Hi, good morning. I'm Jeff Zekauskas. I analyze chemicals for JP Morgan. It's my pleasure this morning to introduce the management of Eastman Chemical. Representing Eastman is Willie McLain, who's the Chief Financial Officer. He's been CFO of Eastman since 2020. In his early days, he graduated from the University of Chicago Business School, so he's a pretty sharp CFO. In the audience is Greg Riddle, who is the Head of Investor Relations at Eastman Chemical. The format of our session is fireside chat. Maybe the place to begin, Willie, is it seems to me every year Eastman puts out a press release before it comes to our conference. What you guys do is you say, you know, we've exceeded earnings, or we've missed earnings, or this is good, or this is bad. This year, there's nothing.
I was wondering why the change in pattern?
Jeff, I think I heard in the front row there's been enough drama today. First of all, thank you. It's great to be here at the Industrial Conference again. Thank each of you in the room for being here and your interest in Eastman. You know, I think as we laid out our expectations about six weeks ago, you know, the macro background that we gave was in the discretionary end markets, which is about half of our portfolio, that we expected, you know, basically flat to declining consumption. Think about building and construction, durables, and automotive. Also, we have half of our portfolio that's in stable end markets that we expected to grow. We're seeing, you know, fundamentally those growing here in the first quarter.
I would also highlight that innovation is a key part of our growth, allowing us to grow above the end markets. As I see Q1, you know, we're ultimately on track for the guidance that we gave back at the end of January to be slightly ahead of Q4 here in Q1 from an earnings perspective. Obviously, I would say there's been lots of discussions on tariffs, recessions, and all of those scenarios. As you would expect at Eastman, and I think we've demonstrated over time, one, we allocate capital and we do it efficiently. Two, we control our cost structure and do that well, which I'm charged with overseeing. We adapt and adapt quickly to the environment to maximize the outcomes for our stakeholders.
That is what we're focused on because I think, you know, while there may be more scenarios that we're planning for today, at least here in Q1, you know, solid results and in line with expectations.
Some materials companies in the first quarter tend to have a March that is bigger than February or January. Is that true of Eastman? Is March a particularly important month in the quarter? Or how is it weighted?
What I would say is that transition month is March. As you think about just general seasonality, right, you got three more shipping days than you do in February. With the additional shipping days, and it's always critical to starting Q2 strong. I would say in the near term, order outlooks is a little tougher as you think about the order books and people are managing choices. As we see it today, you know, ultimately the update that we're in line with guidance takes that into consideration. Typically, Q2 and Q3 are the strongest quarters of the year in our space with our end market exposure. March is definitely critical to finishing it strong, but setting the tone for Q2.
From your point of view, your order patterns that you can see through March are within your sort of general guidance parameters, at least at this juncture.
At this juncture, you know, what I would highlight is as you think about headwinds and tailwinds, as we outline those, you know, for the year, you know, what we're seeing here in Q1 is, you know, the, I'll call it the markets in the stable are holding up well. Additives and functional products is doing a bit better. As you think about chemical intermediates, advanced materials, there's a little more exposure to natural gas. There's some headwinds on that front. You know, I think some of the banks, you have an improved outlook on currency and the euro. That could be, you know, ultimately modestly favorable as we see here in Q1 and more favorable for the full year if that plays out.
You know, where we stand today, I think Eastman said, you know, maybe there's a $50 million headwind from natural gas and maybe currencies are negative $30 million, you know, for the year. You know, my guess, my guess is natural gas is a little bit worse than that, or it's, what I mean by that is natural gas has inflated. Now, maybe you've hedged or, you know, you can see into your gas costs. You know, it may be that the, maybe the economies have softened or demand has softened a little bit. You know, do you find the first quarter more uphill? Or do you think that the, you know, the risks have increased or are they more or less the same?
I think sitting here, you know, with, call it 2 weeks left in the quarter, the risks have, I'll call it heightened, I think, but it's more of a full year heightened.
Full year.
Versus Q1. You know, when you're sitting here with a couple of weeks, yes, we need to fulfill the orders. We need to operate our plants well to get the cost structure through that we need. I would say net, the stable markets and strength in additives and functional products is offsetting any, I'll call it short-term headwinds as our costs pass through contracts and our pricing actions and advanced materials, fibers, and chemical intermediates, you know, would ultimately follow through in Q2.
Are tariffs something that Eastman really has to contend with or not so much?
You know, the direct impacts, you know, tariffs are enacted and have been increased with China. Also, as we think about, you know, outside of the automotive space between Canada and Mexico and the U.S., ultimately our revenue base is about 10% in China, of which, you know, 5%, about half of that we keep in country. It's low single digits for Mexico and Canada. Everything that's been enacted to date, there's been minimal direct impact on Eastman. As you would expect, we would use our global supply chains and asset footprints in addition to our, you know, our partners and suppliers around the world. You know, where I see, and this is true in late 2018, early 2019, and the playbooks that we set up, it's really about the health of the global economy.
You know, uncertainty, you know, for capital uncertainty, you know, for making, you know, contractual decisions, that's not healthy for the overall consumer and our customers. I think that's, as you think about, you know, the back half of what 2025 could be, there's more uncertainty today because there's not clarity. You have to be prepared, you know, to deliver on your cash commitments, to deliver on your cost commitments, and maximize where you're innovative and differentiated in the marketplace with customers.
Some people think that there's room for China to accelerate in its growth. Some people become a little bit more optimistic about Europe. Maybe they become a little bit more pessimistic about the United States. Is it really too soon to tell? Or when you look across Eastman's businesses, have you seen any inflections, even if subtle, in any of those geographies?
I would highlight the fact that, you know, we're diversified globally. As you think about roughly 45% of our revenues in North America and the rest is outside the U.S. and North America. The way I think about that, it positions us well ultimately should that growth occur. I would say there's been more talk than there has been actions. How do those actions start to flow through the economy? Yes, I would say last night over dinner and today, lots of questions on Germany and the health of Europe. Can that be positive? The question is, is that 2026 or longer? Because it takes time to get that into the economy. You know, I think long term, you know, China needs to create that confidence in its consumer base. That will create growth opportunities for Eastman.
As you think about a healthy economy more broadly, where, you know, 75% to 100% of your end markets are growing, you know, I think we've done resilient and performed well relative to peers. With our investments and the growth that can continue to differentiate us, that creates upside when those economies do become healthful. Until then, we'll be disciplined. I think that's a characteristic of Eastman. Our team members, you know, are committed to delivering on the plan and the strategy long term.
Eastman believes that it can grow its earnings, I think to a range of $8 to 8.75 billion. And maybe last year you earned $7.89 billion, something like that.
Yes.
Is the key to earnings growth this year the methanolysis initiatives that you have?
Great question. Thank you. Absolutely. We're focused on growing from innovation. As we think about the growth year over year, roughly $75 to 100 million of EBIT and EBITDA growth come from methanolysis and our advanced materials. As we basically, it's interesting that we have aluminum here on the table for water today. As we think about carbon efficiency, polyester is key to that. We can take that polyester as a feedstock, which is basically purified carbon already, and turn that back into a circular material. It's basically on a molecular level back into the intermediate, which is DMT in this case, and ethylene glycol. Then we turn that into specialty products, you know, that could go into personal care, cosmetics, medical devices, hydration, kitchenware.
Those are all of the places that we're winning with today that not only want clarity, chemical resistance, and durability, but today we're adding circularity to that. That growth, we had over 100 plus customers and wins last year. We're continuing to grow that pipeline and funnel. Again, based on the operations this year, we're on track to double our production from 20 to 50 kmt in 2025. Production, I'll call it the benefits of utilization and not having the startup cost, create a growth picture that can impact the bottom line of Eastman. About $50 to 75 million of that we expect in advanced materials. The startup improvement will be here in first quarter in our other segment. Confident in the growth, we're off to a good start.
You know, again, look to check off the milestones as we go through the year to prove the investment case and that 15% plus ROIC on this project.
I think your primary product is called Triton Renew. Is it a premium product? And in selling a premium product in the current market, is that easier or more difficult? Or how have you contended with the price premium if there is one?
As you think about Triton, it was a premium product before we added this new capability. As you think about co-polyesters and competing on the pyramid that polyesters compete on. I highlighted those factors. We are adding this new dimension. You are exactly right. It is a premium with that new dimension to what our customers and brands can claim on the shelves with each of us as consumers. Across those end markets and the segment and the offerings that we give, in some cases, they may want 25% recycled content. In others, it could be 50%. In others, even more. There is an offering across those segments and applications that we are pricing in premiums above the standard price of Triton.
I think as we highlighted at the deep dive and in some of our calls, you know, given the near-term macro, we've actually seen more success in winning in these new market applications with the new functionality and brand claims. If a customer is already in Triton in this environment, making that switch or timing of when to make that switch is being evaluated. The key I would highlight is we're not losing any business. As we're winning with new brands, we're continuing to grow off of those wins and those bases.
In moving from 20,000 to 50,000 tons of production, really the polymer sale could be more than that because you're not selling 100% methanolysis product. What you're doing is you're blending it in. And then depending on the customer requirements, they'll take certain percentages and you'll price accordingly. Is that the basic idea?
That's the basic idea. A good summary. What I would say is we're looking at capacity and we think that'll be over the next two or three years that we would, you know, basically consume 110 kmt of waste plastic. It's about a 90% yield. So about 100 kmt of intermediates that we can then, you know, monetize into 150 or greater polymers.
Have you been able to manage the flow of waste plastic adequately in order to keep your production ramping at the right speed? Or has it been difficult working with the waste plastic?
What I would say is as we think about some of the learnings, you know, as we had last year, we went through the mechanical phases that we, you know, now have fully vetted. The opportunity is not the flow of the waste plastic. I would say it was our learning curve as we think about the technical, the engineering, and the operations aspects. I would say we're quickly accelerating up that learning or S- curve. Today we operationally know how to handle the different mixes of feedstocks that we're bringing in. It's always been hard to recycle materials, but you can think about the different form factors and materials that you're bringing in, the operating states. We're coming up that learning curve. We actually think that creates, you know, a more sustainable first mover advantage. It also creates higher barriers to entry.
You have to remember ultimately we've been in polyesters, you know, for +70 years. You know, we've been operating methanolysis in some form for Kodak and Eastman for 30 years. Now we've introduced a broad array of complex feedstocks. This is not your clear plastic bottles. As you saw when you visited Kingsport in November, it is a complex slate and we're improving on that every day and coming up that curve. What we're seeing here in Q1 gives me confidence that we can produce, you know, that 2.5x greater year- over- year.
Just in rough terms, if your incremental revenues are, I don't know, $75 to 100 million and your incremental EBIT exclusive of the startup costs you had last year is maybe $50 million. So the incremental margins of this thing are 50% roughly, something like that?
Yep. To your point, as we've highlighted, you know, ultimately of the $75 to 100 million of incremental EBITDA year over year, about half of it is related to cost and operating efficiency. The other half is related to that $75 to 100 million. I think at the high end of the range, you're right. At the low end of the range, it's a little less.
The eventual, the capability at the Kingsport site, I think is around 100,000 tons. All things being equal, that facility will be about half loaded this year. When we project out what the EBIT can be or the EBITDA can be, you know, there's another, I don't know, $50 million in EBIT for 2026 or 2027 or however long it takes you to get to that full utilization rate. Is that fair?
Yeah. I would highlight to you that, you know, we expect to exit at a $100 million EBITDA run rate in advanced materials. As we think about that, part of the 50 kmt of production will be at inventory to supply at that higher run rate at year end. While directionally, I think you're correct, I would consider the exit run rate. We think that that number can approach $200 million of EBITDA when we're at full run rate. We're also at the, I'll call it, optimized mix as a true of our advanced materials and specialty plastics segment is we're always looking for that, you know, premium mix and upgrade over the long term with these assets.
Do the incrementals keep rising as you get to very high utilization rates? Is that the way you get to these?
What I would say is you can always over time raise those rates. Ultimately, you know, on the other assets, and we will talk about Longview separately, but as you bring on the next set of capacity, you can serve the broader market as well.
Is it inexpensive to bring in waste plastic? You know, when you think about that versus buying paraxylene or ethylene glycol, you know, does this work to Eastman's advantage or does it work against it?
Yeah. I think, you know, we've given past references, you know, at around the $70 crude mark that there's definitely value being created relative to the paraxylene markets and what you're discussing. Also, as you think about trade and trade flows over the long term, we believe that for a true circular economy, that these need to be regional markets because shipping waste and ultimately not knowing, you know, where your waste came from in a recycled product, there are issues with that. I think that's being recognized. The question is how long does it take to get, you know, effective regulation in place to ensure that these markets, one, you know, create the circularity and two, with food contact and things like that, where there needs to be higher standards of safety that that is preserved as well. I think there's two angles.
One, regional markets form a barrier. Two, as you think about the trade-offs with crude or PX.
Where do you stand with your Longview plant? That is the second facility that you have in mind.
Again, we've made great progress with the offtake as we think about base load contracts with PepsiCo. Two, we're making good progress with the engineering and on the engineering front as we're progressing towards, you know, breaking ground here around mid-year. I would also say that we continue to make progress with the DOE and the DOE funding, which is additional scope within the project. We have an award of up to $375 million. We received cash on that award in Q4. We've continued to receive some cash here in Q1 as well and have good engagement along those milestones. The next set of milestones will be the permitting and moving forward after you have that with the construction side as well.
As we think about, you know, the broader footprint, we also will have the capability, you know, to also, in addition to the base load contract, as we sell out Kingsport, about the time this plant would be coming online to produce some more of those specialty products also with the intermediates from this facility. Again, the base load contract is there. That's going to be more than half of the project. Again, stable margins over the long term. That's what the model is. We've got a specialty model. Then we have the circular solutions model. You know, to me, the circular solution is the bigger market opportunity from a total volume, but it needs to have the key principles that we've outlined from the very beginning, which is we're going to be disciplined.
It's got to have base load contracts that are long term, that have consistent margins across the economic environments.
Have you given any more thought to licensing the technology over time in that, you know, these are relatively tiny amounts of polyester tonnage and the PET market is a very, very large market? Or do you think it's best more for Eastman to go it alone?
What I would say is we're focused on creating the most shareholder value for Eastman shareholders. What I would say is a licensing model or a different business model that enables these to be capital efficient. In some cases, you may need 10 or 10+ , you know, these types of facilities for polyesters in Europe and in the U.S. As we think about it, there is long term value that's going to be there. Part of it is what's the speed to market? With that speed, how does that enable Eastman either through growing it, partnerships, licensing, all of those we would consider.
What's it like to negotiate with the DOE these days? Is it continuous from your experience last year or a little discontinuous? You know, it certainly seems as though the administration has different priorities than the previous administration. The nature of the grant I think that you are going to receive has different sort of components that may or may not be necessary to the project.
The thing that I would highlight is across both parties, there are things that are key, which is one, jobs. We are bringing that, you know, to ultimately East Texas. Two, as you think about bringing jobs, also it is onshoring, right? This is ultimately feedstock that we have here that we can make circular and it is onshoring assets and jobs. The other aspects as we think about ultimately improving technology and investing in technology over time with the batteries as an example. Sorry.
Sure.
Is also a positive. We're.
These are solar batteries. Is that right?
I would say these are batteries that can store energy. To me, yes, there are components of the project which are less favorable in today's administration. Having battery technology and being able to store energy is powerful for the U.S. and for differentiating, I think, U.S. and our capabilities. All in all, for East Texas, for circularity and for, you know, solving long term differentiated for us versus the rest of the world, we do not want to be, you know, ultimately bringing products from around the world and putting that into our landfills or incinerating it.
Okay. I think the other larger component of Eastman's EBIT growth this year is its cost reduction program. Maybe it's $50 million. How do you see that? Is that something that's more SG&A focused or more cost of goods sold focused? Is it more people? Is it more process? And how do you monitor the progress of that initiative?
Great question. As I like to think about Eastman, our focus is on offsetting inflation every year. You know, that number could be 75 in normal years. It could be $100 million, I'll call it, in some of the peak periods that we saw in the not too distant past. As you think about, first, we're committed to that. This year, as we think about what's required in this type of environment to grow, we're doing an additional $50 million. I would say a large component of that is focused on gross margin and gross margin efforts. We're doing it across the enterprise. As you can imagine, at our large manufacturing sites in Kingsport in Texas, we've had a lot of activity going on at those sites and we've diverted resources to make sure that we have successful startups of our investments.
We're putting those resources back in focus now of, you know, how do we gain energy efficiency? How do we, I'll call it, make sure that we have the best contract partners at our key sites and that those partners are driving the milestones and the efficiency with us? This is something that I think Eastman is good at. And we've got towers across the key components, which is yields, energy efficiency, and then fixed cost structure and then third party contractors is the way I like to think about driving those outcomes so that we hit that to the bottom line. It enables us to ultimately, you know, perform well and resiliently, you know, should the environment be more difficult in the back half of the year.
When we think about risks to Eastman this year, you have a very profitable fibers business. And that's been a business that's really grown very nicely over the last several years, very, very sharp upward pricing. Maybe there's been some change in different inventory levels or how do you see that business going forward over the next couple of quarters if you have visibility?
Yeah. You know, what I would say is, you know, as we've got it this year, we expected the full year to be $400 to 425 million. Part of that was.
Down from maybe 450.
That's correct.
450.
Ultimately, the key factors in that are destocking. I would say destocking is occurring in these end markets a little later than the broader markets that we were talking about the last couple of years. Why is that? Fundamentally, what has occurred over the last several years is the decline in traditional uses of filter tow has ultimately declined at a lower rate. Two, the applications that consumers are buying is a different denier. With that different denier, it is ultimately reducing capacity of the industry because you have to run that slower. On top of that, we have had growth in end markets that are considered reduced risk like heat not burn and others. In many cases, it uses the same or higher amounts of the cellulose acetate tow. That is on, I'll call it, the demand side. The demand is playing out better.
That's good for us. It's good for our customers. Also, as you think about capacity realization, Eastman has been focused on growing products like Naia and the textiles and the circularity of that product. We've converted products over to textiles. Additionally, we're innovating and using part of the intermediate. Think about cellulose flake into the production of a product that we talked about at our deep dive called Aventa and bringing solutions for polystyrene to market today that's on the shelves being tested. We're also seeing growing demand in other applications and markets. That is what led to a multi-year, I'll call it, change in the economics because they weren't, you know, I'll call it, at maintaining the level of service that our customers were demanding.
We raised that to meet our expectations, you know, to also be on par with other products that we were testing. As you would expect, it's a low part of the cost in serving the traditional markets that acetate goes into and these new reduced risk. They did not want to be short as they were launching new products. They built inventory. Now that we believe that the market is more stable, they're adjusting those inventories. I would say what we've seen in Q1 is pretty much in line with what we expected. You know, there's not certainty, but obviously we're in close contact with our customers and serving them in Q2 and Q3. It could go a little longer in Q2, but overall, I would say today it's been in line with expectations here in Q1.
You've changed your pricing in fibers to be more multi-year. Does that cushion the change in EBIT or EBITDA? Can you see your margins a couple of years forward?
You have heard us talk about being fully contracted this year, you know, being at that 70-80% plus in 2026. To your point, we have contracts in 2027, 2028, even at this point. The answer is, as we have converted, I will call it the business model and the return level, we were looking for longer term for visibility. Also on top of that, cost pass through as we think about, you know, certainty of margins across a multi-quarter period so that we can maintain those margins within a year while we may get behind for a quarter. The new model of commercial has transitioned from annual contracts that were not a high percentage of cost pass through to multi-year contracts that are staggered that also have cost pass through in them.
Maybe as a last question, is Eastman a coiled spring? If you had a lower interest rate environment, if interest rates went down 100 basis points, 150 basis points, would that activate your business model or can you calculate what the benefits to that might be in terms of volume?
The way I think about it, Jeff, is the answer is we're well positioned. We've been disciplined. We've taken the portfolio actions that we needed to. We produce a lot of cash. You know, we've got half our portfolio today that has been depressed. We talked about them automotive, building and construction, durables. That used to be 60% of our portfolio. If you can take 10% of our portfolio, that's at higher margins than the corporate average, and then add growth on top of that, whether it's industrial production or low GDP with the innovation, there is tremendous upside in that scenario. We believe that it's our job to be ready to activate that when it happens. Also, we're disciplined on the cash flow and the generation of that cash flow. We're going to deliver $1.3 billion of cash flow this year.
It'll be tough here in Q1 as we have higher cash taxes. I'll call it building some inventory for the Q2 turnarounds. We're delivering $1.3 billion now. My goal is to take us back to the $1.6 billion and above in that type of environment.
The cash taxes this year are $50 million higher than last year?
I would say cash taxes are higher. We're not going to say the number, but I would actually say it's a little higher than what you just said.
Okay. All right. On that note, thank you very much for attending.
All right.
Appreciate it.
Thank you.
Appreciate it.