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spk05: Good day everyone and welcome to the first quarter 2022 Eastman Chemical Conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.
spk16: Thank you, Keith. Hello everyone and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO. William McClain, Senior Vice President, CFO, and Jake Leroux, Manager, Investor Relations. Yesterday, after market closed, we posted our first quarter 2022 financial results news release and SEC 8K filing. Our slides and the related prepared remarks in the investor section of our website, www.eisman.com. Before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Cautionary statements regarding forward-looking information and certain factors related to future expectations are or will be detailed in our first quarter 2022 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-K, filed for full year 2021, and the Form 10-Q to be filed for first quarter 2022. Second, earnings referenced in this presentation exclude certain non-core and unusual items. 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 first quarter 2022 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&A. Keith, please let's start with our first question.
spk05: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad, star 1 for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. We'll take our first question from Vincent Andrews with Morgan Stanley. Please go ahead.
spk07: Thank you, and good morning, everyone. Good morning. I'm wondering if you could talk a little bit about just sort of how the second U.S. project in molecular recycling is developing. I see you're now mentioning that you're talking to several global brands. I'm wondering if anything is changing about the size, scope, or scale of the expected initiative as well as – I think it originally said you might have something formalized in the first half of this year, and here we are almost in May. So just curious for an update there.
spk13: Sure, Vincent. So on the circular economy, we're really excited about how well it's been going across all projects. So we've got the Kingsport project that's going to be starting up in the next nine months, and then you've got the looking at the France project. And so a lot of momentum going on on those two fronts. As we look at the U.S. project, Um, we would expect it to be, you know, similar in size to what we're doing in France. It would be focused on predominantly packaging and textiles since we already have a nice sustained, uh, you know, especially play in the Kingsport site. Um, and we do see tremendous engagement from, uh, several brands on wanting to be sort of significant off takers of that project. You know, when you think about just the scope and, and need that these brands have for recycled content. in the projects and the targets they've set for 2025, they really need to endorse molecular recycling. When you look at mechanical recycling, it just has limitations in truly creating a circular economy, because when you look at the packaging waste, only about 20, 30 percent of it can really be looped back into food grade bottles. And so they have a real shortness of you know, how they're going to get this recycled content, right? 70% is going to get downcycled in the strapping or park benches or in the U.S. landfill or incinerated in France. So that's just perpetuating the linear economy and not disconnecting from fossil-based feedstocks. So mechanical is great that it's energy efficient, but it's, you know, completely insufficient, not to mention it also degrades over time. So they realize that to maintain high quality of their packaging and a long-term solution, molecular recycling has to be around to support that. and enable all of the packaging waste to be recycled. I mean, our position is you should reduce and reuse as much as possible, but much of this, you know, is still going to be needed in packaging or in textiles, same story. And we are the required solution to actually eliminate all the waste. So they get that. They understand it. They also understand that, you know, plastic is a much more energy efficient product than glass and aluminum. So, you know, if you first want to assume green energy is limited in the planet, then you should use the most energy efficient product, not glass. That's four times more energy or aluminum, two times more energy to make than plastic. So they're very focused on this. And that's why we've got such good engagement. And they understand the sort of cost pass-through contract nature of what we're trying to do. So we feel really good about where we're at. But as you know, with these kind of very complicated long-term commitments, it takes time to work out the details.
spk07: Sure, and maybe just as a follow-up, you know, I noticed there were no buybacks in the quarter, but you're still committed to doing at least a billion in the year. So, how should we think about the cadence during the balance of the year to get to that at least billion-dollar goal?
spk17: Sure. Thanks, Vincent, for the question. We did wrap up the ASR that we launched in December here in early March. completing the billion dollars from last year. We've also, I would say here in April, closed on the transaction. We had the billion dollars of cash in, so I want to compliment our teams and also wish our Adhesives teams success as they transition. And also, we're continuing to partner, providing transition services on both transactions here through the end of the year. If you think about how we started Q2, we've already purchased 200 million shares here in the month of April. And you can expect a pace similar to that through the rest of the quarter. For the full year, I expect, again, to be at the billion or greater as we deliver on the commitment that we made. And you can look at that on a full year basis as, you know, basically providing about 75 cents a share to offset the roughly $100 million of impact from the divestitures. I would say that's about 30 cents in the first half growing into the second half as we complete the purchases here in Q2 and Q3.
spk04: Great. Thanks very much. Appreciate it.
spk05: We'll take our next question from Kevin McCarthy with Vertical Research Partners. Please go ahead.
spk08: Yes. Mark, good morning. You affirmed the annual EPS range. I was wondering if you could speak to the seasonality in the back half of the year as you're recovering operationally at Kingsport. Speak to 3Q versus 2Q and then the seasonality in the fourth quarter. For example, I think you mentioned you got a plant turnaround in chemical intermediates later in the year. How do you see that unfolding through the coming quarters?
spk13: Thanks, Kevin. And a very important question. We spent a lot of time trying to think about, you know, how our cadence of earnings and value creation goes through the year. When you think about this year and you look at sort of the guidance we gave for the second quarter and add that together with what the results that we had in the first quarter, you know, the first quarter looks, you know, to be around, you know, 475 if you use the midpoint of our second quarter cadence. So to get to our midpoint of our full year guidance, you're talking about $5 a share in the back half, which is about 5% higher than the first half, to your sequential question, or 75 cents a share on a year-over-year basis. So that's, you know, a strong back half quarter for us. We don't really have a normal that we can look to in the past, because we've had so many different events that our first or second half floated, if you look at 2018 to now. But we can recognize that's a little bit stronger than normal. And I think the easiest way to talk about it is on a year-over-year basis. And when you really think about delivering that $5 a share in the back half of the year, it really comes down to a question of what is AM going to deliver relative to what normalization in CI occurs? Because we obviously had the steam line event in the first quarter, and we had a sort of significant setback on that to the first half of the year. So when you look at it, and do the math on sort of the midpoint of our guidance for the full year of AM of 650 to 700. That means we basically have to be about $200 million over the back half of last year. Now roughly half of that, actually probably greater than half of that, will come from how we're managing spread. So almost all of the spread compression last year that occurred in this segment was in the back half of last year. We've been incredibly successful in implementing price increases to begin the first quarter and get the spreads that we were aiming to get that we discussed in January, and that sequential improvement in spreads is still expected in the second quarter. So we have a lot of great momentum in the pricing actions we've taken, including implementing a whole set of additional price increases in this month to cover the inflation that occurred through the first quarter. So you've got $100 million, you know, greater than $100 million, really, of spread improvement in the back half of last year, in the back half of this year relative to the compression that occurred in the back half of last year, right? So recovering that compression, if you will. So that's half of it or more than that. And then you've got, you know, strong volume growth. And the volume growth in the back half will be a little bit different. First of all, you've got incredibly unmet needs, especially plastics, given how we we're not able to serve that market. So markets are incredibly strong. No one has inventory, so the likelihood of destocking in the fourth quarter is much less because there's nothing to destock. You've got the automotive market we're assuming starts to get better in the back half relative to the first half. And we expect logistics to, you know, constraints to ease, which is really one of the bigger limiters of our ability to sort of serve demand. And then you've got the production catch up, right? So we lost about $75 million of volume in the first quarter. And we think roughly half of that will be recovered through the year. But most of that recovery is going to occur in the third and fourth quarter because we're just ramping up production. And with logistics these days, getting all that out the door and recognizing the second quarter is going to be a bit of a challenge. So a lot of factors that drive volume to be a lot better. So then you weigh that against what's going to happen in CI normalization. And I think we've taken our standard approach to assuming it's going to normalize at some point. And for now, we're expecting that in the back half of the year. And there's some higher growth spend. So you put all that together, you net out, you're going to come up with positive EBIT relative to last year in a meaningful way. And then you've got $0.45 a share from the share purchase we're doing to replace the divested earnings. $5 is a very reasonable improvement to get when you think about it in those dynamics, and that gets you that sort of 5% sequential improvement versus the first half.
spk08: Great. Thank you for that, Culler. And then as a follow-up, Mark, have auto production forecasts bottomed at this point from your perspective? I appreciate any updated thoughts on what you're seeing in terms of order books and expectations for that particular end-use marketplace.
spk13: So on the auto market, we had an expectation of demand being relatively stable in the first quarter and the second quarter and then modestly improving in the back half of the year. I'd say first quarter turned out to be a little bit softer than our expectations. And we expect the second quarter to be down a bit relative to the first quarter, principally due to the Ukraine war impact on European auto production and some of the slowdowns we're seeing in in the COVID, you know, lockdown situation in China. But we do, you know, so a little bit lower base than what we started the year with, but we still expect it to improve in the back half of the year as China gets its COVID situation under control is our base assumption, as well as the European situation starts to stabilize, supply chains start to improve. You know, but, you know, we're still, you know, looking at an annual number in our forecast that's below last year a bit. Obviously, LMC is above last year in their current forecast, and we're not using that. Just to be clear, we're using something lower than that in what's loaded into our forecast. I think we're taking a reasonable approach to what we're estimating and what we're seeing in the marketplace.
spk08: Perfect. Thanks a lot.
spk05: We'll take our next question from Josh Spector with UBS. Please go ahead.
spk01: Yeah. Hi, guys. Thanks for taking my question. I guess just specifically on AFP. I'd be curious on the new portfolio if you'd comment on a couple things. One, how you're thinking about longer-term growth in that restructured business now versus GDP or whatever metric you look at from that perspective. And then also, you have a relatively strong first half in that business. Your guidance leaves it pretty open-ended in terms of where things could be in the second half and just wondering what drives perhaps a lower second half versus first half in AFP. Or is that not the right way to think about that earnings trajectory? Thanks.
spk13: Yeah, so we're really excited about the new AFP. It's a business that's very focused. It has a lot of great in-market growth rates that are both stable in things like personal care, animal attrition, and has opportunities for accelerated growth in places like automotive and aviation recovery. And BNC has also been incredibly strong. So the in-markets are great. Like AM, our innovation is starting to really gain traction, so it's creating the ability to grow faster than the underlying markets. When you look at TetraShell going into packaging, you look at how we're moving into, you know, higher value formulations in alimentation versus just selling the organic acids. The microbead opportunity, you know, not really relevant to this year, but significant upside in the future. So there's a lot of growth programs, you know, that are out there allows us to grow better than the underlying market. And then on the spread side, similar to AM, there's some spread recovery that's going to be in this year relative to last year. It's not quite as large as AM, but that accelerated path of inflation last year, prices were still catching up in this business as well. So you see price implementation being very aggressive in the AFP business. to cover all of those raw material energy and distribution cost headwinds. And we did a great job in the first quarter in getting prices up to sort of cover that and improve spreads. That will, you know, continue to be true year over year in the second quarter. But sequentially, we'll see, you know, the second quarter come off a little bit just because it takes a year for the CPTs. I'm sorry, it takes a quarter for the cost passer contracts to catch up. So overall, very strong first half, both by strong volume, that 10% volume mix that will continue into the second quarter, and spread improvement. As we look to the back half, there's some seasonality we're just assuming and how demand comes off in some of these industries like BNC and the ag business, where that will soften up a bit in the second half of the year. And we think that we'll see spreads continue to improve relative to the back half of last year. So it's still going to be a very good second half, but not quite as strong as the first half.
spk18: Great. Thank you.
spk05: We'll take our next question from Mike Lighthead with Barclays. Please go ahead.
spk07: Great. Thanks. Good morning, guys. Maybe just three quick hitters on the methanalysis, facility intensity. So, first, it looks like maybe a slight delay with supply chain. So, can you just flesh out what's moving in the timeline, whether it's equipment or labor? Second, is the 250 capital cost still the right number for the facility? And maybe finally, if we do get mechanical completion in 1Q23, when should investors anticipate it sort of reaching kind of full commercial operations there?
spk13: Sure. So when it comes to the sort of one-quarter delay we've identified in mechanical completion, it's equipment-related, just like the automotive industry is. getting all the parts to build your plant isn't the easiest to do in this environment. The team's done an extraordinary job of locking down and securing all those components being supplied, but just being realistic in the environment we're in right now, we expect about a quarter delay. It's not a labor issue. It's just a supply chain issue. When it comes to the capital, we're still on track for the capital. We did a lot of securing, especially on the equipment side, you know, before the inflation started, you know, when you go back to when we actually started this production. So we think we're in a good position to manage that and keep that, you know, around that number. And then when it comes to startup, you know, we were always going to, you know, aiming for a startup, you know, the first half of next year. We always assumed that there would be some, you know, bumps along the road in how we get there. So we don't think there's going to be a significant delay in the startup of the facility for serving customers. So, you know, by summertime, you're making recycled content off of this facility and supplying the market and building to full run rates by the end of the year. And you'll get a full year effect as you get into 2024. You got to remember, this is different than a specialty plant and how it ramps up and fills out because while the specialties will grow like they normally do and not, you know, be a light switch in how you fill out the plant, we have the ability to take all the excess monomer from this methanosis plant and make PET or textiles for packaging in the clothing market and sort of ram the plant full pretty quickly as the operations come up to full levels in those markets. And then we just mix up grade as we grow the specialties relative to serving those markets from this plant. So much faster ROIC in this kind of facility with that flex than what you would normally get in a specialty plant.
spk18: Great. Thank you.
spk05: We'll take our next question from Alexey Yeferimov with KeyBank. Please go ahead.
spk15: Thank you. Good morning, everyone. As we get closer to the startup of this methanolysis plant, Mark, I was just trying to understand how economics might work in the real world. For example, crude jump year to date, would it have been a tailwind for your methanolysis margins or a headwind or or not a factor? So in other words, when oil moves like this, is the cost of your feedstock changing? And if so, are you able to kind of promptly raise prices?
spk13: Yeah. So higher oil prices is very good for methanolysis. All right. So the competitive material in the marketplace, which is virgin PET based on fossil feedstocks, you know, is connected to oil. So the price, you know, that's in the marketplace for those products goes up pretty consistently every day with the price of oil, so that raises their alternate, you know, product on the marketplace. The reality, though, is our product, both its feedstock and our final price, is not really that connected, you know, to the virgin PET market anymore because they're buying it on the value proposition of recycled content, you know, and right now what we're seeing is Those prices, both historically and in this environment, are holding up to be substantially higher than the sort of fossil-based polymer. If you look at Europe, you're roughly about a 50% premium for that recycled content value proposition of creating a circular economy versus perpetuating a fossil-based linear economy. So the market's changed, and structurally so. When it comes to the value of our feedstock, You know, there may be sort of a modest increase in the prices, but the reality is it's going to landfill, right? The price of landfill isn't changing with the price of oil. It's being incinerated, same thing, you know, not really changing dramatically. Or these low-value applications like park benches or strapping and where this sort of waste feedstock is going that the mechanical recyclers, you know, can't upcycle into good applications. So, you know, we're not seeing a significant increase in feedstocks just because the price of oil is up.
spk05: Thanks, Mark. We'll take our next question from David Beglier with Deutsche Bank. Please go ahead.
spk06: Thank you. Good morning. Mark, just on the Q2 guidance in terms of the earnings bridge, you're thinking about the 80 cent impact from the Kingsport incident and the 206 base. You looked at the midpoint of Q2 guidance to 75. What are the offsets to that sort of bridge from Q1 to Q2 with the Kingsport incident layered in?
spk13: Yeah, great. Great question, Dave. And that's exactly how we look at it. We had a phenomenally strong first quarter when you back out the steamline event at 285. It's just tremendous success, well above how we guided in January for the first quarter. Unfortunately, the event happened, but the demand for those products was very much there. So that $125 million hit would have easily shown up in the quarter. So we do start looking at saying, okay, from 285, which is, you know, the run right now, the events behind us, you know, what's the up and down relative to that number in the second quarter? So on the upside, we expect continued strong demand that we saw in the first quarter and the significant mix improvement that comes with that. That's part of our story and our specialties. The pricing actions are doing a phenomenally good job of keeping pace real time with inflation that occurred through the first quarter. So spread sequentially will improve from first quarter to second quarter in AM and Fibers. and then CIs, you know, holding up and being stronger than expected. So that'll be quite stable, you know, sequentially from first to second quarter. And so all of that, you know, leads to a higher number, right? So then what, you know, why is it, you know, why are we guiding to something a little bit less than first quarter? First of all, you know, the $50 million of accelerated cost accounting doesn't repeat. So that's a pure tailwind, you know, Q1 to Q2. But the $75 million in the a steam line event that's related to production, that doesn't catch up in a quarter. So it takes some time to get production back up, to get it on ships and trains and get it delivered through this quarter. There's only so much excess capacity that we have to make up that lost production. So that's going to take the whole year to sort of recover that. And we're only expecting to recover about half of it through the year. you've got a bit of a headwind from the event on the production side. Then you've got in AFP, remember a good portion of their pricing is connected to cost pass-through contracts. We had a lot of inflation in the first quarter. The way those contracts work, it doesn't really catch up until July 1. So there's just a lag in that part of AFP and how prices catch it up. They will. You saw the benefit of that in the first quarter based on catching up to fourth quarter raw materials. And this will happen, you know, as we go into the third quarter. So there's a bit of a headwind from that, you know, so AFP will be slightly down relative to first quarter. And then you've got to step up in growth spend as we start ramping up the circular investments. And then there's just macro uncertainty, right? So we've adjusted our outlook, as I said earlier, about autos being a little bit softer. sequentially as well as China in the COVID lockdowns is certainly having an impact on some of our businesses like performance films and in general how we bring product into the country to get it delivered with all the different various lockdowns. So there's some sort of headwind there that we're trying to estimate but highly uncertain on how that's going to play out for the quarter. Very, very helpful. Overall, though, to put it together, it's still a 10% increase year over year. So it's great momentum, you know, to building towards our full year guidance.
spk06: Got it. And just on the CI spread normalization the back half of the year, is that more supply driven or demand driven? And which products in particular are you looking for the spreads to normalize first?
spk13: Yeah, so in the spread normalization, you know, we're obviously been in very tight market conditions since the second quarter, really, since the beginning of the first quarter of last year. And CI has benefited from that like many other companies in these intermediates. And the markets remain tight, and that's demand driven. Demand is incredibly strong for all of the products or customers that we're serving with those intermediates. And that's obviously holding up in the first quarter, expected to hold up in the second quarter. And there's also supply-driven issues that are creating constraints across both olefins and acetils, as you can see in the many announcements of operational issues across the planet. And the third issue that's new now that we're still thinking through is the U.S. has just picked up a new advantage cost structure relative to the energy costs now in Europe and Asia. So that structural cost improvement is not yet factored into sort of how that's going to play out for the back half of the year or years ahead. But that's probably I would call an upside if that continues to be true to how we're looking at our forecast. So it's really, you know, a combination of both. Right. You know, we're assuming that the economy start to slow down a bit, you know, with all the inflation out there, the China issues, Ukraine, Russia issues. So markets soften a little bit. We assume people will get around to running their plants more reliably. And so supply will start to improve and that creates some softness. But, you know, I think we all know that it's hard to call when this normalization is going to occur. And so we've put in something, you know, to estimate that there's some normalization back to, you know, sort of what we call sort of normal margins. You know, but it's frankly anyone's guess when that's actually going to occur. There's no specific data any of us have to make that call. Understood. Thank you very much.
spk05: We'll take our next question from P.J. Javkar with Citi. Please go ahead.
spk11: Good morning, Mark.
spk12: You know, Mark, there's a lot of discussion about inflation in the economy and all that. Where do you sit from your vantage point? Do you think 1Q is the peak inflation? You know, inflation could be raw materials, you know, trucking, logistics, truck drivers, all that stuff. Or do you think inflation has peaked when you look at the second derivative of your businesses and you talk to your own people? Or do you think inflation will continue to go higher?
spk13: Well, I think inflation is certainly going higher as you go into the second quarter. When you look at just all the price increases that we had to implement in April to catch up to the inflation that occurred through the first quarter in our raw materials and energy costs, That's now higher prices in the second quarter flowing into our customers. And they're going to take all those higher prices and they're going to have to flow it into their products, which will go through this quarter into the third quarter. So I don't think we're close to how inflation is going to peak downstream of us because this has all got multiple steps to be passed on through multiple quarters to get to the consumer. You know, when you think about the inflation of our raw materials and energy costs, you know, what we're assuming right now is we are sort of peaking out in the second quarter and that it doesn't get, you know, worse as we go into the third quarter and the fourth quarter. In fact, you know, maybe raw materials stabilize and come off a little bit in the back half of the year from the second quarter. So that's what's embedded in our forecast on our cost side. But if you're asking downstream, we've got, I think, multiple quarters before inflation reaches the consumer. all of what's happening to our part of the industry because we're just so far up the value system.
spk12: Right. So consumer inflation will continue for the next couple of quarters is what you're saying. Thank you.
spk13: For customers and consumers, yes. For us, we think second quarter is peak in our price. Right.
spk12: And just you mentioned on methodologies, you're putting together these contracts to buy raw materials. How do these contracts, how are they structured? Is it a fixed price or the price goes up with energy? And the same thing on the other side. When you sell your product, I would presume that you would sell it at a premium because it has lower carbon footprint. And so how does those contracts look like? Can you just sort of give us the terms and how these contracts are structured? Thank you. Sure.
spk13: So there's a spectrum of contracts that we're securing when it comes to feedstock based on the source of the material. So there are some contracts that are exactly what you said, where the alternative value is landfill. And so the pricing of that is set in a very stable manner that doesn't have an alternative value to drive the price and value of that material up or down. And we're getting long-term contracts sources of waste on that front. There are other products where you're competing maybe against a park bench or strapping. So downcycled applications that perpetuate the linear economy. And so we have to look at the alternative values of those applications and how that might change. So there will be some connection to where price of oil goes or alternative market values go that we have to compare our pricing to. to sort of secure that. So it'll be connected to some either cost or price-based index. So there's a lot of different sources, but all of them, when you look at what drives them up or down, they're actually relatively stable compared to where the price of oil goes every day on the sort of fossil feedstock-based market. And then you have to keep in mind that On the customer side of things, there's two models we have in our pricing. So in our specialty business, pricing is going to be based, as always, on value. As I said earlier, the value of recycled content is quite high, right? So it's not a speculation. You can look at just for PT for packaging, which is a relatively low-value application compared to our specialties, is trading, you know, on average 50% premium to the fossil-based feedstocks. So plenty of premium there to create the circular economy and get waste out of the environment and lower the carbon footprint impact of our operations and the scope three of our customers when they think about improving their overall carbon footprint. So they are paying a premium for that already. That's not speculation. That's just fact. But you have to remember that, and especially pricing will just be based on that value and we'll do it like we do pricing today. But for the PET and the textile applications, the packaging and textile applications, as we said, we're not taking risk on the difference between our feedstock costs and market price. We're doing cost pass-through contracts that give us predictable, stable margins. Otherwise, we won't build these plants and invest them because I don't want to get caught in trying to speculate you know, where the feedstock costs are going to go relative to market prices. You know, that's the air gas model that we're taking for those applications. So, you know, we're not trying to exploit a spread expansion or take a spread contraction risk on those high-volume applications that baseload the second and third plants.
spk05: Great. Thank you. We'll take our next question from Matthew DeVoy. With Bank of America, please go ahead.
spk03: Thanks. So as we look at the year-over-year bridge to 2023, maybe it's early, but it seems like, particularly for AM, it seems like the add-back of $50 million on the accounting side is maybe a starting point. But you won't recover the full $100 million or the $75 million additional. I think you said it's maybe half. but you're also going to get that back through the course of the year. So I guess where should we start when we think about, you know, building a bridge for next year?
spk13: I think that with AM you start with the bridge that occurs every year. So, you know, when you look at advanced materials as a segment, you know, its value creation starts with strong volume growth prediction. You know, when we look at the markets that we serve, Automotive, I think odds are, I hope, good that supply chain issues get resolved and automotive demand will be better next year than this year. You know, the demand we have in the other end markets like durables, medical, all those have continued strength that we see going forward, especially medical. You know, so the end markets we expect to be relatively strong. Then we have the innovation that creates our own growth above these end markets. We've proven that extensively over the last decade. So even in a softer economy, we're still going to create growth over those end markets. And then you've got, you know, production catch up, right? There's a certain amount of production volume because of the steam line event. We're not going to realize this year, even though demand is there for it. So that'll be upside, you know, in volume next year. And there's, The cost accounting issue really isn't a year-over-year tailwind, because while it's a headwind to first quarter, it sort of comes back, if you will, to the rest of the year. So that's not something I would include in the bridge for 23. But tremendous amount of volume, and then importantly, mixed upgrade across all these volumes that we're talking about that have high growth or very high value relative to the segment average in AM, and certainly well above company average. So that creates a lot of mixed leverage, as always. So you've got all those drivers that are going to sort of increase success. And then on top of all that, you've got the start of the circular plant that gives you a whole other growth driver and value up on mix because the margins are attractive there. That's going to occur in 2023 relative to 2022. So that's how we create value every year is control our cost structure, drive volume and mix, Spreads, you know, my guess are not a source of headwind or tailwind next year because we're getting our margins back to pre-pandemic levels this year. You know, so it's a volumic story as it always has been to deliver, you know, pretty attractive growth in 23 versus this year. This year is going to be a very attractive growth number relative to last year when you think about, you know, $650 to $700 million. You know, that's tremendous growth relative to 21.
spk03: Thank you for that. And I guess it looked like corporate expense was a zero for 1Q. Part of that looked like insurance proceeds and stuff like that. Does any of that flow into 2Q, or do we see a more normal rate of corporate cost in 2Q in the rest of the year?
spk17: Thanks for the question. For the rest of the year, we see roughly about an $85 million expense rate. Obviously, with the steam line incident, we stayed focused, and I'll call it to pace our level of investment and growth and projects. Also, I'll remind you that we had the adhesives business still part of Eastman, and the earnings were part of other during Q1. So as we ramp up the circular, as we also look at the startup and completion of the first – The cost incurred and related to those initiatives will be paged through the back half of the year.
spk18: We'll go to our next question.
spk05: Yes, we'll take our next question from Jeff Tsakakis with J.P. Morgan. Please go ahead.
spk04: Thanks very much. So when you talk about the methanolysis project and producing packaging material, is what you're referring to, you know, disposable PET bottles? In other words, you know, water bottles? And what you have is essentially a more circular route to making the PET bottles? Is that the essence of it?
spk13: Jeff, that's it. So it's not disposable water bottles. It's now circular water bottles, right? So, you know, we were in the business of making PET, obviously got out of it because it became incredibly competitive, if you want to go back to 2011. And, you know, with the first plant, just to be clear, it's all specialties. The K-Sport plant we're building is feeding all of our specialties. But when we talk about the plant in France or the second plant in the U.S., you know, we are bringing back into our product portfolio making PET or polyester for textiles. Both of those in markets have a phenomenal waste problem, as we all know, in the bottles being thrown away. And frankly, right after packaging waste, textile waste is the second largest problem going to landfill and incineration across the planet. Both of those issues need to be solved in significant ways. That's why we're taking this act to sort of bring the circular economy in the linear economy and eliminate fossil-based feedstocks. But the model is going to be very different in how we get back into it, Jeff, versus where we were before. So it was market-based transactions competing against China every day in the traditional PET business. In this business, we're not building a plant unless we have long-term cost pass-through contracts that give us stable margins relative to wherever feedstock costs go and not, you know, connecting it whatsoever to the sort of traditional PET market pricing. So we get, you know, much more predictable and reliable returns on these investments. So that's basically, you know, the heart of what we're, you know, trying to do in the model to make sure it's different than what we did in the past.
spk04: Okay, I get that. And so, you know, in terms of the non-packaging applications, you know, what you're doing is you're making a more specialized PET that's more capital intensive in the end rather than people who use, I don't know, recycled polypropylene. So what is it about the applications for your specialty PET that makes the customers want to buy a more expensive material is there some engineering characteristic that they've got um so that they want to use specialty pet rather than you know a less capital intensive and cheaper polypropylene yeah jeff i just want to make sure we're keeping sort of different conversation clear so
spk13: When you're saying specially, are you talking about our specially copolyesters and our Triton?
spk04: Yeah, that's what I'm talking about.
spk13: Yeah, so if you look at our first plant that's going into Triton and our other copolyesters, it's the same issue, right? So Innovation Day, we told you a great story about Black & Decker, right? It's a drill, but they want to be part of the circular economy. They want to address their scope three emissions, the emissions that are occurring in their supply base, to improve their impact on climate. And they want to be using something that is getting waste out of the environment. It's part of how they're marketing their product. And they're getting a premium on their products, whether it's a Triton water bottle for hydration that's a reusable bottle instead of using a PET bottle that you throw away. So reuse in the three R's. Or it's a drill. Or it's a phone case where they want to make it out of recycled content to, you know, again, improve their impact on climate as well as, you know, the branding positioning they get about using, you know, recycled content. And all these brands are getting, you know, meaningful premiums well above the price, way, way above the price that we're charging for the polymer in their final products. So it's a value up for them. And so we get, you know, a better price. for this recycled content. So there's better spread for us as we sell this versus our current products. And we're getting significant accelerated growth, not just in applications that we've been in, like, you know, water, you know, sort of reusable water bottles, but also into new applications like phone cases where, you know, we weren't before. And, you know, there's other electronic applications, automotive applications. So it's opening up accelerated market growth that we can tap into as well. Okay, great. Thank you so much. It's actually been tremendously exciting because the scope and strength of interest in this has well exceeded our expectations. So, you know, we're rushing as hard as we can to get this plan up and running.
spk05: We'll take our next question from Mike Sison with Wells Fargo. Please go ahead.
spk14: Hey, guys. In Advanced Materials, you mentioned In the January quarter, you gave a $700 million EBIT outlook, and you added sort of a lower part of the range this quarter at $650. Is that largely related to the Kingsport shutdown? And if it is, what's the impact in maybe QQ and in that outlook?
spk17: So, Mike, this is Willie. What I would highlight is Yes, it is a key component of, I'll call it, adding a lower end to the range for 650 to 700 million. As we've highlighted, the impact in Q1 related to the steam line incident for advanced materials is approximately $100 million. Also, we've highlighted that it'll take us some time. We expect to get roughly half of the volume mix impact, which is, for advanced materials, about 60 million. as you think about pacing that into the back half of the year. So as Mark has highlighted, we remain confident in this business, and ultimately it will put us on a strong pace in the back half of the year as we recover 100 million of spreads on a year-over-year basis and get our volume mixed back to more normalized levels, which sets us up for more growth as we go into the 23.
spk13: Yeah, just to add one thing to that, there are really sort of three parts of this, if you think about it, versus where we were in the beginning of the year, where we said we were going to be greater than $700 million. You know, we obviously had the impact of the seam line incident that Willie just described. We also have expectations of the automotive market being a little bit weaker. You know, and then we have the China COVID kind of underlying risk here that we're realizing in the moment. You know, but the spreads, you know, are actually, the spread improvement relative to last year is very much on track relative to where we were in January. So that is held up and we believe, you know, consistent with where we were in January. So we went from, you know, greater than 700 to this sort of adjusted range now to reflect these headwinds.
spk14: Got it. And then just a quick follow-up in chemical intermediates. I think you've had five quarters now above 100 million in just the EBIT. I mean, in the event that oil stays high, demand stays good, and when I talk to the commodity folks, I don't think a lot of them are seeing sort of this normalization in the second half of the year. But, you know, if all that sort of plays out, would you stay above 100 million? Because I think if I model out the segments, you would be below in the second half.
spk13: Yeah, so when you think about CI, you have to keep in mind there are sort of three factors that cause the second half to be lower than the first half, right? So one, we have just normal seasonal volume trend off and functional means in the ag market. So there's some of that that occurs every year and certainly will happen this year, we believe. Second is just shutdown schedules. So last year, shutdown schedule was sort of loaded into the front half. This year, the shutdown schedule is loaded into the back half with a big cracker turnaround in the fourth quarter. So There's just that sort of shift in maintenance expense that's going to occur. So those two will moderate the second half to be lower than the first half, even if the spreads stayed the same in the back half of the year to the front half. So then you get into this question about sort of markets softening and going back towards normal versus where the margins are today. You know, if you go do the math, you can see there's some headwinds already, you know, in the cracking spreads, you know, that it creates a bit of a headwind that you can start seeing here in the second quarter. And so some of this is, you know, likely to happen. But again, we don't sell, you know, ethylene and propylene. We sell derivatives, and those markets continue to be really tight. So we're not going to see much of the impact on the sort of cracker spreads in the second quarter from what we can see. But we expect this will eventually start finding its way into the market as we get into the second half and some amount of normalization is going to occur. But, you know, we've all been guessing at when and how much it's going to occur. And as I said earlier, you know, I think we've taken a reasonable or conservative approach to say, you know, we're going to normalize. You know, if we turn out to be wrong about that and it stays stronger into the second half, that'll be upside down.
spk05: We'll take our next question from Lauren Alexander with Jefferies. Please go ahead.
spk00: Hi, good morning. This is Maria Milena for Lauren Alexandra. I have a question on the impact of China lockdown and COVID that you mentioned a couple of minutes ago. Do you expect to recapture the earnings after these lockdowns or how do you see it playing out?
spk13: That's a good question. So, um, You know, I would say China lockdowns is probably the biggest uncertainty, you know, that we can think of at this stage, you know, especially, you know, in the second quarter. You know, we've assumed that the lockdowns, you know, are continuing through this month and will start to get resolved in May. You know, so who knows what's going to happen, but just, you know, that's sort of what we've assumed into our forecasts. You know, it's impacting us in a couple ways. One, our ability to import products into China, you know, which is important for all of our segments, including advanced materials where a lot of products are made from our Triton and then shipped around the world. And then you've got the impact on just demand in the country, you know, where you've got people buying cars and appliances and everything else and the impact that it has on our business, you know, from a direct demand point of view. So we're keeping an eye on all those factors. Automotive seems to be the market most impacted at this stage, especially for a performance films business at the point of sale for those films and paint protection and window films. But I think that overall, what we think is it is still underlying pent-up demand, especially all the export business that is still strong in Europe and the U.S., So, we do expect that there could be a rebound in demand, you know, when we get past, you know, how they're managing COVID. But it's anyone guess on how managing COVID in China is going to go and sort of the pace and breadth of that impact.
spk14: Okay. Thank you.
spk05: We'll take our next question from Steve Byron with Bank of America. Please go ahead. Steve, your line is open. And we'll take our next question from Arun Zavwansian with RBC Capital Markets. Please go ahead.
spk02: Great. Thanks. I guess I wanted to revisit the outlook for 23 you kind of laid out earlier. So if you think about your own inflation potentially peaking in Q2 this and then you look into the rest of the year, you laid out the 5% increase. When you look into next year, I guess you will see, you know, potentially a moderating feedstock environment, as you just noted. But do you still expect kind of 8% to 12% EPS growth in that? And if so, maybe what would be some of the drivers that would get you there? Would you see like a still 45 cent buyback opportunity or how should we think about that as well? Thanks.
spk13: Yeah, so, you know, 2023 bridge, I have to admit, that's a first for me in the first quarter call. But, you know, look, when we look at it for 23, as I said earlier, strong demand growth in AFP and AM will deliver earnings growth next year relative to this year, you know, and we'll have a tailwind because of the, you know, sort of capacity production disruptions we had this year. then enable that volume recovery also to be a tailwind for next year. You know, it's a little hard to predict where spreads are going to be next year, you know, in the specialties. But, you know, if inflation, you know, if raw materials come off, you know, that'll create a tailwind relative to pricing for next year relative to this year. I think that's correct. You know, then you've got normalization of CEIs. So how those two net out at the corporate level, you know, could be to some degree neutralized as a tailwind relative to this year. So really the volume mix story, the key drivers, as always, will manage our cost structure to make sure there's not a headwind there outside of some gross spend. And so we're set up, I think, for improving EBITDA in a meaningful way. Obviously, we have a very strong cash flow and that will continue to be both reinvested in organic investments that we're doing for especially as well as our circular plants. And as we said, at Invention Day, there will still be money left over for share purchases on top of that as we go through next year to create that EPS growth on top of the EBITDA growth relative to this year. So we feel good about the 8% to 12%, but it's a little early to start calling numbers.
spk02: Okay, fair enough. And then I just wanted to ask as a follow-up back to the strategy on methanalysis. It sounds like initially, you know, the plan is to roll out more of the specialty applications, but over time potentially progress towards replacing some of the, as you said, circular water bottles. You know, is that really the strategy that Eastman wants to pursue? Maybe longer term, do you see this company as kind of 50 percent? specialties and then maybe 50% replacing some of these more commoditized applications? Or how do you think about strategy and the strategy you guys have been following for many years of trying to go more downstream and more specialty and squaring that with the needs to replace some of these commoditized items with circular solutions?
spk13: Yeah, so from a total company point of view, obviously our strategy is very much focused on specialties and AM, AFP, as well as textiles, you know, with our very differentiated, you know, biopolymers and new applications that we're creating for the biopolymers like microbeads and food service packaging, et cetera. So when we think about specialty, let's just be clear what specialty means to us. It's attractive, high, stable margins. over time where we have good pricing power because of the value our products create in the marketplace to manage our pricing relative to our raw material and energy costs. And creating value for shareholders, you know, not by expanding spread over time, because the spreads are already very attractive to start off with, but by growing volume quickly and because that is high margins, that translates into significant mix upgrade at the corporate level. And whether that's, you know, especially copolyesters or Triton or coating additives or personal care additives, or, you know, circular PET or circular textiles at, you know, very attractive margins that are very stable and cost pass-through contract. That's all in our category of specialty where we're bringing very attractive high margin growth, right? And you think of the circular platform, we've told you we're going to deploy $2 billion of capital across these first three plants The first one being focused on specialty, France being a hybrid of specialty and PET and textiles, and the third being predominantly packaging textiles with, I'll call it specialty circular polymers. But that $2 billion translates into $450 million EBITDA. So when you look at the ROIC and the value creation from those three projects, I call it special.
spk16: Let's make the next question the last one, please.
spk05: Okay. Our final question is from Jadit Pandya with On Field Research. Please go ahead.
spk09: Thanks a lot. Your first question is really around the circular plastic projects that you have, you know, to your point. And if you take France as an example, you want to invest a billion dollars for a 160-kT plant So if I just go by the returns numbers that you sort of said, I mean, sort of back of the envelope, it feels like there will be, you know, all else equal, you would need almost 3x the price of a recycled polymer versus a virgin polymer. So if that is not the case, then what is the inherent cost advantages in the cost structure which make returns attractive and prices not ridiculously different from virgin polymer that's my first question and the second question is just around cash flow sorry to ask this but i suppose is it really just a raw material inflation why you have changed your wording on the cash flow or is there something else to it as well thanks a lot yeah let me start with the cash flow question first uh so yes obviously uh we're we've seen a pretty significant uh
spk17: Inflation here in the first quarter, as Mark highlighted, we expect that to peak in the second quarter. So as we think about that, that's at least $100 million of headwind that we see. And what we're highlighting is a change in guidance. I would say our first quarter cash flow was probably pretty normal compared to pre-COVID. If you look back at the 17 to 19 timeframe, Our Q1 is pretty representative. We had a couple of headwinds this year in Q1, which one is a higher than normal, I'll call it variable compensation payout, as well as the impact of the steam line incident and the divested EBITDA year over year combining for about 100 million. So, as we go into the back half of the year, it'll be more traditional. And we'll use all the levers. We've made investments in integrated business planning to effectively and efficiently manage our inventories, as well as, again, we look at our net 90 programs and terms and accounts payable, as well as other avenues on the accounts receivable side. Again, we've been able to demonstrate and deliver cash flow in multiple environments over the last several years and remain confident and robust cash flow this year.
spk13: So the first question, I'm not quite sure how you did the math, but it's wrong. So when you look at this plant in France, first of all, we've said that the first phase of the plant is going to be $600 to $800 million, not $1 billion. The second phase, where we're adding more specialty capability down the road, is what gets you to the billion dollars. So capital number is a bit lower than what you assumed. Second, when we look at the pricing, you've got to remember that the value that we're capturing is the price in the marketplace relative to the cost of our feedstock, right? It's a two-step investment, right? We're building methanolysis and we're building PET and selling, you know, PET revenue, right? So that $6,800 million is to build the methanolysis and the PET plant. So the margins you're generating are a lot more substantial when you're going all the way to the cost of plastic waste, which is quite low relative to the price you can get in the marketplace. So when you do that math and say, okay, what premium do I have to get above the sort of fossil-based feedstock market, it's not all that different than the premiums that exist in the market today for mechanical-grade feedstock. And remember, our material is much higher quality in its clarity, its performance, reliability, and safety than mechanical-grade feedstock. So, it is a high-value product, and it is a long-term solution because we can infinitely recycle plastic waste. We don't degrade sort of after five laps, you know, like mechanical does. By the way, that makes us also a necessary complement to mechanical to keep it a viable stream in the long term because we can revitalize what is degrading through our technology, you know. a lot of value we're bringing to the marketplace, not just in what we provide, but enabling mechanical recycling to exist in the future, which it will not do without molecular recycling. So there's a lot of value we can get, but we're taking a pretty reasonable pricing approach relative to the market and generating the sort of $450 million EBITDA out of $2 billion in capital, so good returns. All right.
spk16: Thanks, everyone, for joining us today. Very much appreciate that, and I hope you have a great day. This concludes our call.
spk05: Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.
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