Q1 2020 Earnings Call

May 1, 2020

Good day, everyone and welcome to the Eastman Chemical first quarter 2020 Conference call Today's conference is being recorded.

This call is being broadcast live on the Eastmans website, www Dot Eastman Dot com.

We will now turn the call it over to Mr., Greg Riddle of Easement Company Cameco Investor Relations. Please go ahead Sir.

Okay. Thanks, Moly and good morning, everyone and thanks for joining us.

On the call with me today are more cost Us Board chair and CEO willing to claim senior Vice President CFO.

And yet grow manager Investor Relations.

It takes you missed it yesterday after market close in addition to our first quarter 2020 financial result news release and that you see a filing.

We posted slides and related prepared comment.

The Investor section of our website www dot he spent dot com.

This is new for us and I hope it's helpful to you.

Now before we begin cover two item.

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 or will be detailed in the company's first quarter <unk> financial results news release.

During this call in the proceedings flies in prepared remarks.

<unk> filings with the screen straight commission, including the form 10-K filed for full year 2019, and the form 10-Q to be filed for first quarter 2020.

Second earnings referenced in his presentation exclude certain non core an unusual items and using adjusted effective tax rate using the forecasted tax rate for the full year.

Reconciliations to the most directly comparable GAAP financial measures another associated disclosures, including a description of the excluded in adjusted items are available in the first quarter financial results news release, which can be found on our website.

With that I'll turn the call over to Mark.

Thanks, Greg.

Well, we turn it over to your questions I want to take a few minutes to make some comments.

We all recognize that a road is facing unprecedented challenges right now Cobiz 19 is unlike anything we've ever seen before.

Well there was affected by the pandemic Oh I want to recognize how difficult is must be for what you're experiencing.

So many are helping to in this difficult time, and health care community or first responders and government and local communities.

And to them and one express my gratitude for helping keep us.

As importantly, when it makes the men and women at least.

It's been said that characters revealed through diversity and he spent team has demonstrated its character and arisen every challenge we face.

Come together and tremendous ways to keep everyone say.

While keeping our operations going.

I, particularly want to thank our operators are mechanics are electricians and their families who kept her plants running I get her products outdoor customers every day.

And to the many Eastman employees are working from home for on site.

Q4 continues supporter customers and keeping business going.

So do you my colleagues at easement.

Thank you for your courage.

Ingenuity.

And your dedication.

You are truly making incredible difference in a material way.

Turning to Q1.

Strong first quarter and earnings even more impressive for free capital generation.

This quarter demonstrates what he's been can do when we have a day sunlight between the trade we're starting to moderate.

Encoded starting domestically.

Given all the uncertainty related to cover 19 is extremely difficult to predict financial results for 2020.

So we are withdrawing our guidance.

We did see some impact in the first quarter as we attribute the $20 million to $30 million EBIT decline to the impact of the pandemic.

Our diverse end markets mitigate some of this well, we saw substantial impact and transportation and textiles.

We also saw stability or a number of or other markets.

As we look forward, we expect to see increasing challenges and transportation textiles and energy markets.

We also see a number of mark is providing stability such as consumables medical personal care ANAC.

And there are markets, where we expect in mixed impact such as building construction consumer durables and industrial chemicals.

No. It was can know what was actually happen with how we attempt to restart these cosby's across the globe.

We can take some insight hope from the recovery, we're seeing in China.

We were far from having inside North American Europe will restart.

We're able to continue to lead from a position of strength, because our innovation driven growth model and our operational discipline.

The benefits, especially in this uncertain time I've never been clear.

The long track record of transforming our portfolio towards specialties.

Within this portfolio, we've built outstanding innovation capability as well as a decisive operational execution capability.

Houston has industry, leading cash flow, which we are taking aggressive actions to sustain in this current environment.

Strong balance sheet and significant sources of liquidity.

In addition, weve proven track record in or specialty businesses and driving growth above in markets with their innovation driven growth model.

That said in this incredibly uncertain time, we're focused on the actions, we can control and are exceptionally well positioned to whether this environment.

We are realizing stability from a diverse end markets and leveraging our strong customer engagement.

We're taking significant cost actions adjusting operations to the current demand environment.

And then secondly, reducing discretionary spend and deferring some turnaround of assets.

We're expecting strong free cash flow this year with working capital expected to be a source greater than $250 million beyond previous expectations.

We reduced our expectations with capital expenditures.

By approximately 100 million dollar to a range of 325 to 375 million.

Finally, we will maintain or disciplined approach to capital allocation.

Yes on strong strong dividend.

And the significant debt repayment program, which we now expect to be substantially greater than $400 million for the year.

All in we made great progress strengthening the company and you can see the evidenced in the first quarter earnings and cash flow.

With that really and I are happy to take your questions.

Operator, we're now ready for the first question.

Thank you if you wish to ask a telephone question. Please signaled by pressing star one on your keypad and piece and check your mute function is turned off.

Your first question will come from Vincent Andrews of Morgan Stanley. Please go ahead. Your line is open.

[laughter] excuse me, thank you and good morning, everyone.

It sounds well.

I didn't see your prepared or I didn't see your prepared remarks, but I'm happy I'm happy you're doing them and I look forward to reading them in the future to just I did just given the but with that said Mark I'm wondering if you can just talk a little bit I saw the slides you talked about you know April being down 15% versus March and it sounds like March was worse than the other.

Two months of the first quarter, but maybe you could just contextualize April.

How much is down versus the overall first quarter.

Sure. So as we said in the slide we really try to provide some perspective across the market since are grouped into three categories Vincent and it's good to hear you and you sound healthy as well.

There are you in about 40% of our markets are quite stable and doing quite well being relatively flat I'm sequentially and you know those markets in the U.S got things like personal care.

Ah consumables, which is a range of things from packaging adhesives to packaging polyesters et cetera.

See a medical pharma parts good.

Nutrition.

And all those markets are going to hold up relatively wellness, then you've got somewhat challenged markets.

Our like building construction consumer durables.

Like Tronics, just for chemicals, where they're actually still also you know sequentially declining as you can see in April but you know we expect goes to.

Continued to sort of do relatively okay to the more impacted ones and transportation textiles in energy so.

There really are three things that diversity of in markets, such that 40% that gives us a stability in them in the world is incredibly helpful. In this time.

And we would expect that to sort of continue through the quarter. You know the what we called mixed impact or a little bit harder recall I think there's some of that that's holding up well like consumer durables water renovation and training and things like that are allowing us to create a real growth.

So we're seeing stability from not just markets, but innovation in some of those applications architectural coatings is holding up really well as well as or architectural interlayers, but.

Reasonable expect somebody that is going to moderate has either existing projects might be completed et cetera, but through Q2, I think it's going to be okay. So the question is what happens longer term to some you know new starts and housing.

And then the real challenge of courses in you know transportation, which I think is extremely well documented where you've got a.

Auto plants tire plant shutdown all over the world Fortunately trying to coming back a.

We track every tire plant every auto OEM every you know window plant down to the model in her mapping all that out as you know they're all shut down now. The question is one of their going start back up.

And Ah you know, we see that recovery and that sequential improvement in China.

Already but obviously U.S. and Europe is still the question Mark So we've been conservative we've assumed that the auto OEM markets going to be a down.

Yeah from OEM production point of view be down 50% for the quarter, which is on the sort of more.

Pessimistic a into the range of the consultants out there and that's really to inform our production inventory strategy as opposed to trying to.

So we can predict earnings at this point given the uncertainty, but so we've been very aggressive and how we manage your plans for that.

And we'll see how would how it recovers so lets say you know april's a good indicator you know quarter.

I think that we can expected to be a bit more challenging in may as you know supply chain like catches up to us with a lot of these plants being shut down and then.

We presume that thing as well or the consultants and things will start back up to some degree and so you'll see some of that benefit in June.

<unk>, Okay answer your question.

Yeah, sorry, just to just to recap it sounds like you're saying you know being down 15% in April sequentially, It's probably about right it'll be a little worse in June in May and a big deal that better in June, but if we think sequentially between two Q1 Q. We can think about your volumes being down I'm, just gonna say, 15% to 20% at that air.

I mean, I think thats arranged to start with that I, just really want to emphasize for everyone. No. One knows what's going to happen here right. I mean, there's just a phenomenal amount of uncertainty.

We don't even know how the U.S. in Europe are going to restart yet.

And you know there's a lot of questions that we have to answer that go with that so.

You know, we can get people back to work in a lot of companies, but it's really pushing on what consumers are gonna do where they're going to go back to restaurants back to their you know more normal life activities travel.

Shop, and retail stores by cars you know, we don't know how the consumer is going to behave coming out of this which will then dictate when auto plant start up when tire plant start up.

You know how is housing going to play out.

When it comes to you know they've got great D., I lie and and and projects that are finishing in construction, but you know how you know I mean, you starts are going to happen.

So there's a lot of Crystal ball gazing, you know I think april's informative and is one third of the corner.

But you know what we're going to use be conservative really focus on cash generation manage what we can control.

And we will give you updates through the quarter as we get more insight.

Okay Fair enough I'll pass along.

Thank you our next question comes from.

Jeff Caucus J.P. Morgan. Please go ahead your line is open.

Hi, Thanks very much.

<unk>.

How did you make so much money and chemical intermediates on a sequential basis.

You are up.

Okay, and you know maybe it was 20 and 20 ish in the fourth quarter and can you talk about the dynamics what are you doing right there.

Well you know we have great commercial team there that does things right every day and how it optimizes every market to place product at the best price possible and optimize our.

Big engines that support, especially businesses don't remember chemical intermediates role is clearing the excess capacity that isn't going into the specialties and Oh, my hats off to that team and doing that it's a dynamic time.

We did have a very strong sequential improvement from Q4 to Q1 and it was really driven by four factors.

It was strong volume growth so we saw.

Strong improvement AG Alkylamines in.

That market had been pretty depressed, there's a lot of stocking going on in the fourth quarter last year.

The AG market came back to life those are high margin products for this segment and so that was quite helpful. But we also saw strong demand a lot of other markets asset yields plasticizers and a few others. So volume was the biggest driver of all of the levers that improved in the second was a lack of shutdowns. So we had a huge shutdown.

Going on in the third and fourth quarter last year law that expenses in the fourth quarter. I'm. So you know we didn't have doubts that was a 20 million dollar benefit and itself from from Q4 to Q1.

The third wasn't improvement in spreads.

We got to spread the back to being.

About where they were in Q1 19, I'm. So that was a bit of an improvement from Q4 somewhat was cracking spreads got better in January and February Unfortunately started compressed a bit in March.

But we got the benefit of that.

And Ah the last part was the a licensing as we told you we had a robust multiyear licensing program that we're driving in our fourth quarter call in January and we got the first installment on one of those licenses in the.

In the.

First quarter I'd say that was a smaller part of the story, but progress there's more of that to come this year. When we complete that license and then we as we said have a portfolio of licenses were looking at doing as we go into the next couple of years. So it was just great success, Jeff on the phone sort of every line of the income statement.

And the assets ran well utilization was good.

How how representative are those operating earnings for the remainder of the year or what are the headwinds or Tailwinds you for C and when you talked about April being down sequentially by 16% for the company as a whole how much was april down year over year.

What people are on a year over year basis, just to take that quick question first was.

Similar to sequential okay.

And regardless to the CIA story, Unfortunately, it's not going to hold up like like it did in Q1, we do see some headwinds as we go into Q2.

And Ah the key components. There one is volume different story, I guess continue to hold up and be really strong.

But with recorded 1919 impact you certainly see market slowing down you know our.

A couple Grammys Dogar do go into end markets or that you know face. These headwinds that we're talking about so they're going to see that demand pressure on multiple markets and.

In the current environment with the oil situation a lot of what we would sort of excess capacity, we would exports to Asia.

After serving through a north American European markets.

It's a two sort of run the assets totaling four those market those export markets aren't as available Asia still isn't come really back to life margins aren't great.

You got to go to the low margin volume, but some of that you know export volume that sort of restricted in this current environment. So volume will be the.

Fortunately reverses or outside of Haggen means as being a bit of a headwind.

Second part is you can run the models and I know you have them, Jeff I'm cracking spreads are a bit more challenged as we go into this quarter.

And so we'll feel a bit of you know headwind from that.

And then we'll you know as we slow down the big engines do the decline in specialty business.

Yeah, we're going to have a asset utilization headwind that occurs crosses the two big complexes in Longview, and Kingsport and you know that higher sort of cost per unit with the slower rates will get impacts the eyes wells, especially so feel good about so you're going to see him a meaningful decline.

With with all those factors as we go into sort of Q2 with this business.

I would note that oil is on a corporate basis neutral to positive, but it will have an impact on ceiling.

Thank you very much.

Our next question comes from Frank Mitsch from Freemium Research. Please go ahead.

Hey, good morning, and Greg Yes, the prepared remarks were helpful. So thank you for that.

As always.

I know size as I was reading the prepared remarks on the cost reduction front, you would outlines a that youre going to save $20 million to $40 million. This year in $100 million over a three year period, that's been accelerated to $150 million. This year can you talk about the buckets that that falls and.

Two how how are you going to to get at the how you can build up to that 150 million dollar cost savings in 2020.

Yes. Thanks. Thanks. Thanks, Frank This is Willy and I'll I'll need on that question. So as you think about Mark's already highlighted how we're changing our operational footprint and becoming focused on cash here and.

In late Q1, and planning to run that way for the rest of the are also Ah that enables us all I'll call it to reduce the level of.

Contractors on site a it also a result and changing the scope of all some of the maintenance et cetera. Additionally, another key loans to that is discretionary spend a week stop travel have reduced consultants and third party services as you think through that.

So those are the key factors also as you think about that we didn't get some of that benefit in Q1 was a small amount all we expect that to increase and a in Q2 to be about a third of 150 million.

And that third in Q2 will probably only partially offset the impact of wall.

Of our bottling plants and reducing the operation right and then the remainder would be in the second half of the.

As I think it really has I think about what do you just said it sounds like a lot of that is more train.

Transitory.

You know at some point you are going to have caught contractors back on site you are going to.

To travel et cetera, So I should we be thinking about this 150 as kind of a [noise].

A 2020.

A reduction versus your previous plan and then that will dissipate in 21 and beyond.

So Frank for the second happening here, we are going to be focused on improving the long term structural cost of the company and we highlighted that or a yearend conference call with a 20 to 40, we're looking to accelerate that.

And transform all the operational as well as our all.

Functional footprint for the long term, but you're correct in the near term we have pivoted the actions on the tempering fraud and made waters normally done fixed cost unbearable at some of that will come back, but you have to remember we have all strong variable margins in our specialty product line.

Across advanced materials, and Asap and they will more than a obviously offset that with the spreads.

Hi, I'm just to get you Frank just just add.

Recognize that in a good portion will come back a it's important to keep in mind, if demand really doesn't come back much. We can extend these savings for longer than what we've currently assumed.

Right through even more difficult time on the flip side I think we're learning a lot about how we can operate and be efficient in this work from home environment and there's different operating modes, we're embedding that into our thinking about how to improve our long term cost structure.

And we're certainly escalating and accelerating what we intended to do on that a 100 million dollar plus program.

I get more of that you know as we go into the back half this year as well as next year. So there's a lot of actions, we're taking to sustain you know or.

Through the second phase of activity.

Our cost keeping I would emphasize there was none of what we're doing is cutting or innovation programs. So we are optimizing for this environment.

We're very focused on cash, but we're also focused on making sure that we have a long term strategy in place as we come out of this.

I have streams create around growth when markets actually come back to life through innovation continue to have that kind of engagement with customers were still actually getting a lot of engagement with customers today.

On innovation, even in this sort of virtual environment. We've had a number of wins you know we've ever recycled tried triton content.

Product that we launched we've already got three wins on that Valjean camel back in a couple other big brands have adopted we're getting wins on our recycling cellulosics or as we speak to the largest ophthalmic manufacturers have seen the power of a half bio content half recycled content product.

For their offerings do you get a wins and Tetra show for can packaging and food.

Where we've got just great chemical resistance and toughness and non and 10 bps. So good news innovation. So live we're still focusing on keeping those programs going but we are very aggressively going after it really kind of cost.

Very interesting that thanks, so much.

Our next question comes from Alex Yefremov of Keybanc. Please go ahead.

Thank you good morning, everyone and I would join everywhere and supporting the prepared remarks.

Question on free cash flow or you have about 400 million dividends.

You said substantially more than 400 million and debt repayments, maybe another 50 million in buybacks. So can we say that kind of the floor for your free cash flow is about 50, and that's really substantially more than eight safety this year.

Hi, So yeah, let me let me answer that question are we we expected it and I want to start a little bit just back on the market comment so.

The obviously demands unpredictable that's why I pulled earnings guidance and we are in the position to sort of understand what happened in April but not know what's coming for the rest of the year.

But we have to make some assumptions and we are modeling scenarios like everyone else is doing a different kinds of recovery out of the second quarter. We do believe the second quarter will be the toughest quarter.

With the complete shutdown of these global economies and and the indication as we see it now that people will start trying to come back to life through this quarter.

Whenever size you know this diversity in markets is a huge help for us to maintain stability to 40%, that's very stable and even 35% that's.

That sort of mixed is providing a lot of stability to offset the challenges we have in that or you know transportation textile side and there's a lot of uncertainty there we do see price stability. So we saw great price stability in the first quarter, we expect priced ability to.

Continue into the second quarter, especially in the specialties. So we're getting some benefits there from raw materials.

And would expect that continue through the year.

And as I said low oil is sort of a neutral to positive event for the overall portfolio. So that's all you know what we know about the markets.

And that in that great uncertainty, what we have to do is focus on what we can't control and so what we can control.

More so there's a lot of our cash generation outside of cash earnings and so.

We're doing everything we can to stay close to our customers make sure we don't lose share keep their innovation going so we when the markets recover we will cover with it.

We've acted really quickly died all of our plants or campaign them are due to utilization. We moved very quickly in March when we saw this was gonna get worse outside of China with Nicole good spread so we really sort of ramp back you know raw material purchases and everything else.

In the plant so that we could take advantage of you know what demand does exist to pull inventory down and we're doing a great job that so.

Working capital $250 million, we think we can release and with all the cost actions. We described $150 million on input you know on that.

On the cost side and about.

40% of that will flow into the second quarter number on that hundred 50.

Reducing capex 100, so lots of levers that we're pulling.

And so when we look at that and run our scenarios obviously the dividend as are our priority we're going to pay that is a great strong dividends been increasing for over a decade.

On the de levering, which is our focus you know we do think we can do substantially more and what that means to us even in a very slow economic recovery.

We believe we can do greater than a billion dollars or free cash flow.

And and obviously, if the recoveries better than that you know, there's there's upside so.

When we see substantial it's it's substantial.

We're going to begin to make a lot of progress in our delevering, but you know people should not be using that to try and reverse engineer earnings you know, it's it's what we're trying to you on cash flow things in the levers that we can pull we completed harder and inventories we need to we can pull harder on costs, if we need to.

But it's it you know it's a cash centric strategy that we're operating right now.

Understood.

Thank you Mark very helpful and just a follow up on a on your margins.

It's unsustainable that your volumes will affect your margins, but in terms of spread between price and raw materials by the end of the year should should we expect that spread to be.

At a healthier level, then, let's say back half of 2019 or even a first quarter unrelated to that if you could update us in your view on the methanol contract headwind this year.

Sure. So I'll take the first for the question I'll, let Willy I answer that the contract question. So on spreads in the specialties, we do expect to improve our spreads in advanced materials are there I'm thrilled to the ones that we have there.

With the two thirds of they appeal as we sort of separate that out for you we expect spreads to improve.

You with a good price stability relative to the raw material declines and so in all those areas I think we see that fibers are very steady spreads for the year.

All that as you know I think a place where we can get some additional cash and earnings benefit.

The one third of if P. I'd say into the tires and he says its going to be more stable spreads, but at the challenge levels. We had in the back half of last year, we don't see it getting you know a lot worse this year relative to the.

Second half a 19, but we don't expect it to get a lot better given or sort of compare dynamics and that spot.

And in chemical intermediates.

As I said you know we've got some challenges there on spreads.

So many important to note about this oil topic is.

Our crackers in the spreads there a little bit different than other companies.

So it's not nearly as challenged at this point as it has it was in the past tend to 16.

You know we had a huge tailwind you know when oil went up and we had stranded gas in the in the U.S., that's led to ethane and propane also be stranded and really cheap.

Do you remember our crackers are propylene centric because that's what we make specialties from that's why they exist.

So we're much more propane based in our crackers and we on top of that we made the our GP investment even further reduce the amount of ethylene produce.

Replacing you know.

Some of the NGL feeds with Pete.

Our GP.

So.

You know that change that dynamic so we're now 70% to 75% propane, 20% to 25% ethane remainder five to 10 is our GP and propane it wasn't stranded anymore right to stranded up through about 16, but they added so much export capacity to export propane. That's now we connected to the oil market.

So propane propylene spreads are a lot more connected and ethylene <unk> ethane.

And our GP is very tightly correlated to PGP. So you know the volatility still is going to be a challenger, but it's not nearly the challenge that we would have faced back in 15 and 16 as an example with is low oil now so we have some spread it's more about competitive intensity than it is about cracking spreads.

That's going to sort of pressure somebody's margins in this compares environment, but you know spread will be in you know challenge and see I, but net when you put it all together you know, we're we're really good shape on spread to sort of be a bit better this year than last year.

Okay, Mark on the methanol from just a follow up quickly as we made the transition as we highlighted in January of we had marked that contract to market. So oh, it actually say, a it's actually a slight.

Tailwind on earnings and a modest headwind on cash overall, but we're exposed to a coal based methanol as well as.

Natural gas and market, so well positioned on the methanol fun.

Thank you we would take our next question from TV typically share of Deutsche Bank. Please go ahead. Your line is open.

Thank you good morning.

Just looking at Q2 thinking about how should think about decremental margins in the specialty businesses given the asset yields actually headwinds he is called out here.

I'm going to really take that one.

Yeah. Thanks, David on the decremental margin front, we've highlighted the fact that.

We've idled plants, we're lowering capacity utilization and that a lot of that is focused on our our transportation textiles, and energy end markets and that that is predominantly and advanced materials and additives and functional products.

As you think about am we've previously talked about how the margins have shown through as the specialty and premium products have grown.

The cost of the fixed cost leverage as as they've been able to grow. So you can expect a little bit of the reverse here in Q2, as we focus on maximizing cash generation.

And reducing cost in this environment.

However, you should expect on the recovery that a as as the demand recovers. So for these businesses that are that it would bounce back.

Little bit of contrast between a and after he is the fact that [noise].

Advanced materials has idled, a more plants, whereas atavism functional products as slowed those down. Additionally, a given the specialty nature and a linkage across the streams or more a fixed cost.

And and capital involved in those.

Specialty product lines that result, and all the Dechra detrimental margins in fixed costs are being worse when those bearable margins come back a the reverse is true and we would expect to see that in the second half a year.

Got it and markets on this.

Right.

No bad.

Yeah I think that's just on these are difficult artist process that one third of asked me that you highlighted back in October any any update or progress he made on that initiative.

David Let me.

Go first and Mark and follow on.

We had several interested parties.

Pre the toll that environment, but it's difficult to get a transaction done and now.

And.

Obviously, we need to focus on.

Earnings impact of this event, we also focused on restructuring these businesses right now and continuing to evaluate or manufacturing footprint.

In these businesses and we'll have decision soon on those additionally, a well taking cost out of such that a on the other side of the covered environment. We can now.

Focus on the other strategic actions that we can take with these businesses.

So I think that's you know not exactly surprise. It you know that that we'd be search out from process point of view the thing I want to add beyond just the restructuring activities and we intend to be aggressive there and hopefully make some decisions are seen about or asset footprint.

Innovation is actually very attractive to you know potential interested parties and.

And and actually going quite well, so you know, our new crystex, but as far superior to the competitors in the marketplace is getting a lot of adoption more than we thought that's one plant that's actually running well right now those tire environment. A in fact, we've had increased rates there because of the demand for it. So that's helpful and encouraging obviously overall market is extreme.

We difficult in tires.

But it's good to see that the innovation still is attracting attention and adoption and it's at a better price.

Same is true and tire resins, we've been launching and trying to validate and you said a differentiated tire resins.

And weve virtually once again, you know that progress innovation wise and verifying and validating that was a couple of big and then see seem to value in one before those programs and even over the he says our new.

Ultrapure lesser odor previous he free resin is getting a lot of adoption right now even in this context. So innovations important. It's all part of you know restructuring the business and improving and while we have it as well as making it more valuable to other people. So.

You know, we're just not to get through this short term environments.

Thank you very much.

Our next question will come from P.J., you've car Fishy. Please go ahead. Your line is open.

Hi, good morning markets, our kids free on for PJ.

Eric how much how much did your premium products in advanced materials grow in first quarter or were there de stocking actions by auto Oems for Interlayers. This loss head up displays.

Yeah, so too it's a bit of a split story between auto and and the rest of the business. So the a two thirds of the revenue from abroad. It was only one third of the revenue of advanced materials did really well. So we had strong engagement volume growth.

In a in a lot of different applications, especially you know in that.

More stable category. We gave you in the slide you know so packaging, that's inside and consumables did really well.

We had decent a very strong stable medical its important to think about in advanced materials that.

Well the one third automotive is a big part of earnings you know the second largest market is consumer durables.

And actually held up well because of Triton continuing to create its own growth. So that's actually been been been reasonably good the third largest market for this business is medical very stable very profitable and doing well you know the fourth market is these consumables I mentioned stable fifth is Arkansas.

Actual even they're holding up relatively well.

So all that's gone fairly well and why you saw earnings be up and stable.

Automotive, which is a very high margin part of our portfolio and the entire company, whether it be or am obviously, we saw good demand.

Actually we saw good demand and generate February and then obviously you know demand came off with the escalation coated in March.

That is you know that $15 million to $20 million EBIT headwind, we called out was really sort of transportation related it was really March related.

So we felt that impact.

On the demand there. So overall you know it's holding up pretty.

Pretty well, except for a for transportation and prices held up well raws came into it'd be quite a benefit for the for the quarter.

And yes utilization was in general pretty good in the first quarter, we haven't really seen the impact of vessel utilization in this business until until we get to the second quarter.

Helpful. And then secondly, some paints and coatings companies are guiding volumes downs for second quarter by a third are you expecting similar declines.

So in automotive coatings, we would expect to see you know pretty dramatic decline as you saw we're assuming OEM production.

To be down 50, 50% sequentially.

So automotive news is going to track that.

Ah be quite a large headwind on the other side architectural coatings seem to be holding up a lot better based on what we're seeing and what I heard.

Are you know coating customers that we have you know say earlier. This week. So I think that number you're quoting some bit of a blended number.

[music].

You know, where we have two markets that have very different you know sort of tracks between architectural though in auto him.

Thank you.

Our next question comes from Duffy Fischer from Barclays. Please go ahead.

Yes, good morning.

Within your ANS piece segment and am segments.

Can you walk through the products, where your competitors would to base their chemicals off of oil and so even if they have kind of lesser quality products, maybe with this lower oil environment, they will push harder on price.

Sure so.

Advanced materials, you know oil is sort of ultimately drives a lot of raw material cost for pretty much the entire segment outside of the Cellulosics products stuffy.

Into that care that area you have that potential so far we've seen great price stability through all last year right presented it was a tailwind all last year prices are holding up relatively well start to give some back to be clear as we've said in many calls in the past you don't hold on to all of it right you got to treat your customers respect unsure of some of the raw material value.

Going to do that.

But still net you know I think it's going to hold up quite well from what we can see and things like Triton wherever the only competitor in the World you know, we've got a lot of Uh huh.

Control over pricing.

On the.

Auto related markets.

Interlayers is a annual contracts and those prices got established a last year I'm. So they don't have a lot of movement to them a winter comes a raw materials, you know within the year and into performance films. It's also very price stable.

The you know to consumer product and our prices are pretty stable. There you know the value that we present, you know and performance films is not remotely connected to raw materials. So overall I'd say that segment, it's going to have some prices come down a bit this year with raws, but but hold up really well.

In a p. if you go to the two thirds of they have pea that we've called out to you know coatings specialty fluids.

Chemicals crop et cetera.

That's actually going to have pretty good price stability has had good price ability through last year.

And expected to continue to have really good price stability. This year. There are some cost pass through contracts and chemicals and coatings that you know will pass on some of those raws that the spreads will be stable.

Which is in the and all we want from a long term point of view, but you know.

You'll see some of that impact that's about two of the 6% for the overall segment as those cost pass through contracts is for the first quarter as an example.

We will see some you know increase price competitive behavior in adhesives and tires in the winter, but that's also sort of stabilize it got very competitive by the back end of last year and.

I don't think spreads are going to compress a lot more from from a that to this year. So overall I'd say, we're in pretty good shape duffy either neutral or improving even in this environment in that portfolio fibers is totally different as you know where those prices you know what percent down would be that for the year.

And see I ever I think I've already addressed.

Sure Okay, great. Thanks, and then I think it was in your prepared remarks.

Made a comment where you thought transportation demand.

I don't know if you said was going to be stronger or less bad than tire in aerospace. So was that a call on kind of those markets or is there some inventory in those different segments. It may skew that how many how it hits your business, but can you you just talk through why you think transportation will be stronger than tires and aerospace.

So when we see transportation Duffy, it's all three.

Right. So when we talk about transportation and.

In any reference it's always.

Autos tires and aviation.

So all three are in that comment you know about being very challenged market, what I'd say is.

Tires in aviation is more challenged and auto OEM.

So you can go get the external David obviously, no one's flying right now and and I think the rate of people flying is going to come back slower than the rate of people buying cars.

And a condition damage caused by the way that could be an upside here is.

You know who want to get their mass transit right now we could see more cars sold on the back into this thing as people shift their behavior towards being in their own car versus mass transit.

We're not baking that into ours are forecasting, but it might be an upside.

[noise], but tires is you know demands you know very much off it's not just you know the OEM side, but the refinish side I mean replacement tire side is obviously off because what's driving and Ah.

And so you know net that overall segment as you know what you see 40% or down is all of that rolled together.

Great. Thank you guys much.

Our next question comes from Matthew deal Bank of America. Please go ahead.

Good morning, gentlemen.

That he'd done well, it's hard to believe there's only a couple two months adoption, we were at 25 to help but.

Oh I wanted to.

Touching a little bit on Franks. Prior question, you had mentioned the second half a year, you're looking for more of the structural savings. So if we think about the cadence and those stickier savings as we move through 2021 2022 can you talk a little bit about that it's still perhaps 100 million in structural costs is that larger now.

We didn't eventual announcement on asset footprint optimization be included in those numbers is that upside.

Sure so.

You know that 150, you know obviously a lot of it is connected demand and.

And by the way you'll be very happy if that you do a temporary cost relief comes back because it's going to come back with revenue that has a very high variable margin to pay for it so.

So you know will be celebrating.

Those temporary cost coming off.

The but the structural side I think is what we said so.

We have a lot of work going on I'm extensive comp comprehensive program on an operational transformation project to look at every element of how we operate.

From supply chain manufacturer inventory manager et cetera to take out significant costs that analysis and work going on as discovering more opportunity than we expected and we'll give you more insight on that as we refine it.

So we're excited about that and that will allow us to escalate increase 100 million.

There's a long term goals wells get some more of it you know into the back half of this year that when you annualize into a real helpful benefit for next year. It does include asset rationalization. You know we told you we're going to you know dress or Singapore plant, where that has a material benefit.

So the with the tire situation, we're looking at optimizing our tire footprint asset footprint and we'll make some decisions around that so it.

The combination of.

Better maintenance better network optimization, better supply chain management, a more efficient operations as well as asset Rationalizations unit pulling every lever we got.

And we're going to look at US you too and figure out how we take our business operating model, that's really working phenomenally well and how we've built in developed out over the last couple of years and improving how we operate make commercially and operating decisions today.

And see if we can you know that will enable some efficiencies.

Something else I note I'm just on the back half as this year.

It's important to keep in mind that as we're running our plants and something that really said about you know idling, a bunch of facilities or severely reducing their run rates.

That changes cost from going from India, and the tour in flowing out to being a period expense. So the second quarter, you're going to see you know a pretty you know significant hit on period expense.

Of conversion costs, you know that will.

<unk> be sort of charged in the quarter as opposed to float normally.

So that'll hit Q2, but it becomes a mirror image benefit in the second half of this year because there are total conversion cost for the years going to be down with all the actions we're taking.

But the timing of when it shows up by quarter is going to be very different than any other year, because so much it's going to get sort of aggregated into this second quarter. So even though second half basis. You know, we've got that 60% of 150 million coming in we're also going to have you know this period charge you know sort of if you will reversing because it's no longer inventory.

So as long as demand comes back at some level in the back half the year versus Q2, you're going to see that benefit. So there's number of things that help that back and that's just cost accounting on top of all the actual actions were taken to reduce cost that you got to keep in mind.

That's helpful. Thanks, and I guess, if I can side one more in mentioned you know you're the only producer Triton, which.

And she's thankfully the case, but the product does compete against polycarbonate NASA and and the other two I'd imagine we're seeing some pretty significant price deflation. So does the value proposition of Triton change at all here does that possibly limit gross.

On the back end as well as adolescent Triton and maybe has.

Higher product price versus peers and before.

Yeah, So titan wins in the marketplace for historically for two reasons and now it has a third so historically, we launched into specific applications, where we actually had better product performance. You know in this sort of normal functional way so better chemical resistance better you know a you know performance and these houseware applications and.

Medical applications than polycarbonate.

As a starting point then of course BPH became an issue.

So we picked up a lot of share and a lot of stability you know in or pricing because we have BP a free in polycarbonate. It's not so that helped a lot and has allowed us not really we don't really compete against polycarbonate anymore. In the applications were in that stands out there, but it's a riddle breaks if you drop it.

It doesn't have the toughness or you know at all compared to what we do so it's a real downgrade.

If you want to go that product and now people are starting to especially in Europe as a leading indicator really starting to worry about styrene.

So we're getting a lot of conversations from brands. It you know that they want styrene free solutions. So that's also helping us.

And then the third thing we've added.

That I think is gonna be very significant for the entire portfolio, especially plastics is recycled content whether its triton.

Our for a coupon or other core copolyesters or even or Cellulosics, we now have.

You know the do it at you know recycled content through chemical recycling, which means I can put recycled content. All these products and no compromise and performance whatsoever is identical product it has recycled content.

And so we're already getting wins as I mentioned earlier, so that's adding a whole another level of differentiation and and valued as sort of taking plastic out of the environment and truly offerings circular solutions, where we can actually take back you know products from cosmetics or hydration vessels or any other source and loop it straight back into that same.

Product, even on textiles over and fiber so lot going on to help us continue our differentiation.

Is there a market price premium or you catching that price premium on recycled content are you finding that people are willing to pay up for it.

We're not going to discuss that right now that's a customer by customer basis, but you know there is a value to this that in a cost you know to this and we're confident that our spreads will be equal to or better than our current spreads.

Thank you.

Our next question comes from Kevin Mccarthy for she could research partners. Please go ahead.

Good morning, a couple of questions on chemical intermediates.

Mark I was wondering if you could expand a bit on your licensing activities last quarter, you discussed some ethylene glycol.

Market opportunities in licensing was that the source of the revenue and in the first quarter.

How how much of the benefit did you have then and what does it look like for the balance of the year relative to the magnitude as a first quarter contribution. Thanks.

So well it really took this one.

Yeah, Thanks, Kevin or so and as you think about what we said in January we said, we would get a lighting revenue roughly 25 to 15 million over a three year period, a I would say this first installment is a modest amount that we see on this and we Linux.

Backed a potentially.

More in the second half of the year as we hit additional milestones, but you can think about it as being caught a little bit less than long than the 25 million on the low end.

Okay and then.

With regard to volume and chemical intermediates.

I think you called out for different factors there one of them was.

Volumes in AG I was curious about your volumes in and OXXO alcohol. So do you see any any sort of the boost from.

Hi, so procon all into sanitizers or sort of coated.

Related demand there or is that too small to matter in your mix.

I would call too small to matter I mean, if there are certainly some some who's in the propylene all area.

We see demand holding up relatively well in some of these you know stable markets and so see I've, where those their products are going into those those stable markets are benefiting from it.

I wouldn't call. It you know significant offset the real benefits, we're seeing on the positive side.

The covert 19, a crisis is more in parts of specialty plastics, you know, where we're going into phase shields into barriers seem to the grocery store. If you see those plastic barriers up between the the checkout person and the consumer.

That's our heavy gauge sheet that goes into those applications are you seeing a lot of strong growth and some of that medicals, obviously, you know doing relatively well.

From a et cetera. So yeah. There are places, where we certainly see some benefits in that stable section of what we called out.

On that market map, but.

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