Q3 2020 Eastman Chemical Co Earnings Call

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

This call is being broadcast live on the Eastmans I place W. W. Eastman Dot com we.

We will now turn the call over to Mr. Gregory.

Oh Eastman Chemical company Investor Relations. Please go ahead Sir.

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

On the call me today are Mark Costa Board Chair and CEO well.

Well, the Mcclain senior Vice President and CFO.

Ajay grow manager Investor Relations.

Yesterday after market close in addition to our third quarter 2020 financial results news release, and FCC 8-K filing we posted slides and related prepared remarks in the investor section of our website W.

Www Dot Easton Dot com.

Before we begin I'll cover two items.

First during this presentation you will hear certain forward looking statements concerning our plans and expectations.

Actual results.

Cool events or results could differ materially.

Certain factors related to future expectations are or will be detailed in the company's third quarter 2020 financial results news release.

During this call in the slides and prepared remarks.

In our filings with the Securities Exchange Commission, including the form 10-Q filed for second quarter 2020, and the form 10-Q to be filed for third quarter 2020.

Second earnings referenced in this presentation excludes certain non core and 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 adjusts associated disclosures, including a description of the excluded in adjusted items are available in the third quarter financial results news release.

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

Thanks, Greg before you answer your questions well take a few minutes to make some problems.

Got a strong recovery in the third quarter and solid performance for the first nine months of 2020, despite the challenges associated with Carbonite team.

Our employees around the world have done a great job of taking actions necessary to keep their co workers and himself safe.

Hello.

We remain steadfast in the suffer especially as we see a resurgence October 19, I continue to be committed to building work close it teams. So everyone can fully contribute at work.

I just think about the impact of the pandemic on our business, we are leading for a position of strength with our innovation driven growth model.

Continues to be at the heart of how we win.

As we moved through the third quarter demand across our businesses are proved particularly for markets most impacted by COVID-19, especially.

Partially auto building construction consumer durables and some other markets.

Earnings were strong with almost a 60% improvement from the second quarter, driven by innovation and market development.

Standing work of Eastman employees as they navigate this challenging an unprecedented environment.

Additionally, we made progress in our plan to generate $25 million to $50 million of licensing technology earnings over the next few years with $14 million of earnings in the third quarter.

In markets are recovering as the third quarter reflected a strong improvement we saw 10% sequential recovery in volume and mix for Q2, I got us back to within 5% of last year, which was limited by our planned shutdowns in CR.

On a nine month basis or volume and mix is down, 6%, which is well above underlying markets.

This reserve performance is due to our robust and diverse end market positions and the strength of our innovations.

We realize a strong and proven are most impacted and mixed impact in markets.

But our resilient end markets the benefit we enjoy the first part of the year moderated as expected.

That's a volume at our Brazilian markets is approximately flat year over year through the first nine months.

We see continued momentum in October and into November based on what we know today, we projected volume and mix of Eastman will approach fourth quarter levels of 19.

A testament to the resiliency of our portfolio and the great work of Eastman team has done to mitigate the impacts of COVID-19.

All that said, we continue to be focused on what we can control.

Across the portfolio, we continue to create our own growth through our innovation driven growth model whether.

Whether it's in performance films, especially plastics architectural coatings among others, we are performing better than are recovering in markets.

Prepared remarks are shared with you how we are leading the way in innovation market development I'm excited about the early strong customer engagement with the new potentially revolutionary product and architectural space, which has the potential to come what of easements top three growth drivers.

We've expanded or paint protection portfolio, we're launching a black P.P.S. expanding our position from clear products too opaque market with tremendous growth.

In a world where sustainability is driving consumer behavior, we've had a number of wins across our sustainable product offerings that leverage our innovative molecular recycling technologies.

Assuming economic conditions remain as they currently are we expect our fourth quarter adjusted EBITDA will be similar to the fourth quarter of 2019, adjusted EPS of $1.42.

The volume mix drink in October continues the remainder of the quarter RMBS could be above the prior year.

Obviously, there's uncertainty about the impact of covert resurgence, we expect to provide an update in Q4 December.

Finally, our cash we've made a priority given the uncertainty.

We've done a great job managing working capital and in particular inventories.

As a result of free cash flow for the first nine months is the highlight of our company's history.

And we are on track for a fourth consecutive year of greater than $1 billion or free cash flow.

All this gives me confidence we continue to be well positioned to manage in this uncertain environment.

And deliver long term attractive earnings growth and sustainable value creation for our owners and all of our stakeholders with.

With that I'll turn it over to Greg.

Thanks, Mark Oh, Yeah, we are now ready for questions.

Thank you if you would like to ask a question Keith signaled by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again that is star one to ask a question we will pause for just a moment to allow everyone an opportunity to signal.

[noise] our first question today.

From Jefferies consist of JP Morgan. Please go ahead. Your line is now open.

Oh, thanks very much.

I mean in your script, you say that.

The impact of lower capacity utilization was 60 million in the third quarter persist 140 in the second quarter.

And then I think you also said that you thought your volumes in the fourth quarter year over year or wouldn't be so different than what they were last year.

And you also said that earnings would be flat relative to last year, but.

If you have 60 million penalty in the third quarter and that seems to go away in the fourth.

Could you just heard a lot more in the fourth quarter.

So Jeff this is Willie so let me start with the response, so as you've highlighted.

Q3, we had a headwind on a year over year basis of roughly 60 million.

And what I would highlight in Q3, we actually.

Actually reduce our inventories about 5%.

Well volume was increasing 10% as we think about where we sit at this point in time, we see.

Volume levels being similar.

At approaching last years level, while we expect I'll call. It the slightly have higher capacity utilization. So as we think about.

The year over year performance in Q4 and door sequentially, we should have a slight tailwind, but its not a full $60 million impact because you'll have to recall that volume was down quite substantially on a year over year basis, whereas it will be coming back. So you have to take the volume.

Opponent of that that partially offsets the $60 million.

It's okay and look the cost actions, we took a Jeff and good morning, Jeff as well as improving utilization certainly is going to help the quarter.

We said volumes are going to approach 19 levels not get all the way back there. So we're seeing great recovery of the.

Auto markets, and BNC et cetera, and but you also have some markets that are off like aviation.

Some specific coating additives in China that are still in the process of recovering.

So we have a few markets off netting out some of the recovering markets and the ones that are off for very high mix value. So you know its strong recovery great momentum as we go into 21, but not quite all the way back on the sort of volume mix side and.

And you've got a bit of spread pressure as well as you go into Q4 number.

With the improvement and a increase in raw materials energy costs, we've got some price contracts that lag and how you catch up to that I'm not a problem overtime. Just you know in a quarter you could you could call that lag in some of their competitor pressures in tire. So when you net it all together.

We definitely see a way to get back to a 19 levels and earnings.

And.

And potentially better if you know that if the strings holds up but obviously with coated.

You know locked out in Europe, et cetera, et cetera, we're going to have to see how that you know plays out.

Thank you.

You said you have a goal of $25 million to $50 million and licensing revenue and licensing revenues and through the first nine months.

Thank you reported 18 million.

So does that mean there's.

You know.

7 million to go on the bottom end or is this 25 to 50, some kind of annual number.

Yeah.

Jeff just to refer back to our January call. The 25 to 50 million was between 20 and 22. So what I would say is this is a.

Great progress by the team, we're delivering on that front and what you should expect is we're probably have the confidence that were at least a in the middle of the range and over the next couple of years, we can deliver on top of that.

Yes, it's a great multiyear program, Jeff you know, we have a lot of incredibly valuable technology. Some of which are very much is on strategy for growing our specialties and some of which weve developed over time.

That doesn't really fit with where we want to go. So this is an energy technology that allows you to successfully convert through gasification.

Cool got sufficient into making a high quality imaging product, which the current technology in China does not do.

So we've seen strong engagement and this is the first license to sort of do this obviously there are other companies who are very interested in being the energy business in China. So we expect to get.

More of these licenses in the future or building on this first one and then there is other normal licensing activity. We have some of our other technologies that are a little bit lower in value per license, but this is a great example, it's a little chunky when it shows up.

But it is what we would expect to repeat you know again and again in the in the coming years.

Okay. Thanks very much.

Thank you. Our next question will come from of course from Goldman Sachs. Please go ahead.

Thank you very much Marc.

Mark you talk about the.

The October conditions prevail for the quarter, so does that mean.

Better than typical from a seasonality standpoint.

And I would presume November December usually weaker months or does it just mean typical seasonality.

From that October level trying to sort of gauge what you've baked in in terms of what may or may not be atypical this fourth quarter.

Yeah. This is in the atypical category, Bob So normally have a really strong third quarter and second quarter, and then things you know trail off in the fourth quarter as people.

We as well as our customers for a de stock you know for tax reasons and you know the primary demand in some markets like BMC and other things.

Slow down.

That's normal.

You know the primary demand basis, some things will still slow down like billing construction to some degree, but even that is showing some more strength than normal because of all the delays that occurred.

In the summer.

So the primary demand seems a little bit stronger, but the most significant driver of why we're going to have much better performance than a normal seasonal pattern.

Is.

A number of our customers you know, we're like us aggressively destocked inventory through the summer.

I think we can all acknowledge and see the demand came back in the third quarter better than we expected. So people are really tight on inventory the automotive companies are really tight.

BNC is obviously very tight.

To do away demands come back.

That's true and consumer durables and a bunch of other markets.

So what you see as people trying to build back to normal inventory levels. I don't think they are trying to build to something excessive there just trying to get back to stable natural inventory levels to support the now the better demand than we than we probably expected in the second quarter.

So that's all sort of good news, but normally you got this destocking going on instead Youve got this or restocking back to normal levels.

We can see so that's going to give us a lot more stability, especially true in a foreseeing this both in the <unk>.

Auto side as well as some of the durable.

But also true everywhere else I mean, we're we're running utilization flat out and see I number product for running flat out to support this demand and and building action during the quarter did that did that answer your question about yes.

Yes, absolutely I mean, I, obviously typically the fourth quarter destock ramifications can be pretty negative, but it sounds like just the reverse this year. If you look to next year your cash flow has been very.

Very impressive as you contemplate having to rebuild that working capital on your own.

Franchise for next year have you have you sort of reconcile what that might be kind of drag on cash flow that could be for next year.

Well this is Willie let me highlight a.

We have factored.

Call it and they increased business activity, but I'd also highlight to you that we've made significant progress this year on.

But structurally changing the levels and we're making investments in our integrated business planning on an advanced level such that we allow.

Ultimately have a pathway to preserve the gains this year and mitigate any headwind on inventory with business activity.

Additionally, I would highlight that we will continue to leverage our accounts receivable and accounts payable programs. So as I sit here today I see a pathway to a fifth consecutive year greater than a billion in free cash flow.

Some of it is a natural hedge Bob where you've got earnings improving.

The inventory to some degree will come up at lesser than in the past because of the investments will be made with a certain actually had you to other Reits as EBITDA grows.

You know the inventory comes the value of EBITDA greater than the cost of inventory that thats rebalances. Each other out capex will be a little bit higher too.

As we start ramping up some of our circular investments, but we've modeled this a lot and edited out we think is going to be roughly sort of similar to this year.

Thanks for the help.

Thank you. Our next question will come from Matthew deal of Bank of America. Please go ahead.

Hi, Yes, so performance films seem to have somewhat of a blow out quarter.

Why are we seeing so much demand for window Tinting is this expected to continue or is there some sort of pent up demand trend that wouldn't necessarily be obvious kind of on the back of our lockouts.

Yes, well, let's start with performance films had well a couple of years and a blow out first nine months of the year. So on the first nine months their volume mix is only down 5% aftermarket was down 20, and they're up year over year in the third quarter. So they are having a great year and it's.

A combination of things one when the film business is very solid and always growing to our paint protection films are.

Our growing tremendously fast at very high values.

As that marketplace has just taken off and we've talked about that over the years and now or even expanding from just clear into into.

Black.

Or a pay products as we go into next year, which is going to give us a whole new addressable market. So a lot of growth potential there, but it's not just that the bigger part frankly is an excellent channels.

Channel strategy in a service model, we have an incredible team out there, especially in the key markets, we serve like North America, China, and the rest of Asia.

That.

Institute, a far superior model and how we support both.

Aftermarket dealers, but also building these auto dealership programs, where they can now sell these products as a value.

The car, which they're always looking for in where we sort of train develop support them in doing that.

The auto dealerships and we have huge relationships with the top two.

Auto change here in the U.S. as well as the big of other chains in China. So it's a combination of multiple things that's getting us to win.

Great products, great new markets growing, but an excellent service model that gives us durability and now we're going to add on also a whole new digital tool that dramatically improves the install ability of the product with the with the.

Installers, and Thats very attractive and launching as we speak.

Okay. That's helpful and I was interested.

The pick your brain a little bit more on the new markets for the heat transfer fluids and then.

I think that's one of the higher margin businesses in ANS area and NFP and.

Clearly expectations are pretty soft on the Aero side. So can you talk maybe about growth there and the margin profile associated with that growth.

Sure. So if you go back 510 years ago, and say what was the business was primarily transfer fluids for chemical plants like polyester plants et cetera, and that was really the predominant source very attractive business lots of growth in China consuming it.

But the market in markets have dramatically diversified.

The first big New market was solar so you have to use in the heat of these panels. These reflective panels out in the desert you got to get the heat transfer to the turbine engine in our fluid does that.

Solar has been a huge driver of growth for us over the few last few years.

At a new market, it's really taken off for us is LNG.

They also consume and use these products in those facilities.

And that added on a whole another dimension so while some of the traditional chemical markets are slowing down a bit obviously with different capital cycles.

We are seeing these other markets deliver growth and and enable us to have a lot more stability as well going forward in this business.

I think.

Thank you. Our next question will come from PJ Juvekar from Citigroup. Please go ahead.

Yes, good morning.

NCR you mentioned that you are running flat out.

You know, what our propane to propylene spreads and.

Oh, so you're using more refined any propylene how did how did that play out in the quarter.

And then just didn't see how you also have.

As smaller the AG business, how did that do you.

Yes last year, you had some tough comps I guess this should have.

Some more stability and that AG business. Thank you.

Good morning PJ.

Just first on the spreads obviously as we think about the integrated spreads to our derivatives lift.

With raw materials, increasing here during the quarter.

Our pricing lag. So there was a I'll call it some compression within the olefins.

Lastly, on our R&D investment, we're still very positive on how that is provided a retired and paid off and given us a little more stability, but again I caught the key thing is that slight compression.

And we also highlight had some good plant.

Planned turnarounds like at our Singapore facility.

That will give us an opportunity for a little bit higher volumes than we had in Q3 as we come out of those planned turnarounds.

And in AG.

Seasonally I'd always decline for us in the third quarter PJ.

There is a lot of build to get the products to the customers the farmers.

And and by the third quarter plastics over so.

You know that always turns off for us, but this year was also more of a headwind than normal because one of our largest customers. There had a very long shutdown in the quarter and so that has a real mix impact it's not just a volume impact on on spy because.

The means business is very high value attractive business and FBI.

And so you feel both on the volume and mix and some of the normal some of it was unique to this quarter.

Great and you know in your prepared comments you talked about molecular recycling.

No need to something that the world needs today.

Talked about you know that that happening and try and then my you on fiber can you talk about what are the inputs to this molecular recycling no and was the product quality and you know when does it become economical. Thank you.

Sure. So we're incredibly excited about the circular economy in over a decade ago, we've been focused on sustainability and how that.

As a critical driver of change and innovation in our industry. We saw that all the way back to trade when we're launching that in 2009 around health and wellness natural resource efficiency feeding a world.

Our world all those trends have been core you've heard us talk about all of them and essential to our innovation. In fact, we require every new product development program to be connected to something sustainable if it's going to be durable.

That's been true for the last decade, the circular economy as a whole new dimension of growth for the company. We're really excited about the reality is plastic waste is a crisis.

Just also ridiculous waste how much carbon in the environment, we should be capturing and keeping it environment and reusing it.

A lot goes into making that happen and we can play a critical role in that obviously a lot of infrastructure outside of our scope to get it to us, but we need to prove that it can be reprocessed reuse effectively how much.

Mechanical recycling, which is the way it's done today is very energy efficient. So wherever you can do it you should do it.

Problem is it requires extremely clean feedstock has limitations on its quality as well as how many times you can reuse it mechanically so while important very limited to solving the total classic problem. So molecular recycling is required it's not an option it's required to actually solve the plastic waste problem.

And we're excited because we have two technologies that are commercial now.

That are going to prove that it's both commercial and scalable and economic returns for our shareholders to do so.

And so those technologies. The first is what you're mentioning around cellulosics. So we have the ability to do reforming with our gasifier and sensitive guests I call, we can reform waste plastic.

And return that into feedstock for making our Cellulosics plastics.

That includes our naya yards as well as.

The thermoplastics, we sell in specialty plastics, and it's a huge opportunity we already were picking up a lot of momentum from sustainability on these price because.

In the yard and 60% is bio content from for FSC certified sustainably growing for us that alone was driving a lot of growth for us I mean, if you look at women's wear this year for us our.

Our volume is flat last next relative to last year, where the market is down 30%. So we're seeing tremendous success there in that part of the market.

And that also will go into thermoplastic. So we are the largest player by far in Ophthalmics and sunglasses eyewear.

For the high end plastic that goes in those frames marshawn, where the key leaders in their markets already launched with us using our recycled content.

To have that offer so we see a lot of opportunities to grow the sales or plastics even opportunities in.

Electronics toys even.

We've been seeing is plastics is an opportunity in a market that we see.

So on that side tremendous opportunity lot of growth allows us to grow an existing applications allows us growing new applications like electronics, where we're not today and opaque applications and it comes at a higher margin and the polyester technologies the same thing PJ.

We've got our try for new product already getting orders from two iconic brands like Camelbak and now gene we have a number of customers working with us.

Cosmetics.

In.

Ill foamix as well durables more.

More hydration customers.

As well as single use plastics.

So we look across the two markets as of now we already have 100 customers doing traveling with us.

Across all these different markets and opportunities around these two technologies to grow the volumes that well get a better premium and we know we can get the better premium we're getting it now.

And if you look at a better broader market about how important this is for great PT recycled in Europe is growing at a substantial premium to serve urgent PC. So markets are willing to pay and support the investment necessary to solve this problem. So great return on investment for everyone. So we're really excited about this.

We think it's a great way to defend our existing business grow our businesses.

Solve a real challenge in the world that we need to we need to resolve.

Great. Thank you.

Thank you. Our next question will come from Alex Yefremov with Keybanc. Please go ahead.

Thank you good morning, everyone Mark just just to continue on the subject.

You made any progress in your decision, making on methanol assist project you any closer to.

Thats nine or defining the economics for both for that business.

Yes, Im ethanol says is key to our strategy.

The.

It is a meaningful adjustment to build one of those plants and we're close to refining and finalizing the details of exactly.

When we're going to build it we're committed to making this investment we believe it's the right thing to do the economics are very attractive.

For all the reasons I just mentioned.

In the January call the fourth quarter call. We'll provide you more details as we're just finishing up.

The final analysis of timing and capital scope et cetera.

And just to follow up on that market.

Is it fair to say that regardless of what decision you make with that methanol is this project youre kind of free cash flow parameters that you outlined for next year. It's still there 1 billion plus what was potentially methanol as capex.

Yes that includes when we were talking about free cash.

Free cash flow earlier that.

That includes the capital from ethanol says that's.

The reason Capex would go up.

Next year, we've already built a lot of specialty capacity so well.

Where we believe we'll have tremendous growth are you seeing great recovery, we're going to get back to almost 19 levels and in the fourth quarter of this year you got to remember Bakken 18, we felt a lot of plans right a lot of different specialty plant support growth and Triton.

And a number of other products ketones et cetera, and so we're all well positioned in our cost structure to support growth you know the one exception is.

The circular economy, which is relatively new and.

And we are completing and in this year an expansion of our performance films capacity to smart so to support its tremendous growth. So I think we're in good position on that it's really a test and our ability to do all of that is a testament to our team's operational excellence. We've made a lot of investments in the business operating model and how we operate our company in the systems on Howard.

Managing production there, we're continuing to make more investments on those to be much more efficient in our working capital. So we can need to transfer.

Improvement in growth capital.

Thank you.

Our next question comes from David I guess from Deutsche Bank. Please go ahead.

Hi, Thanks, Good morning, Mark just on your cost savings I believe about a 100 million of these onefifty are somewhat temporary interim cost savings.

How should we think about how they flow back into the into the cost base in 2021.

Good morning to everyone really take out sure. Good morning, David. Thanks, So as we think about the $150 million of actions that we're taking this year and we've highlighted the two thirds of those are.

Discretionary.

We're trying to match those as you think about with the level of business activity I would highlight that we do expect over the long term that some of that discretionary spend would become structural as well as we think about.

The leveraging of technologies and how we do business the.

But fundamentally as we think about 2021, we have cost actions that includes site shutdowns as well as.

I'll call that labor cost actions that are going to approach $100 million and we're taking actions on those this year. So as you think about.

2021, we will not only generate.

Cost savings that offset any of the discretionary that's flowing back we actually expect through Digitization, the integrated business planning and other network optimizations to actually give us capacity to invest in growth and capabilities and it's with that confidence.

That we're going to deliver $150 million net.

About 225 million gross.

As we go into 2021 and much of those actions are already in play and we're making strong progress this year, so that those structural actions.

Our in place as we start to 2021.

As we think about 2022, we expect that to grow into.

Yes to a total of.

200 million net and beyond.

Very helpful and Mark just on the the one third of anthem pay that has performed poorly over the years I know you spend it in a sense the ER.

And the actions during the pandemic, but head into 21.

First have you may have been able to improve these businesses through further cost actions and these are thinking any different about the.

The role of this month or the business going forward in the eastern portfolio. Thank you.

Thanks, David So look we've always been a disciplined portfolio manager.

It was a while ago.

We had a.

Our significant portfolio transformation.

Weve sold off a lot of underperforming businesses in our history.

And Weve had very successful acquisitions of great specialty businesses to give the portfolio the strength.

Not just in the stability of revenue that you're seeing this year unless.

And let's not forget we started with a trade war and coated.

Over the last two years, we've shown I think good resilience.

In the top line.

And with this portfolio.

But also tremendous cash flow with the value of the acquisitions. So I think we're good being disciplined and as we said we saw two businesses.

Tires adhesives that we're developing instability that wasn't consistent with our strategy, especially as part of a fee.

And needed to address that I think we've made great progress.

On managing the cost structure is especially in tires, where we're going to pick out a couple of plants and improve its cost structure in a meaningful way.

As well as and that allows us to lever up our new plant, that's a much lower cost flat as well in tires.

And then innovation is also going really well and both businesses but.

The reality is the tires business is really challenged the competitive dynamics the unit.

80 tariffs that got put in place shoving, China ties back into China.

The broader trade war with China kicked off by truck just created a huge drop in demand while capacity is coming online and that has created.

Food fight the tire company level as you can see.

And at our level.

Our competitors in this in this business.

So that we can volume recovery has been great in the back half of this year and the earnings the back half of tires will be much better than the first half.

But it's still a competitive environment and a headwind relative to my team.

And so thats, one where we're doing we can improve the business innovation is giving us the ability sustain premiums above our competitors in a meaningful way.

But it's a business, where we're going to continue looking for either JV or divestiture options and as hopeful.

Hopefully, we'll get to stability at some point here with Covidien.

And be able to sort of pursue that but we're committed to dealing with.

The portfolio adhesives is actually holding up relatively well in 2020 relative to 19 volumes actually up about 5% price is stable to the back half of 19.

Managing costs, there like everywhere else. So that business is stable innovations getting a lot of great traction our epos.

Our really winning in the marketplace with superior.

Superior environmental footprint as well as.

Better spread ability and.

Allows you to lose less.

Less resins are great growth there great great growth, we've talked to you a number times about.

Loader.

See resins that we've launched so it's stabilizing but we're also still looking for opportunities to improve its performance. If we can through partnership and and how we continue to improve that business. So we're still working its not going as fast as we'd like to at the beginning of the year with their code.

Thank you very much.

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you.

Mark maybe you could just touch on what you're seeing and building and construction.

In the prepared remarks, you talked about benefiting from the DIY market. So yes, how big is that for you versus sort of regular regular construction and as we think about going into next year.

I know you have some innovation I see the opt to sell.

In the in the deck, but as we go into next year, if DIY sort it softens a little bit.

How is that going to impact the portfolio or do you have other things that will come back to offset that.

Good morning, guys, how you doing.

Good thank you.

[music].

So in our coatings business roughly half of our coatings business is.

BMC and half is TRASM transportation, roughly and on the auto side remember again half OEM. After we finish but on the beans, PNC side, we're more weighted towards residential than commercial.

Which positions us well for for benefiting from the DIY demand buildup. So we certainly are seeing the benefit our service outages are going architectural paint did quite well.

Consistent with what you've heard from either architectural coating companies in the third quarter. So we're tracking with that fairly well huge part of the revenue total revenue.

But it is helpful combined with the stability, we are getting and care chemicals. The great performance. We've had a few transfer fluids, that's offset the headwinds or some of the headwinds I should say and aviation fluids.

And then the nation's helping to as we talked about in the growth story runoff to film. So it's a market recovery. It's good positions with the winners in the marketplace that we always focus on that and.

A great example of the resiliency of our portfolio and how it provides stability where.

Well, some things might be challenged other parts do well and that sort of balances out nicely.

Okay, and just on advanced materials, obviously, the volume performance all year and obviously, it's been a check.

Plunging year has been very strong and.

And it seems like a lot of its innovation driven as we think about going into next year, presumably the innovation.

Continues to compound, but are there parts of that portfolio that have struggled this year that we will actually see some recovery in next year or is that just kind of trying to be steady as she goes.

No I am aims doing really well, so I wouldn't call it struggling that obviously demand and and transportation count this year. So.

We certainly took it impacting advanced materials, especially in the second quarter.

In our customer shut their plants down and we shut our plants down accordingly and interlayers.

So we took a hit there obviously even performance films, while did well was still down year over year.

And and faced some challenges there, but overall I'd say the portfolio is doing great. I mean, it's it's got innovation driving growth across all three main elements of it, especially plastics has been incredibly steady through this year where.

Things like some durables unit were off in the second quarter, but we had tremendous sort of cocodrie driven strength and shrinking for.

Packaging that goes in grocery stores.

Our our sneeze guards.

The polymers that we make is great has great chemical resistance for cleaning. So it's very popular for all these scenes guard you're seeing in stores or restaurants et cetera can see you had growth in that offsetting some of the weakness.

And good price stability relative to raw materials delivering good success.

And you've seen the snap back already right the earnings in the third quarter or better than the first quarter next year.

So we've had great step back volumes almost getting back to last year last years level with the rebound in automotive and the great performance and performance films I talked about earlier.

Turning this business is really on track to deliver a great result, this year, but build audit with continued great result next year even.

Even in Interlayers, which we didn't talk much about we've launched a number of new products Weve enjoyed a lot of success with our acoustics and heads up display premium products, we've and we've told you we've been working on Nexgen for all those and we've had great wins on all three fronts Weve had a nexgen acoustic product.

Superior sound dampening just get selected by one of the leading sort of easy Oems out there onto their iconic models.

No. It is a huge issue and.

In.

These because you've lost the sound of the combustion engine.

So sound dampening in a variety of places in the car is critical and we had the biggest place where you get sound coming into a car is actually the window.

So we play a critical role in addressing some of those issues.

We've had a multi functional problem weve been working on that is much more difficult for our competitors to do that combined solar rejection acoustic and had all in one and.

And it's been just adopted by leading Japanese OEM and we've had great success also on our next gen.

It's in Troy.

Trials right now with a leading German OEM thats going to be part of their augmented reality had that theyre building in that market. We will continue to grow so a lot of success. There Triton is doing great and they've got a circular economy piling on top of this as I mentioned earlier delivering a lot of growth on on many different fronts and the portfolio is diverse and gave it to be.

So we feel good about that.

Okay, great. Thanks, so much.

Yep.

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

Good morning, sorry.

Hey, Mark just to follow up on on kind of the auto side, you just talked about acoustics and heads up displays et cetera, but I guess part of the part of the reason why you're outperforming the auto OEM build is due to paint protection that got some nice airplane it for in the in your remarks.

Can you talk about the growth prospects. There I guess, you know and the SEC market segmentation there because I guess my thought my thought was that that was more geared towards kind of higher end vehicles. So that might suggest that you are in the early innings of being able to roll out that product as you move.

To more Mcneil mainstream RMBS can you spend.

A moment or two describing the growth prospects there.

Yeah, its tremendous growth opportunities Frank it's it's.

It's a segment that's been growing.

Growth opportunities, both geographically as well as within the category. So you're right. It started out with very high in hyper cars and very expensive cars, where people want to protect them.

It's already starting to move into that.

Normal luxury market and the mid tier market even.

Especially in China, It's amazing.

The number of people, who are interested in sort of protecting their car, which for them as a very significant investment.

And and so there's a lot of growth and addressable market in front of us and this on the markets.

And and while its growing really well in China and North America. We're at very early stages of this growing in Europe. So that's a whole nother region of growth for us on top of growing the category. So we believe these sort of very strong double digit growth from growth rates will continue for quite some time. So we should be dialing in greater than auto OEM growth for M&A.

For the for the near future near mid term future.

Absolutely and advanced materials, that's true.

In automotive.

In coatings, I'd say, we're tracking more with the market.

Okay, Great Great and then a question for Willy you talked about 600 million plus in debt net debt pay down in 2000 and planning to 50 or so here in the fourth quarter, how should we start thinking about 21 in terms of the priority uses of cash and expectations on debt Paydown in 21.

Yes, Frank good morning on the capital allocation front, our priorities have not changed.

Weve increased our dividend for 10 consecutive years and Thats, an important mechanism for us returning cash to stockholders.

So to your point, we're committed to.

So our investment grade credit rating and two.

2021 will.

Really depend on the pace of economic and economic recovery.

But we will continue to stay focused on.

Getting our debt to EBITDA ratio closer to that two and a half times.

Here at the end of Q3, our net debt is about.

Three times.

Our leverage.

And also we're committed to offsetting the dilution right now and obviously the pace of EBITDA growth will be.

As we think about allocating beyond that in 2021.

Got you. Thank you.

Our next question will come from Kevin Mccarthy from Chicago Research Partners. Please go ahead.

Yes. Good morning, Mark has done a tremendous amount on the innovation front in recent years and we'd like to hear more about enough to sit on this you highlighted in the prepared remarks that more broadly tend to ask is there a way to.

Quantified the benefit that you anticipate from new products, either on a top down basis across the portfolio or perhaps bottom up.

Thinking about what the top two or three contributors could be in coming years.

So.

Good morning, Kevin We do we gave you.

Hey, a metric on new business revenue from innovation. So we you know theres lots of new business revenue was just way marketshare and things like that but we isolate out what comes from innovation platforms, and we had a target of this year getting to $500 million, we are well on track at $40 million last year.

Even in a trade war and we continue to have great engagement, even virtually with customers I. We've told you about all kinds of wins, we're having in this year across our product portfolio.

I feel good about it but it's not going to be at that level.

We aim for so we will always give that to you I would note that that new business nation will build.

And I think we can get back to that level that target next year in 2000.

21 so.

Feel good about the growth that we can sort of put together there and it really fits with where I think we are headed for delivering you know a very attractive 2021. So will you told you we've got.

Fixed cost basically flat we've.

We have told you that we have a $100 million tailwind in asset utilization.

Next year relative to this year if volumes are just flat and 21 versus 20 right. Because we took all these aggressive inventory management actions this year too.

We'll go beyond demand to you.

Generate cash and were quite happy we did that.

And that inverts becomes $100 million tailwind of flat volumes in this innovation from new new business that we're just talking about here the market recovery that you might have.

At some level.

Coburn everything plays out.

All create incremental growth above that and because of the inventory actions. We've taken this year innovations at the growth that we're getting there is above average margins for the company.

Because the inventory management, we've done you know, we don't have any fixed cost headwinds.

Incremental margins for growth next year, probably going to be 60%, 50% to 60%, so very attractive margins to that growth.

Flow to the bottom line and you know we put out together 60 cents just were flat volume on on utilization.

Flat costs, and then growth and topic to get that get us back to 19 levels.

Okay. That's helpful and then secondly.

Secondly, Mark I want to ask about Interlayer films, you talked about the acoustic films and heads up displays do you feel as though you're gaining market share in that business or is it.

More situation, where volumes could be could be exceeding auto sales as a function of restocking or perhaps both of those things how would you how would you characterize the market dynamics.

In Interlayers Helms.

Interlayers is a great business.

It's more directly tied to OEM production, obviously says got production goes up and down so our volume.

We still benefited ended better than that growing market. This year, Kevin with acoustic and heads up display, but not to the same extent.

As performance films because performance films is expanding its overall market that it serves.

And.

And so its doing well the Hutton acoustic doing well. This next gen set of products I, just mentioned are going to give us additional tailwind as we go into next year.

So we feel that it will continue on a volume mix basis.

It will be well mix is incredibly important keep in mind about this the entire company spec.

Especially in A.M.. So when you are selling paint protection films or window films or acoustic and heads up display that's way way above segment average margins and am including Triton and the circular economy products were selling same thing. So all those growing isn't just volume it's a mix upgrade.

Okay. Thank you very much.

Our next question will come from Mike Sison of Wells Fargo. Please go ahead. Your line is now open.

Hey, guys nice quarter.

Just curious and I think I've done the math right. It looks like sales to be up sequentially, right, I'm, sorry quarter versus third quarter and I apologize I missed this but why is EBIT.

Your guidance and I'm like EBIT is down right. So if anything I'm missing I would've thought maybe you'd have flow through.

On an EBIT basis.

So.

Good morning, Mike. So thanks for the question so on a volume mix, we expect it to be approaching.

Q4 levels of prior year.

As we think about.

Raw materials continuing.

To be I'll call it.

Increasing we would expect it to continue to potentially have some.

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Slight spread compression as we think about our chemical intermediates and some of the.

At the one third potentially tires. So as we think about the balance of that also will have a little less of the cost actions benefit. So I'll remind you in Q3, we had roughly $50 million Q4, we'll have roughly 40.

The activity continues to increase so all in that's a sequential view as well as some of the key inputs on a on a year over year. So.

We think about it ever being similar to prior year as where we come out as we look through that there's always some normal weather, we don't have normal seasonality of the drop space I think as I said earlier.

We still demand to be a little bit less in.

Products with some seasonality so tremendous strength to get back to last years levels and earnings so.

I think that's a great accomplishment.

As we look at it a little bit less than third quarter.

Right now I agree and then in terms of if demand level stable sort of around the third quarter level.

Second half level.

And then given some of the cost saving efforts Yaffa 20 line, where do you think your run rate level of earnings arch is tracking and I know it may be too early to give specific guidance, but.

How are you.

Bob 19 are you close to 18, just maybe just give me a sense of where earnings should maybe.

Lay out if things stay at these levels.

Yes, so I was trying to get at that you know around the growth in question a moment ago.

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Soon fixed cost flat.

Assume a tailwind of 60 cents, a share and asset utilization at flat volumes.

So then you build on that with volume growth mix improvement as I was just talking about the power of mix is incredible and as such and such as volume.

The headwind this year it was mix as a big driver is the markets that were impacted by Kobe, where our highest value markets.

So you're seeing the value them coming back in the third quarter, you'll see that.

More progress in the fourth quarter, but next year you'd expect to get all the way back there on mix.

And then the asset leverage of that fixed cost.

With sort of that 50% to 60% incremental margins I think when you put all that together theres still some spread headwinds you're going to have with pricing catching up to rise because we assume rosneft will be increasing next year with an improving economy.

So you have a little bit of that as a headwind and some competitive pressure in tires and asset yields offsetting some of that.

Growth and success.

So put it all together, we think we can get back to around 2019 levels could be a bit better, but there is a lot of moving parts on that well.

When we got to see how we get through this Kobe crisis, which obviously is going to have some amount of impact.

And there's the selection, there's China trade tensions et cetera. So there's a lot of things to factor in and refine that outlook, which will give you in January.

Got it thank you.

Our next question will come from John Roberts. Please go ahead.

Thank you you have all these great EPS key initiatives.

Think tow business fit into that mosaic and do you have to carve that out at some point or can it co exist as you ramp up the other initiatives.

Yes, so that so obviously, we've considered carving till out of the portfolio a number of times, especially back in 2015.

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Unfortunately can't be carved out John it's so integrated into the Kingsport site and so interdependent with all the cellulose of growth we have an ASP.

And am into shared assets and recycle Luke you just can't separate it would be a disaster. So you have to grow out of it and that's what we're doing right. So our strategy is to ultimately if you go long term enough replace all the toe with textiles and other applications.

With that growth, obviously, that's going to take some time.

But our strategy in the answer to that question when it comes up is.

We have to maintain the economic integrity of the company to invest in growth and support our success.

So you know tow as part of that.

We are going to work as hard as we possibly can to grow and textiles was also has attractive margins.

And grow that business as the tow business.

Okay declines over time.

Thats sort of the answer the question, but it's also a way to leverage a lot of excess tow capacity that we have right now that.

Has great incremental margins will grow textile against zero.

And then secondly back to the performance films, the Interlayer business, it's almost all OEM can be pay protection and opaque films Bell OEM as well and maybe just give us a little bit of parameters, if interlayer profitability or content is onex for car.

The opaque films go on the side Windows and grow when does so that's got to be much bigger than onex and then the paint protection goes on a much larger surface area and so thats got to be even higher than that darkening sounds kind of give us one of the onex and then the the interlayers and what are the opaque films and they.

Paint protection films.

Yes, so John I don't have a quick easy answer to that question. What I can tell you I saw sort of refine a little bit about what they pay protection film is so pay protection film comes in two versions. One is the full wrath of the car, but a lot of people just wrapped a vulnerable put the film on just a vulnerable parts of the car the front the side that.

Sure handles et cetera. So it comes in two different versions on how much you sell per car when it when you do PBF.

It is certainly additive.

Think about our presence on a car because interlayers is doing one thing in acoustics and head the films on the Windows are as you noted so it's not just hitting its actually solar rejection is a big value proposition. So we sell a lot more hot locations than cool locations because the films are much more advanced today than they were 20 years ago.

The big value proposition is and just the ticket actually reject a tremendous amount of solar heat that actually gives you better fuel efficiency since use less air conditioning.

And so Thats you know additive and then you've got the PPL, but we don't break it down on a sort of ratio basis like that it's something we probably should do and we'll take a look at that but.

But what we do know is we're getting a lot of pressure more presence on each car sold and the dealers. As you mentioned are really getting interested in is right. It used to be very much an aftermarket business and.

NPF and.

And it's a lot of our growth is now in collaboration with these programs. We are doing with the auto dealers, where they sell it as a.

Up sell the car sometimes its pre installed on luxury cars. So you have a choice about it when you're buying it.

A lot of it is after sort of an up sell it at the point of sale. So.

Different ways to grow.

Thank you.

Our next question comes from Matthew Blair of Tudor Pickering Holt. Please go ahead.

Hey, good morning, everyone I wanted to circle back to tire additives. The Michelin data showed pretty rapid improvement in replacement tire demand through Q3, I think that both North America, and China up 9% year over year in September. So I just wanted to see how does that match with what with what you have.

I know your tire market is much more commercial but any comments there.

No we've seen the same grabbing a recovering demand and tires or third quarter has been been quite good and consistent with what you're talking about.

Sounds good and then you know all these forest fires have caused a pretty big wood shortage lumber shortage.

Is that having any impact on I guess either fibers are there any other parts of your business.

No the where those fires are occurring are.

Not where we would be getting or would we we only.

Good wood pulp from sustainably grown for us there, they're grown purposely to be regenerated and taken care of and in very different locations and where these fires are occurring.

East Coast, Brazil different different locations and that the west coast.

Got it thanks.

Yes, if we could make the next question last one please.

Our last question today will come from a room since one Ethan RBC capital markets. Please go ahead.

Great. Thanks, good morning.

Thanks for taking my question just just two quick ones. So first off could you just remind us sequentially what was the benefit from a lower idle facility charges I guess Q2 to Q3 and then secondly, if you could just address maybe.

Maybe the benefits to Eastman from a potential infrastructure Bill if there is maybe a percent of your portfolio thats weighted there and how.

How potentially eastland will be.

Positively impacted by that thanks.

Sure.

So if.

If that answer the question. So I'll answer it two ways, one which is a use all our decremental margins go down roughly 60% from Q1 to Q2, and our incrementals be about 60% I would say over 90%.

Period costs associated with our facilities.

Basically went away in the quarter on a sequential basis as our plants came back and became fully operational throughout the quarter.

And then on the infrastructure question.

It will benefit us, we're not really focused on.

Large infrastructure projects in the kind of materials, we make we tend to go more into you know consumer durables cars.

Billy construction, but more commercial than bridges and.

And so it depends on the nature of what the infrastructure is what's great about that is it just creates broader economic growth, which were highly levered to so while it may not be participating directly in some of the infrastructure projects.

You know we are have certainly tied to macroeconomic demand people have more pickup trucks going to work and construction you know.

Which is good for us et cetera, So, we'll certainly benefit like everyone does in.

From the improving economy driven by it.

Thanks.

Thanks again, everyone for joining us. This morning, we appreciate you dialing in and look forward to talking with you again soon have a great day.

This concludes today's conference call. Thank you all for your participation you may now disconnect.

Yeah.

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