Good day and welcome to the Eastman Chemical Third Quarter 2020 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 Ethan Chemical Company Investor Relations.
Please go ahead, sir.
Thank you, Malia, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO William MacLean, Senior Vice President and CFO and Jake Claro, Manager, Investor Relations. Yesterday after market closed in addition to our third quarter 20 financial results news release and SEC 8 K filing, we posted slides and related prepared remarks in the Investors section of our website. Www.eastin.com. Before we begin, I'll cover 2 items.
First, during this presentation, you will hear certain forward looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company's third quarter 2020 financial results news release, During this call, in the slides and prepared remarks and in our filings with the Securities And Exchange Commission, including the Form 10 Q filed for second quarter 20 and the Form 10Q to be filed for third quarter 2020. 2nd, earnings referenced in this presentation excludes certain non core and unusual items and use an adjusted effective tax rate using the forecasted tax rate for the full year. 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 third quarter financial results news release.
With that, I'll turn the call over to Mark.
Thanks, Greg. Before we answer your questions, I want to take a few minutes to make some comments. We've had a strong recovery in the third quarter and solid performance through the 1st 9 months of 2020, despite the challenges associated with COVID-nineteen. Our employees around the world have done a great job of taking actions necessary keep their coworkers and themselves safe and healthy. We remain steadfast in this effort, especially as we see a resurgence of COVID-nineteen, continue to be committed to building more inclusive teams so everyone can fully contribute at work.
As we think about the impact of the pandemic on our business, we're leading from a position to strength with our innovation driven growth model, which continues to be at the heart of how we win. As we move through the third quarter, demand across our businesses improved, particularly for markets most impacted by COVID-nineteen. Especially auto, building construction, consumer durables and some other markets. Our earnings were strong with almost a 60% improvement from the 2nd quarter driven by innovation and market development and the outstanding work of Eastern employees as they navigate this challenging and unprecedented environment. With $14,000,000 of earnings in the 3rd quarter.
The markets are recovering. We saw a 10% sequential recovery in volume and mix from Q2 that got us back to within 5% of last year which was limited by our client shutdowns in Seattle. On a 9 month basis, our volume mix is down 6%, which is well above underlying markets. This reserve performance is due to our robust and diverse end market positions and the strength of our innovations. We impacted and mixed impacted markets.
In our resilient end market, the benefit we enjoy in the 1st part of the year moderated as expected. That said volume in our resilient markets is approximately flat year over year through the 1st 9 months. See continued momentum in October ended in November. Based on what we noted here, we projected volume and mix of Eastman will approach fourth quarter levels of 2019. A testament to the resiliency of our portfolio and the great work of the Eastman team has done to mitigate the impacts of COVID-nineteen.
All that said, we continue to be focused on what we can control. Across the portfolio, we continue to create our own growth through our innovation driven growth model. Whether it's in performance films, specialty plastics, architectural coatings, among others, we are forming better than our recovering end markets. Prepared remarks I shared with you how we're leading the way in innovation market development. I'm excited about the early strong customer engagement with the new potentially revolutionary products and architectural space, which has the potential to become one of Eastman's top 3 growth platforms.
We've expanded our paint protection portfolio by launching a Black PPS, expanding our position from clear products to opaque, a market with tremendous growth. In a world where sustainability is driving consumer behavior, we've had a number of wins across our sustainable product offering that leverage our innovative, molecular recycling States. Assuming economic conditions remain as they currently are, we expect our 4th quarter adjusted EBIT will be similar to the fourth quarter of 2019 adjusted EPS $1.42. If the volume mix strength in October continues for the remainder of the quarter, our EPS could be above the prior year. Obviously, there's uncertainty of the impact of COVID resurgence, but we expect to provide an update in Q4, December.
Finally, on cash, we've made a priority given the uncertainty. We've done a great job managing working capital in particular inventory. As a result, our free cash flow for the 1st 9 months is the highlight of our company's history, and we are on track for a 4th consecutive year of greater than $1,000,000,000 of free cash flow. All this gives me confidence we continue to be well positioned to manage in this uncertain environment and deliver long term attractive earnings growth. And sustainable value creation for our owners and all of our stakeholders.
With that, I'll turn it over to Greg.
Thanks Mark. Molly, we are now ready for questions. Thank
Our first question today will come from Jeff Secusz of JP Morgan. Please go ahead. Your line is now open.
Thanks very much. In your script, you say that the impact of lower capacity utilization was $60,000,000 in the 3rd quarter versus $140,000,000 in the 2nd quarter. And then I think you also said that you thought your volumes in the fourth quarter year over year wouldn't be so different than what they were last year? And you also said that earnings would be flat relative to last year, but if you have a $60,000,000 penalty in the 3rd quarter, and that seems to go away in the 4th. Shouldn't you just earn a lot more in the 4th quarter?
Jeff, this is Willie. So let me start with the response.
So
as you've highlighted, in Q3, we had a headwind on a year over year basis of roughly $60,000,000. And what I would highlight, in Q3, we actually sequentially reduced, our inventories about 5%, while volume was increasing 10%. As we think about where we sit at this point in time, we see volume levels being similar and approaching last year's level while we expect, I'll call it to slightly have higher capacity utilization. So as we think about the year over year performance in Q4 and or sequentially, we should have a slight tailwind, but it's not a full $60,000,000 impact because you'll have to recall that volume was down quite substantially on a year over year basis, whereas it'll be coming back. So you have to take the volume component of that that, partially offsets the $60,000,000.
And so, and look, the cost actions we took Jeff, and good morning, Jeff. As well as improving utilization certainly is going to help the quarter. We said volumes are going to approach 2019 levels not get all the way back there. So we're seeing great recovery in the auto markets and B and C, etcetera. And, but you also have some markets that are off, like aviation, some specific coating additives in China that are still in the process of recovering So we have a few markets off, netting out some of the recovering markets and the ones that are off are very high mix value.
So it's strong recovery, great momentum as we go into 20 but not quite all the way back on the sort of volume mix side. And you've got a bit of spread pressure as well as you go into the Q4 number. With the improvement in increase in raw materials, energy costs. We've got some price contracts that lag how you catch up to that. Not a problem over time, just in the quarter, you could caught that lag in some of the competitive pressures and tires.
So when you net it all together, we definitely see a way to get back to 2019 levels and earnings. And potentially better if the strength holds up, but obviously with COVID lockdowns in Europe, etcetera, etcetera, we're going to have to see how that plays out.
Okay. You said you have a goal of $25,000,000 to $50,000,000 in licensing revenues. And through the 1st 9 months, I think you reported $18,000,000. So does that mean there's $7,000,000 to go on the bottom end or is this $25,000,000 to $50,000,000 some kind of annual number?
Jeff, just to refer back to our January call, the $25,000,000 to $50,000,000 was the 20202022. So what I would say is this is, great progress by the team. We're delivering on that front. And what you should expect is we'll probably have the confidence that we're at least in the middle of the range. And over the next couple of years, we can deliver, on top of that.
Yes, it's a great multiyear program, Jeff. We have a lot of incredibly valuable technology some of which very much is on strategy for where we're growing our specialties and some of which we've developed over time, but doesn't really fit with where we want to go. So this is an MAG technology that allows you to successfully convert through gasification, co gasification into making a high quality MUG product, which the current technology in China does not do. So we've seen strong engagement and this is the first license to sort of do this Obviously, there are other companies who are very interested in being the MEG business in China. So we expect to get more of these licenses in the future building on this first one.
And then there's other normal licensing activity we have in some of our other technologies that are a little bit lower in value per license. But this is great example. It's a little chunky when it shows up. But it is when we would expect to repeat again and again in the coming years.
Okay. Thanks very much.
Thank you. Our next question will come from Bob Kors from Goldman Sachs. Please go ahead.
Thank you very much. Mark, you talk about the October conditions prevail for the quarter. So does that mean Better than typical from a seasonality standpoint, when I would presume November, December are usually weaker months or does it just mean typical seasonality from that October level, trying to sort of gauge what you baked in in terms of what may or may not be atypical this fourth quarter.
Yes, this is in the atypical category, Bob. So normally you have a really strong 3rd quarter and second quarter and then things trail off in the fourth quarter as people we, as well as our customers sort of destock for CAPTrees and the primary demand in some markets like B And T and other things slow down. So that's normal. On a primary demand basis, some things will still slow down like building construction, to some degree, but even that is showing some more strength than normal because of all the delays that occurred in the summer. So primary demand seems a little bit stronger, but the more significant driver of why we're going to have much better performance than a normal seasonal pattern.
Is, a number of our customers, were like us aggressively destocked inventory through the summer. I think we can all acknowledge and see the demand came back in the third quarter better than we expected. So people are really tight on or the automotive companies are really tight. BNC is obviously very tight, relative to the way demands come back. And that's true in consumer durables and a bunch of other markets.
And so what you see is people trying to build back to normal inventory level I don't think they're trying to build to something excessive. They're just trying to get back to stable natural inventory levels to support the now the better demand than we probably expected in the second quarter. So that's all sort of good news. But normally, you've got this destocking going on. Instead, you've got this sort of restocking back to normal levels, that we can see.
So that's going to give us a lot more stability, especially true in AM. Or seeing this both in the auto side as well, some of the durables, but also through everywhere else. I mean, we're running utilization flat out NCI number of products were running flat out, to support this demand and building action in the quarter. Did that answer your question, Bob?
Yes, absolutely. I mean, obviously, typically the 4th quarter destock ramification be pretty negative, but it sounds like just the reverse this year. If you look to next year, your cash flow has been very impressive as contemplate having to rebuild that working capital in your own franchise for next year, have you sort of reconciled what that might be with kind of drag on cash flow that could be for next year?
Bob, this is Willie. Let me highlight, we have a factor I'll call it in the increased business activity, but I'd also highlight to you that we've made significant progress this year on I'll call it structurally changing the levels and we're making investments in our integrated business planning on an advanced level. Such that we ultimately have a pathway to preserve the gains this year and mitigate any headwinds on inventory with business activity. Additionally, I would highlight that we will continue to leverage our accounts receivable and accounts payable programs. So as I sit here today, I see a pathway to a 5th consecutive year to a greater than $1,000,000,000 in free cash flow.
Some of it is a natural hedge spot where you've got earnings improving, you know, an inventory to some degree will come up, but lesser than in the past because the investments really made, but those certainly had each other, right? So if the EBITDA grows, the inventory comes, the value of the EBITDA is greater than cost of inventory and that sort of balances each other out. CapEx will be a little bit higher too, as we start ramping up some of our circular investments. But we've modeled us a lot and netted it out, we think it's going to be roughly sort of similar to this year.
Thank you. Our next question will come from Matthew Deo of Bank of America. Please go ahead.
Hi, yes. So Performance Films seemed to have somewhat of a blowout quarter. Why are we seeing so much demand for window tinting? Is this expected to continue or is there some sort of pent up demand trend that wouldn't necessarily be obvious kind of on
the back of all the lockdowns?
Yes. Well, let's start with Performance Films. I had to blow out a couple of years and to blow out 9 months of the year. So on the 1st 9 months, their volume mix is only down 5% in a market that's down 20% and they're up year over year in third quarter. So they're having a great year.
And it's a combination of things. 1, the window film business is very solid and always growing 2, our paint protection films, are growing tremendously fast at very high values. As that marketplace has just taken off and we've talked to you about that over the years and now we're even expanding from just clearing into black, or a paid product we go into next year, which is going to give us a whole new addressable market. So a lot of growth potential there, but it's not just that. The bigger part, frankly, is an excellent channel strategy and a service model.
We have an incredible team out there, especially in the key markets we serve like North America, China, in the rest of Asia, that, had instituted a far superior model on how we support both the aftermarket dealers, but also building these auto dealership programs where they can now sell these products as a value up, with the car, which they're always looking for. In where we sort of train develop, support them and doing that at the auto dealerships. And we have huge relationships with the top 2 auto chains here in the U. S. As well as the big auto chains in China.
So it's a combination of multiple things that's getting us to win. Great products, great new markets growing, but an excellent service model, that gives us durability. And now we're going to add on also a whole new digital tool that dramatically improves the installability of the product with the installers. And that's very attractive in launching as we speak.
That's helpful. And I was interested to pick your brain a little bit more on the new market for the heat transfer fluids. I mean, that's one of the higher margin businesses in ANS or, yeah, in ANFP and, clearly, expectations were pretty soft from the arrow side. So Can you talk maybe about growth there and the margin profile associated with that growth?
Sure. So if you go back 5, 10 years ago and say what was the business? It was primarily heat transfer fluids for chemical plants like polyester plants, etcetera. And that was really the predominant source, very attractive business, lots of growth in China consuming it. But the market in markets have dramatically diversified.
The first big new market was solar. So you have to use when you heat up these panels, these reflective panels out in the desert, you got to get the heat transferred to the turbine engine and our fluid does So solar has been a huge driver of growth for us over the few last few years. And a new market that's really taken off for us is LNG. So they also consume and use these products, in those facilities. And that's added on a whole another dimension.
So while Some of the traditional chemical markets are slowing down a bit obviously with different capital cycles. We are seeing these other markets deliver growth and enable us to have a lot more stability as well going forward in this business.
All right. Thank you. Thank you. Our next question will come from P. J.
Juvekar from Citigroup. Please go ahead.
Yes, good morning. In CI, you mentioned that you're running flat out. What are propane to propylene spreads? And also you're using more refinery propylene. How did all that play out in the quarter?
And then just in CI, you also have a smaller ag business, how did that do? I guess last year, you had some tough comps, I guess, this year should have more stability in that ag business? Thank you.
Good morning, P. J. Just first on the spreads. Obviously, as we think about the integrated spreads to our derivatives, with raw materials increasing here during the quarter, our pricing lags. So there was, I'll call it some compression within the olefins obviously on our RGP investment, we're still very positive on how that has provided a return and paid off and given us a little more stability.
But again, I thought the key thing is, it's slight compression, and we also had highlighted had some, I'll call it, planned Turner like at our Singapore facility, that will give us some opportunity for a little bit higher volumes than we had in Q3 as we come out of those planned turnarounds.
And in ag, you know, seasonally ag always declines for us, in the third quarter, PJ and you know, there's a lot of bill to get the products to the customers, the farmers. And by the third quarter, planting silver. So, that always trends off for us. But this year was also more of a headwind than normal because one of our largest customers there had a very long shutdown in the quarter. And so that has a real mix impact.
It's not just a volume impact on CI because the means business is very high value attractive business in CI. And so you feel both on the volume and some of the normal, some of it was unique to this quarter.
Great. And in your prepared comments, you talked about molecular recycling. Clearly there's something that the world needs today. You talked about that happening in try and Naya, Jan fiber. Can you talk about what are the inputs to this molecular recycling and was the product quality and when does it become economical?
Thank you.
Sure. So we're incredibly excited about, the circular economy. Over a decade ago, we've been and sustainability and how that is a critical driver of change in innovation in our industry. We saw that all the way back right when we were launching that in 2009 around health and wellness natural resource efficiency, feeding a world, a world All those trends have been core, you've heard us talk about all of them, and essential to renovation. In fact, we require every new product development program to be connected to something sustainable if it's gonna durable.
That's been true for the last decade. The Circular economy is a whole new dimension of growth for the company. We're really excited about it. The reality is plastic waste is a crisis. It's just also ridiculous to waste that much carbon in the environment.
We should be capturing and keeping it in the environment and reusing it. A lot goes into making that happen and we can play a critical role in that. Obviously, a lot of infrastructure outside of our scope to get it to us, but we need to prove that it can be reprocessed, reused, effectively. Mechanical recycling, which is the way it's done today, is very energy efficient. So wherever you can do it, you should do it.
Problem is it requires extremely clean feedstock and it has limitations on its quality as well as how many times you can reuse it mechanically. So while important, very limited to solving the total plastic problem. So molecular recycling is required. It's not an option. It's required to actually solve the plastic waste problem.
And we're excited because we have 2 technologies that are commercial now, that are going to prove that it's both commercial and scalable and economic returns for our shareholders to do so. And so those technologies, the first is what you're mentioning around cellulosics. So we have the ability to do reforming with our gasifier. And so instead of gasifying coal, we can reform, waste plastic and return that into feedstocks for making our cellulosic plastics. That includes our Naya yarns as well as the thermoplastics we sell in specialty plastics.
And it's a huge opportunity. We already were picking up a lot of momentum from sustainability on these products because in the yarn, 60% is bio content from FSE certified, sustainably grown forests. That alone was driving a lot of growth for mean, if you look at women's wear this year for us, our volume is flat last next relative to last year where the market's down 30%. So we're seeing tremendous success there in that part of the market. And that also will go into thermoplastics.
So we are the largest player by far, not fallmix, sunglasses, eyewear, for the high end plastic that goes in those frames. Marsh Sean, one of the key leaders in that market's already launched with us using our recycled content, to have that offer. So we see a lot of to grow the cellulosic plastics, even opportunities in electronics, toys, even seeing it as plastics is an opportunity in a market that we see. So on that side, tremendous opportunity, a lot of growth that allows growing existing applications, allows us to grow new applications like electronics where we're not today, you know, opaque applications, and it comes at a higher margin. And the polyester technology is the same thing P.
J. You know, we've got our tried renew product already getting orders from 2 iconic brands like Camelback and Naljeans. We have a number of customers working with us. In cosmetics, in, ophthalmics as well, durables, more hydration customers, as well as single use plastics. So we look across those two markets.
As of now, we already have 100 customers doing trialing with us across all these different markets and opportunities around these two technologies. To grow the volumes as well as get a better premium. And we know we can get the better premium. We're getting it now. And if you look at a better broader market about how important this is, food grade PET recycled in Europe is going at a substantial premium to sort of virgin PT.
So markets are willing to pay and support the investment necessary to solve this problem. So a great return on investment for everyone. So we're really excited about this. We think it's a great way to defend our existing business, grow our businesses and solve a real challenge in the world that we need to need to resolve.
Great. Thank you.
Thank you. Our next question will come from Alexia from Manav with KeyBanc. Please go ahead.
Thank you. Good morning, everyone. Mark, just to continue on the subject Have you made any progress in your decision making on methanolus project? Are you any closer to investment or defining the economics for that business?
Yes. So Methanolis is key to our strategy. The, it is a meaningful advancement to build one of those plants. And, we're close to refining and finalizing the details of exactly when we're going to build it. We're committed to making this investment.
We believe it's the right thing to do. The economics are very attractive. For all the reasons I just mentioned. In the January call, in the fourth quarter call, we'll provide you more details in just finishing up, you know, the final analysis of timing and capital scope, etcetera.
And just to follow-up on that, Mark, Is it fair to say that regardless of what decision you make with that methanolus project, you're kind of free cash flow parameters that you outlined for next year are still there $11,000,000,000 plus with potential methanolosis CapEx?
Yes, that include when we were talking about, free cash, the free cash flow, earlier, that includes the capital for methanol. So that's and the reason CapEx would go up next year. We've already built a lot of specialty capacity. So while we believe this growth already seeing great recovery work get back to almost nineteen levels in the fourth quarter of this year. You got to remember back in 2018, we built a lot of right?
A lot of different specialty plants to support growth in Triton, and a number of other products, ketones, etcetera. And So we're well positioned in our cost structure to support growth. The one exception is, the circular economy, which is relatively new. And we are completing in this year, an expansion of our performance films capacity. To support its tremendous growth.
So I think we're in good position on that. It's really a test and our ability to do all that put the test submit to our team's operational excellence. We've made a lot of investments in the business operating model and how we operate our company in the systems on how we're managing production that we're continuing to make more investments on this to be much more efficient in our working capital. So we can transfer that improvement into growth capital.
Thank you.
Our next question comes from David Begleiter from Deutsche Bank. Please go ahead.
Thank you. Good morning. Mark, just on your cost savings, I believe about $100,000,000 of these $150,000,000 somewhat temporary interim cost savings. How should we think about how they flow back into the, into the cost base in 2021?
Good morning, David. I'm going to
let Willie take that one. Sure. Good morning, David. Thanks. As we think about the $150,000,000 of actions that we're taking this year, and we've highlighted 2 thirds of those are discretionary, we're trying to match those as you think about, with the level of business activity.
I would highlight that we do expect, over the long term, that some of that discretionary spend would become structural as well as we think about the leveraging of technologies and how we do business. But fundamentally, as we think about 2021, we have cost actions that include site shutdowns as well as, I'll call it, labor cost actions that are going to approach $100,000,000 And we're taking actions on those this year. So as you think about, 2021, we will not only generate, cost savings that offset any of the discretionary that's flowing back, we actually expect through digitization, the integrated business planning, and other network optimizations to actually give us capacity to invest in growth and capabilities. And it's with that confidence, that we're going to deliver $150,000,000 net, about $225,000,000 gross as we go into 2021. And much of those actions are already in play and we're making strong progress this year so that those structural actions are in place as we start 2021.
As we think about 2022, we expect that to grow to a total of $200,000,000 net and beyond.
Very helpful. And Marcus on the 3rd of AFP that has performed poorly over the years. I know you suspended in a sense the any actions during the pandemic, but if you head into 'twenty one, First, have you made, have you been able to improve these businesses through further cost actions? I need you thinking any different about the role this once they're in the business going forward in the Eastman portfolio? Thank you.
Thanks, David. So look, we're we've always been a disciplined portfolio manager. It was a while ago, when we had a our significant portfolio transformation, but we've sold off a lot of underperforming businesses in our history. And we've had very successful acquisitions of great specialty businesses to give the portfolio the strength, not just in the stability of revenue that you're seeing this year, unless I forget, we started with a trade war and then COVID over the last 2 years, we've shown, I think, good resilience, in the top line, with this portfolio. But also tremendous cash flow with the value of the acquisitions.
So I think we're good at being disciplined. And as we said, we saw 2 businesses, you know, tires and adhesives that were developing instability, with our strategy, especially as part of AFP, and needed to address that. I think we've made great progress on managing the cost structures, especially in tires where we're going to take out a couple of plants and improve its cost structure in a meaningful way, as well as that allows us to lever up our new plant. That's a much lower cost plant as well in tires. And then innovation is also going really well in both businesses.
But The reality is, the tires business has really challenged in the competitive dynamics. The ADD tariffs that got put in place shutting China tires back into China, Then the broader trade war with China kicked off by Trump just created a huge drop in demand while competitive capacity is coming online and that just created a food fight at the tire company level as you can see and at our level. With our competitors in this business. So that's the volume recovery has been great in the back half of this year and the earnings in the back half of tires will be much better than the first half. But it's still a competitive environment and a headwind relative to 2019.
So that's one where we're going to do everything we can to improve the business. Innovation is giving us the ability to sustain premiums above our competitors in a meaningful way. But it's a business where we're going to continue looking for either JV or divestiture options. And as hopefully, we'll get to stability at some point here with COVID and be able to sort of pursue that. But we're committed to dealing with the portfolio.
Adhesives is actually holding up relatively well in 2020 relative to 2019. Volume's actually up about 5% price is stable to the back half of twenty nineteen. You know, managing costs there like everywhere else. So that business is stable. Innovation is getting a lot of great traction, our APOs.
Are really winning in the marketplace with superior environmental footprint as well as better scalability and allows you to lose less resin. So great growth there, great growth. We've talked to you a number of times about our low odor, low VOC resins that we've launched So it's stabilizing, but we're also still looking for opportunities to improve its performance if we can through partnership and and how we continue to improve that business. So, we're still working it. It's not going as fast as we liked at the beginning of the year with COVID.
Thank you very much.
Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you. Mark, maybe you could just touch on what you're seeing in building construction. In the prepared remarks, you talked about benefiting from the DIY market. So how big is that for you versus sort of regular construction? And as we think about going into next year, I know you have some innovation.
I see the optofone in the deck, but as we go into next year, DIY sort of softens a little bit how is that going to impact the portfolio or do you have other things that will come back to offset that?
Good morning, Vince. How are you doing? Good. Thank you. So, in our coatings business, roughly half of our coatings business, is, B and C and half is transportation roughly.
And on the auto side, remember, again, half OEM, half refinished. But on the B and C side, we are more weighted towards residential than commercial which positions us well for benefiting from the DIY demand build up. So we're certainly seeing the benefit our sort of added as we go into architectural paint, did quite well, consistent with what you've heard from the architectural coating companies in the third quarter. So we're tracking with that fairly well. A huge part of the revenue, total revenue of AFP, but it is helpful combined with the stability we're getting in care chemicals the great performance we've had when you transfer fluids that's offset the headwinds or some of the headwinds, I should say, in aviation fluids.
And innovation is helping to you as we talked about in the growth story around Optofilm. So it's market recovery. It's good positions with the winners in the marketplace that we always focus on and, And a great example of the sort of resilience of our portfolio and how it provides stability where, you know, while some things might be challenged. Other parts do well and that sort of balances out nicely.
Okay. And just on Advanced Materials, obviously the volume performance all year. And obviously, what's been a challenging year has been very strong. And it seems like a lot of it's innovation driven. But as we think about going into next year, presumably the innovation continues to compound, but are there parts of that portfolio that have struggled this year that we will actually see some recovery next year or is it just going to kind of be steady as she goes?
No, I am doing really well. So I wouldn't call it's struggling, but obviously demand in the transportation was down this year. So We certainly took an impact in Advanced Materials, especially in the second quarter, when our customers shut their plants down and we shut our plants down accordingly. In interlayers. So we took a hit there.
Obviously, even performance films, while it did well, was still down year over year. Is in and face some challenges there. But overall, I'd say the portfolio is doing great. I mean, it's, it's got innovation driving growth across all three main elements of plastics has been incredibly steady through this year where things like some durables were off in the second quarter, but we had tremendous sort of COVID driven strength and shrink for packaging that goes into grocery stores, our sneeze guards, the polymers that we make has great has great chemical resistance for cleaning. So it's very popular for all these sneeze guards you're seeing in stores or restaurants and etcetera.
You can see, yeah, growth in that offsetting some of the weakness. Good price stability relative to raw materials, delivering good success. And you've seen the snapback already, earnings in the third quarter or better than the first quarter of this year. So we've had great snapback volumes almost getting back to last year's last year's level with the rebound in automotive and the great performance in performance films that I talked about earlier. So I think this business is really on track to deliver a great result this year, but build on it with continued great results next year.
Even in interlayers, which we didn't talk much about, we've launched a number of new products. We've enjoyed a lot of success with our Acoustics and heads up display premium products We've we've told you we've been working on NextGen for all of those and we've had great wins on all three fronts. We've had a NextGen acoustic product with superior sound dampening, just get selected by 1 of the leading sort of EV OEMs out there on 2 of their iconic models. Noise is a huge issue in, in EVs because you've lost the sound of the combustion engine. So sound dampening in a variety of places in the car is critical and we and the biggest place where he gets sound coming into a car is actually the window.
So we play critical role in addressing some of those issues. We've had a multi functional product we've been working on that is much more difficult for our competitors to do combined solar rejection, acoustic and HUD all in 1. And it's been, just adopted by a leading Japanese OEM. And we've had great success also on our NextGen HUD, it's in trials right now with leading German OEMs that's going to be part of their augmented reality HUD that they're building that market will continue to grow. So a lot of success there.
Triton's doing great. And then you've got the Circular Economy piling on top of this as I mentioned earlier, delivering a lot of growth on many different fronts. And the portfolio has diverse and gave it stability. So we feel good about that.
Great. Thanks so much.
Our next question will come from Frank Mitsch of Fermium Research. Please go ahead.
Good morning, folks. Hey, Mark, just to follow-up on kind of the auto side, you just talked about acoustics and heads up displays, etcetera. But I guess part of the part of the reason why you're outperforming the auto OEM bills is due to paint protection that got some a nice airplane in the in the in your remarks. Can you talk about the growth prospects there? I guess, in the segment market segmentation there, because I guess, my thought my thought was that that was more geared towards kind of hiring a vehicle.
So that might suggest that you're in the early innings of being able to roll out that product as you move to more mainstream one of these. Can you spend a moment or 2 describing the growth prospects there?
Yes, it's tremendous growth opportunities, Frank. It's a segment that's been growing. And it's got growth opportunities, both geographically as well as within the category. So you're right. It started out with very high end hypercars and very expensive cars where people want to protect them.
It's already starting to move into that, normal luxury market and the mid tier market even. Especially in China, it's amazing, the number of people who are interested in sort of protecting their car, which for them is a very significant investment. And And so there's a lot of growth and addressable market in front of us in this on the markets. And while it's growing really well in China, North America. We're at very early stages of this growing in Europe.
So that's a whole another region of growth for us on top of growing the categories. So we believe these sort of very strong double digit growth run growth rates will continue for quite some time.
So we should be dialing in greater than auto OEM growth for EMA for the near future, near and midterm future?
Absolutely. In Advanced Materials, that's true. Automotive, in coatings, I'd say we're tracking more with the market.
Okay, great. Great. And then a question for Willie, you talked $600,000,000 plus in debt, net debt pay down in 2020 implying $2.50 or so here in the fourth quarter. How should we start thinking about $21,000,000 in terms of the prior to uses cash and expectations on debt pay down in 2021?
Yes, Frank, good morning. On the capital allocation front, our priorities have have not changed. We've increased our dividend for 10 consecutive years and that's an important mechanism for us returning cash to stockholders. Also to your point, we're committed to our investment grade credit rating. And, 2021 will really depend on the pace of economic and economic recovery, but we will continue to stay focused on getting our debt to EBITDA ratio closer to and a half times.
Here at the end of Q3, our net debt is about, I'll call it three times, our leverage. And also, we're committed to offsetting the dilution right now. And obviously, the pace of EBITDA growth will be as we think about allocating beyond that in 2021. Got you. Thank you.
Our next question will come from Kevin McCarthy of Vertical Research Partners. Please go ahead.
Yes. Good morning. Mark, you've done a tremendous amount on the innovation front in recent years, and I would like to hear more about film as you highlighted in the prepared remarks, but more broadly, I'm tempted to ask, is there a way to quantify the benefit that you anticipate from new products either on a top down basis across the portfolio or perhaps bottom up, thinking about what the top 2 or 3 contributors could be in coming years?
So, good morning, Kevin. We do we gave you, a metric called new business revenue, from innovation. We there's lots of new business revenue, just when you market share and things like that. But we isolate out what comes from innovation platforms we had a target of this year getting to $500,000,000. We were well on track at $400,000,000 last year, even in the trade war.
And we continue to have great engage even virtually, with customers, we've told you about all kinds of wins we're having in this year across our product portfolio. So we feel good about it, but it's not going to be at the level, that we aim for. So we'll always give that to you. And I would note that that new business innovation will build And I think we can get back to that level, that target next year in 2021. So I feel good about the growth that we can sort of put together there.
And it really fits with where I think we're headed for delivering a very attractive 2021. So Willie told you we've got fixed costs basically flat. We've told you that we have $100,000,000 tailwind in utilization, next year relative to this year, volumes are just flat in 'twenty one versus 'twenty, right? Because we took all these aggressive inventory management actions this year to go beyond demand to generate cash and we're quite happy we did that. And that inverts, it becomes $100,000,000 tailwind at flat volumes.
And then this innovation from new business that we're just talking about here the market recovery that you might have at some level, depending on how COVID, everything plays out. All create incremental growth above that. And because of the inventory actions we've taken this year, the innovations that the growth that we're getting there is above the average margins for the company because of the inventory management we've done, we don't have any fixed cost headwinds. The incremental margins for growth in year, probably going to be 60%, 50% to 60%. So very attractive margins.
So that growth flows the bottom line and we put out together $0.50 just with flat volume on utilization, and flat costs. And then, you know, growth in topic could get us back to 2019 levels.
Okay. That's helpful. Secondly, Mark, I wanted to ask about interlayer films. You talked about the acoustic films and heads up displays. Do you feel as though you're gaining market share in that business?
Or is it more a situation where volumes could be exceeding auto sales as a function of restocking or perhaps both of those things, how would you characterize the market dynamics in any interlayer films?
Daniel Larry, it's a great business. You know, it's more directly tied to OEM production, obviously. So that production goes up and down. So will our volume We still benefited and did better than the rolling market this year, Kevin, with acoustic and heads up display, but not to the same extent. As performance films, because performance films is expanding its overall market that it serves.
And so it's doing well, the HUD and acoustic doing well. Gen set of products I just mentioned are going to give us additional tailwind as we go into next year. So we feel that it will continue on a volume mix basis. It'll do well. The mix is incredibly important to keep in mind about this, the entire company, especially in AM.
So when you're selling paint protection films or window films or acoustic heads up display. That's way above segment average margins in AM, including Triton and the Circular products were selling the same thing. So all those growing isn't just volume. It's a mix upgrade.
Okay. Thank you very much.
Our next question will come from Mike Sison of Wells Fargo. Please go ahead. Your line is now open.
Hey guys, nice quarter. Just curious, and I think I'm doing the math right. It looks like sales will be up sequentially, right? Fourth quarter versus 3rd quarter. And I apologize I missed this, but why is EBIT your guidance going to imply EBIT is down, right?
So anything I'm missing, I would have thought maybe you'd have flow through up on an EBIT basis?
Good morning, Mike. So thanks for the question. So on the volume mix, we expect it to be approaching Q4 levels of prior year. As we think about raw materials continuing, to be, I'll call it, increasing. We would expect to continue to potentially have some, slight spread compression as we think about our chemical intermediates and some of the AFP 1 third potentially tires.
So as we think about the balance of that also, we'll have a little less of the cost actions benefit. So I'll remind you, in Q3, we had roughly 50,000,000 Q4 will have roughly 40 as the activity continues to increase. So, all in, that's a view as well as some of the key inputs on a year over year. So, as we think about it, if it being similar to prior years, where we come out as we look through that.
Yes, there's always some normal. I mean, while we don't have normal seasonality of the drop space on things I said earlier, we still demand to be a little bit less in products with some seasonality. So a tremendous strength to get back to last year's levels and earnings. So I think that's a great accomplishment, as we look at it, but a little bit less than third quarter.
Right. No, I agree. And then in terms of if demand levels stay sort of around this third quarter level, or second half level. And then given some of the cost saving efforts to act for 'twenty one, where do you think your run rate level of earnings are is tracking. And I know it's maybe too early to give specific guidance, but are you above 2019?
Are you closer to 2018? Just maybe just give me a sense of where earnings should maybe, lay out if things stay at these levels?
Yes. So I was trying to get at that, you know, around the growth question a moment ago. You know, assume fixed costs flat, assume a tailwind of $0.60 a share and asset utilization of flat volumes. So then you build on that with volume growth mix improvement, as I was just talking about the power of mix is incredible. And so it's not just volume that with the headwind this year, it was mix as a big driver is the markets that were impacted by COVID were our highest value markets.
So you're already seeing the value of them coming back in the third quarter. You'll see that in the more progress in the fourth quarter, but next year you'd expect to get all the way back there on mix. And then the asset leverage of that fixed cost you know, with sort of that 50 percent to 60 percent incremental margins. I think when you put all that together, there's still some spread headwinds you're going to have pricing and catching up to raws because we assume raws will be increasing next year with an improving economy. So you have a little bit of that as a headwind and some competitive pressure in tires and in acetyls offsetting some of that, growth and success.
So put it all together we think we can get back to around 2019 levels could be a bit better, but there's a lot of moving parts on that. But we got to see how we get through this COVID crisis which obviously is going to have some amount of impact. And there's the selection, there's China trade tensions, etcetera. So there's a lot of things to factor in and find that outlook, which we'll give you in January.
Got it. Thank you.
Our next question will come from John Roberts from UBS. Please go ahead.
Thank you. You have all these great ESG initiatives. How does the CING TOE business fit into that Mosaic and Do you have to carve that out at some point or can it co exit as you ramp up the other ESP initiatives?
Yes, so that's, so obviously we've considered carving toe out of the portfolio a number of times, especially back in 2015. Unfortunately, it can't be carved out, John. It's so integrated into the Kingsport site and so interdependent with all the cellulosic growth we have in AFP and, in AM and shared assets, and recycle loops you just can't separated, it would be a disaster. So you have to grow out of it. And that's what we're doing, right?
So our strategy is to ultimate if you go long term enough, replace all the tow with textiles and other applications, with that growth. Obviously, that's going to take some time. But, our strategy and the answer to that question when it comes up is, we have to maintain the economic integrity of the company to invest in growth and support our success So, you know, tow is part of that. But we're going to work as hard as we possibly can to grow and textiles was also as attractive margins. And grow that business, as the tow business, declines over time.
So that's sort of the answer to the question And it's also a way to leverage a lot of excess, tow capacity that we have right now that has great incremental margins will grow textile against 0.
Okay. And then secondly, back to the performance films, the interlayer business is almost all OEM. Can the pain protection in the opaque films, about OEM as well. And maybe just give us a little bit of parameters. If interlayer profitability is or content is 1x per car.
The opaque films go on the side windows and rear windows. So that's got to be much bigger than 1x And then the paint protection goes on a much larger surface area. And so that's got to be even higher than the darkening films. Kind of give us what are the 1x and then the for the interlayers and what are the opaque films and the paint protection films?
Yes. So John, I don't have easy answer to that question. What I can tell you, I just want to sort of refine a little bit about what the paint protection film is. So paint protection film comes in 2 versions. One is the full wrap of the car, but a lot of people just wrap the vulnerable, put the film on just the vulnerable parts of the car, the front, the side, the door handles, etcetera.
So it comes in 2 different versions on how much you sell per car when you do PPF. And it is certainly additive. When you think about our presence on a car, because The interlayers is doing one thing in acoustics and HUD. The films on the windows are, as you'd noted, so it's not just tinting. It's actually solar rejection is the big value proposition.
So we saw a lot more in hot locations than who locations because the films are much more advanced today than they were 20 years ago and the big value proposition isn't just the tinting. It actually rejects a tremendous amount of solar heat that actually gives you better fuel efficiency since you use less air conditioning. And so that's additive. And then you've got the, but we don't break it down on a sort of ratio basis like that. Something we probably should do and we'll take a look at that.
But, but what we do know is we're getting a lot of more presence on each car sold And the dealers, as you mentioned, are really getting interested in this, right. It used to be very much an aftermarket business in P. F. And, And a lot of our growth is now in collaboration with these programs we're doing with the auto dealers where they sell it as a upsell the car. Sometimes it's preinstalled on luxury cars, so you don't have a choice about it when you're buying it, a lot of it is, after, you know, sort of an upsell at the point of sale.
So a lot of different ways to grow.
Our next question comes from Matthew Blair of Tudor, Pickering, Holt And Co. Please go ahead.
Hey, good morning, everyone. I want to circle back to tire additives. The Michelin data showed pretty rapid improvement in replacement tire demand through Q3. Think they had both North America and China up 9% year over year in September. So I just wanted to see, does that match with what with what you have?
I know your tire market is much more commercial, but any comments there? No, we've seen the same rapid recovery in demand and tires quarter has been quite good, and consistent with what you're talking about. Sounds good. And then all these forest fires have caused a pretty big wood shortage, lumber shortage. Is that having any impact on, I guess, either fibers or any other parts of your business?
No, where those fires are occurring, are not where we would be getting our wood. We only get wood pulp from sustainably grown forests. They're grown purposely to be regenerated and taken care of in very different locations and where these fires are occurring is. East Coast, Brazil, different locations than the West Coast.
Got it. Thanks.
If we could make the next question the last one, please.
Our last question today will come from Arun Viswanathan of RBC Capital Markets. Please go ahead.
Great, thanks. Good morning. Thanks for taking my question. Just two quick ones. So first off, could you just remind us sequentially, what was the benefit from, lower idle facility charges?
I guess, Q2 to Q3 And then, secondly, if you could just address, maybe the benefits to Eastman from a potential infrastructure bill, if there's maybe a percent of your portfolio that's weighted there? And, how potentially each one would be positively impacted by that?
Sure. So if I answer the question, so I'll answer it 2 ways. 1, which is, you saw our decremental margins go down roughly 60% from Q1 to Q2 and our incrementals be about 60%. I would say over 90% of our period costs associated without facilities, basically went away in the quarter on a sequential basis as our plants came back and became fully operational throughout the quarter.
And then on the infrastructure question, it will benefit us. We're not really focused on large infrastructure projects kind of materials we make, we tend to go more into consumer durables, cars, building construction, but more commercial than bridges. And, So it depends on the nature of what the infrastructure is. What's great about that is it just creates broader economic growth, which we're highly levered to. So well, it may not be participating directly in some of the infrastructure projects.
We are certainly tied to macroeconomic demand and people have more pickup trucks going to work construction, you know, which is good for us, etcetera. So we'll certainly benefit like everyone does from the improving economy driven by it.
Thanks. Thanks again everyone for joining us this morning. We appreciate you dialing in and look forward to talking with you again soon. Have a great day.
This will conclude today's conference call. Thank you all for your participation. You may now disconnect.