Thank you, and welcome back. Next, we have Eastman. With us, we have William McLain, Chief Financial Officer. Before we get started, I'm gonna read these important disclosures and ask you to please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Maybe just to get started, you could just give us an update and walk around the world in terms of what you're seeing in terms of current business conditions.
Okay. No, thanks, Vincent, and great to be here at the Laguna Morgan Stanley Conference this year. It's been six to eight weeks since we did our conference call. You know, as we look around the world, what I would say is North America continues to be, as you would expect, the most resilient economy. You know, I think China has disappointed those that had hoped, you know, this year, that they would recover. And I would say Europe's trading sideways at a very low level. So that's really from a, from a global sense. As we think about, you know, the transition from first half to second half, you know, we had highlighted on the call that we felt primary demand.
that we had reconnected to primary demand in most of our end markets, but weren't expecting growth in the second half. And, I would say overall, that continues, but I would highlight that, we're well on track, to our full year guidance, in the second half. And as we think specifically about, our Q3 results, being similar to Q2 at, $2.15 per share, that, you know, we're on track to deliver that here in the quarter.
Okay, that's great to hear. Maybe just shifting gears now to methanolysis. You know, you've been in operation and generating revenue since March. Can you just give us... I know it's been six to eight weeks since you last answered these questions, but you know, obviously, with the new plant, we're all very interested in you know, hearing about how it's coming up and running and operating rates and percentage of on-spec product it's making. And you have a I think it's now $50 million EBITDA target for the year. So if you could just update us on progression there.
Yeah. What I would highlight, you know, as we highlighted on the call, we had had, you know, I'll call it the material, which had caused, you know, the process to not operate as efficiently as we had introduced, an increased level of hard-to-recycle material. Mark highlighted on the call and that we were implementing changes to the operating process as well as the feedstock material, and we've continued to make progress on that. The plant is up and running and continues to demonstrate a higher level of on time, and making progress towards those goals to be around that $50 million at year-end.
Also, we've got a scheduled polymers turnaround, which includes our methanolysis, as we highlighted on the call, during October of Q4, and we look to finalize, you know, the process modifications to enable us to achieve both the higher rates and also the efficiency of leveraging our broad slate of hard-to-recycle content. With that momentum, that'll give us the confidence to be able to deliver, you know, that $150 million exit rate in 2025.
What about from a customer feedback perspective? As they're getting more and more experience with the recycled material, are they telling you anything interesting that's, you know, well, in terms of their own demand or expectations, or what applications they're now using it in? Are you seeing it as it leaves you and goes to the customer, is that progressing, you know, properly?
Yeah. A couple of things I would highlight for those that don't follow Eastman as closely is the fact that with this hard-to-recycle material, we are demonstrating that we can produce the scale and also the spec of material that is comparable to fossil fuel. You cannot tell the difference. And we've not only demonstrated waste to methanolysis and the intermediates, but we've taken those recycled DMT and EG into our Tritan material. And as they're receiving that material, they're also, you know, they can't tell a difference. We're not having to re-qualify this material because we've used glycolysis to do that. So that's exciting, one, that it's going through the value chain, and our customers, you know, are getting the quality and the spec that they need.
And this year, we had expected, you know, a growth with our existing customer base, probably at a higher rate than new introductions in the new markets. That's actually playing out a little differently than we had expected. As you think about the level of inflation and as you think about, at the consumer level, they're looking for value, in some cases, discounts. So that's slowed down the adoption rate and existing applications for the recycled content to be adopted. But the exciting factor is we're actually winning in new end markets, whether that's personal care, cosmetics. It can also be in, you know, I'll call it tools and durables. Those types are winning at a faster rate, and in many cases, that's because they have a new brand that they're bringing to the market that's differentiating them.
It isn't a discussion around going from a Tritan product to a Tritan Renew. And, I would actually say that's more exciting because as we're building out the third Tritan plant. That's what we want to occur. We need to grow our end markets. And as I've said all along, I expect this third Tritan facility to sell out faster than the first and the second.
Okay. And just getting back to the feedstocks, you know, you referenced earlier that you know, you're working through the process of using the more complex or dirtier feedstocks. How is the procurement going? And as you think about that second plant in the United States, where are you on procurement for that? And is anything changing in terms of the type of post-consumer waste that you wanna procure as you think about the Texas plant?
Yeah, I think with Kingsport, we're demonstrating that broad, diverse feedstock from polyester carpet fiber to large chunk polyester waste to all the colored polyesters that you see in landfills and in videos online. So we've got the broad spectrum in Kingsport, and we've actually introduced much of that already into our process today. So what I think this brings the opportunity is to go into different regions in the U.S. It could be similar partners that we have today, or it could also be a broader slate. Like here in California, we are bringing some of that polyester fiber that you know it can't go to landfill here. It's actually going into and being recycled into durable products. It could be a blender.
It could be into durable things that are gonna be used for years versus, you know, in a single-use plastic that's going to a landfill. So great progress on both fronts. I, you know, I think, in many cases, when we brought the circular business model, you know, forward as an organic growth platform that was unique to Eastman, that was a concern that, I'll call it the supply chain. But at the scale of two plants, when you may need 10 - 15 plants to solve, I'll call it each continent's opportunity, we're sitting in a good position today.
Okay. And as you think about the Texas plant, you know, how are you doing with permitting and budget and, you know, just sort of getting to those, you know, next proof points in terms of moving forward with the project?
So happy with the progress that we've made since the call. Obviously, that hinges around the negotiations that are going on with the DOE. We appreciate the speed at which they're working with us, you know, to get that under contract. Also making progress, as we think about the engineering of the facility and getting it to that quality investment that helps us make the investment decision. We'll be speaking more about that progress, both on the Q3 earnings call and the deep dive that we'll be hosting in Kingsport and online on November 21st later this year. So exciting progress. I think the environment is conducive and looking forward to bringing, with the Texas facility, the potential to reduce the carbon footprint compared to fossil fuel up to 90%.
So think about that. You know, we can actually take carbon in the form of cups like this or plastic bottles, and which is a more purified carbon, and turn that back into a durable product, or in this case, a circular solution for PepsiCo and other brands, such that they can produce that at 90% less carbon footprint than the process exists today. I think that's powerful, and I think as consumers, we all find value in that, and we can do it in a way that's gonna generate solid, consistent returns.
Mm-hmm.
As CFO, that's most important.
For sure, for sure. As we think over in Europe and in France, you know, I think there, you know, budget things you're working through there, and you have customers that you're trying to get over the line in terms of securing the terms that you would like to have before moving forward there. Is there any update on either of those items?
I would say at this point, there's no updates. I would say those are still the two main issues. We're working those even today, as you would expect. To me, Europe ultimately, they're gonna get to the right point. It's interesting that, you know, with the level of inflation that we've had, they've got, you know, already established goals in place that are requirements in 2025 and 2030. What's not clear today is, what's the cost to companies and the consumers of not achieving those? Also, with recent policy discussions, can recycled content be brought in from other regions? Just the fact that we're having that discussion of recycled content being brought in from other regions, that's not a sustainable business model.
In that case, you may be bringing recycled content from Asia to meet the needs, and then what are you gonna do? You're gonna still have to incinerate in landfill. This will get worked out. We're trying to influence that. The French government's been very supportive, and our brands have been supportive. And I think we will get to the right solution. In the meantime, the way we also support that is deliver on our Kingsport plant and make Longview a reality, such that it's not, you know, a theoretical discussion. We're demonstrating to the world what's possible in an economic return way.
Mm-hmm. Okay, well, that was great. Shifting gears back to sort of the operating environment and, you know, sort of the end of the year and looking into next year. You know, one of the big topics of conversation, not surprisingly, at the conference to date, has been around interest rates. You know, we're hopefully on the cusp of a loosening cycle, so maybe you could just sort of talk about, you know, what you think the impact of lower rates could be for Eastman, as we move into next year, and you know, I don't think anybody expects the world to change with a 25 basis point rate cut later this month.
But, you know, different points of view on how many cuts, you know, the U.S., and I guess the world, is gonna need in order to really start moving the needle and get us out of the malaise over the last couple of years. So any thoughts there?
I think we're all trying to look forward to that point where primary demand is growing, especially in markets like building and construction, automotive, and durables more broadly. Good to see the ECB took the action. I think the long-awaited Fed is coming, right? I do then think it has to be more than that. Honestly, it's been good recently to see the crude oil market and some of the other commodities start to actually connect back closer to, you know, material demand.
Mm-hmm.
All of that can be positive from a consumer point, right? Which is there's more cash that starts to build, there's more flexibility that they have. And also, you're gonna see a cycle of, you know, people spend money on experiences, and travel. So now, you know, we're a year that's, you know, year four, year five from when COVID and things like that unfolded. Materials are gonna come back into demand. I think it will be positive. I think there will be lots of debates, you know, here in the near term. Is it, okay, is it at the end of Q1? Is it Q2? The positive thing is the momentum is changing, and, you know, I'm sure there will be lots of debate, was it too late-
Yeah
... as we look at this. But it should open up outside of our stable markets, those other markets, for growth. I'm actually happy to say here today, you know, like, this year in the automotive, you know, we called the decline in builds this year. The consultants are coming there. But like in our Advanced Materials business, our interlayers business is growing because of our innovation growth model, and being able to deliver not only the core safety films, but multifunctional films. And we're growing our footprint on each car, whether it's EV or ICE. So innovation is proven, and we're gonna have to continue to innovate to be successful into the future.
Yeah. You know, I look at your volumes, and, you know, if I use 2019 as a base year, in some of your businesses, your volumes are way down versus any sort of reasonable proxy for what volumes should have done with GDP multipliers or IP multipliers or whatever you wanna use, and we all lived through the two years of destocking.
So I guess I'm curious, you know, as you talk to your customers, and here we are on the cusp of this rate loosening regime, you know, are you getting any sense from them that the level of inventory of your product that they would like to hold, which I'm assuming is at very low levels based on what's transpired over the past couple of years, that, you know, as rates come down, it won't just be that we'll see some improvement in consumer activity in building and construction. Is it probable that the supply chain folks are gonna say, "You know what? We've kind of gotten away with holding on to safety stock levels of inventory for two years, and, you know, and we maybe did that for any number of reasons, one of which was just the cost of carry.
Right.
But now that cost of carry improves, maybe it's a little smarter to be... you know, for the pendulum to swing a little bit back towards the middle in terms of, you know, amount of inventory we're holding.
It only takes one supply chain event to ultimately cause that to come into recognition. I agree. The cost combined with the amount of destocking the pendulum has swung. It swung too far and there will become a medium. I think that would be growth on top of it. As referenced, from 2022 - 2023, with the destocking event and primary demand declining, our volume mix declined, you know, $450 million from 2022 - 2023. We call roughly a third of that being related to destocking. We're seeing the recovery of that this year. You know, we're growing off of that lower base.
I actually believe that, the lower level of safety stock and, I'll call it, the activity with a growing economy, will also be, another percentage of that growth that gets us back on track. And, you know, we're leveraged, we've talked about it, with methanolysis and the investments there to innovation. We're leveraged to recovery with rates, and we're a strong cash producer in any economic environment. So as you think about Eastman and going forward, you know, that's what, a sustainable future and, with our investments focused on our specialties.
Yeah. Yeah, I mean, I think going to a level beyond rates, which obviously has been an issue over the last couple of years, you know, we've had China not really recover to prior pre-COVID growth rates, had a very slow European economy, and some of that may be an interplay with each other. But, you know, what are you seeing on the ground in both Europe and China right now? And do you think it's plausible that we've kind of bottomed finally in Europe, and that there's maybe scope for recovery next year with lower rates and maybe some lower energy costs, or?
... So great questions. As, as I look at Europe and China, definitely underperforming. Maybe to set up the picture for Eastman, roughly 75% of our global assets are based in the U.S. China's about 10% of our revenue, Europe's between 25% and 30%. So as we look at those, we're serving those from what I view as one of the best cost positions in the world, as we think about the access to those markets. The challenge with Europe is, in many cases, the materials from Asia and China, more broadly, are, you know, ultimately impacting their economy.
So it's been an interesting set of facets for the Europeans to compete, but also, you know, as a U.S. manufacturer going into Europe, it's not where you want to be right now, and we need demand to soak that. It will actually improve every region of the world. And I think going forward, that would be additional upside. The economy's gonna have to grow differently in China than it has in the past. You know, the automotive space has been strong, but they're still exporting a lot of that. So I think Europe and China are a little bit interdependent. Europe will get better if China gets better from an asset position.
Yeah. No, for sure. You referenced your cost position, and I just... You know, one of the other things that's transpired since you, since you reported, is that we've had a lot of volatility in the energy markets, in particular with oil prices coming down, and, you know, there's debate over whether that's a recession indicator or what have you, but the fact of the matter is the price is lower.
Yes.
So, what impact does that have on your business, whether it's in terms of your own raw material base, the things you're buying, or on your customers or just in general?
So typically, the way we look at oil is, to your point, if it's demand-driven and it's declining, then while there's benefit, that demand impact and you know, the variable margin loss is gonna be a headwind. On a global basis, our specialties have a lot of cost passthroughs and compete on the value and use. So from that lens, a declining energy raw material is net positive. The opposite would be true for our intermediates business, you know, with the crude environment relative to naphtha. But energy broadly and with our U.S. asset position, nat gas has been positive, you know, here through the summer, which has been good to see and has enabled you know, the benefit in a pretty weak demand environment.
Let's hope that it's reconnecting to the environment versus, I'll call it, you know, building supplies in different parts of the world.
Okay. We also have an election coming up in a couple of months, and one of the dynamics that could result from that, regardless of how it goes, is just sort of trade tensions. You know, we obviously all lived through a period of tariff implementation late in the last decade.
Yes.
So I'd be curious to know what sort of the learnings were from that that could be applied if we get into that type of regime again, you know, this time around.
Yeah. So let's maybe first talk specifically with China, 'cause I think that's where a lot of the learnings were in the last cycle. You know, roughly 5% or roughly half of our sales in China stay in China. So in many cases, where it was imported and re-exported, the tariffs were not a significant impact. But where we imported to compete locally, that was a challenge. I would highlight that was part of the reason for an acquisition in our Performance Films business to produce locally. We have...
North America is a large region and China, and now we have assets in each of those regions to serve it, as well as some expanding capabilities in Europe to also serve China, which is a great market with automotives growing and having paint protection and window film, which are appealing within those markets.
Okay. Are there any questions here, in the audience? Okay, then. Willie, thank you very much.
All right. Thank you.
Thank you. Sure.