Good day, everyone. Welcome to the Q4 and full year 2022 Eastman Chemical Conference Call.
Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir.
Thank you, Emily, good morning, everyone, and thanks for joining us.
On the call with me today are Mark Costa, Board Chair and CEO, William McLain, Senior Vice President and CFO, and Jake LaRoe, Manager, Investor Relations. Yesterday after market close, we posted our Q4 and full year 2022 financial results news release and SEC 8-K filing, our slides and the related prepared remarks in the investor section of our website, Eastman.com. Before we begin, I'll cover two items.
First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially.
Certain factors related to future expectations are or will be detailed in our Q4 and full year 2022 financial results news release during this call, in the preceding slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for Q3 2022 and the Form 10-K to be filed for full year 2022.
Earnings referenced in this presentation exclude certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of excluded and adjusted items, are available in the Q4 and full year 2022 financial results news release. We posted the slides and accompanying prepared remarks on our website last night, we'll go straight into Q&A. Emily, please let's start with our first question.
Thank you. Anyone who would like to ask a question today, you may do so by pressing star followed by one on your telephone keypads now.
We will now go to our first question from Josh Spector of UBS. Josh, please go ahead. Your line is open.
Yeah. Hey, good morning.
Thanks for taking my question. I guess first wanted to ask, can you walk through your step-up and your implied guidance from Q1 through the rest of the year?
I guess mostly interested to hear how much you see this within your control versus subject to macro conditions changing.
Sure, Josh, and welcome. We expected that question, and I think it's an extremely important one we spend a lot of time on. First, let's just recognize we're in an extremely dynamic time in this world, where it is difficult to predict some of you've got China in a weak situation but likely to recover. I've seen one article saying there's $2.2 trillion of cash out there with Chinese consumers to be deployed and how that impacts both demand Ukrainian war, you've got inflation at 40-year highs and what the Fed's going to do with it. There is a lot of uncertainty, and the Q4 was incredibly challenging.
As we challenges continue, whether it's the destocking in durables and BNT that still needs to work itself out, auto and the stable markets fortunately getting past destocking but not growing yet. We'll certainly see some raw material benefits in the Q1, but not much in the way flow-through works, and seasonally energy's high.
The Q1 has a number of challenges, not to mention pension and variable comp. As we look at the step-up into the Q2 and through the rest of the year, there's really three key elements. To your point, the one that's most directly in our control is taking out $200 million of cost net of inflation, and not much of that's really helping us in the Q1.
There's some in the non-net manufacturing activities that we're executing on. Even that is being implemented through this quarter and the operational improvements flow into inventory. Those benefits won't flow out until they start moving into the Q2. The vast majority of that $200 million gets spread across the three quarters.
That's a big step up Q1 to Q2. The second one is how will spreads improve? We've had tremendous success in being disciplined and successful in managing our pricing with just great commercial excellence across all parts of the company. It's pretty extraordinary when you think about the amount of inflation that we faced.
Last year was about $1.3 billion in inflation, where at the beginning of the year, we didn't really expect that much inflation, if you go back to our January calls last year. If you look at it on a it's $2.4 billion inflation.
If you even go back to 2019-2022, $2 billion of inflation. Significant amount of inflation, and we've and across that multiyear timeframe. We certainly kept up with it through last year. As you go to each segment, the story's a little bit different. Advanced Materials is probably the most important one to start with, 'cause it has a pretty significant tail, when in spread.
When you think about it, they had one of the most challenging raw material and energy environments, across our segments with VAM and PVOH up 45%, relative to 2021 PX up 40%, energy up 70%.
They kept up with that inflation, with 13% increases in price, but they didn't improve spreads. If you go back to where we were at the beginning of last year, we had the intention of recovering spread compression in 2021 of about $100 million. We didn't get that, but we did keep up with inflation, and we're starting now into this year at a much higher altitude with the prices that we've achieved in keeping up with this inflation.
As we look at this year, we see that this segment's going to have a pretty substantial tailwind in raw material and energy. We're not trying to be too optimistic if we just use where raw materials have already come down, in VAM, px for the Q1 of this year. Think energy off of the natural gas forward curve for the year.
That's actually quite a bit more spread tailwind than what we would have got last year, that $100 million because of the higher altitude. That's part again that shows up as a step-up as you move into the Q2.
There's a bit of it that flows through in the Q1, but most of that is in the Q2 through with fibers, a much shorter, cleaner story, which is you had a lot of challenges in inflation here as well, both especially on energy and the market.
The customers have moved to being worried about security of supply. You've been very successful in increasing the prices last year, as well as contractually securing much higher prices this year to make sure the margins are back to sustainable levels to support million outlook to earnings this year, which is a significant step up, in fact, enough to offset the spread normalization in Chemical Intermediates that we expect this year.
AFP will have modest spread improvement as well, but not as much because they managed spread quite well last year. A little less upside this year. When you put it all together, that's a lot of spread improvement, and a lot of it flows in sequentially into the Q2. That's a big step up. The third segment is volume and mix, and this is more of a mix of what happens with the economy versus what's in our control.
Destocking at some point is going we're assuming right now that it predominantly ends by the end of this quarter for durables and D&C. You get of demand going from destocking levels, which are pretty severe, to something less than that.
In the stable markets, we can already see you're moving past that and have some amount of growth from those markets. Importantly, innovation is something in our control, and we've had a lot of success last year despite our challenges in the economy and securing a lot of new business wins that are going to help this year. Again, that doesn't really happen during destocking, so you got to wait to get that past you to start seeing some of that benefit. Then, of course, there's China recovering.
We're being very conservative, not assuming much of that in our sort of outlook that we've provided until we see more proof of it. The bottom line is there's of step-up across these three factors. Many of it is in our control.
As you look at the guidance we gave you for the year, given the outlook it's appropriate to sort of look at the lower half of that guidance for how we're going to perform until we get past this quarter and have more insight on all these factors.
Thank you.
Our next question today comes from David Begleiter with Deutsche Bank. Please go ahead, David.
Thank you. Good morning. Mark, just on Fibers, can you talk to the sustainability of this higher level of earnings going forward?
Hi, David, thank you for the question. It's one of the bright spots of the year and one we're excited to talk about. Fibers has obviously been on a tough journey since 2014 when the market structure loosened up for a variety of factors.
The situation has evolved and changed over time. First is on the we historically thought about demand declining in a 2%-3% range. What we've seen over the last few years is it's only declining around 1%. Partly that's driven by the strength of the heat-not-burn segment of the marketplace, that is growing at 15% a year, offsetting some of the other decline on the cigarette side.
China has also stabilized to being pretty much flat to slightly up in demand over the last several years. You've got stabilization demand, the heat-not-burn market growing, and the heat-not-burn devices require quite a bit per smoking experience than that's also helping. If you look at it on the last decade, we've only been down about 10% of demand as we sort of put all these factors together.
We uniquely at Eastman also have the benefit of the textile growth, providing stability, and margins to our business. On side there's also a lot that's changed in the last decade. You can see about 15% of capacity has been shut down and repurposed.
That's assets that have been retired, the impacts that Russia's had on capacity, in their country, as well as us repurposing some of our assets towards the textiles growth. The move to like the slim cigarettes, especially in China, as well as acetate tow has actually had a significant impact on the effective capacity. It's much more difficult to make those products, you lose a lot of capacity.
At least 10, maybe 15% of capacity is lost with that. The industry has gone, when you put those factors together, to being pretty high in capacity realization, where the conversations and the focus with our customers is how we are a reliable, secure supplier for their needs. You have to remember the value of tow in the final price of a cigarette is a very small %.
Making sure they have it to sell their product at very high margins is incredibly important to them. That's now the focus. That's allowed get quite a bit of price up last year, so already good momentum. Seeing some of the benefits already in the Q4 of last year that indicate the trajectory we're on for this year. We do view these factors as sustainable, and earnings quite a bit. I would say this year is going to be at least $275 million when you put all those factors together.
The other thing that it does is gives us a much more solid base for our overall cellulose stream and very strong cash flow to support the investments we're making in the circular economy, not just the polyester side, but we have a huge number of opportunities on the cellulosic side with our recycling capability to take plastic waste into that product also being biodegradable, is allowing us to realize a lot of growth in our Naia textiles.
We told you a lot about, you're going to hear a lot more this year around the Aventa for food service that has a huge market opportunity to replace polystyrene and the microbeads. The is shifting to being pretty attractive and sort of, when you put it all together, growth business.
Just on cash flow, you mentioned an increase to $1.4 billion this year due to a number of actions you're taking. Can you just unpack those actions you're taking and specifically working capital re-release this year?
David, good morning. This is Willie. I would highlight, to your point, basically in 2022, of course, the inflationary pressures consumed another roughly $300 million in working capital.
As we look at 2023, we see, I'll call it an absence of that inflationary pressure, as well as we optimize the inventory for the new demand think there's at least $300 million on that front that we'll benefit from on a year-over-year basis. Also, as you think earnings i would say you need to look at higher cash earnings year-over-year as we normalize for the pension, and also as you normalize for the variable comp coming back to normal.
Usat $1.4 or above, and higher taxes will bring us back down to the $1.4 level. That's a high-level bridge for you.
Thank you very much.
Our next question today comes from Alek Yefremov with KeyBanc Capital Markets. Please go ahead, Aleksey.
Thanks. Good morning, everyone. The price of virgin plastic has been very volatile lately. Has the interest in recycled content that you're negotiating changed at all, given lower, virgin plastic prices and, perhaps weaker demand?
Good question. We haven't seen any real change in people's interest when it comes to recycled content. If you it the brands have set out very aggressive goals of in 2025 and 2030, and the pressure out there for why they set those goals is just increasing, not decreasing when it comes to plastic waste. Consumers are very sensitive to this topic. There's obviously a lot of environmental NGOs putting a lot of pressure on this. Politicians both in Europe and in down on sustainability, climate impact, plastic waste in the policies that they're putting forward.
In extensive policy around plastic waste reduction that's was passed a couple of years ago, and the rules are being implemented now that requires you to have 30% recycled content in your packages if put them on the shelf and 25 in taxes for whatever doesn't have recycled content in it.
There economic drivers in Europe that are driving brands to be committed to that. u.s. the ngo pressure, the social media pressure on brands is pretty high, and you now have at least five passing some version of legislation that's driving change like what's going on in Europe, and some of those are quite big states like California.
The policy pressure and almost requirements to do it are there versus pay a tax. From a brand, it's easier to be sustainable than pay a tax from a choice point of view. The brands have these commitments. The other challenge is the mechanical industry is not remotely capable of supplying the recycled content that's needed by this 2025 timeframe back into food grade.
A lot of material gets recycled down into other applications like textiles and park benches, et cetera. But to get it back to food grade at that quality, mechanical recycling just can't meet these goals. The need for our capability is very much there. The brand engagement is very strong.
We've seen tremendous success already on the specialty front, as we've shared with you, with the 1,000 opportunities that we're pursuing with customers around our first plant here in Kingsport. On the PET side, like the PepsiCo contract that that an essential part of actually solving this crisis. The other thing I would note, though, is a drop in demand in short term.
Thanks, Mark.
Yeah, I just forgot to mention one thing. On the AFP, if you're looking at short-term demand and it's dropping, that's actually not about packaging. It's the carpet people and the textile people, having such low demand. They were also buying clear bottles, and they're not buying those clear bottles anymore, for their feedstock. That's why short-term demand is coming off is purely what's going on in the durables and Building and Construction sector. It has nothing to do with packaging.
Just follow up on advanced materials, Mark. Do you need raw materials to come down from where they are today to get to of be meaningfully up versus 2021? Or are you assuming sort of current spot raw material prices prevail for the rest of the year?
Yeah. On the spread assumption that we've got and how advanced materials improves, we're we don't have another inflation crisis like we did last year, right? Again, the PVB prices were extraordinarily high because the VAM producers, half of them in the U.S., were unable to operate for \we had prices for some periods of the spring and the summer were double. Because of that extreme market tightness. We had to buy a lot of very high-priced material from the spot market Asia to continue to supply our customers.
Getting rid of all tightness which is where sort of VAM and PVB prices have now gone, to some degree, I think there's still more coming down, but we're just using where we are today, for this quarter in how we project spread improvement versus last year. Same with PX. We're not assuming a dramatic improvement relative to where PX is now. You could look at 6 million tons of PX capacity coming online this quarter in China, and PX prices could get lower, but that would be upside. We're not banking on that, in our outlook. We are assuming energy costs get lower, and as I said, we're using the forward curve on natural gas for that. That's what's in the sort of outlook we're giving you for this base case.
Could things be higher? Sure. requirea pretty significant move up in oil from what the sort of $80-$90 range we're in. I think we feel good about this base case given sort of the world that we're in and the macroeconomic challenges that we face right now.
Thanks a lot.
Our next question comes from Michael Leithead with Barclays. Please go ahead, Michael.
Great. Thanks. Good morning. First question, just on the circular plastic build-out, a bit of inflation so far, and you still need to break ground on the second and third facility. Can you just talk about what you're doing today to help make sure we don't get further CapEx creep here over, say, the next year or so?
Sure. There's a lot that doing to manage a difficult capital construction environment last year, for the Kingsport plant and have done a great job those costs under control. A little frustrated by the challenges in getting craft labor to plant sort of completed here. The cost control is working well. We're confident we'll get this plant up and running early summer. When it comes to the next two projects, there are a couple of things we're doing. One is, some of the commentary we provided in our prepared remarks about how we're building these plants.
We had a design for building these plants where we were always going to start out with 100 KMT of capacity, but designing them upfront to expand to bigger when you added on the second phase. We've switched to taking a more standardized approach to sort of say, "Look, we're going to build identically what we're building here in Kingsport, in France, and in this second U.S. project with PepsiCo." A very standardized approach to leverage all the engineering, procurement, construction approach to sort of build a replica of what we're doing here in a very efficient manner. That's one way we're going to help to keep the CapEx costs down.
To be clear, we're still spending capital at the site to make sure the infrastructure is in place for what we will do is double the capacity at each of these sites over time, after we get the first modules up, if you actually sort of expanding what we think we can deliver between 2030 doubling it versus going 50%, but we're taking a more standardized approach. This also allows us to take a lot of insights we have around how to improve the technology on energy efficiency, and feedstock robustness into phase in this more modular approach. There's a variety of benefits.
The other thing we haven't really factored into our capital is a slowing should create some deflation in the, in the construction industry. We're already seeing it in the price of steel and pipes and things like that. Materials are going to get cheaper. I don't think the cost per labor hours are going to go down, but think e're going to have more availability of resources, higher quality resources, so productivity will improve and equipment will probably come off in price. That will help also keep control on the CapEx numbers.
Great. Thank you for that detail. Second, just on fibers and the new contract there. If I remember, most of your tow business was moved to long-term contracts a few years ago. Is this new pricing just reflective of a portion of your current business, so we'll see further resets over the next two years, or is this a big reset for almost all of your business here today into 2023?
It's a big reset for most of our business. About two-thirds of our business is on contract. A lot of that is multi-year. Some of it is annual. And even with what is agreements when it comes to volume on an just the nature of when all these contracts started to turn over happened to be last year into this year. That gave us the opportunity to have these negotiations and increase these prices. That's why you're all happen now as opposed to a year ago when the market was already started getting tight, but we didn't have the contractual flexibility to make these changes until now.
Great. Thank you.
Our next question today comes from Vincent Andrews with Barclays. Sorry, Vincent Andrews with Morgan Stanley. Please go ahead, Vincent.
Okay. Thank you. Good morning, everyone. Mark, could you talk a little bit more about, I guess two things. One, I was struck by the consumer durables comment in Advanced Materials where your volume was down 40%. That just seems like an enormous number. Could you just talk a little bit more about how that's actually impacting the Advanced Materials business and what the sort of cadence of improvement is going to be? Also, could you just sort of detail a little bit your assumptions about the auto business for 23? I think I read that you've got Expectations for a sequential decline from 4Q to 1Q and some modest growth overall in 23.
Is there anything changing about the customer mix of your products for 23 in terms of the cars they're building and the tech that's in them or anything like that? Just given it seems like the automakers are starting to focus on different things in a more recessionary environment.
Sure. Both very relevant, important questions for us. The consumer durable business is incredibly important markets where we sell our Triacetin at very high margins and have had tremendous growth over the last decade. What I can tell you, we've been doing a very deep dive on what's going on in the Q4, as you would expect. It's entirely market driven. When you look at some of what's going on in the specific parts of the market we're in, which appliances housewares, electronics, that part of just been declining really for quite a long time, right? The underlying market started declining in the Q2 of last year modestly.
As people versus buying a lot of durable goods, you saw that in the announcements from Walmart and Target, if you go back to May. What really fully appreciate is much overstocking the retail sector was doing in ordering from everyone who could supply them because they were so short of material, and then suddenly it all showed up, and they had a lot more inventory to get out. With inflation high the consumer durable sector is the first thing people stop buying. You can see that in the semiconductor data. You can see that electronics where they're dramatically down.
When we look at what's going on in the end market, you can see a lot of evidence at the primary demand level of demand being off, but not nearly as much as us, right? The retail sales data will show our direct end markets might be off 10%, 15%, and we're off 40%. The rest of that is by definition, destocking. That's because of these retail inventory channels that are so overstuffed, and it just took a while to get that in momentum to try and production through the it's a challenge and it's continuing into the Q1. We expect it to be equally challenging this quarter as the fourth. point it's going to end.
From what we can see so far, we think we will get this mostly by the end of this Q1. You've got a big step demand when the destocking is over lower demand than what is normal, but still a lot better than 40% down. That's part of the step up in earnings for Advanced Materials as you move into the Q2. On the auto demand we're being, I think conservative, probably a little bit more conservative than what the consultants would say about demand being slightly down in the Q1 and not improving much for the year.
If, if we're wrong about that and more that's a lot of upside because those are very high value markets that we serve in our earnings. The shift in the market, to get to your question, Vince, is really important. That shift is very favorable to us. We've about 10% of our sales going into EVs at very high margins. You have to remember that each EV is about 3.5 times more value for us than an ICE car. There's a lot more glass in an EV car and a lot more functionality they're putting in it, from acoustics to solar rejection to heads up display, et cetera. The value capture there is tremendous on a mixed lift basis.
The EV trend, and we're aligned with the top players on this, with our products, significant opportunity. i would also say heads up display in general, not just in EVs, but all cars have a lot of growth momentum. It was a big mix up lift last year and even a down market. We think that trend is going to continue and accelerate into this year as they resolve the semiconductors. There's a lot in the HUD. There's a lot of times if you were trying to buy a car last year, they wouldn't let you order the HUD because of semiconductor limitations. That's going to resolve. We see market picking up. I'd also note that that's in interlayers.
The paint protection business and the performance films business is doing fantastic. Very strong growth, very high margins. We got a lot of mix uplift relative to the underlying market and auto that helped us offset some of the challenges last year and certainly will be a significant lever versus last year into this year. Thanks so much.
Our next question comes from Jeffrey Zekauskas with JP Morgan. Please go ahead, Jeff.
Thanks very much. Of the $200 million in cost savings, how does it split between SG&A and cost of goods sold?
Good morning, Jeff. Thanks for the question. major pillars within this. We've highlighted roughly $125 million of this will be taking from our operations, which would include manufacturing and supply chain. Seventy-five million, I'll call it more in the non-operations, which would be SG&A and primarily. I'll break it down a little bit for you. On the $125 million, what gives us confidence is we expect more efficient operations as we run at lower rates due to moderating demand. As you think about the supply chains, as well as our planned and unplanned schedule last year, we expect a significant improvement.
I also think we've demonstrated, even back to the COVID environment, that we also leverage a pretty variable cost structure when it comes to leveraging overtime contractors. We're already taking the actions at the end of the year, starting in the Q1, to change that cost structure to the current demand levels. We're very focused on operating at the most efficient level from an operations standpoint as we assess the demand environment that Mark has highlighted here. On the supply chain and optimization we see $30 million-$50 million in that space as you think about us having to air freight, use inefficient modes, on a year-over-year basis. A substantial increase on that front.
As you saw in the prepared materials, we expect to have roughly $25 million lower we're also looking at our asset footprint. As you saw some restructuring charges there as we look on a go-forward basis. That's on the manufacturing front. On the non-operations, highlight we've already, I'll call it reduced discretionary, and we're starting that here in Q1. As you think about external spend versus our workforce reduction, that's about 50/50 from a cost impact on a year-over-year basis.
Okay. These are net reductions. Does it mean that SG&A should go down $75 million all in in 2023, exclusive of the $110 million lift in pension expense? Can you explain what the event was that caused the $110 million lift in pension expense?
Okay. Let me break that into a couple of parts for you, Jeff. On the pension, I'll hit that first. That will not impact SG&A or manufacturing. It's separate on our income statement within the EBIT. There's two drivers as you think about pension, and they're equal. The pension interest to cost, we had lower discount rates. You can think about 200 basis points on the interest cost in 2022. That will increase to over 500 basis points, so a 300 basis point change on the interest cost. Our assets are lower year-over-year. As you think about the market, basically being down about 20% assumed return of about 6%.
That's about $50 million each is what I would roughly say there. On the SG&A question, our variable cost will be normalizing, so that will be a headwind on a year-over-year basis that we expect that to be substantially offset by the $75 million.
Jeff, one way to think about sort of the waterfall, across the businesses and the is the cost reduction actions, are sort of equal to offsetting both the pension cost, the return to variable comp, and inflation, right? We put all that sort of together. So sort of fixed cost structure, if you will, is flat. The fibers improvement offsets the normalization in CI. You have to have a point of view that the two specialty businesses are able to deliver, earnings growth over the annualized FX headwind for this year. That's another way to sort of think about how we get of flat eps, is those specialty businesses have to offset basically inflation this year and growth relative to last year.
We've given you waterfall and sort of where that growth comes from.
Is the pension expense cash or non-cash?
It is non-cash, so there's no impact on our cash flow.
Yep.
That's why we built the guidance the way we did, to talk about the growing earnings of the segments.
Thank you.
Our next question today comes from Frank Mitsch with Fermium Research. Please go ahead.
Yes. Good morning, Willie, I'll give you a shout later on and talk about how Fermium can help on your pension plan asset returns. Mark, you mentioned in the prepared remarks that you're going to keep the cracker down through the Q1. Can you talk about some of the factors and the outlook that you're seeing on the CI side of things and when it should or should we expect that the cracker will come back up in 2Q?
Yeah. Our expectation is the cracker starts to come back up the anyone can do the math on sort of cracking spreads right now last year. Remember, our crackers are a bit different, where they're highly oriented towards propane versus ethane, and we're trying to make as much propylene as we can and as little ethylene can with the investments in switching into RGP, which we're doing as much as we can, because the ethylene market is very economically challenged. We're basically a cash cost on bulk ethylene.
As the propylene markets are starting to improve, you can sort of see that through the, spreads the crackers are recovering. As we go through this quarter and that feeds into that is likely to continue or hold, and we bring the cracker demand right now continues to be challenged, so we don't really need as much of the output, which is why it's easy to sort of make this decision at the moment, from both a demand and a cracker spread point of view. We expect demand to get better in the Q2 as well as the spreads to continue to sort of stabilize at these better margins. That's sort of how we're looking at it at this stage.
You have to remember that propylene prices are well below any sort of historical norm to oil, right? They're very depressed. If you go run that analysis, it's pretty extraordinary. We're really just trying to get back to a more normal relationship to the price of oil on propylene.
Terrific. Thank you. If I can ask about the second methanolysis unit in the U.S. You indicated in the remarks that you've made progress on permitting, but you haven't selected a location as of yet. Can you just talk about how that process plays out? I mean, I don't doubt that welcome a methanolysis unit in their locations. Can you talk about a little more color there?
Sure. First of all, we're to have this relationship with PepsiCo that baseloads this facility and gives us the confidence to move quickly on this project. We are looking at multiple sites, as you might imagine. We're looking at existing sites we own and whether we can leverage all that brownfield and cost down in Texas. We're also looking at some other brownfield sites in some other states that could be attractive.
evaluating the capital efficiency of each of these feedstock benefits of each site, as well as the incentives that different states are willing to promote investing in the circular economy and playing a role in solving this environmental challenge. The engagement, frankly, across the been really high. As you said, I all quite interested and excited to sort of participate in this kind of a green project. We haven't finalized that. I'm hoping within the first half of this year, we'll have that finalized and then start moving very quickly, on the sort of not just the incentives, but the permitting and the site development and everything else.
The advantage of our new sort of standardized approach in building these plants, so allows us to start the engineering now without knowing what the site's we're already spooling up engineering for this site and is what we call inside the battery limits, the actual operating units of this plant. The sort of infrastructure will obviously be dependent on which site we finally select.
Very helpful. Thank you.
You bet.
The next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead, Kevin.
Yes, good morning. A couple of questions on your capital deployment. In the prepared remarks last night, Mark, I think you methanolysis investments in the aggregate would cost $2.25 billion, which is up about 10% relative to your prior projections. Can about how that flows through? Is it going ratable over the next 5 years or some other shape? And then related to that, are your returns still the same? In other words, are you able to perhaps extract a larger premium to offset the higher project costs?
I guess more willie do you think CapEx will run million over the next several years? Or again, is there a different shape to that as you execute on these investments? Thanks very much.
Thanks.
Kevin, thanks for the question. Yes, highlight here in 2022, we've already invested approximately $300 million as we think about our circular investments that we highlighted in the prepared comments. As about approaching $2 billion next 3 to 4 years, in 2022 or 2023, we're increasing our CapEx budget to $700 million-$800 million. That includes a step up on a year-over-year basis. Yes, as you think about a normal, I'll call it, large capital curve, it will definitely be over $800 million through that time horizon and peak around $1 billion-$1.2 billion.
Okay. Mark-
As I think about capital allocation.
Sorry, go ahead. If you're talking about the returns, we didn't answer that question.
Yeah, I was just going to follow up on that. I think in the past you've talked about 12% plus.
On the return front, to be clear, what we announced in the prepared remarks today around the design of the facilities is the same as what we had in our economics back in 2021 at innovation phase. The first phase was always going to be around this 110,000 tons of waste being processed. The $40 million-$50 million EBITDA has not changed, and we confident as we're actually securing prices with contracts and securing feedstock, both its availability as well as what it's going to cost supporting those economics. The capital costs being a little bit higher than what we about that sort of 10% increase that we discussed in our prepared remarks don't affect the returns.
We said our returns were above 12% for the second and third project, above 15 for the first project. We said greater than, we have room to absorb some of because you always expect them to happen, frankly, when you're doing these kind of capital construction make sure we have robust plans for the economics to deliver returns.
Okay. Very helpful. Thank you.
Our next question comes from Matthew DeYoe with Bank of America Merrill Lynch. Please go ahead, Matthew.
Morning. Thank you.
Morning.
I might have missed this, but if we're looking at the Kingsport methanolysis unit, can we just walk through the progression from cost how much commissioning cost is in 2023 numbers? What do we think for how that moves to profit in 2024 and getting back to like full run rate earnings on that facility?
Yes. I would highlight, as you think about the startup, we're talking about roughly $35 million, including I'll call it the depreciation as it starts up in the back half of the year. As we think about project you should be getting to a more normalized run rate of growth in 2024. By the end of 2025, we would expect to be close to the full run rate of the plants, which we've highlighted could approach roughly $150 million per project.
All right. On that end, would that mean that 2024 is just neutral, or would you see EBITDA? I guess just a question, you don't really talk much about buyback for next year, and I know CapEx is going up, but it still seems like maybe you'd have $200 million-$250 million of after dividend cash flow. Do we assume that goes to buyback or, I mean, your leverage is fine. Can you do in excess of that?
Yes. Definitely we expect 2024 to be accretive from our Kingsport circular methanolysis project. We're confident in the progress. You'll see revenue here in the back half of 2023. That turns into earnings and growth in 2024 and approaching those run rates as we expect these plants, given I'll call it the market excitement that's around that and the 1,000 leads that we're already working on. As you think about.
Capital
On the capital front versus the share buybacks. Yes, we're on the capital allocation, our priorities remain the same. We increase the dividend here in the Q4 for 2023. Also, as we think about $700 million-$800 million of CapEx, and we're looking at prioritization of bolt-ons versus share repurchases. We're going to always fully leverage our cash flow to give shareholders return. There is that capacity, and we won't let the cash to use.
We always have this debate around best cash on a principal basis. When we look at the circular platform, the capital we're deploying there has substantially better returns and valuation potential for the company than buying back stock today. We think that's the appropriate way to deploy the capital versus buybacks on that front.
Sure. That's not contemplated in the earnings guidance, right? Is it?
What?
Any accretion from like a deal or a buyback or anything like that? That would just be upside.
Sure. Well, highlight obviously we executed $1 billion of share buybacks in 2022, both from our operating cash flow and the divestiture proceeds. We will have, I'll call it EPS accretion as a result of the full year benefit from that. Right now, that's primarily offset by higher interest expense.
Understood. Thank you.
Our next question comes from Michael Sison with Wells Fargo. Please go ahead, Mike.
Hey, good morning, guys. Mark, just one you spent a lot of time over the last several years, transforming the portfolio specialty assets. when you think about the performance in the second half, kind of the start q1 what can you point out to folks that demonstrate that maybe the performance has these special characteristics or maybe it's more the bounce back in the second half? Clearly your multiple isn't where it should be if that's the case. Just curious what your thoughts on that.
Sure. First of all, we think we've made tremendous progress in improving our portfolio over the years. We've obviously divested a lot of commodity businesses, acquired some businesses in the past, if you go that sort of 2011, 2012 time frame as well, through the acquisitions to 2014 and the divestitures more recently and optimizing portfolios. I think we have a very good track record and portfolio discipline. I think last year, as you look at it, was a uniquely challenging year for two reasons that you have to sort of judging a history and a future of this portfolio. Obviously the Q4, turns out, was the entirety of the earnings decline from a volume and mix point of view.
We were actually flat in volume and mix, leading up to the Q4, and the entirety of the of the volume mix decline was driven there. Because of some of the very unique operational challenges we had last year. Those limited our ability to deliver growth, especially in advanced materials. Those two factors sort of was on track at the beginning of January before the Ukrainian war and rapid inflation and everything else, was going to be a really impressive year of earnings growth. I wouldn't sort of over torque on trying to interpret too much into 2022.
Our challenge and our proof point will be if we deliver this performance just sort of suggested in our today in this kind of challenging economic environment, that's a really strong endorsement about the quality and strength of the manage through these challenges. question we create a lot of value in markets that have economic sensitivity, whether it's BNT or durables auto all last year was at 80% below 2019 is not a good year for auto demand. We managed still do reasonably well in that business on the volume mix side.
I think we feel about the quality of the portfolio, from a volume mix point of view and its ability to deliver innovation and growth through of platforms, not just the big circular platform we've been cellulosic has probably $200 million upside when we go forward over the next, three, four years. And then the interlayers business, as I discussed earlier, has a tremendous amount of growth. PPF is great. Coatings and Inks has a lot of sustainable introductions to the marketplace, semiconductor leverage we have and hydroquinone sales. Growth innovation is very much there, as a specialty business should have, to deliver good results.
Margin is on the spread side, quite good, when you look at the portfolio and how it combines deliver steady spreads at the favorable margin good commercial discipline. What you really got last year is a manufacturing recession in 1 quarter and a headwind for the year, and then some limitations on how much growth have with some one-off operational issues. I don't think there's any lack of differentiation in this portfolio or quality of it.
Think as we get through this year delivering pretty significant growth next year, assuming we put this recession behind us, be very attractive for others.
Great. Thank you.
The next question comes from John Roberts with Credit Suisse. Please go ahead.
thank you. You had an ethylene propylene flex project for Longview. Has that been delayed? If you had that in place, would you have still shut down the cracker?
We're not yet constructing that project. We are completing the licensing and the early engineering work around being able to pull the trigger on that project as soon as we feel we have a lot of re-requests for capital across our portfolio. Back to the valuation discussion I just commented on. It's not just circular that has a lot of capital opportunities for very attractive ROIs. Our whole specialty portfolio has those opportunities while certainly the current economic challenges are don't see lack of growth opportunities across our portfolio on the those get priority call on capital relative to the ethylene to propylene investment.
It's one that we will for sure do when it's at the right time, but we're going to have to be thoughtful about how we manage our overall CapEx budget. To answer your question, if E to P have left this cracker down. Remember, we had it down for maintenance. We just didn't bring it back up after we completed the planned maintenance. We would certainly have been down in it for the maintenance in Q4, but would have been switching to E to P right now.
Thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Good morning. Two quick ones. First, on the renewables capacity, will that inventory build show up on your P&L, or will it be separate? Can you give a sense for the magnitude? Secondly, on the end market comments that you're hearing from customers, I guess the It looks from your presentation as if the overall theme is the an industrial recession driven by destocking to recalibrate, but underlying demand is pretty solid, pretty stable outside the construction markets. How confident are your customers on that? Do w hen do you think they need to How much warning do you think you would have if they did need to recalibrate?
I'll let Willie take the first question, I'll take the second.
Sure thing, Laurence. On the Kingsport methanolysis project, obviously we've built out a supply chain. We already have the key raw materials and recycled materials as part of our inventory here at year-end as we're preparing for startup next year. You can think about there's no significant impact of transitioning from fossil fuel feedstocks to recycled content as we go from 2022 to 2023. As we think about our projects, second U.S. project and the project in France, again, we could have different operating models in the regions, but those are not significant working capital builds.
When it comes to your question you really need to think about end market exposure in 3 buckets, right? The one that's most impacted by this sort of manufacturing recession is durables and the 40% down in durables is, as we earlier 30% down in Building and Construction in the Q4 . those markets are being very that destocking relative to data is pretty significant relative to end market demand, still quite weak. There's that. We do think it's destocking by definition has to end at some point.
It's hard to say exactly when, but we've told you assuming and you can factor believe into the models. When it auto the auto demand's already at recession levels all last year, right? That second bucket, which is a huge driver of profit for the industry as well eastman probably has limited downside and more upside as we go through this year, even though we are already in an economically challenged area where consumers have discretionary choices on spend money. We do know sort of be stable and sort of modestly improve.
Within that mix, I should have earlier we are levered to the luxury market with all of our products, 'cause they're very high-value products that we're selling. That part of the market is likely has held up better last year and certainly going to, I think, hold up better this year in sort of these economically sort of expensive times when it comes to interest rates. The third bucket, which is about half of our revenue, is what we call our stable markets. This is medical, Consumables, ag, food, feed, all these sort of end markets or water treatment, that are very stable.
We saw quite a bit of destocking, even in these stable markets in the Q4 across the entire company, as people were trying to get rid of high-cost inventory, generate cash for themselves. That was a big part of too less than a but happening everywhere, as part of the challenge. see that destocking playing out because their markets are stable, there's not a lot of destocking they can actually do. That starts to really help stabilize as we go through this second the overall revenue base across the company.
Thank you.
Let's make the next question the last one, please.
Of course. Our final question today comes from the line of P.J. Juvekar with Citi. Please go ahead.
Yes. Hi, good morning. Thank you. Thanks for taking my question. Mark, on methanolysis, you mentioned your CapEx is up 10%, but you don't expect a huge change in the returns you expect. Are you passing on that increased cost to also the plastics are cyclical, get steady returns there, are your customers willing to take the cyclicality of the plastics and volatility so that you can have steady margins?
Yeah. I think from a spread point of view, the way we're sort of contracting into the PET market is with our, what we call our circular contracting provide steady spreads between the cost of feedstock and energy and the price of materials. From a spread Airgas company kind of model. Demand, of course, is still subject to end we when it comes to sort of the volume, there's be some variability. We're going into packaging, into Consumables, so the variability in that volume on basis year-over-year is pretty stable, right?
I don't have a lot of volume when it comes to the specialty side of platform we're not changing market sort of structure in both demand or how we do pricing. We're just adding recycled content as another dimension of differentiation to Tritan and all the other copolymers into cosmetics and everything else we're selling. We'll still be sensitive to demand changes when it comes to the circular platform. we currently realize in these products and growing total volume quite fast, right? One of the reasons we win the marketplace is high value growth driving mix upgrade against fixed cost leverage, right?
That is very true in good times, this will lead to much more accelerated growth from these kind of products to give you fixed cost faced down times like the last Q4 and the Q1 of this year, where that mix is a headwind. When at the upside in our stock as you get through this, not just for circular, but for just market recovery, there's a huge mix upside for our company as you go into the back half of this 2024 when you think recovery's coming, which we demonstrated coming out of 2020.
mark the airgas or the industrial gas model hasn't really worked what gives you confidence that this will work this time? Is it because this is such a specialty product and the consumers want it or the customers want it, that you can have that kind of contract structure?
Yeah. As especially it's just our current model, but when it comes to the PET, that's where the industrial gas model concept applies. Yeah, it's a unique offering, right? We're the only large-scale company on the planet, especially in North America and Europe, who's offering recycled content from hard to recycle plastics. When you get to the food-grade industry, mechanical can't remotely meet their needs, and someone has to plug that gap if they're going to hit their targets, and we are way ahead of our competition in being able to provide that service. That's exactly what an Airgas company does too, is provide a convert a product into a highly needed input.
That's sort of where we're at today, and that's our confidence as we go forward into these three projects. That's why we'll continue to maintain this dis-discipline of not building these kind of facilities unless we get these kind of contracts, because I'm not into as you said, PJ, the traditional plastics high margin volatility. We just won't do that.
Okay. Thanks again for joining us today. We really appreciate it. I hope you have a great day.
This concludes today's call. Thank you for your participation. You may now disconnect.