Q2 2020 Eastman Chemical Co Earnings Call

Good day, everyone welcome good.

Chemical second quarter Twentytwenty conference calls.

Today's conference is recorded.

This call is being broadcast live on the east funds website.

Which is www dot.

Dot com.

We'll now turn the call Mr., Greg we do have Eastman Chemical company Investor Relations. Please go ahead Sir.

Thank you, Brian and good morning, everyone and thanks for joining us.

On the call with me today are more cost a board chair and CEO, Willie Mclean, Senior Vice President and CFO and Jay Clearone manager Investor Relations.

In case, you missed it yesterday after market close in addition to our first quarter 2020 financial results press release.

And I see a K filing we posted slides them or Lady prepared remarks in Investor section of our website, which is www dot Eastman dot com.

We continue this practice from the first quarter and I hope it continues to be helpful. Cheap.

Before I 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 the company second quarter 2020 financial results news release during this call.

The proceeding slides in prepared remarks.

And in our filings with the Securities Exchange Commission.

Moving to form 10-Q filed for first quarter 2020, and the form 10-Q, two be filed for second quarter 2020.

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

Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluding adjusted items are available in the second quarter financial knows me. Good results news release, which can be found on our website any investor section.

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

Thanks, Greg.

For turned over to questions I want to take a few minutes to make some comments.

First off a 2020 has been unprecedent, given the serious threat to health and safety.

Reminders of racism and the need for positive change.

The incredible amount of economic volatility.

And the lingering uncertainty that confronts us all.

I'm grateful to the health care community or first responders, along with government local leaders were hoping at this difficult time.

As importantly, I want to thank the women and men to be Smith their families who continue to come together and tremendous ways, they've gone above and beyond working long hours. Many times in challenging conditions. Most important they have been diligent to keep people say.

Continued to support our customers and keep our business is going.

Well come in 19 has caused us a shift some priorities. This year, we're renewing our commitment to driving more inclusive in diverse workforce.

Which is a core value of Eastman and critical to our growth strategy and ability to innovate.

During the quarter, we took steps to strengthen our efforts to build more inclusive teams by increasing our efforts to mitigate the impact of unconscious bias and expanding resources to quit employees for their role in driving a more inclusive culture.

We're making progress in a much more work to do to ensure every team can show up in contribute fully at work and in their communities.

As we look at our first half performance, we believe that we have performed relatively well with our focus on free cash flow.

Sales revenue for the quarter and for the first half of the year when compared to peer results demonstrated resilience, which is a function of our innovation driven growth model as well as the diversity of our end markets and a testament to the great work of Eastman employees as they navigate this challenging and unprecedented environment.

We also made great progress or $150 million of constructions in the quarter and are on track to hit our full year target.

Where they are focused on free cash flow. We're also we also manager inventory aggressively to respond to the fallen demand and go beyond that to generate even more cash delivering our best free cash flow.

For first half.

Turning now to our expectations for 2020 in the second quarter the cost for the lower capacity utilization was $120 million sequentially.

We expect this will decline by about a half in the third quarter have you, partially offset by increasing maintenance spending a moderation of impact from cost reduction actions as we ramped back up.

Advanced materials will have the biggest impact from the improvement in capacity utilization of between 30 and $35 million for the quarter ASP, we'll see some benefit and see I will face and that headwind as higher maintenance shutdowns will be more than the utilization tailwind.

The third quarter is off to a strong start as we benefit from volume recovery and start to realize the benefits of inventory our management actions, we took in the second quarter.

As a result, we said we expect to substantial sequential increase in earnings.

Most importantly, we are maintaining our focus on cash generation, which is our priority for the year.

Building on a very strong starting the first half of the are we on track to generate over $1 billion or free cash flow for the year.

Given the continued uncertainty related to covert 19, we're not providing 2020 guidance.

Well the actions were taken today are making a significant difference we remain focused on innovation strategy and are continuing to invest in our growth and our commercial capabilities.

At the same time will be driving an operational transformation program to structure remove costs by greater than $200 million by into 2022.

The significant impact in 21.

Altogether. These actions we've taken in 2020 or well, we're well positioned to benefit from the turn of economic growth as we look at.

The future and 21 and beyond.

Because really from a position of strength with our innovation driven growth model.

The heart of how we win.

Our strengths and never been clear during this pandemic our portfolio transformation, especially businesses the outstanding innovation capability, we've built.

Along with our decisive operational execution capability.

Generating excellent free cash flow as a top financial priority our balance sheet strong and we have significant sources of liquidity with that I'll turn it back to Greg.

Okay, Thanks, Mark and Brian we're now ready for questions.

Yes.

So if you like to asked.

Chris style and the telephone keypad, if you're using the speakerphone. Please make sure it's at your mute function.

And often.

These features.

Again that a style I want to ask a question, we'll pause for a brief moment, hello, everyone and opportunity to signal for questions.

As a reminder that is there a one to ask a question that take our first question.

Vincent Andrews from Morgan Stanley. Please go ahead, Sir your line is open.

Hi, Good morning. This is inject the steel on for Vincent.

Just had a quick question regarding cover renewal of technology sounds like you getting good customer Receptiveness. So I was wondering if you could give us a little bit more color.

In regards to unit economics, whether what payments you getting versus non recycle product and then as we think about the product moving toward that's wondering 300 million type number that you mentioned could you give us a sense of what checkpoints, you're thinking about and whats the timeline of that might be.

Maybe when we moved from a pilot plant to to a full scale rollout.

Sure Great set of questions and one of most exciting growth platforms, we have an easement.

We've been working on for the last.

I guess 18 months now.

As as all of you know attention to carbon footprints or to our economy. The plastic waste problem, we have and landfills. The ocean is a critical issue that we as an industry need to solve.

And it's also just a huge waste a carbon letting that all going to environment as opposed to receive recycling in what's exciting about easement is.

We are leading I think with commercial scale investments.

To close that loop and create a circular economy.

That is both economic and great for the environment. So one of those two technologies. As you noted is a carbon renewal technology, where we're re purposing our gasifier.

Two reforming waste plastic and so we take it in on the front end instead of the coal.

And we can.

Completely cleanup that waste plastic to its molecular elements and rebuild asset deals and cellulosics products.

So we went commercial and that quite some time ago.

Better scaling up of their customers both in textiles.

Our new diet products that have already 50% bio content from sustainably growing for US now the other half will be based on recycled plastic. So it's in the end. These products are biodegradable as microfibers and the ocean. So it's the hatrick of all offers and textiles.

When you have bio half recycled content and you don't have to worry about the Mike fibers. So we get we have tremendous interest in a number of customers.

Who are adopting this one of the biggest wins, we've had recently with each of them.

Who have put that in their conscious collection. They were seeing a number of other companies adopt now obviously in the hosted environment, where the textile market is severely down it's hard to see a lot of that benefit.

We can still see it in women's wear which is our target growth market, where we were only down about 15% when the underlying market is down 30.

So we're seeing good substitution growth even in a very challenged market where people are still adopting sustainable solutions at a premium.

Compared to other alternatives in the marketplace. So we're getting both.

Price premium as well as.

Accelerated growth and we would expect as a textile market recovers that would accelerate.

Same is true with a variety of say listen plastic offerings, we have on the.

Specialty plastics side Ophthalmics, we've had a number of customers now adopt to recycle their cellulosics waste for.

Sunglasses eyeglasses, where the dominant player in that marketplace with a very strong leadership position and we're going to be taking back.

Their product actually and circulating it back into a true circular solution for sunglasses and eyeglasses. So we've had a number of wins there.

And Thats only one of two technologies. The other one is our polyester technology.

And where we can recycle polyester and ends up it back into its intermediates.

And then return that back to market and what's great about both of these technologies.

Is that they're truly circular where we can close the loop into the same level of application or even a better application, we're not down cycling products, which is what happens to a lot of waste.

And what's great about molecular recycling is the product is identical so theres no no trade off in performance performance is identical to the fossil fuel based product quality is identical there are no safety concerns because we're breaking it down to the molecular and cleaning it all up before we make the new Palmer.

And it's infinite like aluminum. So we can continue to recycle the product forever.

There is no limitations mechanical recycling starts to break down over time. So there's only so many times you can do that so it truly is a solution and we believe that.

As we've said theres $2 million to $300 million at least of incremental revenue associated with this in both.

Share gains and and price premiums that we can get from the marketplace.

Provides a very attractive return investments.

That's very helpful. Thank you.

And then just in terms of the portfolio optimization seem youre doing Stan.

Maybe its cost savings initiatives.

I think on their last earnings call you had mentioned that perhaps in this environment a little bit hard to look at monetizing some of that maybe one third of ASP that.

Struggling a little bit more as wonder if you could give us an update on higher beyond the strategically and if there's opportunities to do.

Some of that as well on top of the cost reductions.

So yes. This is really speaking so on the one third of ASP first so let me just reiterate that we're taking action now.

Actions to improve the business, including.

Progress on our innovation as well as the restructuring of our footprint you.

You'll see that we announced the closure of an asset and Asia and we continue to work to other actions and choices that we have to improve the near term business performance, we're pursuing all options which includes partnerships.

To improve the overall business performance and reduce our exposure.

In addition to that we would be looking at.

Got it also divestitures over time, so we're looking at all fronts and we're taking actions now to improve that performance as you can imagine in this environment. It is more difficult environment, but I would say now that we've gotten through.

Caught the first phase of co that there has been renewed engagement and interest.

Multiple fronts.

And we're pleased with with those engagements on the 150 million of cost savings to pivot there what I would highlight again as we're on track to achieve that Q2.

We were a little ahead.

And on you would expect Q4 to be the lowest quarter and Q3 to be about on average, but again on track to achieve that.

And as as we highlighted we're looking to also.

Actually.

Make structural changes of which we think roughly a third will be structural from that and our objective right now is to ensure that as the discretionary spend comes back in 2021 that we have structural actions that at least offset that as we move forward.

Helpful. Thank you.

Okay.

Moving onto our next question from Ben Isaacson from Scotia Bank. Please go ahead. Your line is open.

Thank you.

I noticed that youre sales by customer location was down about 20%.

In the us 20% in Europe.

The only around 9% in Asia, So could you split that between China and the rest of Asia.

Remind us what your China exposure is and.

Are you working on any risk mitigant with respect to potentially a worsening.

You asked trying to create.

Thanks.

Yes, just to give a little bit of color around our Asia Pacific exposure, what Weve previously said as roughly half of that exposures and China half of it.

Outside of China.

As you think about also the way co that impacted around the world the impact of code that.

Much more impactful in Q1 in Asia and as the economy risk return you saw that pickup.

And basically I think what you're seeing and the revenue is how it impacted Europe and North America more so in Q2.

And as you think about.

The the trade where question, sometimes we forget we're just in phase two we start with a trade were 19 into.

Pandemic just to make it more interesting this year on top of it.

And we're already living with a certain amount of trade where that didn't exactly get completely abated. If you've got stabilized I would say in the beginning of this year, but it didnt go away. So that's still there.

And I think we've done a good job managing our way through last year.

We certainly we're seeing strong improvement in our results once it stabilized in the January February part of this year.

But.

We have a diversity of end markets. We've shown we can be stable.

With our end markets as well as or regions. There's a lot of upside in North America and Europe in a pandemic recovery in front of us.

That would certainly mitigate some risk to China as we sort of move forward. So I think we've we've got a good diverse position on not just geographies, but end markets and have already demonstrate we can manage our way through a trade war.

Thank you.

We'll take your next question from Kevin Mccarthy.

Vertical research partners. Please go ahead your line is open.

Yes, good morning.

Can you speak to the inventory reductions in the second quarter as well as where you ended the quarter and what that might mean for your operating rates moving forward.

Thanks, Kevin This is Willy we've made very strong progress on working capital and specifically inventory in the quarter I think sequentially, you saw inventory down roughly 15% and again.

Flawed all of our business teams in operations and supply chain for.

We're executing on that very effectively we would expect only a I'll call. It very modest additional inventory reductions throughout the year. So you can expect.

I'll call it the utilization rates to pick up quite substantially here in Q3, as we bring our auto plants back on board and the definitely in the transportation end markets.

And I'd also reference that as you look at that on a year over year basis.

We were building inventory so it's in that 20% to 25% level year over year of inventory reductions so great progress still more to do as we think about our receivables and payables as those.

I'll call it get back to more normal levels on the back half of the year, but.

Effectively improving overall.

The other thing I'd note is as you think about utilization.

The upside of utilization headwinds this year is in 2021 so.

Weve generate a lot of cash this year really proud of how much progress we made an incredible actions by our teams and how well they did it.

And it wasn't just falling demand right, we went way beyond that and pulling inventory down to generate cash which created a good portion of that headwind. So as we as we said $140 million year over year headwind in utilization the second quarter.

Half of that was doing that inventory management beyond just following demand. So if you look at next year. If you just assume volumes next year equal to this year.

That half of that 140 million dollar is a earnings tailwind next year relative to this year. So not only are holding costs flat with our structural actions into next year.

On the fixed cost.

This utilization.

Set of actions, we took in the second quarter in to some degree continuing in the third quarter.

We'll.

Create a pretty substantial earnings tailwind for next year as long as volumes are equal to this year and then once volumes get better than that obviously, you get even more tailwind because the incremental margins become quite significant for all the volume and mix growth beyond that so I think utilization really sets us.

That's great for cash this year as our priority.

We've been very clearly thats, our priority as opposed to worrying about how the earnings look from an accounting point of view.

I am, especially with the period charges in the first in the second quarter.

But really sets us up for recovery next year.

I see thank thank you for that and then secondly.

I wanted to ask you to elaborate on restructuring it looks like you foresee $200 million.

We're more savings through the end of 22 fairly large number there.

Where will that be coming from in terms of your businesses and and regions. Perhaps you could talk about how much is head count versus asset rationalization that and other sources of savings.

Yes, Kevin let me start out here as you think about the actions that we're taking first and foremost we look to optimize our or asset footprint, specifically in the one third as well as the Singapore announcement that we previously announced so you can see that number being at least 50 million.

Our greater Additionally, as we had highlighted earlier this year, we were talking about.

Continuing to improve.

Our site utilization so as you think about leveraging our integrated facilities, we've highlighted in with.

Our products.

And other assets along the Gulf coast, the benefits that will achieve and earnings there and then Additionally, we're looking at how do we use digital solutions as well as in transform how we do maintenance.

On our sites and optimize our networks around the globe in a post.

In freight more post coven environment, and those will be a additional moneys on top of that.

Yes, there's quite about quite a bit of value around network optimization, and we've done a lot of acquisitions over the years as you guys know building up our specialty portfolio. So as you look at those plants warehouses networks of how we do everything there's opportunities to optimize all of that.

And there is head count reduction as well so as we optimize our business operating model and our investments about making us more effective and nimble agile.

In our commercial operations all the way through how we improve our effectiveness of operations, especially lessons learned here in the last.

Four months.

We see real opportunity to streamline the organization and take cost out there. So there's a lot of different levers of it. It's all line of sight Theres very detailed programs to to that total number Kevin and how we get there.

It's no one silver bullet, but a lot of heavy lifting by people across the entire organization to make it happen.

But it's a it's a great year to sort of step back and say how do we complete the transformation to especially company both on the commercial capability in innovation investments, which were continuing to do.

But also on how we become very cost competitive to create value for shareholders and stay competitive against the people we faced the marketplace. So.

A lot of great work, there very clear clear set of action plans.

Alright, Thank you very much.

And then take your next question.

Matthew Dewey from Bank of America. Please go ahead your line is open.

Hi, so.

One of your competitors had talked about the fact that the outperformance or the outperformed autos into Q given that position on supply chain in the fact that insulated them.

Sell off initially.

However that would represent a lag.

It's an operating rates in demand pull through as transportation rebounded.

Are you seeing a similar.

Indications on your businesses, particularly as it relates those on OEM, where do you see orders already kind of coming through your system.

I think is there the answers are a little bit different between M&A of piece, so I'm going to sort of give achieved on both fronts. So in advanced materials.

The supply chain there is very short.

So we feel the changes in.

Oh, yes behavior production or sales level when it comes to performance films business.

Because thats at the point of sale as opposed to production pretty quickly. So thats why you saw advanced materials.

Take the bigger impact from coated in the first quarter, where the earnings weren't nearly as good as the recovery of earnings you saw sequentially from Fourq, you to one Q and ASP.

So we felt it quickly we acted quickly and that's also why you saw us take down a lot more operating facilities in advanced materials in that demand came off.

In March through April May.

And we have more standalone facilities was easier shut those facilities down.

In a him so very quick impact and we already saw very quick recovery in those businesses as we got to June.

Hence the much.

Stronger forecasts for earnings recovery and utilization benefit for advanced materials in the third quarter. So that played out.

Much faster than what we're seeing and advances.

Effectual products, where supply change much longer.

So we didn't feel the impact really in the first quarter has strong earnings performance and stronger as a result bigger sequential drop when it finally caught up to us in the second quarter in ASP.

Coding just has a longer supply chain.

Same with aviation.

And.

So we felt that.

And through the second quarter, and it's not going to come back quite as fast in the third quarter.

On the ASP side.

I would also note. This couple other differences one aviation is obviously not coming to us Bakken back as fast and when it comes to transportation as we call it.

And about half our automotive coatings as refinish.

As opposed to OEM. So if you also doesn't see that sort of snap back and OEM production as much as am.

Because the refinish, obviously is based on our customers comments as you're going to take a little longer to recover.

We do see traffic improving and we expect to good solid recovery, there, but it's not going as fast.

Okay and so.

The 200 million dollar number is pretty chunky and in that light I guess absent an acquisition.

At reasonable to think you can get back to that mid 600 million dollar EBIT range for a NFP by 2023, and if not what is it reasonable assumption for mid cycle kind of earnings in that business.

Well I think that as you look at S&P in earnings first what we're not going to be giving forecasts out to 2023. So.

But what I can say is it.

It's a great business and the vast majority of the the impact of this business has faced since 2018.

Which is where I think about you know where earnings were in a stable environment.

Before the trade where started compounded by a pandemic.

The vast majority of our hit between now and then.

Was volume mix right.

Less auto demand BNC demand a variety of different places, where we realized some impact on demand.

All of that demand will come back with the market.

You got to remember that mix is a huge part of the story in both a M&A FP. So when that volume dropped in those in transportation or B and C or either consumer durables.

That's the highest margins we have relative company average so big impact on the way down last year this year.

And big impact on the mirror image of a recovery.

Such as about volume recovery that mix is a huge impact in driving value and earnings and cash.

So we expect that ought to come back.

The other party of course is we're taking aggressive action on.

The cost side right. So if we take $150 million out this year make that structural into into 21, and even add on another 100 million.

It means we've taken out $150 million relative to 2018 19.

That offset some of the spread and competitive pressure.

More than offset the spread competitive pressure that we've seen in tires adhesives Theres No reason for the you know for the earnings not to be able to come back for the company to a pretty substantial level and get back when volumes come back we should get back to earnings being better than 19 or or 18, when the volumes get back to that level.

Okay, So a message being just.

Structural cost cuts plus volume recovery equals.

Pressure on.

Adhesives.

And once you've done.

Businesses like that maybe give or take plus bind dress in there.

Yes, it's only about the mix part.

Setback.

With that mix not just the volume but.

We've tried to be very clear about that back to innovation to in 2018 to give you guys. Some sense of the significance of mix and.

And it's a big part of our story in growth of course, it cuts the other way when you have demand come up.

Yes. Thank you.

Reloading. Your next question from Duffy Fischer from Barclays. Please go ahead. Your line is open.

Yes, good morning, guys.

Could you just because there's been a couple of cost takeout program. Some temporary some permanent if we just use Q2 was the base how much comes out the rest of this year and how mentioned that's permanent versus temporary then how should we think about the sequencing and 21 and 22.

So.

As we think about this year there is an additional 100 million, which will take out and I'll say, let's think about roughly half of that being.

More discretionary and half of it being structural as we make momentum on the structural aspects here in the second half.

As we pivot into next year, I think I highlighted earlier that we're making decisions and taking actions. This year that will build roughly 50 million more a structural as we look at our asset footprint.

And I'll build that connection to let mark highlighted and we expect network optimization to be a major driver structural changes.

Also in and 2021, so that would basically in that sense, keeping cost neutral year over year as the discretionary goes away and we replace it with structural and on top of that we see a pathway to an additional 50 to 100 million and and 21.

22.

Growth.

The additional increases and deliver to the bottom line.

Okay and then if we look at your outlook for 120 million half of that back 60, offset by 10 that would walk to an improvement of $50 million from Q2 to Q3.

Is that the baseline that then we should think about making adjustments for kind of the pricing trends in these cost take outs or that's your best view on kind of all in.

Incorporating everything but just.

A way to get us to that 50 million dollar number how can you parse those two.

Yes, so the first step I would take as to your point the.

Removal of the inventory in the impact of that in Q2.

Mostly offset by a cut the reduce maintenance.

Andy.

Slightly lower cost actions that gets us I'll call it to that.

30 to 40 range as we think about structural cost and operational improvement and then on top of that would be.

I'll call it the variable margin improvement for volume growth that we have sequentially.

And were thank you guys right. So doing a good we're seeing a good build and volume right. So we saw.

8% increase in July as of June compounded by another 4% in July order book, So far it's early August but.

The orders being similar to a July and August is good compared to the normal seasonal decline you see in August with Europe shutdowns and everything else. So.

So far off the good start, but you know as we know painfully well, it's a very unpredictable year.

We want to see how economies are impacted by the resurgence.

If there's things, we don't see coming that that mitigate demand.

Terrific. Thanks, guys.

Moving onto next question will be Frank Mitsch.

From research. Please go ahead your line.

If I could follow up on that really appreciate slide five it gives us a good confidence level in terms of this snap back in.

And most impacted in the mixed impacted businesses.

The resilient business looks like it is down 10%.

Year over year in July.

The text you suggested a moderation.

In that area.

As.

Tumors go back to normal can you elaborate on that and perhaps offer.

It's on when that moderation may be over and what you're seeing.

What your order books are seeing.

Yes.

Sure Frank and thanks for the question.

As far as the resilient markets go obviously some of those markets had a real benefit.

From.

You know the people stocking up.

Covidien from grocery stores and things like that or chemicals same type of product so packaging care chemicals did well.

And there was some people buying some product ahead of time.

Because they're worried about security of supply.

And wanted to make sure that enough inventory and had to run their operation. So you saw a little bit of that going on in some of these resilient markets.

The.

And really what we see as demand coming off.

Some of those cases to what we call it more normal than the answer to that additional buying that's part of the story in some of those sort of packaging consumer markets. We will talk about worried about.

You also just remember there is a seasonal trend down in volume from Twoq to Threeq you in some markets like AG right. So some of this volume is coming off because those markets just naturally seasonally come off sequentially from Twoq to threeq.

So you got those dynamics going on.

I wouldn't say theres anything more dramatic that at the only other place I can think of is in medical.

We had very high value product.

In in advanced materials.

Where people were buying.

To make sure that inventory then elective surgeries, obviously didn't play out as well so some of the demand of those products.

Wasn't as great as expected and so there's some of that destocking going on but I think that from a timing point of view Frank It's this month.

July August is where people are sort of adjusting their inventories I don't think it extends through the rest of the year as far as some of that volume adjustment goes and we just sort of level back out to more normal. These end markets, but we're not we're not seeing a steady decline for a long period of time.

Hi, that's that's very helpful and.

One of the one of the key focuses of the quote new better Eastman is innovation and I'm.

These are obviously not normal times, but what might be helpful. When people talk about innovation is providing some metrics around that in terms of the pace of progress.

And then that you're making in that regard is there any is there any way that you can provide some quantification.

On the on the innovation front.

Well I think that the key metric we've been using with you in the past is one we'll we'll continue to use in the future just not as useful at the moment.

Thats the amount of new business revenue, we close from innovation products rise, we have a very detail tracking system with our digital tools on every business. We win weather was innovation related or just.

Good market segmentation strategy or just transactional.

As well as you know why we lose every bit of business, what we can do about it.

And so we've been driving towards a 500 million dollar number this year, new business from innovation and we're well on track to hit it.

Even with the trade where last year, where we delivered a very good number.

But obviously this year, we're not going to get to that 500 million our number one.

Yeah, everyone has been sheltered in place for a period of time.

Well is encouraging is we see people stay highly engaged we've had a number of wins in the circular economy.

Like agent them as I mentioned earlier with the story, we're told the prepared remarks around trade and renew.

Hydration.

Area with Allergan, Camelbak and a bunch of other brands that are coming onboard with that.

To recycle content offer that is so important to that customer segment that buys those kind of hydration vessels.

So we are seeing good wins, but theres also a lot of places where.

Virtually we're still working with our customers on coating additives tire additives odor free adhesives.

The next generation of HUD and acoustic Interlayers that we're launching.

There is activity in every place where where people are still working their innovation agenda is which is the only way you grow out of this and create your own growth.

But we're not going to have.

We're not going to get to the 500 million in this context, but I do expect with the activity, we're seeing that will snap to it pretty quickly once we get into recovery mode and people can start interacting with each other.

Physically.

Terrific. Thanks, Thanks, so much.

We will never taken mix question.

Jeff.

With us from JP Morgan. Please go ahead your line is open.

Thanks very much.

Your fluids business I think in 2019 was 460 million in revenues.

How much of that is aviation fluid.

How much is the aviation slowed down or what do you expected to be down this year.

So.

When I look at the fluids business Jeff.

I'd say, it's about half and half.

And.

You know clearly into the aviation side of that portfolio, which is very high high margin business.

Is it down dramatically consistent with the either.

Milestone of airplanes.

We are very sort of milestone driven.

With that business and so it's going to recover slowly.

When it comes to the other side I want to highlight the heat transfer fluids.

Business is actually doing great and actually and deliver growth this year over last year.

So one of the bright spots in the two thirds of Asap.

In addition to care chemicals, and pharma and packaging and even residential architectural businesses, we got a lot of growth going on in a number of those businesses.

That's.

Held in fairly well.

And secondly, you talked a lot about.

Cost achievements.

But as best as I can tell Sq Nay was down 10 million in the quarter, which is about 6%.

And your sales were down that are now 19.

Okay.

Why Isnt best Junaid down more do you have an S junaid target.

In terms of that cost reductions.

Jeff This is really what I would highlight to you as.

If you think about 150 million, we're going to get roughly a 100 that the I'll call. It manufacturing cost line in roughly 50 million.

Through the FDA Slash R&D line.

As you've seen from Q1 to Q2, we've got some I'll call. It variable compensation plans that are linked to market based and what their coverage in the stock market that occurred in Q O Q2 that.

Basically offset.

Cost savings within the quarter.

How much was that how much kind offset.

So the way I think about that roughly.

And I'll call it the 10 million range.

Okay, great. Thank you so much.

Moving on to our next question, we will take David Glitter from Deutsche Bank. Please go ahead. Your line is.

Thank you good morning.

Mark you discuss trends in raw materials, what you saw in Q2, and what you're expecting in the back half the year.

Sure Good morning, Dave.

So the raw material trends.

As you think about it.

Obviously have come off in first quarter second quarter.

It is it's actually helpful to think about raw material trends in the back of third quarter of 18 right. So.

Yeah with the trade where we saw.

Price of our petrochemical derivatives that providing for example come off a lot last year faster than oil did so even though oil came off a lot this year.

Many of the derivatives of oil at already come off pretty substantially.

A big part of the Robbinsville trend from all of this happened last year as opposed to this year.

But we certainly have seen some benefits in raw materials to the first half of this year as we look to the second half of the year.

Summarizer I think are expected to stay relatively flat or moderated if you will like to Paris xylene.

Then you've got other places like you saw already in the second quarter, where propane.

Moved up pretty dramatically and PGP didnt.

So you've got things moving around a lot of different corrections.

We're not expecting a huge raw material headwind as we look at the back half of the year.

In our forecasting and plans assume that there's going be some increase.

In some of those raw material cost, but we have a bunch of plans in place and like in chemical intermediates, we're moving prices up already.

Consistent with the raw material environment to stay track.

But we we think we're in good shape as far as spreads go when it comes the back half the year.

Very good and just lastly, just on do you suppose cap allocation priorities that back half a year and get some buybacks in Q on Q2.

Just cause buybacks versus debt reduction as well as other actions.

Thanks, Dan for the question.

Obviously first and foremost focused on our strong in solid dividend.

Being the first priority also as we've highlighted.

Affecting the payback greater than 600 million net debts down almost 200 million in the first half we would expect that to grow.

Roughly greater than 600, and the back half and we paused the share buybacks until we meet those objectives and as we look into 2021 with growth in recovery will reevaluate the pace at which we did that.

Thank you very much.

We will now take our next question from PJ Juvekar from CICC. Please go ahead. Your line is open.

Yes, hi, good morning.

Mark can you discuss your intermediate business.

Some products like Glycols, you already had new capacity before the pandemic started.

And then there was a week Casegoods was weak also for you. So can you just discuss what happened in than outlook for second half.

Sure so.

Obviously.

Environment, where demand drops significantly relative to capacity available in chemical intermediates products. The prices are going to follow raws, which is predominantly what we've seen the only place where where we've really seen a material spread compression.

Due to competitive activities.

As you know in this disconnect we saw in the second quarter between propane and propylene.

And that really resulted in.

And.

So some challenging raw material cost and the market you know that sets the price in the marketplace, which is PGP.

Obviously didn't go up and went down and that was a tough combination. Fortunately, we've already seen that sort of corrective back to a more normal relationship.

Through July and at the beginning of August here, where PGP is gone up dramatically.

Where propane has been sort of holding steady.

So we feel good about how thats corrected.

Already into this quarter.

Yes, if you will side, we've seen some compression obviously as oil prices and methanol. That's that's price the marketplace comes off.

We feel some of that compression relative to our cost structure, which is principally based on coal.

So those are the places where we're seeing some of the pressure, but the big but spreads overall have been relatively good. So that's not the story. The as you can see into revenue table the bigger impact for us has been volume as opposed to price.

On the on the first half basis, where you've you've really especially in second quarter.

At that impact on covered related demand not being there.

And some of the export markets that we would normally clear capacity.

You know not being as available when oil prices dropped so much.

And.

Generally that's on a high margin business for us, but still it has a significant impact on the volume and that contribution margin. It comes in the pace of pay for some of the integrated fixed cost of the overall complex.

So those are really the sort of the key stories there I think theyre all you do two extraordinary circumstances in the second quarter.

A lot of this will continue into the third quarter, but no reason this won't recover as we go into next year.

Okay and my second question is on the charge that you took in tight additives, that's quite a lot charge of 128 million in that segment, what triggered that is that due to low utilization.

And then what happens when volumes come back next year.

Sure PJ this as Willie so as you think about the impacts that co that has had on the transportation market more broadly.

As well as.

The impact on utilization that which you've highlighted.

We had to assess the value.

Certain businesses and specifically tire additives so the biggest.

A piece of the impairment was related to I'll call. It the trade names Crystex.

And Santa Flex and that's related to a revenue outlook as you look at valuing those on a royalty basis. So as the revenue outlook is let's deteriorated that the starting point of where we are valuing this as well as the rates being lower resulted in the impairment that you see.

Obviously with accounting once you write it off you don't get the right back on one when things recover.

Okay, great part of accounting, which is we dramatically improve the value of businesses like performance films Interlayers from where.

From what we bought it but you'll get a right at the asset values, but you have to take the impairments wherever these kind of issues occur.

Right, you're not alone and taking these charges this quarter, but.

Does that mean that margins look better next year when volumes come back.

Thank you.

No PJ I think as we've highlighted through this if you take roughly half of the 140 million across the company 70 million of that was data to the I'll call utilization impacts across the company and that will result in a tailwind that at even flat volumes. So as we.

Think about growing volumes next year in a recovery holding costs flat.

This will result in a good momentum as we go into 2021 and specific to tires were actually seeing a strong recovery in volumes.

Into the third quarter. So that's that's one of the when you look at that line on page five about volume recovering back.

Big part of the snap back in that volume is actually in tires competitive dynamics are still there. So pricing is going to approve for some period of time, but the volume is really starting to come back.

Thank you very much.

No take.

Question for John Roberts from you'd be please go ahead.

Your name is open thank you.

It used to be that seek tow held up well into recession, because people smoke more when there are under stress.

It was down a little in the third core quarter. It looks like the outlook is to be down a little bit further how comfortable are view that this is just order patterns or that maybe there's something else going on here.

So yeah, we don't have any evidence that there is something else going on John as you said it was incredibly stable in the o. eight or nine recession.

There is a general trend, where the markets always sort of declining in that 2% to 3% range as we've said in the past and.

We expect that to be the story. This year, there's a lot of different stories out there at the moment that all sort of breaking in the last couple of weeks.

We are different cigarette companies are having you.

Doing well and others are not doing well.

So you really have to get to the details of what's going behind each of those companies, but overall and we put it all together we think market demand.

Is.

We have declined about 2% to 3% range outside of China.

China. The data suggests that stable to sorta up maybe 2% you know which is about half of the cigarette around the world. So thats all sort of put together in the market outlook when it comes to customer buying patterns as we have.

Discussed many times in the past it is a bit as we call the chunky and what we saw a is good demand obviously in the first quarter as well as a good demand of the second quarter some of that was.

Buying some incremental tow for security reasons with all the uncertainty of coated and that's why we expect a volumes to trend off modestly as we go into the third quarter.

But overall, we still view this as tote very stable.

In especially with the cost actions, we're taking the earnings and cash level.

On the textile side of course, you know, which has been growing to offset some of this underlying market decline on toe, we're not going to get that this year with textile market being so challenged.

Doesn't give us any concern for the long term I think textiles is an incredibly exciting opportunity for us, especially now with the circular economy as I answered in the first question.

Really see a lot of opportunity to grow in the target markets right. So if you think about.

Women's wear.

Down about 15% year over year.

In the first half the year versus market the 30 as I said.

When we look at the forecast for this quarter, probably of 40% sequential improvement off of.

The second quarter in women's wear the problem right now some of the traditional markets.

That we've gone if you like sued linings, obviously not much demand for those right now in this environment as everyone is working were virtually.

And so thats offsetting some of this but that will correct itself and we expect good growth out of that in next year.

As a way to continue filling the assets and levering.

The integrated complex up.

And then are you have any issues getting recycled material for your gasification process.

And is pricing for green material issue now that problem not a version raw material is cheaper urgent materials are cheaper.

Yes. It is a very complicated market when you look at recycled content and we are doing our best to segment it.

What's great about our strategy is molecular recycling does not require high quality recycle content, we can use which.

Product that has no other use so we can take carpet we can take textiles, we can take plastic that cannot be used to mechanical recycling and grinded up and using the gas wherever we can grinded up and use it in the methanol says plant for.

Polyester recycling. So we don't have to compete against that high quality stuff that is and the price there is going up a lot significantly higher than Virgin PT in Europe right now.

Asher almost 60%, but we don't have to compete with that I mean, there's a little bit of that will buy in the beginning but we can really access what is truly has no alternative use that's going into landfill.

Thank you.

Well no Deca next question, Mike Sison, whereas I go. Please go ahead your line is open.

Hey, guys Marty.

Just curious how do you think about the fourth quarter and I know, it's a lot of variables there but.

Can you get sequential improvement it earnings again, and you do have cost savings pick up some of the inventory reductions, but clearly the question as you know what you're hearing from your customers do we see a normal.

Seasonal downtick in the fourth quarter is it possible that we can continue to improve sequentially.

Just curious your thoughts there on the fourth quarter.

I think that the fourth quarter is awfully difficult to call at this point with all the uncertainties of what's going to happen with coated the election et cetera.

But what we would I do think will happen is there'll be some markets, where you'll have just normal seasonal decline demand like construction activity in the winter.

But I don't think you're going to see the same kind of inventory destocking.

That you that youve seen the past because we've all been doing a pretty aggressively in the second quarter in the third quarter. So I think you avoid that relative to what happened last year.

And if people are looking at next year in their economies looking positive you're going to actually probably having some people start building inventory to serve that demand as they go into the first quarter.

So I couldn't pretend to know how the all those are going to bounce together.

I know that we've managed our inventory aggressively in the second to third quarter. So.

We're not gonna be doing much destocking in the in the fourth quarter. So that's certainly going to help not just.

You know, where we go with inventory, but also asset utilization will continue to get better as we go from Threeq to Fourq you.

So I think we'll have some benefits on the cost structure side, both an asset utilization getting better as well as the cost actions, we're taking demand could be a bit better than than you might think.

So as we look at it as you know sequential improvement from Threeq you I'm not sure we can get all the way back to Fourq you have last year.

It's somewhere in that range it seems feasible, but I've got to emphasize we're not giving guidance for the year for reason, which is we have no idea what fourth quarter they'll look like at this stage no one does.

Understood and then one quick one on the inventory reduction 140 million number that was reduced by EBIT. I think you said that you get 70 or half back on flat volume what volume level do you get all back and 21.

Yes, so the way I think about that Mike is basically you've got to get back to 2019 levels.

As we think about.

Fully absorbing all of that because at the end of the day, what we did as we pulled all.

Fixed costs from 29 teen inventory levels into the PML here in 2020 as we reduced.

And he used to $140 million number for the year over year number when you think about 21 versus 20, not the went 20 sequential from one Cuda Twoq you said, it's about half of that 140.

You definitely get back with just flat volumes and the rest is upside with volume growth.

Understood. Thank you.

We will now take our next question from.

Thank you for move from Keybanc. Please go ahead your line is open.

Hi, Thank you good morning, everyone.

Based on what you saw in July in early August so our volumes tracking for the third quarter versus cycle quarter or year over year pieces for the company overall.

I think as we had highlighted earlier, we've got good momentum we at 8% growth from June to July.

And we continue to see things in August to be roughly flat with July which as I would say.

Positive overall normally we would see as seasonal decline and the August in Europe, but continued good momentum.

Certainly see blanket third quarter.

Second quarter.

Right, it's just hard to do the math because the base debates its active so difficult in the second quarter was maybe I'll try to little bit differently, where you're mostly volume slide.

It appears to show that you were about down 12% year over year in July for corporate average.

So so that seems to be roughly in line was minus 13% that you posted for the second quarter or an average am I looking at this correctly and do you expect on a year over year basis.

Just on September two to be better up from volume perspective than July.

Alex I think thats a reasonable assumption.

Based on the momentum noticing.

Okay. Thanks, a lot.

Let's make the next question the last one please.

Sure I'm that comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open.

Good morning can you help on two things in the markets where you are.

Outgrowing the end markets because of innovation and.

Better.

Relevance should we expect to slingshot effect, where as volumes come back you should have a multiplier on that or should we see the spread is being roughly stable.

The recovery because it makes quite a difference and how we think about operating leverage over the next two three years.

And secondly to extend the your these structural realignments that you're doing to what extent should this be viewed.

As as establishing a playbook, so that future acquisitions will be integrated with a higher level of synergies upfront.

Or is this a kind of one off geometry, and we should reach.

Beyond that.

I'll take the first part and let you take the second particularly on the revenue side.

Look we expect recovery and as I said that the mix hit that we took on the way down it was our highest value segments.

And the innovation, we're driving also tend to have margins way above company average in all the different products. We walk so as you see volume recovery come that that that mixed leverage is pretty significant.

You'll see that in advanced materials this quarter.

And you've seen it for years into advanced materials.

So we expect a lot of.

Hi.

Incremental margins.

On a recovery start associated with the cost actions. We've taken so you don't have a fixed cost headwinds offsetting that variable margin growth and you've got this utilization benefit we've identified.

So I think I think we're feeling pretty good about how the how the earnings can come back in that scenario, but it requires economies recover we're not we're not about to try and tell you. When we think we're going to get back to 19 or 18 levels in this economy, but we certainly expect.

Given what we know today 21 to be better than 20.

When it comes to economy in demand.

Innovation I think is still keep you got markets, where weve had incredible success innovation like performance films, where we set a record in revenue in June in this very down automotive market.

Heads up display Triton circular economy newco lessons.

In architecture et cetera, we have a lot going on across all three segments, including fibers.

Where we're creating our own growth despite the economic circumstances.

And on the synergy question, though what I would say.

We were very pleased with the synergy level that we achieved on our previous acquisitions.

With above I'll call it industry benchmark levels, but what I would say is obviously, we've gone through a trade war, we're going through a pandemic and also on the digital front. There are more solutions today than when we did those acquisitions, we continue to learn and we will apply those as we move forward and as we think.

About and future acquisitions and portfolio changes.

Okay. Thanks again, everyone for joining us. This morning, we appreciate your time I Hope you have a great day.

That concludes today's call. Thank you for your participation.

You may now disconnect.

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