All right. I think we'll go ahead and get started. For those of you who don't know, Mike Leithead, Head of U.S. Chemicals and Packaging here at Barclays. Really happy to have Eastman here with us today, Mark Costa, chairman and CEO, and Greg Riddle. Long-time IR guy who had brought that up. So before we start, we're gonna start with the ARS questions. Audience response. If everybody gets their clickers, we'll fire those up. Do you currently own this stock? Overweight, market weight, underweight? No? Okay. It looks like we have some owners in here.
Yep.
Next question. Greg might be skewing the results over. What is your general.
3x.
What is your general bias towards the stock right now? Positive, negative, or neutral? Okay. Seems mostly positive. Next question. In your opinion, through-cycle EPS growth for Eastman will be above, in line, or below peers? Okay. Seems like a mix between above and in line. Next question. In your opinion, what should Eastman do with excess cash? Full-plant M&A, larger M&A, repos, divvys, debt paydown, internal investment? Okay. Seems like share repurchases is the quorum for right now. Next question. In your opinion, on what multiple of 2024 earnings should Eastman trade? We kinda have a spectrum from less than 10 through higher than 21. I know Greg's hammering six out there. Mark, unfortunately, we don't give you,
I know.
A clicker up here.
I go grab a bunch of his devices and.
Okay. Seems like a mix here. Most people between 10 and 15. Last question, I believe. What is the most significant share price headwind facing Eastman? Core growth, margin, cap deployment, or strategy? Okay. Seems like core growth is number one and frankly been a pretty common theme, I think, for a lot of companies so far. People trying to get a sense of the growth. So look, Mark, really appreciate you guys being here today. Always happy to have Eastman here. Maybe just to kinda start off, big picture to kinda help level set things. You guys obviously in a lot of different regions, a lot of different end markets. You said you just came back from Europe last night. I mean, maybe just do a quick tour around the world.
What are you seeing in terms of growth or outlook kinda as you see it today?
Sure. I'll actually start with the end markets and then sort of talk about region. Overall what we're seeing is what we said on the call, right? End markets are stable on the discretionary side at a pretty low level. Destocking is pretty much over, in all markets that we serve and we do serve a pretty wide range, with the exception of ag still doing some destocking and medical. And then I would say auto, you know, didn't have destocking last year. And end market would be similar to slightly lower this year than last year. That would be sort of what we see on a global basis. And we do have positions in all these end markets across the globe, in what those comments suggest. But it's good to see the destocking over.
You can definitely see order patterns starting to, you know, show that gap of orders being better this year in January/February than last year, in the way you would expect. So it's at least comforting to see that lift, you know, with the with that lack of destocking. I would say on stable markets like personal care, water treatment, pharma, ag, etc., you know, those markets have all been, you know, relatively stable in market demand. You know, they've been off a bit last year with destocking. Now it's over. Destocking's definitely over in those. You see some modest growth, you know, in those segments consistent with what you might see in other data reports. So with that, you know, then you build the sort of outlook for, you know, where we look to grow, in that market context.
By the way, China bad, Europe not great, U.S. better, which I think is probably consistent with what everyone says. I think that's fairly obvious. But we're creating a lot of our own growth on top of that. So we have a lot of innovation going on that gives us lift. I'm sure we'll get to it later on methanolysis. But, you know, that's creating a lot of growth on top of the market. We also saw a lot of lift in automotive where we created our own growth with, you know, very high penetration of more cars adopting HUD installations for heads-up display. Even though EVs are growing less, you know, maybe than what people inspired, they're still growing faster than ICE cars.
And we get three times the square meters in an EV relative to an ICE car, for example, at much higher prices 'cause they're very sophisticated interlayers that they wanna get. So there's a lot of places where we can create our own growth in that market context. So overall, and I'd say volume and specialties is coming in a little bit better than expected, you know, but not meaningfully. And it's sort of across all markets. So things on the demand side are holding in well. Of course, like we're gonna tell you, March is everything. So, you know, at this point, you don't really know until you get through March. Exciting on that side, everything's holding up reasonably okay.
The offset to some of that is this really high propane prices that come up on intermediates is sort of offsetting some of that volume effort.
Yep.
From an earnings point of view.
No, it makes a lot of sense. Then as we kind of take that and maybe carry it forward into 2024, I think you guys just reported Q4 results laid out. I think a pretty helpful bridge to earnings growth despite, I think, what I'd argue is a pretty choppy or mixed macro picture.
Right.
Can you maybe just kinda flesh that out a little bit? Just your confidence in how Eastman's able to grow your own earnings in spite of, in some ways, that this macro backdrop?
Yeah. So for first, you know, I don't think we've made the most of a call of the macro economy very well in January, you know, relative to how things play out through the year really since 2017 as an industry. I mean, no one's sort of got that right. So we took a different approach this year, which is I'm not gonna call it, right? We're just gonna assume end markets are flat and then build a forecast around that and let, you know, you all have your own opinions about where markets are gonna go up or down. And that's really how we built the forecast. It does have a wide range 'cause you really don't know where markets are gonna go. But the, you know, the core starting point was just getting destocking, you know, behind us, right?
So a big hit of the demand, we told you, $450 million of variable margin down last year, just due to volume and mix. And we've estimated about a third of that is destocking. It could be a little bit more than that, but a third to be conservative. And so we just have that as not a headwind, right? So it's like it's an easy comp, if you will, right, if the markets stay flat. So you get that back. And I would say the first two months are confirming that theory to be true. Then you get, you know, some stability and modest growth in some of these stable markets. But, you know, you call it 2%-3% in what we sort of put in the assumption there off of sort of a low starting point, right?
So not getting back to normal by any means, at least growing a little bit. And then you've got all the innovation, right? So you've got the $75 million EBITDA, you know, as incremental growth and earnings relative to last year, that, you know, sort of adds, you know, to some of the innovative growth and some of the things I just mentioned where we create growth in automotive markets and some others. That's sort of the volume story, right? And it, you know, as that volume story plays out, you also just get the $100 million of asset utilization headwind back. So we went way beyond demand and pulling inventory down to generate cash, which we did very well, with the focus that we had on that.
But that came with a non-cash headwind to earnings last year of asset utilization 'cause you're effectively paying cost out of inventory that from 2022, right? So that $100 million comes back. And that's all in the back half of the year, you know, in from the accounting point of view where that utilization headwind showed up. So that's part of why second half is so much better than first half. Same is true with the startup of the methanolysis plant. That $75 million incremental EBITDA is very back-end loaded as you're ramping the plant up through the first half of the year, bringing the revenue in, really in the back half in a meaningful way. So those, you know, all sort of combined together to give you some tailwinds. From an inflation point of view, we're taking enough cost actions to offset inflation.
And so that allows also more incremental flow through as you go through the year. There are a few offsets to that, of course. One is, you know, we've got some capability investments, a higher turnaround schedule, you know, this year than last year. About $50 million of headwind that we're not offsetting, you know, with our cost actions. And then there's some timing of orders and fluids that we called out as well as, you know, from a first-quarter point of view, timing and customer buying and fibers. That's a bit of a headwind. And then the question then becomes, where are spreads gonna go for us? There's a lot of divergent opinions about, you know, where spreads are gonna go this year across companies.
What I'd say is, you know, our view is, you know, in the specialties, you know, we did an extraordinarily good job last year, right? We had a $450 million volume headwind, $50 million FX headwind offset all of that in holding prices really well relative to raw material, energy, and distribution cost tailwinds. That's pretty extraordinary. Our intention is to hold those prices as best as possible. But there will be, from that altitude, you know, some sharing of, raw material tailwind that will occur with investors. We also expect more raw material and energy flow through just from the inventory. So spreads are gonna be sort of neutral. But I wouldn't call them a tailwind or a meaningful headwind in the two specialty businesses. On fibers, spreads are gonna be better.
Earnings will be a bit better relative to last year, you know, if we continue on that business. And then Chemical Intermediates is difficult to predict, right? So in January, propane price is one thing. Today, they're much higher. You know, by April, they'll be lower. You know, so there's a certain amount of volatility to that. And, you know, so we're not forecasting some big improvement in spreads in olefins or acetyls. We definitely think olefins will be better this year than last year. But it's hard to call how much.
Mm-hmm.
We're fairly, you know, sort of neutral, you know, on the acetyls side.
Got it. I do wanna pivot over to methanolysis 'cause, again, I think that's, in my opinion, one of the more interesting ESG or circular, you name it, stories in the space right now. So can you kinda talk a little bit? Obviously, you have your Kingsport facility that's, I believe, on the verge of starting up. So can you maybe just flesh that out a little bit, sort of where we are in that process? And then sort of how you think about kinda moving forward, beyond the startup here.
So we're very excited about the circular platform. You know, the methanolysis plant in Kingsport will be by far the world's largest, you know, chemical recycling facility built. And especially in the polyester world, by far the largest. So we're excited to be a leader in this. It is a proven technology that we've had for a long time. That ran for Kodak, you know, operated for 30 years at Kodak. At a smaller scale, about 40,000 tons. This plant's 100,000 tons. So we feel about the core you know, the core technology is not a lab experiment. It's something that's been commercial in the past. But it is a bigger plant. And it is using a much wider range of feedstock, from plastic packaging waste to textiles to carbon fibers.
So there's, you know, more complexity on the purification side of that plant when you put in that divergent set of feedstock. So it's constructed. It's built. Construction completed, you know, pretty much in the second week of November. There's a huge amount of commissioning activity going on in the plant. It's a very large, complicated plant. And, you know, we're behind schedule, as we said. You know, it's sort of a decline that we're have on the cycle context. And it's mostly been delays of very small little mechanical issues. There's nothing significant we've run into from a process technology point of view or design point of view in that sense. We've been operating all parts of the facility reasonably well, you know, with chemicals in each part of the plant.
But as we get ready to start growing, you know, raw materials, which are, you know, present in the first part of the plant through the rest of the plant, we've run into small mechanical issues, the pinhole leak and, you know, the heat transfer fluid, pumps that weren't designed properly. You know, these are all little sort of mechanical quality issues that occurred during the supply chain crisis. So painful lesson that's been you know, 'cause the issues are way above normal. But they're, you know, poor poor welding in some place or another that you're still finding as you're heating the plant up. That changes the metallurgy. And then you find a leak that didn't exist when it was cold, you know?
Or, you know, as you're filling the ram, you know, different materials through different types of vacuums and this, that, and the other equipment that just wasn't properly constructed. So it's, you know, right on that edge of being on spec. And then something comes up that we gotta stop everything and fix it before we keep going. You know, we've gotten through what we believe are most of the issues. But, you know, we still gotta get to that on spec. And hopefully, in the next, you know, sort of 7-14 days, we'll be there.
Okay.
And you all know 'cause, trust me, our customers are very keen and excited to get access to this material. And we'll have a press release once we feel like we're, you know, on spec.
Great. Okay. And then maybe moving forward then, you guys have talked about potentially three plants, a second plant in the U.S. as well as a plant in Europe. I believe last quarter, you talked about wanting to, in my words, get a few more mile markers before you're kinda fully with it, we're willing to declare FID for shovels in the ground.
Right.
Can you maybe just talk a little bit more about what those leading factors are, sort of a rough timeline for investors about how we should think about those over the next?
Sure.
Years?
Yeah. So I think that, you know, for our plant, starting with Kingsport and the next two plants, one of the biggest issues that we all wondered about is can we get feedstock, you know, 'cause it's garbage. And while there's, you know, you know, tons of it around in tons of it around the world, it's hard to access. And we actually feel very good about the feedstock question, you know? The next question is getting to customers. And we have many customers for the Kingsport plant that are really interested in when this plant comes up and running and want some biomaterial here to deliver that $75 million EBITDA we've identified. So we feel, you know, good about how we're getting started, where the prices are and demand.
We're excited to have Pepsi as a partner, you know, with a large contract for our second plant here. Making good progress on the contracts with the customers in Europe. So that is feeling like it's all sort of headed in the proper direction. You know, CapEx was, obviously, an overrun issue in the first plant. So we're spending a lot of time just getting the plant up and running. But also really thinking through, why did that happen? How much of that is the nature of the plant or things that are unique to the environment of building in 2021 and 2022 and 2023? And most of the capital overrun is connected to sort of extreme inflation, serious issues around contractor competence and doing a lot of the pipe welding. There's a lot of pipe in the facility.
We are sort of engineering the plant where we're building it on purpose to get a sort of two-year jump on the market. But we're still running the pilot plant on some design issues. And so that just kept changing scope. And that's very disruptive on capital construction projects. So, you know, there's no question inflation's there. But a lot of the overrun in the French plant was driven by these sort of productivity issues and some of those scope change issues, which will not repeat because we're building the same plant again a few more times. So all the, you know, scope will be locked. You know, we have a lot of insight around how to manage the contractors better and get better contractors. So we've got two top firms working with us on that.
And, you know, but there still is inflation on labor rates and some materials. So we're working through all that. We believe we have a pathway to get CapEx into the right spots, for both of those projects to have about a 12% return. Even with the capital overrun on Kingsport, we're above 15% for the mean market inflation out of the forecast. So, you know, I think we've got a line of sight on that. And we've made great progress on getting additional incentives in France, so that we have that aid on some of this inflation. And then, of course, policy has to get put in place properly, in particular in Europe. You know, they're right now finalizing all the rules. And that needs to sort of come into place.
So I think, in general, we feel, you know, good about where we are right now. But there's still work to be done. You know, we've done a very disciplined management of our capital and how we allocate it to make sure we get the good returns for investors. I've said that from the beginning. You know, we're very confident where we are in plant one. These criteria have to be met for plant two and three. You know, if they get met, we build. If they don't, we don't. You know, we'll deploy capital on the fourth plant.
Great. No, that's very helpful to frame that. If we jump back to the base business, maybe let's start with fibers because I think maybe lost in all the moving pieces of the past year and a half, two years, really, a nice improvement in the fibers business and the profitability. And I think you alluded to on the call, a bit more visibility or or clarity the next one, two, three years here. So you maybe just unpack that a bit, just where the industry stands today versus.
Sure.
The past few years overall.
So I would say it's been a tremendous success in the recovery runnings, in my first a bit of a six months. You know, we've got the earnings back to where they used to be historically before a number of disruptions hit the marketplace in 2006. It took, you know, a decade to get there, right? So it's been a long journey. But the margins and the and the cash flow, which is exceptionally high quality in this business, for sort of investment and limited with purchasing of plants, has gone really well. It is structural. So what's happened in this marketplace is it became loose for a number of reasons back in the sort of 2014, 2015 time frame, due to some backward integration in China and some other overstaffing issues in China that is not worth getting into now. But it really loosened the markets up.
But from 2015 to 2022, with a couple of things happened. Importantly, demand didn't decline nearly as much as people thought. So people thought it'd decline 2% or 3%. Turned out it only declined 0%-1%. And that's, you know, largely driven on a mixed basis. So within the demand, even though burn has been growing 15% with Philip Morris, as a replacement of traditional cigarettes, as a sort of reduced-risk product. And that growth is offsetting some of the natural decline netting out to a slower growth rate. There's no sign that that's slowing down. So that's, you know, I think pretty good. And then on the supply side, a number of companies rationalized capacity or converted it into other uses. Like, we took a facility and converted it from making tow for cigarettes to making Naia, which is now almost sold out.
Yep.
So the supply side, a lot of corrections, both in capacity reductions, which was about 10% of capacity. And then you in addition to that, you had, actually, a 15% capacity pull-out. And then an additional 10%-15% loss of effective capacity. So the market's been moving to, like, slim cigarettes or TiO2-free cigarettes, all these more complicated filters that slow the plant down in the pace at which they can run. So you lose effective capacity to remaining assets. So the asset utilization is now in the, you know, mid-90% range. And so the market's tight. And the value of a filter, which is a very small percentage of the final price of a cigarette, is very high. So secure supply is by far most important to these customers 'cause they can't live with a margin on a cigarette 'cause they don't have a filter.
And so their mentality has switched back to what it was for a decade, leading up to 2014, on not being a number one priority. And as a result, we were able to get, you know, very sort of reasonable contracts to improve our margins back to being as an industry reliable suppliers. And, 100% of that is contracted this year, 90% next year in 2025, and 70% in 2026. So stability, at least through three years, is good. You know, that these earnings will hold up. The cash will come out of this business. And there's no, you know, meaningful new capacity yet under construction that would sort of change as well. At some point, there may be. But I think we're very, very good shape for at least three years.
Great. And then maybe pivoting over to advanced materials and AFP, two of your structurally, I would argue, faster-growing, more specialty-type businesses. With where the portfolio is right now and obviously over time, what's sort of the two or three biggest growth strategies businesses, which investors you focus on to really appreciate the value that you guys have there?
Yeah. So Eastman has been a great business. If you look at its decade of growth from 2010 through 2020, even 2020 and how well it held up there, 2021, it was a great year as well. And then 2022, you know, we started running sort of, you know, some demand issues, especially the Q4 of 2022. We also had this stream line event that sort of, you know, was a short-term disruption to our ability to serve the market. But, you know, the challenge in that business is just demand, right? The margins from a price-cost relationship point of view are very good. You know, we had tremendous inflation across the entire company. It was $14 billion in inflation from, you know, 2020 through 2022, which was pretty extraordinary. And we were able to keep our pricing up for all of that inflation, right?
Now we're at a much higher altitude. Some of that raw material's coming off. And we're showing good discipline, you know, to offset that. And we can only do, you know, pretty extraordinary.
Great. As you said, volume's a little bit better in the specialties. The winter storm, you know, that hit Texas.
Mm-hmm.
The propane are a bit of a headwind to CI. And I think fibers is, you know, doing reasonably well. There's a bit of a customer order pattern thing.
Mm-hmm.
Where it's a little bit lower than normal in Q1 but doing okay. So we feel pretty good about Q1.
Mm-hmm.
The big question is how you deliver Q2.
Sure.
You know, that's a big step up for all the I think everyone the way they've guided.
Mm-hmm.
started out with a pretty conservative Q1 but a pretty good-looking full year. And I think there are a number of, you know, tailwinds that are very real for us in that step up.
Yep.
There's some basic seasonality for that step up. And then there's, you know, the sort of unusually low fluid fills and customer orders and fibers that gives you a step up. You got very low natural gas prices going on right now. But very little that'll show up in Q1 'cause we buy on contract, not spot. So we don't even see the benefits of those spot prices until a bit in March but much more in the Q2.
Mm-hmm.
So, and propane will, you know, very likely come off.
Very likely.
Right, from where it is right now. So there's a lot of different elements to sort of how you get that sort of step up in into Q2.
Mm-hmm.
And then the back half has all of the $100 million utilization and has the, a portion of that $75 million of methanol. So that's part of why second half is so much better.
Great. Well, maybe last one here. I know we've got about two minutes left. The Eastman portfolio, I think, since you got there, has changed a lot. There's been a lot of change in the world, frankly. And I think one of the things that you've always talked about for Eastman is this innovation theme around continuing to adapt, continuing to evolve sort of as the world is what it is. So when you talk to investors, counterparties, what do you think people perhaps underappreciate or, or don't fully, I don't wanna say understand but appreciate, where Eastman is today versus maybe Eastman of 2014 or 2015 or, or, like I said, it's almost 10 years.
Yeah.
Yeah.
Yeah. So look, I think that the portfolio's changed a lot. It actually changed a lot from 2007 to 2012. That's really going back in history. But we were very early, I think, in really curating our portfolio. Like, we sold off $3.5 billion in revenue in commodity factory, including PET. And then, and we bought, you know, Solutia, Taminco, you know, added about $4.2 billion. So very high-quality revenue, in what we did in 2012 to 2014. We really consolidated. We focused on, "Okay. That's our portfolio. How do we optimize and drive a lot of innovation-driven growth out of that?" Which we have done. And then we've also optimized portfolios recently with tires adhesive. So it is a very good portfolio for where it stands right now.
I think what's unique about Eastman on the upside is sort of your platform gives us an additional level to create our own growth than just waiting for markets to get better, which, you know, we're all also collectively doing, right? I don't think any value from I think, you know, the methanolysis facility is in our valuation at this stage. I think everyone's still waiting to see the plant run, which is understandable, and, start delivering on that $75 million EBITDA to show that not only does the plant run but it actually can make a profit, right? So there was a lot of upside that was unrealized in our valuation around that, as well as the ability to sort of build additional plants off of that platform.
I think there's, you know, some caution in the valuation right now around advanced materials that has delivered so much very strong growth, right? You know, if you look at a decade of proven success but a real challenge in 2022, 2023, right? So I think we've gotta come back out of that, which, you know, we intend to do starting in the Q1, and see that segment will get back to being the largest segment that's delivered the most growth. And then obviously, continued stability in AFP and some modest growth there. So I, I think that the valuation, which obviously seems a bit low from our opinion, which is probably true with the CEO, has some upside. And it's us earning it. We, you know, deliver on AM and get that earnings recovery.
We need to get the plant running and show how that's sort of, you know, delivering value. I think those are the key elements, you know, that are, you know, what we're focused on. The others, you know, we can't control the end markets. We know that. But what we can do is create a lot of our own growth through innovation, which I think we're well positioned to do. There will be some degree of market recovery in this business, you know, when it comes to all these markets that are extraordinarily low demand levels. I mean, existing home sales, you know, at a 28-year low, right? That drives a lot of growth for us, you know, when it comes back. The fixed cost leverage of this business is high.
So that's great when you're growing 'cause the earnings fall down through the bottom line impressive way. It's also pretty tough when things aren't there like last year. But it's all sort of macroeconomic-driven, you know, and there'll be a lot of upside.
Caution in valuation usually means opportunity. Mark, Greg, appreciate it as always. Appreciate Eastman taking part here today. Thank you.
Thank you.