Q4 2020 Eastman Chemical Co Earnings Call
Eastman Dot Com, we will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead Sir.
Okay. Thank you Cecilia and good morning, everyone and thank you for joining us on.
On the call with me today are Mark Costa of Board Chair, and CEO, Willie Mcclain, Senior Vice President and CFO and.
And Jake Laroe manager of Investor Relations.
Yesterday after market closed and addition to our fourth quarter and full year of 2020 financial results news release, and SEC 8-K filing we posted slides and related prepared remarks, and the investors section of our website www dot Eastman 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 events or results could differ materially.
Certain factors related to future expectations are or will be detailed in our fourth quarter and full year 2020 financial results news release during this call in the preceding slides and prepared remarks, and and our filings with the Securities and Exchange Commission, including the form 10-Q filed for third quarter 2020, and the form 10-K to be.
We filed for full year 2020.
Second earnings referenced in this presentation exclude certain noncore and unusual items reconciliations to the most directly comparable GAAP financial result, financial measures and other associated disclosures, including a description of the excluded and adjusted items are available on the fourth quarter and full year 2020 financial results news release, which can be found on our website.
With that I'll turn the call over to Mark.
Good morning, Thanks, Greg before we answer your questions I want to take a few minutes to make some comments.
We've had a strong recovery and the fourth quarter and robust performance for the full year. Despite the challenges associated with COVID-19.
I'm credibly proud of how Eastman employees around the World responded to these challenges and stepped up to help us deliver on 2020 and.
And here of some of the highlights.
The early in the year, we took quick and decisive action to adjust our operations to keep employees safe and preserve our operational integrity.
And we shifted our financial forecast of prioritizing cash and liquidity given the uncertainties and we delivered another year of outstanding cash flow, our fourth consecutive year of cash flow of greater than $1 billion.
While we prioritize cash our earnings performance was resilient, which is a testament to the tremendous investments, we've made and our innovation portfolio and our overall business portfolio over the last decade, including enhancing our market development and commercial capabilities.
Additionally, we demonstrated we have diverse portfolio of businesses and end markets, which gives us the building.
And we're committed to being a leader and the circular economy, we've accelerated progress and it's paying off with several wins across our portfolio <unk>.
Including Houston being named as the Wall Street Journal, most sustainably managed company of 2020.
In addition, and our 2020 sustainability report, we committed to the ambitious goals of reducing our scope one and two of greenhouse gas emissions by one third by 2030.
And achieving carbon neutrality by 2050.
Looking forward to 2021, we entered this year with momentum from our record fourth quarter results and.
And we are seeing clear signs of recovery across many of our markets, including strong orders in January.
That said visibility remains limited due to the continuing effects of COVID-19.
This means that we will continue to focus on what we can control and 2020, we meaningfully reduced capacity utilization as we aggressively manage inventory well beyond the decline in demand to maximize cash as a result of EBIT declined by about $100 million just related to this additional inventory actions we took.
If the volume is flat and 21 compared with 20, we would have about $100 million tailwind from this improved utilization as we go into this year.
We're about 60 of share.
Looking at our cost structure and recall that we reduced cost by approximately $150 million and 2000 and 'twenty versus <unk> 19.
And we estimate about $100 million of this was temporary.
We also took actions to accelerate our transformation program and we're on track to reduce costs and 2021 to offset the return of those temporary costs.
As a result in 2021, and we expect our cost structure to be about flat with compared when compared to 2020.
On topline growth, we expect growth from three levers first we anticipate market to continue to improve relative to 2020 as we've seen in Q4 and in January.
Second we continue to make progress with our innovation driven growth model to grow faster than the underlying markets and many of our specialty products there and number of examples of this across our portfolio and 2020 and we expect it to continue in 'twenty one.
Third we project a strong improvement in mix with recovery in these high value markets and the innovation driven growth of our premium products the.
The significant portion of our headwinds in 2019 with the trade war and as well as 2020 with COVID-19.
And were related to mix.
As growth and our specialty products accelerates and 21 improved mix will be of powerful driver of our earnings growth.
We're already seeing this benefit in Q4 of 'twenty and expect it to accelerate through 'twenty one.
Were also headwinds, including the lack of visibility related to COVID-19, and other global macroeconomic uncertainties.
In addition, we are seeing cost for raw materials energy and logistics.
The logistics rising and have competitive pressures and the few products.
When we put this together we expect our 'twenty, one and adjusted EPS will increase between 20 and 30% compared to 2020.
This means our expected 'twenty, one EPS will be well above 2019, which would further demonstrate the strength of our portfolio.
We anticipate strong start to 2021 with adjusted EPS similar to the first quarter of 'twenty, you'll recall on the first quarter of 2020, our EPS was up 15% year over year of very strong performance of our industry at that time.
Finally on cash of high priority for Eastman.
We expect 'twenty, one to be our fifth consecutive year of free cash flow above $1 billion.
A moment ago I talked about our intention to be a leader and the circular economy and as part of that commitment today, we are announcing along with Tennessee Governor Bill Lee our plants and build one of the world's largest methanol Swiss facilities here in Kingsport.
Through Metanalysis this world scale facility will convert.
Waste plastic polyester plastic.
Often ends up and landfill and waterways and the durable products.
Over the next two years Eastman will invest approximately $250 million of the facility, which will support Eastman and commitment to addressing the global waste crisis and mitigating challenges created by climate change.
While also creating value for shareholders.
Using the Companys polyester of renewable technologies, New facility, we will use of 110 Kmt of plastic waste to produce premium high quality specialty plastics made with recycled content.
This will not only reduce the company's use of fossil fuels feedstocks, but will also reduce our greenhouse gas emissions by 20% to 30%.
This is incredibly exciting news and we're only just beginning.
I'll close where I began with appreciation for the men and women of Eastman.
The make all of this happen and do it with the bias for action adaptability and optimism for the future of.
Sure. The optimism. This is an exciting time for Eastman and our strengths of never been clearer and that gives me the confidence that we are well positioned to manage and this uncertain environment and deliver long term attractive earnings growth and sustainable value creation for our owners and all of our stakeholders with that I'll turn it back to Greg.
Thank you Mark Cecilia, we are now ready for questions.
Thank you if you wish to ask a question today. Please press star one on your telephone keypad. Please ensure the mute function on your telephone the switched off two of our your signals from Richard with Quickbooks.
And please press star one to ask the question we will now take our first question from Vincent Andrews from Morgan Stanley. Your line is open. Please go ahead.
Thank you and good morning, everyone Mark.
I'm wondering if you could just talk a little bit about the the molecular recycling plant and I can't pronounce the metal whatever it is.
Just help us understand.
It sounds like Youre, saying this is the can be the world's largest but what is the scalability of these in terms of how much larger could it be.
Where do you where are you in terms of customer demand and true in terms of filling it out and in the script you talked a little bit about there being clear evidence of a willingness to pay price premiums.
And for renewable products, how are you going to be pricing. This product, maybe we could just start there.
Service and the.
It's the methodologies.
So it's a technology that's been around for a long time.
Kodak developed of decades ago.
The recycle actually ex polyester ex very material and then they learned and saw the opportunity to take of municipal waste and broaden the operating capability of this technology back then.
And it's something that I actually wanted to start in 2010, and we actually had the plans on the on the.
And developing the engineering of it at that time, but the market wasn't ready for it.
We're really excited as the market is very much ready for it now climb.
Climate Circularity.
And the ability is obviously, becoming an incredible priority around the world even with Covid, It's just becomes stronger not less and so we think we're on a great position to be a leader here.
When you think about the.
The the technology and the opportunity that it has from a market point of view.
And it's tremendous around.
A wide range of specialty plastic businesses from hydration and consumer durables to electronics ophthalmic et cetera.
The wide range of markets a lot of customers are very interested and this is there.
We're making aggressive commitments to improve the recycled content.
And and so there's just a lot of the engagement we have over 100 customer trials going on right now.
Across a wide range of different applications.
So the ability to grow is there we've already seen great success and launch with Camelback and Nalgene, where they've put in on.
Recycled content into our tried and renew and.
And you'll see a lot more announcements as we go through this quarter.
And the demand there from the from a value point of view as we showed you on the chart.
The retail products are commanding a premium.
For recycled content and sustainability.
PT food Great P. T is trading at a substantially higher premium and in Europe as people are trying to work towards the recycle content goals.
And I think customers recognize that there has to be some amount of premium that we have to achieve to make these kinds of investments and solve such a serious challenge we face around the world obviously, everyone wants to keep this as affordable as possible and so we don't expect our premiums premiums would be significant.
Sufficient to give us some attractive return, but our primary goal of getting the return is on the growth and this business and.
And we're able to load this plant really fast as another advantage on the economic side because.
We can take the balance of slowly growing the specialty conversions like we do on any specialty products that Phil and the rest of the capacity.
And with P T into the packaging market, where there is strong demand and then just keep on valuing that up over time so the.
And the economics here are quite attractive so a lot of different ways to sort of win and both existing applications through premiums and accelerated growth getting into new applications like electronics and automotive.
Some key examples.
And our scale and integration gives us a huge advantage and how we can do this we've got some significant advantages and how we can manage our feedstocks.
And thanks, and just as a follow up the $600 million of.
Revenue.
Is that is that just sort of assuming from this plant or is that assuming additional capacity down the road.
Right you asked about the scalability of the and additional plant sorry Vincent.
So to be clear of the $600 million of new business from innovation is for the total corporation of all of our products not just methodologies as well.
And when you think about methodologies and we look at it as a standalone opportunity.
Both of the polyester revenue the polyester of renewal technology and the carbon free technology combined we think is between the 500.
<unk> million and of $1 billion revenue platform for the company, obviously that doesn't happen in one year. It takes years to build that out.
But a very substantial platform and frankly the biggest platform after.
And before this and this would be the two biggest platforms we have.
And that doesn't include scalability, so thats building plants to serve the demand that we think we can make with our specialty products. We also think this is scalable and.
Partnerships with other people around the world, we're very interested and recycled content for their needs.
And are pursuing of business model around how we scale of this into multiple plants around the world.
And I'm focused on doing the.
The the methanol Sis, it's very scalable to build these plants and economic.
And there is an advantage to having them in different regions. So we think there's a whole another vector of growth on top of this but it's early days. So I don't want to get ahead of ourselves on that.
Alright, well, thank you very much sounds very exciting.
We will now take our next question from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
My first question is you talked about.
The <unk> million cost penalty.
And from lower utilization, but wasn't the cost penalty $200 million.
Why does the $200 million come back in 2021.
The Jeff Good morning, this is Willie.
First what we would highlight is.
The 100 million debt were.
And how long is a tailwind and specifically related to the $300 million of inventory reduction actions that we took in 2020 and you can clearly.
And the impact of that and our cash flow the other.
The 100 million and should we think about utilization versus volume mix.
And you can combine those two together so fundamentally the lower.
Utilization and volume mix net together with the other $100 million.
Okay and in your methanol assist on facility.
Can you just buy methanol.
Do you have to make of ethanol.
Jeff its not.
Not making methanol, so I don't know where that kind of what the name of the technology, but but what you basically do is you take polyester waste and.
And you use and methanol and a modest amount of energy to convert that waste ore and zip and the polyester basically back into its intermediates of DMT and.
And EG and other monomers.
And purify so it's actually and input not and output to the process to do preliminary depolymerize the the molecule.
That's sort of how it works and it's far more energy efficient than the fossil fuel process. So while it takes a bit of energy and methanol.
It's a lot less than you know.
And sort of pulling oil out of the ground and all of the steps to get it to being DMT and and <unk>. So we're 20% to 30% better carbon footprint.
And by doing this technology and I think that's an important thing we want emphasizes the new technologies. We do runs the recycling. We believe there are two fundamental gross you have to me at the same time, we are of plastic waste crisis, we need to address it and we shouldnt be wasting any of that carbon and the environment or letting it impact the environment, but at the same time, we got to make sure of carbon footprint is better otherwise we're really not.
Improving the overall environment. So every technology, we're looking at has a better carbon footprint than the fossil fuel process. That's true of methanol Sis or CRT also of $20 to 50% better depending on the feedstock. So.
And we're addressing both of our climate impact.
And with process innovation as well as solving a waste of crisis.
So youre buying and the basketball.
While we make our own ethanol and by some ethanol. It's a mixed bag as you know from the broad portfolio of products we make.
Okay, great. Thank you.
We will now take our next question from John Roberts from UBS. Please go ahead.
Thank you you talked about a 5% revenue headwind and chemical intermediates and 2021 from the changes that you made at the Singapore access facility that seems really big and I didn't realize that facility maybe it was as big as it was or is the significant.
Shutdown of closure you've done there.
Yes, Thanks John.
To your point as we've made the.
Decisions too.
But since the operation that are Singapore site fundamentally it was based on the raw material positions that we have a debt facility.
And the Singapore and.
And roughly it is a world scale equivalent of and Opto facility.
It's about a fifth of the size of what we have and long view, but still significant from the volume output.
The key factor as we think about the 2021 and going forward is overall that will give us the opportunity to continue.
Continue to Debottleneck, our facilities and Texas.
And we have.
A much better cost position and from a fixed cost structure standpoint, we expect to improve earnings by about <unk> $25 million.
On a go forward basis.
But this is this is the action we won't take.
For a while and it's not a profitable position to be with our cost structure that we had in Singapore, and but we had to wait to the contracts expired to be able to shut it down on the supply side.
And so while the volume is going to be down the earnings are going to be meaningfully up.
Around the 2000 $25 million.
Net.
By taking this action. So we've always warranty of the Ci is a lot of volume volatility to it because of shutdowns or.
And just planned maintenance shutdowns of this it's really dangerous to look at volumes.
And that section you need to just focus on the earnings.
Great. Thank you.
Yeah.
We will now take our next question from Matthew Deyoe from Bank of America. Please go ahead.
Hi, Thanks.
Can you just speak a little bit to the confidence and securing feedstock from the methanol plant.
And the U S garbage infrastructure and typically geared can moving product inland to Tennessee, So how do you.
What's your work around there.
Sure. It's a great question and it's one of the strangest questions. When you think about the plastic waste crisis, I think everyone can agree needs to be addressed.
And there is so much of it out there and yet you know one of the biggest challenges.
For any of these investments is actually getting of delivered to your site on which.
And it's very confusing, but better true challenge and a question. So we have a lot of partnerships we have developed.
Two suppliers with waste and we of some very unique advantages.
Around how we can handle ways because of the combination of the PRT using polyester and the CRT and being able to use mixed plastic.
Of a wide spectrum as we sort of re purpose of our gas fired the reform plastic.
At the same site, we can actually take a very mixed plastic stream that no one else really can manage.
We can take of this very low cost and more readily available mixed plastic.
And that doesn't require much separation and do that separation very efficiently here.
Unique process we've developed.
And the feed that then separated streaming and these two assets. So it allows us to access waste more readily.
And.
It will help much lower cost because it's the lower value when it hasnt been separated so that's one of the big pluses of the scale and integration that we benefit from here not to mentioned, our capex will be probably 10% less.
And with some of the assets will reuse here.
And so I think that's important and a real advantage. It still takes a lot of work and we've been devoting the last 18 months and securing a wide range of sources. The other long term interesting opportunity that's going to come out of this of lot of our customers the big brands, both and textiles and on the CRT as well as polyester on a on a variety of end markets.
And are very interested in the take back program right. So they wanted to truly have the circular loop, where we go materials material.
They take back used products for them from their customers and.
And can send it to us and then we can recycle it back into materials for their products. So it's a true absolute closed loop.
And so it'll take a while for that the obviously develop.
But I think for a number of brands. It's incredibly important Patagonia is of Great example, where they've been doing this for a while and fully endorsing.
Molecular recycling is the only way they can actually close the loop and.
And you'll see a number of other customers, making somewhere announcements.
So it sounds like and then a lot of the press release talked about the AR and the PRT side of things, but it sounds like you are also going to do the correlation kind of gasification.
The fiber or the.
Waste stream as well and directly into the Gasifier and I read that correct or is it really just the PRT and that youre going on.
Hi.
No no we were commercial and both now and so we're doing both now.
We've just talked a lot about the CRT and which we call the carbon renewal technology and basically.
We are changing our technology, if you will from gasification of reforming.
When you go from sort of coal to waste plastic and.
And replacing.
Co with the waste plastic with a carbon footprint, that's sort of 20% to 50% lower so at the very compelling technology that goes into our textiles, our NIE of fabrics that were growing quite strongly as well as into some thermoplastics and the specialty plastics business and.
And a new growth opportunity, we see and AFP around foamed installation that would be cellulosic based and very sustainable offering versus EPS. So a lot of different applications and CRT going on at the same level. That's part of that 500 million to of $1 billion platform <unk>.
Combined with the PRT, so a lot going on.
Alright. Thanks.
We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.
Thank you Mark on the 'twenty, one guidance could you walk through the earnings bridge from 'twenty into 'twenty one.
It'd be helpful. Thank you.
Sure and good.
Good morning.
And so I'd start with as we as we said what does it and we can control.
Our fixed costs as we said youre going to be neutral.
And 'twenty, one relative to 20, and so we took a $150 million out.
Debt were sort of temporary cost actions.
Through last year.
Many of those costs are coming back, especially on the operations and we're running our plants incredibly hard.
And we're trying to serve the demand that we've seen in the fourth quarter and it's increasing and January.
And is that those costs of obviously coming back, but theres still a lot of other costs of efficiency and structural costs of our travel with COVID-19 debt.
It's not going to come back certainly not in the first quarter, but we would expect it to start coming back.
Through the year, so cost relatively flat on the fixed basis as Willie just mentioned and the prior answer you've got the $100 million utilization tailwind just at 2020 volumes.
And without volume as being greater than last year and Thats about so put all of that together that 60 of share and just to sort of cost utilization side of things before you get the volume growth and.
And then we've got volume growth and three categories. The <unk>.
First just being market recovery as we are seeing.
And the fourth quarter and January and so that there's we're presuming it's going to continue through the rest of the.
This year that the economy continues to recover and that Covid is not going to have some big negative impact.
The second is innovation, creating our own growth rates of a lot of growth that we had last year.
It wasn't just what markets did but how we create our own growth. We had phenomenal success in the performance films and a very down auto market for the year yet the revenue was basically flat for the year, where they had strong growth year over year and the fourth quarter.
And so that's a great example.
Of innovation, creating growth great success, and acoustics and heads up display of creating growth and the inner layers trite and delivering a lot of growth where specialty plastics actually grew earnings in total.
For 2020 over 2019.
So a lot of things going well on the innovation side and a lot of traction developing and the AFP like amatriciana. So a lot of innovation.
It is important to remember that both of the markets that are coming back of high value mix.
Automotive.
And as well as.
The.
Innovation, having much higher margins than segment average. So there is a huge mix upgrade impact that isn't just about 19 of 20, but it goes all the way back to 18. When you think about the first we had a trade war that really hit some high value markets for us.
And and impacted earnings then we piled on a pandemic and we see us recovering.
Back to 19 volumes and mix and hopefully better than that.
So that all helps there are some headwinds obviously.
The aviation not recur and recovering as well this.
Of this year and so that's still going to be probably of $30 million of headwind on earnings relative to 19.
And then we expect raw materials to go up and there is some lag always been specialties and catching up the raws.
And we have the competitive pressure, we've called out and tires adhesives and <unk>.
The asset Hills.
So a variety of different things going on there, but when you net it all out it's a very attractive recovery and earnings I do want to emphasize of that 2030% range as of genuine range.
There is a lot of uncertainty so while it's great to have <unk>.
Growth in January and great to have the recovery and the fourth quarter. It is January we've learned this lesson and 19 and 20 about what can happen through a year.
And while we remain optimistic that these trends will continue.
And we really don't know the impact of Covid and how it's going to impact the economies. Yet. This year. We certainly are seeing operational limit limitations of of how demand is recovering, especially and logistics.
And getting products to our customers. So that's limiting us a bit here certainly in the first quarter.
And and.
And so there's just those things and factors you have to keep in mind. When you think about this range and I think it's reasonable to the cautious as you start the year and this range and.
And we built the success through the year.
Got it and will address on the free cash flow guidance can you walk through some of the components of their I assume we will see a fairly big build and working capital and 2021.
Hum.
Well, we've got a pretty simple bridge, David from free cash flow to 'twenty, one 'twenty and and actually it doesn't include a big build on the working capital front.
Okay.
I think three of yes, let me start at a high level, which is we expect our cash earnings.
And that's consistent with the 20% to 30% and Mark just walked you through.
And.
Also as business activity does pick up.
On the inventory front, we believe.
Yeah.
That we can offset that and what I would highlight of as part of our transformational efforts, we're investing and advanced.
Integrated business planning.
Processes to enable us to keep the <unk> low.
On the inventory side and packed and maintain the gains that we've been able to accomplish and also we continue to have our programs and AAR and.
<unk> payable.
The offset and continue to make progress on that front and so our base assumption is that.
Working capital will be neutral.
And 2021.
On.
Even in an economic.
The environment that has no none of them on the capital front, we do expect and 2021 on that Capex will be 500 of $525 million. So at least of 100, the $125 million greater than prior year and.
And obviously, we expect to more than offset that with the with the cash earnings so all in all.
And I think developed and track record that demonstrates that.
And we can maintain cash flow is greater than a $1 billion and basically about any environment and our long term focus is to continue to grow that.
And not just be at a greater than $1 billion, but one I would also like to recognize the how the Eastman team stepped up and 2020 to deliver that $1 1 billion of free cash flow and took.
Everyone and that type of focus and the team delivered.
Thank you.
We will now take our next question from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes, good morning.
Mark I heard the.
The comments regarding volume growth, you talked about market recovery, and and innovation and it sounds like mix is going to be important as well but.
A way you can help us better understand the level of volume growth.
And is embedded in your EPS guidance, it looks like and the pandemic year went down 5% how should we think about the high end and the low and.
Whether it's an absolute level or or relative to GDP or and other macro metric.
How would you have its process of that.
Kevin from a kg point of view I think you would think of as our volume recovery as being similar to GDP.
And.
And then you get some leverage from mix. So as you look at this you've got a variety of markets that are sort of still recovering relative to 'twenty, they're going to have volumes up and a meaningful way like transportation.
Our auto has to be specific on aviation.
Even though aviation will be better this year, but not by much.
And so you've got markets like that that of recovering textiles, we expect of very strong recovery.
And so those will continue to drive value and those are all very high value relative to corporate average when it comes to variable margins.
And then you've got other markets are not going to grow as fast because they were really strong last year.
Like packaging and.
And some hygiene applications.
And care chemicals, we still see them probably growing and.
And I suppose going backward, but not by much.
Given the strength of it had last year, so you can't sort of <unk>.
<unk> markets the same way obviously as.
As we look at all of these different.
The parts of our portfolio, but whats nice is the stability you get from the strike. So these resilient markets that we're in and provided a great stabilizer to the headwinds we saw on automotive last year, where our volume mix. As you noted was only down 5% of.
Which was quite good for our industry.
And and quite stable because of all these different resilient and markets and now this year, you're going to sort of have the reverse of that of some of these high value markets were impacted last year are going to do much better and the resilient markets.
Are not going to be a big driver of growth. So it's hard to give you a specific number because of lot of it and you know with extraordinary things with mix for vs Kgs and I don't want to get into the breakdown of that.
Okay. Thank you for that second question I had related to methanol assists.
My understanding is that you can use different sorts of waste streams, such as old pet bottle resin and maybe.
Polyester from carpet and so on and so my question is.
And what testing have you done already regarding the issue of variability of waste streams and does it matter in other words if I'm.
On the shipping it as you say into ethylene glycol and DMT.
Is it the case that the output is entirely fungible.
And the variability is the non issue.
Or do you have to go through customer approval processes et cetera as you.
As you implement the new process.
Sure. So let me sort of break this down into the operations part of it and as you just said the customer qualification part so the the technology of methanol as.
Is it pretty robust technology, and and methanol CIS as is the process is not exactly novel, but when Kodak developed this process of long time ago as I mentioned.
And when they switched from using a very consistent stream of palio structure of films to municipal waste. They discovered that it is challenging to manage a diverse waste stream that also can vary day to day based on the mix of plastic youre getting in there and what's great about this technology is it does not compete with mechanical recycling right so and.
And of course cycling, where you can do it as a better answer it has a very low carbon footprint, but it's restricted to only using very clean feedstock and <unk>.
The most of what they do very clean and clear feedstock.
From bottles is really the what they can handle.
And even then they have problems with the limitations to some degree on performance and the polymer degrades over time.
So theres a limitation to how long you can mechanically recycled plastic period.
So the molecular recycling like methanol is essential as a complement to mechanical with the feed the with the raw materials of the plastic that they cannot use it ends up and landfill and giving infinite life to plastic because we can constantly.
Recycled plastic.
And with no degradation.
So the the key though is you have to have a lot of operating experience on how to manage this process and its not the methanol. So step that's hard it's the purification step that you just got at Kevin that is requires a lot of capability experience and a lot of trade secrets that we've developed over the years on how to do this.
To make sure that the intermediates that come out of the plant are purified and basically identical.
Two of the ones based on fossil fuels, so when we get to making the polymer.
The the polymer is exactly the same there is no.
The profile or impurities that as an issue and that's what's so great about customer qualification.
Is that they don't have to they have to wrap their head around that at the same and that's tough for them to buy into given the process, but once we sort of walk them through the technical details.
You know the great thing is they don't have to change modes of process conditions or anything else. They can just suddenly have recycled content of their products.
Because it is literally identical and has the same quality same performance won't degrade over time and the recycle of loop. So that's what's so compelling about this technology is it really is a long term is and its solution much more similar to aluminum.
Perfect. Thank you so much.
Yeah.
And we will now take our next question from Mike Sison from Wells Fargo. Please go ahead.
Hey, guys nice nice the nice ended the year there.
Thank you.
One quick follow up on that.
Analysis.
Facility and you're going to be.
On the branded like tightened meeting.
Is there going on.
And it's sort of a name or a labeling where a customer can sort of a showcase of its use from recycled materials.
If I wanted to go to Amazon or something and and search for it it would pop up.
Yes, you can.
We've tried to keep our core product brand names and add.
A recycled named to it so triton and renew is actually the formal brand named Mike.
There'll be NIE of renew and textiles, and the series of other products for cosmetic packaging and there'll be crystal renew and et cetera, and and those signify that theres recycled content and now Jean and and Camelback are marketing it that way already. So you can go look at those products.
But yeah, no I think it's important that the.
We get some sort of identification of it.
Every customer is different some customers.
And like us from switched of our products don't declare the you know what it is so it'll be a mixed bag, depending on how customers one of the manage their marketing position on the shelf, we don't mandate of a certain approach.
Got it and then just in terms of Triton overall, it does seem like the.
And the fundamental demand on growth rates of that business has has had gapped up over the last couple of years can you maybe give us a sense of what you think.
This business will grow over the next.
The need of five years and then.
When will you need to add and capacity.
To meet that Klaus.
Yes, so try and has been a phenomenal success story over a decade now right. It's just a business that has continuously delivered strong performance and growth and a wide range of applications.
It started out with hydration.
And we have these reusable water bottles and replacing single use plastic so one of the great things about our recycle content as it's going into durable products predominantly we got out of PT of long time ago. So I'm not trying to defend the PT business I'm actually.
Taking single use plastic I'm, taking carpet I'm, taking textiles of very wide range of supply on the raw materials and.
And then turning them in.
And the durable products predominantly.
On.
And so it goes into a lot of consumer durable appliances et cetera, and we're now going into toys.
And a variety of different applications, and so it's positioned and a lot of markets and already care about being BPA free and products being safe is one of our drivers. The performance is far superior to the competing plastics and its durability and resilience and how it holds up over time and now we got recycled content that we can add and it that just gives us one.
The level of differentiation. So we have a long runway of very.
The attractive growth and this business from when we need to add more capacity. We're still a couple of years out you have to remember that and 18, we added a significant chunk of capacity and Triton.
That we are certainly making progress on filling out but.
But we still have a few years before we have to add more capacity.
Great. Thank you.
Yes.
Okay.
Yes.
Operator are you there next question.
From Frank Mitsch from Freeman Research. Please go ahead.
And.
And always paced the way good morning folks.
Good morning, and give us any of you called out the the biggest source of upside for the fourth quarter came from transportation ex aerospace and obviously youre eager and continuing to see some issues on the tire additives side I was wondering if you could offer a little more granularity on on how that played out.
Are you with your various products how its starting out this year and what's your expectations as we progressed through 'twenty one.
Youre talking about automotive just to be clear correct correct yeah. So.
Automotive, which all roll tires into as well I mean demand came back strongly.
Across the automotive space, whether it's our inner layers performance films logging and significant record earnings and the fourth quarter.
The tires demand actually coming back quite strongly and the third and fourth quarter. So demands come back across the board and that sector. As you can see from a lot of external reports.
And we're advantaged that a lot of our products go into the luxury market.
And especially in advanced materials.
So we benefited from that market, frankly, holding up a bit better last year than the overall market did and how that's continuing to accelerate.
For Us and then you've got you know.
The accelerated growth with acoustics and heads of play.
Doing really well.
Our new Nextgen paint protection film and performance films is doing incredibly well a service channel strategy that allowed us to grow a lot of market share and China.
This year.
And I should say and 'twenty I mean, that's you know kind of continue to provide growth. So it is a real combination of market and innovation and service model.
And that's driving a lot of that growth.
And and you know that the margins of these businesses are.
<unk> segment average and above company average so you get a lot of mixed lift when these things sort of come back we've been saying that you know the volume and mix.
Hit that we took and 19 relative to 18 and 20 versus versus 19.
The mirror image.
And when it starts coming back and you start to see that and the fourth quarter and and we will continue to see it now I will note, though that demand is exceptionally strong across the auto supply chain and.
So we are running into logistics constraints and capacity limits and serving all of it. So we're still happy to serve as much as we are but.
It's a bit challenging out there on the logistics front of it right now for a lot of products.
Got you got you very helpful and if I could if I could ask about AFP was really interesting to read about the retinol sunflower rate and I was wondering where I could get some of that.
On <unk>.
And I know gratefully I know Greg uses it because he looks fantastic.
And.
We certainly need to.
Yeah.
Sure.
So you continue to call that the third of the business debt.
That's a challenge and then where do you stand on the strategic review and and what's your what do you think your ability is to execute something and 21.
Thanks for the question Frank first I'd say, the pandemic as accelerated and some of the issues that we're facing and the one third.
Particularly as we.
We highlighted and the first half of the year and the tire additives.
Also I'd say the environment has made it more challenging.
And complete some of the alternatives that we're considering for the businesses.
But we're committed.
So the addressing the performance we've announced that we're shutting down one of the tire additives facility and.
And you can expect us to continue to look at the footprint of.
The tire additives adhesives, and also and the contract structures within the businesses.
And considering.
Is the the types of actions that make sense. It could also include the joint ventures and divestitures that we.
A lot of and in addition to just transforming and within the Eastman portfolio.
We continue to work on reducing the cost without sacrificing also some of the innovation, we continue to make progress and.
And the transition to I'll call. It the KRYSTEXXA cure Pro next generation.
And we're also very active here on all of the options.
And as we start 2021, and we will update you on when we make progress on that.
Great. Thanks, so much.
We will now take our next question from Bob <unk> from Goldman Sachs. Please go ahead.
Thanks very much.
Mark I was hoping you could answer the question I get and Bumble and my clients asked me and that is.
What is the trends and propylene and refinery grade propylene mean to your business from a profit of our advantage or disadvantage standpoint relative to your competition.
Yeah.
So Bob from.
And what we see and demand is strong across many of the end markets and I think also you are probably referencing what we've seen here and the near term of propylene and I'll call of surging and increasing I think it was roughly 12 cents.
Fundamentally we're happy to have propylene rising with the and.
Driven by demand it's on some of the outages.
The refineries are running at lower rates and it's unclear how long this is going to last.
Some of the feedstocks and <unk>.
Prison, but.
Spreads have moved back to more normal levels.
But they're not fully back.
And so 2018 types of levels.
Also as we said in the past.
And we're not in the the olefins forecasting business.
But again the spreads that we've seen.
And with our transition to <unk> and PGP. Those margins are are very strong right now as well.
On the big spikes can be tricky for our chemical.
Chemical intermediates business to manage the reacting quickly to those market dynamics and again, we see upside at least on the olefin and derivative margins compared to.
The 2020.
So Williams is the Cliff notes then that the.
The raw material inflation is demand based and you're okay with that because it allows you to pass them through and more.
More easily.
Yes, that's correct Bob.
Got it and then Mark I am sure, it's refreshing that and not have to talk about all of the pins and those things and talk about next generation technology is there any way I mean look at the number of questions on the call about it is there any late of ring fencing.
And then yeah.
Put it into a spec of the sales multiple debt drivers your earnings multiples.
Conceptually.
The change your name of the Gamestop.
No.
Not really Bob I mean, I think there is I think what we're doing is dramatically changing the portfolio of this company.
I know, it's the trend that everyone's saying this right now, but genuinely be more of an ESG play.
When you look at for the last decade, we've been launching a wide range of products that are sustainable and much better for the environment across our portfolio and now you add on the circular economy.
And what we can do and how we can scale. This up through partnerships I think we can really pivot the nature of who we are and the significant improvements, we can make and our carbon footprint and drive towards.
And that 30% reduction and 2030 is a huge change in our footprint not dimension, where we want and I'll get by 2050 and.
So I think we are really repositioning the company and are in a pretty significant way, but the.
The the whole value of what we can do that so unique and so powerful and the circular economy is leveraging our integration of our site here in Tennessee, We've talked a lot about scale and integration being a huge competitive advantage for us.
And a lot of people have thought about that being cost I've always thought about that being about enabling innovation and growth and.
And here's another example, where you know this vastly interconnected and complicated infrastructure that we have here is going to be key to differentiating us and doing something that very few other people can do at our.
Economic efficiency I mean, we can definitely the methanol sis around the world, but the way we can do it here.
Is going to be uniquely advantaged relative to the Standalone plant both of our attractive. This is just really attractive and the other ones are still going to be more attractive than the 15% ROIC. So.
No no no isolating and often the spec, but feel free to buy Eastman has a great day, you know environmental play.
[laughter] touche. Thank you.
Our next question is from Alex Yao from Mark from Keybanc. Please go ahead.
Thank you good morning, everyone, Mark if youre investing about $250 million of capital and that's not on all of this project.
ROIC is about 15%, so, let's say, 20%, let's take of the argument.
So does this mean this project could contribute somewhere north of 50 million of the after tax cash flow.
Arab map.
None of the Alex This is Willie and yes, your math is correct.
The 20% levels.
So to your price.
We're focused on and I would emphasize the RFC and this one is unique compared to the normal specialty environment of investments because we can load the plant. So fast so the payback periods a lot faster for us and this one compared to normal where you are in and filling out of trade and plan overtime because we can.
And we can base loaded with P T because.
Because we do still have some pts that's left on.
Debt or dual purpose with with our specialty plastics and.
And so that gives us a lot of leverage and how we are how we are and again.
And the returns on the economics.
The 20% is not necessarily the limit.
Here.
And while we don't want guys Raphael.
But it's let's just leave it at that it's a very attractive investment.
And just as a follow up you were talking about using 250 million pounds of plastic waste by 2025 500 million by 2030 should we think about this as well.
The lower limit for growth, but you're thinking about this business or is it the most likely scenario and the upper limit how high can it go within the next.
Four years too.
The nine years and just the second part of his question you were talking about $500 million to $1 billion and sales does this correspond to these two numbers $2 50 and 500.
Yeah. So those are interconnected so the the type of waste plastic and talking about getting to if you think of it the first methanol plant and what we think we're going to do.
With the CRT.
That is what drives us towards that platform.
Revenue value of the 500 to a 1 billion if we partner with companies around the world to do additional plans that would be additive to those numbers.
And as far as the fill rate goes.
It's a little hard to say.
The you know we're highly confident we can solve the plant and at <unk>.
Mix of specialties and.
And packaging, but the rate of which we can upgrade into the specialties.
Seeing huge customer engaged right now so we're really excited.
But we still of a lot of work to do I mean, the great thing by the way as we are using of sort of a high cost approach to using our existing assets to make recycle content today right. That's why we're of commercial with the Camelback Nalgene is we do have a alternative process that we're currently using but it's.
It's more expensive and has limited capacity, but so it's a way to if you will have a semi works to build mark and momentum adoption that allows us to really hit the ground running on methanol as it comes in line to lower our cost and significantly out of our capacity.
And the CRT of course, it is already being repurposed its a very low capex way to switch.
Switchover to reforming plastic so that we just continue the scale up we got delayed and our progress with their collapse and the textiles market. So we just need to catch.
Catch up now.
Thanks Mark.
We will now take our next question from P. J <unk> from Citi. Please go ahead.
Hi, Good morning, Mark It's Eric Petrie on for P. J.
Good morning, Jim noted the.
Methanol plant and capacity of 150 to 200000 tons of polymer per year I'm, assuming most of that will go on the Triton.
And the fill up point, how much of your of Triton will be renew versus the traditional produce based.
First of all it's not all trading so try and I think it will be one of the big success stories, but its all limit of that so we have a lot of co polyesters that go into cosmetic packaging for example.
On that.
It has a significant amount of value for that space, who are very forward leaning on the sustainability front, who are very interested in adopting recycled content. So it's across that there's even some shrink packaging you know that.
And that we may do.
And so there's a wide range of products and markets, but it'll be a good portion of the Triton mix on but we're not going to call out and that percentage right now.
Okay, and then secondly, how did volumes for your specialty products grown and fourth quarter and what was the cash for full year 'twenty typically those end markets growth two times the underlying.
Yes, so the.
The whole of two times, the math gets a little confusing and the Covid crisis on how to actually measure it.
But.
And what we've seen you've seen tremendous growth and progress and success in the advanced materials Division.
And and.
That's all of the specialty products delivering that growth when you look at the volume and mix improvement.
When you look at our AFP, it's really important to sort of separate out the two thirds versus the one third of.
Obviously, the two thirds.
There's a lot more stable and the margins well above the segment average.
And.
Even with the aviation headwind of $30 million. This year, we think.
Earnings for the two thirds will get back to you and be slightly better than 2019.
And so that business coatings is demonstrating a lot of strong growth and market recovery.
And our care chemicals water treatment and very strong our heat transfer fluids business has been very strong. So we got a lot of great businesses doing well there and that.
The comment by the way the.
And on earnings and and.
And strong growth goes back to <unk>.
So the stability of that segment and and the margins are actually quite good offset of course by what we've identified and the tires adhesives, where we're taking some actions.
But overall of the portfolio.
As you know on the volume side is actually holding up quite well.
Great. Thank you.
Let's make the next question the last one please.
Thank you we've and now.
Now take a question from Arun Viswanathan from RBC capital. Please go ahead.
Yes, Thanks for taking my question and warning.
Alright questions on all the progress on I'm just curious.
Mark you guys laid out and 8% to 12% EPS growth range in the past I know that the 'twenty, one obviously and it's going to be much above that because of the recovery.
And but when you look long term and you add in the meth analysis gains.
Do you see a path to.
Of returning to that level of structurally longer term or maybe even eclipsing that.
Well right now, we're still focused on recovery and getting back to 18 levels, which I do think as you know of pathway. We can see after we get through this year.
You know I think we're already on a strong track with what we've guided for this year.
When you think about post recovery, let's say and I'm not going to try and predict when that is with COVID-19.
We very much would expect.
And to get back to that the growth math that we described on the innovation day of that 8% to 12%, obviously circular economy helps at and drives growth. Obviously, you know we've had things that haven't worked out as well as we had the hope like tires on adhesives. So you've got to sort of do all of that net math, which we're not doing at this stage, but.
We definitely see the.
Set of activities you know the great things that are happening in many parts of the portfolio a few things that didn't work out of those as we had hoped.
Allows us to still get back to 18.
And growth from there with that math.
And then could you just remind us on the capital allocation side.
When do you expect to kind of maybe pivot more towards buybacks.
Buybacks and if at all.
Yes, so as we think about the capital allocation for 'twenty, one first and foremost.
Obviously, we grew our dividend for the 11th year in the ROE and we expect to allocate about 375 million there.
And also we've got some debt coming due in Q4, and we would expect currently the pay that and pay that debt down to $300 million of debt reduction and.
And then also looking through.
With the remaining cash from a strategic standpoint, we would expect to allocate roughly $350 million between bolt ons and share repurchases, obviously, we're going to be I'll call. It cautious offsetting dilution here and the front half.
And we will see how the economy continues.
To pick up.
And just to sort of wrap things up the one last thing I wanted to say was.
I have of deep depreciation two of my employees and our leaders throughout the world.
The success, we had and getting through.
'twenty and a very stable manner.
Compare to many of the industry and to emerge and grow like we intend to do this year is a testament to all of the investments we've made and our capabilities and we've made a lot of investment and commercial capabilities of lot of investments and improving our operational cost structure, we've probably obviously dramatically changed our portfolio and improved its quality and depth of innovation and ability to.
Create its own growth compared to the last recession, we faced in 2009 and 10.
And we're seeing the pay off of that.
And the stability, we delivered last year and the strong free cash flow.
And actually you know quite good earnings, especially the back out the hundred million dollars of additional inventory actions.
And feel great about how we're positioned for this year and so none of that would have happened without the dedication and effort even and the extreme situation of how we had to work and Covid.
Deliver this so thank you to all my employees.
And with that we're going to say thank you very much for joining us this morning.
And if you have questions you can reach us through the day.
Everybody have a great day.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.