there's a lot of sort of lessons we learned as we've shared in past calls around how to sort of be more effective in building the plant, right? So we certainly don't intend to have the construction issues that we ran into, and there's a lot of learning both in the construction as well as operating the plant now that gives us much better insight on how to improve some aspects of the plant, all of which will make the plant cheaper to build.

I think that the Fibers trend from a volume point of view is a bit less in the back half of the year than the first half. So volume and earnings will be a little bit less in the back half of the year. And it's just timing of customer orders. It's sort of normal. We've always talked about this business. The order pattern of the customers is a little bit unpredictable across the year. So it's just that.

The depreciable life, you can just think about around 20 years for the Kingsport facility. And honestly, that would be true for each of the large circular recycling plants that we're building.

Sure, Jeff, and nice compound question. You got two segments in one. So on AFP, we were sort of net down 1%, which I'd call mostly flat. And there are meaningful moving parts on that, Jeff. Coatings and care chemicals actually had very good growth sequentially into the first quarter. And then we had much lower specialty fluid bills and heat transfer fluids. And those two sort of offset each other.

Thanks for the question. Just as a reminder, as we've highlighted earlier, we're on a pathway to the $75 million in incremental EBITDA. I would point out, obviously, in 2023, we had a net investment in the other and an expense of roughly about $25 million. So you can think about EBITDA growing from roughly consuming 25 to about 50 positive for the year.

Sure. So first of all, we're extremely happy to have Advanced Materials back on a track of sort of recovering out of an extremely bad demand environment and getting back on track to deliver very attractive growth and very attractive margins for our owners.

Yes. The model of this business has always been growing above end markets because you're winning in applications relative to some other material, right? And that's been true for Tritan forever as well as our copolyesters. So I'll just give you a couple of examples. One, we're growing a lot in hydration bottles in China. It wasn't a market for us. They're using Tritan, and we're seeing growth in those kind of products.

I'd say on the margin, there's probably a bit of restocking that's occurring. I mean it's almost impossible to really know the answer to that question. When you get into destocking or restocking, your customers are not exactly that clear on what's going on. But I can definitely point to a few examples where Red Sea logistics concerns would cause some -- has caused some customers to buy ahead of that risk in a few places, as an example.

Patrick, thanks for the question. The DOE program, as it's designed, basically provides a series of cash payments based on what we negotiate there that basically is providing an investment offset to the CapEx as we move along. So yes, the way I look at it is a direct offset to the capital. Basically, it will be progress payments across the almost 3 years of construction. So you've got that matching. And it's up to $375 million, as we've talked about.

I think it's too early to tell on the sort of premiums associated with decarbonization. It's very clear, people are willing to pay premiums for recycled content. It has very -- like product safety, plastic waste in the environment is a very emotional issue for consumers, and they're really, really not happy about it. And so they're not happy with the brands about it, and they're putting pressure on their politicians to address it.

Sure. So I think it's easiest to sort of separate our revenue portfolio between what are stable end markets and what are sort of discretionary end markets. The stable end markets have consistently sort of grown through 2019 to now at very modest rates, call it, 2% to 3%, whether it's medical, personal care, et cetera, those kind of markets.

I don't have that answer for you and that -- at a sort of integrated company basis. We look at everything on a market-by-market basis. And so what I told you is sort of how to view it. Half the revenue is very stable and growing. Half the revenue has a huge amount of upside at very high value. And I'm not going to try and quantify that on a weighted average basis.

I don't think so. I just want to make sure I understand the question correctly before I try and answer it. We have three -- we have -- the normal core business that has maintenance, right? So there's always CapEx around that, call that in the $350 million range. And then there's always specialty investments we're making in growing our capacity to serve all the different specialty markets we have, which has always been part of our core model, and that takes you to -- with maintenance, $500 million to $600 million range on CapEx.

Yes. So what I would just say is we're confident that we can keep a strong investment grade balance sheet through that. You're seeing that as we updated our guidance on capital this year of being $700 million to $750 million, and expecting share repurchases of $200 million to $300 million.

Mike, let me start with last year, we had $1.6 billion of EBITDA. This year, our guidance is at $1.8 billion. And what I would say, as we've talked about normalized, that's going to be north of $2 billion. As we think about adding $150 million to $200 million for the Kingsport plant, that puts us in that $2.4 billion range.

If you do look at it on a historical comp basis, it's more compelling because we sold off $175 million of EBITDA in adhesives and tires and used the proceeds of that to reduce share count, basically neutralizing what we sold off in the EBITDA. So when you get to an EPS level, the leverage of that EBITDA number that Willie just told you is much more significant on the EPS and stock price basis.

Yes. I think you framed it well, and I think it fits into the end market lens and the leverage to the volume growth that we've seen since 2019, which is it's basically been roughly flat to slightly negative since that timeline at the corporate level and the volume/mix line.

I'd just add, AFP also has growth. We're an exceptionally low level of heat transfer fluid fills this year. We have a clear order book to that $30 million drop from '23 to '24 to recover that as we go into '25, not to mention B&C having any kind of market recovery would be upside. So there's upside in AFP, there's a lot of upside in AM, stability in Fibers, CI's at the bottom of the market. So at some point, start coming off of that and recovering from a spread point of view. So there's multiple ways you sort of combine that together to get to growth next year versus this year.

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

So this is a large-scale project and aggregating feedstock from a wider range than just France, given the state of the current infrastructure in Europe for collection and sortation is the appropriate thing to do, right? France is a huge opportunity to improve in collections and sortation. It's part of why they want to really support this project.

On the volume, what I would say is -- there's only -- we've talked about Naia growing, and we expect that to grow on the -- as the date front, we would expect, I'll call it, flat to modestly down, but we also provide intermediates and flake, and we would expect that's where some of the volume would be declining.

On a full year basis, it gets a little complicated when you're doing -- looking at sequential and year-over-year numbers for this. The volume is relatively flat to last year when you look at it on a full year basis.

Okay. Thank you, everyone, for joining us today. I really hope you have a great day and a great weekend. Thank you.