Q1 2021 Eastman Chemical Co Earnings Call
This call is being broadcast live on the Eastman website Www, Josh Eastman Dotcom.
We will now turn the call over to Mr. Greg Britain of Eastman Chemical Company Investor Relations. Please go ahead Sir.
Thank you Tracy and good morning, everyone and thanks for joining us.
On the call with me today are Mark Costa Board Chair, and CEO, Willie Mcclain, Senior Vice President and CFO, and Jake Laroe manager Investor Relations.
Yesterday after market closed we posted our first quarter 2021, and financial results news release, and SEC 8-K filing.
Our slides and the related prepared remarks, and the investors section of our website www Dot Eastman Dot com.
Before we begin and 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 and our first quarter 2021 financial results news release.
During this call in the preceding slides and prepared remarks, and and our filings with the SEC, including the form 10-K filed for full year 2020, and the form 10-Q to be filed for first quarter 2021.
Second earnings referenced in this presentation exclude certain non core and unusual items reconciliations to the most directly comparable GAAP financial measures and other associated disclosures.
A description of the excluded and adjusted items are available in the first quarter 2021 financial results news release, which is available on our website.
With that I'll turn the call over to Mark.
Thanks, Greg and before I answer your questions I want to take a few minutes to make some comments.
And we're off to an excellent start to 2021 and I'm proud of and many accomplishments we've achieved and just a few short months.
We're building momentum and the strong operational execution of our teams is paying off as the global economy improves.
Several highlights I want to cover.
First strong demand from the end of 2020 continued through the first quarter.
And many markets demand is returning to or exceeding 2019 levels.
And we reported 20% higher adjusted EPS over 19, and 5% over a very strong first quarter last year before we felt the full impact of the COVID-19 pandemic.
Consistent with our track record of strong free cash flow. We also delivered record free cash flow of $125 million and the first quarter.
Which was up substantially from a very strong performance a year ago.
We achieved these solid results despite operational logistical headwinds from winter storm here.
I'm incredibly proud of our team in Texas, It's a per.
Proactive steps ahead of the storm to avoid a hard shutdown any of our assets and they work tirelessly to repair and restart facilities, which helped ensure supply for our customers.
Thanks to our proactive planning, we were able to safely start with no injuries and well ahead of our competitors we.
We had half of our Texas manufacturing facility operational within one week of the store and we're more than 95% operational within three weeks.
So all of the Eastman employees and sacrifice and rose to the challenge and thank you on behalf of our customers and all of the colleagues at Eastman.
Moving to other highlights we made significant progress with our circular economy efforts, which we'll talk more about in a moment.
And our progress Hasnt gone unnoticed with Baroness, adding Eastman to its list of the 100, most sustainable companies for 2021, our Toronto for Us.
And we issued our inclusion and diversity report, which you can find on our website.
At Eastman, we take our environmental social and governance commitments seriously and transparency is the utmost importance.
We also continue to allocate our capital with returns to stockholders and mine.
And we recently completed a small bolt on acquisition of <unk> food and feed.
A leading animal health and nutrition company accelerate growth and the other attrition business.
And finally.
We think the favorable trends and the economy, coupled with our innovation and investments and continued disciplined cost management and sets us up for strong EPS and free cash flow growth this year and.
Thanks.
And our January call. We gave you an update on the progress, we're making to become a leader and the circular economy.
We announced that we are building one of the world's largest plastic plastic and molecular recycling facilities at our sites and Kingsport, Tennessee.
Since then we've broken ground on the facility and continue to target mechanical completion by the end of 'twenty two.
Even more impressive is the amount of momentum we're building with customers and many different markets around the world the demand for our renewable branded products includes Eastman trade and renew Eastman Cristal renew was strong.
At this point demand for specialty products.
And the circular economy offerings has been better than we anticipated.
And specific to the new facility, we announced we're ahead of schedule in terms of customer demand for the capacity.
We have a robust pipeline for additional announcements throughout the year I look forward to sharing those with you.
Turning to our outlook as we entered the second quarter with strong demand and mixed momentum. We also expect to benefit from cost discipline, including a lower operating cost from our operational transformation program.
However, there are specific headwinds, we face, including maintenance turnaround supply reliability, and some slowdown and auto production.
And Additionally, we have price increases are continuing to catch up to higher raw material energy and distribution costs and some products.
The price these headwinds, we expect a sequential increase and EPS with second quarter adjusted EPS expected to be at or above second quarter of 2018, adjusted EPS of $2 22.
Moving the full year, we expect strong market growth and product mix improvement to continue our day.
<unk> driven growth model will enable us to grow faster than the underlying market recovery and we expect a number of markets will be rebuilding inventory.
We also expect much of the capacity constraints supply reliability and logistics headwinds to lessen alongside a potential moderation and tight commodity markets.
We expect to continue to benefit from about $100 million.
For full year tailwind for improved capacity utilization compared to last year, and we're aggressively manage inventory well below the decline in demand with our focus on cash.
And we're on track to keep our cost structure flat compared with 2020.
And well below 2019 and 18 levels.
We therefore expect adjusted EPS will be about.
D between eight and 25 and 875 for the full year of 2001.
And on cash we expect free cash flow to approach $1 $1 billion, which is consistent with our expectations for stronger adjusted EBITDA.
We expect 2021 will be our fifth consecutive year of free cash flow greater than $1 billion, and we will work to grow free cash flow from here.
Putting it altogether these outstanding results remind me.
About what gives you some and this incredible resiliency and strategic advantage first and foremost is the people at Eastman who continue to persevere and help us win as we saw and you're in a time of crisis and as we see every day from this COVID-19.
And as you reflect on how we position our company through the global trade disruptions in 2019, and then COVID-19 and 'twenty I feel confident our ability to grow EPS and cash off this new level of earnings.
Quite a challenging macroeconomic backdrop over the last several years, we have not sacrificed our efforts to innovate and invest in our specialty portfolio and expect those investments and continue to pay off as we finish off 21 and move into 'twenty two.
And the meantime, we will continue to focus on what we can control we remain committed long term attractive earnings growth and sustainable value creation for our owners and all of our stakeholders.
I'll turn it back to Greg.
Thank you Mark Tracey, we are ready for questions.
Thank you Sir.
Like to ask a question please signal by pressing star one on your telephone keypad.
And for your sales speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
We will now take our first question Vincent Andrews from Morgan Stanley. Please go ahead.
Thank you and good morning, everyone.
Mark I'm wondering if you could just give us a little bit more details on the new molecular recycling plan in terms of what you mean by being ahead of.
Schedule and I'm wondering if you could talk a bit to the customers that are signing up for the volume and how much volume maybe you've already contracted and what's your what's your expectations are and.
Terms of contracting level by the time and you you startup.
Sure.
Thanks for the question.
We're really excited about what we're doing on our chemical recycling technologies.
<unk>.
Cellulosic recycling technology as well as our most analysis to your question around the methanol plant that we announced in January we are seeing incredibly strong interest from our customers and they're really compelled by our value proposition that has three key elements.
Driving their interest and the first is that we have a solution for plastic waste that cannot be mechanical recycle much of which ends up and landfill or and the environment.
And we can use that as feedstock to upscale into more durable products.
The packaging applications, our carpet and other applications that we're sourcing and we can deal with and if it looks so that's incredibly important is to have that solution are equally important to them is that there's no compromise on the polymer and as performance and quality and as a drop and replacement because we're rebuilding building blocks to be identical to what we nor.
And we'll get from fossil fuels.
And the products are identical.
It's an easy drop and an easy switch over to our offering and they don't have to change the brand position and the quality of what we provide and that.
And third element, that's very important to everyone is that has a lower carbon footprint and fossil fuels and we want to solve the waste crisis, but we also need to be sensitive to climate at the same time.
And Theres no toxic waste so it is a great story.
Wanted to embrace and have.
Their brands and.
And so we've seen a number of customers as you've seen on the chart with supply and the prepared remarks of customers adopting Este Lauder is a great win that we're really excited about and.
And there is many other companies and their cosmetic packaging area as well as all these other <unk>.
Fast moving consumer goods et cetera that are working with US right. Now. So we are ahead and securing volume, we're also head and securing the value.
And then we wanted to get for this offering and.
And that's also coming and a bit better we're not going to provide details on exactly what the volume percentage of that is.
But I can tell you we're well ahead of pace.
And selling out of that facility, which is which is really exciting for us.
So overall I'd say, it's really really encouraging.
Excellent.
Ask you a follow up question on pricing and the and the overall portfolio just given all the raw material inflation. That's out there I think historically, sometimes you've talked about when there's been inflation that you view as temporary you don't look to pass it all through.
How are you sort of how do you view the current inflation across your product lines and what is the pricing philosophy going to be for 2020 one related to that.
Thanks, Vince and for that question, obviously pricing is a very hot topic. These days with the <unk>.
Material increase and raw material and distribution costs.
And we've talked about this and number of times in the past and I'm going to revisit just what our philosophy is around pricing and value management, and then talk a bit about how we view it relative to the journey we've been on since 18.
First and foremost and especially business you focus on.
How you get the best value for your products and sell and the value of the products more so than.
Raw material dynamics and.
And our strategy is completely centered on innovation and driving significant mix upgrade and growth and high value markets.
And that gives me improve our margins through that mix.
So if you're going to do that and you think about a lot of the markets that we're in where we have the same set of customers for decades.
You have to have a strong relationship with those customers through the years. If you want to continue to innovate with them and help them succeed and win and grow the market.
So that factors into your pricing strategy and so we want to have stability for us and our spreads and as much as possible for our customers and pricing with the dynamics of raw materials.
And so as we do that we wanted to share some of the value and raw materials go down.
And we want to recover prices when raw materials go up.
From a multiyear point of view I think we've done an excellent job and managing price and you go back to 2018 as a reference point.
And that was a very strong raw material environment in fact stronger so far this year when we look at year over year increase and what we expect.
And we were able to maintain price increases and.
And maintain stable spreads relative to 2017 and the back half of that year.
And that was the strongest earnings year, we had and.
Until this year. So yes, good reference point and so of 19 and 20 with the impact of COVID-19 and before that the China Trade War, and we saw pretty significant drop in volume and mix. It also led to drop and raw material prices.
And shared some of that with customers, but we still expanded spreads to offset some of that volume and mix headwind that we had.
And as we go into 'twenty, and our expectations are that and and as we are increasing prices beginning in the first quarter and more so in the second quarter and we will continue to do and the back half of the year, we will get our spreads for the year.
And the specialties working towards.
The 2018 levels, including the headwinds that we have and tires adhesives and fibers, so making good progress and improving spreads to offset some of those headwinds and <unk> and getting getting back towards that 18 level.
So that I think is a great story and one that you wanted to do because of the story for us on the specialties is volume and mix improvement is really significant you are excited and the first quarter and are going to continue to see it through.
To the rest of the year.
Another thing to keep in mind as you're trying to compare our pricing relative to peers.
As we put mix and volume where most of our peers put mix and price. So just to give you. An example, if you looked at the Q1 and advanced materials, if I move to mix over and to price like our peers habit.
And we'd be up 10% and price and up 5% and volume.
And just giving you an idea of the significance of mixed and our strategy, which we've been explaining and talking about.
14 is the secret to our success and leveraging the best returns from our assets and.
Another way you can look at it of course is also that EBIT margins.
We can look at.
First quarter, EBIT margins, and an improving 370 basis points and.
And this story.
And and Ams doubled more than doubled their EBITDA margins. When you look at where we expect to be this year.
And full company margins. It also mentioned and are probably are expected to be equal to or greater than 2018. So we're very confident about our ability to maintain and manage pricing.
Obviously <unk> is going to have much better spreads in the current market conditions to add to this story and see I also.
And it provides a nice balance too.
The especially so as prices are catching up and the specialties and ci spreads expand and that sort of balances each other out. So I think it's a good story and.
And as always we're focused on innovation.
Thanks very much.
We will now take our next question from Mike Sison from Wells Fargo. Please go ahead.
Okay.
Hey, guys, thanks start to the year.
And Mark when you take a look at your outlook for 2021.
Yes.
95 to 875, what do you think drives the sort of low and and the high end and how much of that Delta is within your control.
Sure. So I mean first of all it's obviously, a pretty significant improvement and our outlook today from where we were in January.
And Mark that's really driven by.
A material improvement and the volume and mix growth that we're seeing I.
<unk> and the first quarter, but the momentum and we're seeing going into this quarter and into the back into the year.
So volume mix as I said, just a moment ago and the sort of heart of our strategy and.
And we will continue to be how we improve earnings this year.
And so thats the biggest driver.
Obviously, we have tight underlying markets and and the chemical intermediates businesses that provide net spread expansion and I just mentioned.
Offset some of the lag and our prices catching up and some of the other products.
One of the uncertainties, obviously is where the spreads in Chicago.
And the cost front, we feel very confident about us getting our costs out the operational transformation program is doing a great job.
Offsetting the return of short term and actions, we took last year and remember that's over a $200 million program that doesn't just help this year, but also will help going into 'twenty two as we feel good about that or you can look at relative to last year, the $100 million utilization tailwind.
And that we have from 'twenty into 'twenty, one and feel.
And very confident about that so a lower cost structure relative to 18.
And utilization tailwind relative to 2000, so all of that.
It has continued to be in place. So it's really about volume mix getting better about spreads being better and then and trying to guess frankly at how spreads.
And see I may moderate and the back half of the year, we're assuming some moderation.
And as some of the tightness that we're seeing.
At some point, we'll go to more normal.
Balanced market conditions, and a little hard to call that and Thats one of the drivers of the uncertainty along with the macro economic recovery and we all face with COVID-19 and all the other uncertainties that are always out there.
Got it and given that your earnings outlook is much stronger and your free cash flow as well as stronger.
And any update on what you want to use your balance sheet for going forward given the.
And the outlook does look a lot better.
Yes, Mike Thanks for the question.
No.
And we agree that the outlook improving and increasing.
And to approaching $1 1 billion.
What I would say as we think about capital allocation and 'twenty one.
Still I'll call it unchanged and our priorities so one.
Mark with the strong dividend, which has increased for 11 years and we expect that to continue.
Also we expect to continue to reduce approximately $300 million of debt and.
And the balance will be used for the bolt on acquisitions and share repurchases, we announced the attracted animal nutrition and bolt on.
And new strategic cash of about $70 million, there and we expect repurchase approximately 350 million shares and the full year.
And also will be remaining disciplined as we go forward, but as we think about also getting our.
Debt to EBITDA in line with our targets that increases our flexibility as we go forward into 'twenty two.
Great. Thank you.
We will now take our next question from P. J <unk> of the cash from session. Please go ahead.
Yes, Hi, Mark good morning Willy.
Good morning.
It feels like you guys are ahead and molecular recycling compared to your competitors, who are working and polyethylene.
I guess he spun quota I've had some great technologies and then congrats on your barron's ranking as well I guess how much. My question is how much is the.
Conversion costs for our new paint and lower then.
Regular P T.
And I know, it's a long ramp up and you've got to get customer qualifications and all that but if you take a long term view mark let's say by 2030, how much.
Could you replace with <unk>.
Recycle and wed like to total recycled.
Yes, just any guess.
Could be could be helpful.
Sure so.
And as I said, we're really excited about methanol CIS and where we think it can take us.
And we are trying to be a leader to demonstrate that the plastic waste crisis can be solved within plastic plastic is in many applications by far the best.
Products for the market it has the lowest carbon footprint versus alternative materials.
And whether it's glass paper and aluminum.
And many cases, so we want to keep plastic.
Being the best solution for climate by far.
And but we got just waste crisis. So we do have to other ways scaled up and I think we're demonstrating how to do that.
It's important to remember that we're upscaling plastic waste into durable applications, we're not trying to sort of defend a large single use plastic business and what we're doing so that allows us to get a lot of incremental growth and durables at high values as well as better margins.
And so we haven't been focused in this first investment on really leaning in on the PT business from.
From a cost point of view and answer your question the costs are modestly higher.
And then P T or co polyesters today.
And oil prices around where they are today, if oil prices go up that equation changes.
On a relative cost basis, and what we see as a real detachment now.
From this business from the <unk>.
Fuel stock market right. When you look at <unk> trading at 60, 80% premiums to <unk>.
Our pet and <unk>.
Relative to fossil fuel PDT in Europe.
There is a completely different economic proposition going on around recycled P. T a recycled.
And especially polyesters that we're making.
But we do think theres, a significant opportunity to scale this up and.
And in fact, we don't just have customers, calling us around wanting our specialty products.
For what we can do with recycled content.
We also have customers talking to us about how we could significantly scale up and make the T Force.
And their needs around packaging.
And we have customers, calling us and we have peers, calling us and we have governments calling us.
And asking US can you sort of work with us to solve this problem and so we're engaging and those conversations and trying to figure out which set of those opportunities makes the most sense for us.
I want to be very clear for everyone. Who's listening, we are not getting back into the normal business that we got out of and 2011 were staying out of it. So if we choose to get back it's going to be and more of and airgas model and how we engage with solving this problem and scaling up.
Which means that we will provide technology construction operations feedstock sourcing and.
And as we build multiple plants will have all the operational and technical Knowhow It gives us.
And advantage and how we can do all that for our potential partners.
We will have long term contracts to secure all the demand.
And that.
We will not take market volatility risk relative to feedstock prices.
And both from a capital allocation point of view will likely be.
And more of an equity participation and partnerships as opposed to putting this entirely on our balance sheet. So very different model more like airgas.
And we'll see how those conversations go I think the need is there lots of people are making very significant commitments and Europe. They are facing very significant taxes and.
To your first point.
Moving faster probably than many others, because we did practice methodologies for a very long time as part of Kodak and so we have a lot of technical and operational expertise and it's allowing us to move very quickly and how we build this up and have a robust capability to deal with a wide set of feedstocks.
Great to hear and then going back to more nitty gritty on Ci and.
And then just stood up to the Texas freeze and thaw.
It's a lean and other commodity spikes.
And prices collapsed by 50% because I think they finally started up before the polypropylene plant started up.
And so I guess, it's hard to understand from outside what I would've expected.
You know a benefit from lower refinery grade propylene for you and higher propylene derivative.
And your prices.
But can you just explain what happened with the propylene chain and.
And what was the benefit or why didn't we see more.
Yes sure.
P. J. So first of all we don't sell propylene right, we sell derivatives from Brooklyn, and as you just noted and share and and so we saw.
Strong pricing momentum before Yuri hit.
And all of our groups because of market conditions, where obviously you remade the market's even tighter.
And as a result, those drove prices have held up quite well and they're going to continue to increase and a pretty significant way into the second quarter.
You have to remember that most of our propylene is made from.
Propane that we buy.
<unk> being converted into appropriate propylene and.
And some supply agreements that are propane based.
And their pricing.
And that propylene based so we're not buying a lot of and merchant propylene.
And our total feed mix so.
And the spreads are good and.
And attractive.
The driven markets continue to remain tight.
And we and we think we're going to have a very good second quarter.
It is also important to note at the segment level when Youre trying to interpret this results and Ci and theres more than than olefins and this segment. So 25% of our revenue is actually functional amines.
Which has had a tremendous and very steady.
Track record of improving earnings.
And from 18 through to now and is on a great track and the vast majority of that businesses on cost pass through contracts same is true with with a number of our acetic and hydride customers and so.
Our strategy is to have stable earnings and Ci.
Got to have really volatile ones as we're trying to be more of a specialty company and more predictable and our earnings and cash flow.
Gave us stability and 19 and 20 relative to <unk>.
And it's going to give us stability this year, but we're not going to be popping up on spot prices as much as some others.
Great. Thank you.
We will now take our next question is from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
And.
And describing the dynamics and your advanced materials business, you talked about raw material inflation.
Pointed to them.
And I would think that you would be pretty integrated and your advanced materials business.
How much how much pressure is there from higher raw material costs and what are the raw material costs that are really lifting there.
So.
Jeff Thanks for the question.
We are very.
And.
Focused on the value of vertical integration as you just noted and it creates a lot of stability for us so.
And our playoffs or change that steals change and olefin James.
That's for the most part away, we provide significant reliability to our customers.
That compared to some of our competitors and through the through the first quarter I received.
And number of calls from very important large customers thanking us for our demonstrated reliability that day deeply appreciated and how well we got through the storm and supply them.
But the one place that we're not vertically integrated is from asset heel to our inner layers, we don't make them.
And and rely on market suppliers revamped so the shortages that we saw.
There has created a constraint for us and earlier it is specific to the interlayer business.
But we were already having served supply problems with some assets your unreliable witty and in the fourth quarter than the number of plants were down about three weeks ahead of the storm due to unplanned outages. So the market was already tight and Yuri took about 25% of global van market awfully.
Hi.
And while they are back operational theyre not near full rates. So it has really created a pretty significant global volume shortage as you know.
And prices are high and the volumes are forcing us to cut back on how much <unk>, we can make here and the second quarter. So that's the one place out of our total portfolio, where I have a supply related problem.
And it is for a lack of lack of vertical integration.
But we're getting through the teams have done a phenomenal job of sourcing them from other places around the world, but becoming incredibly complex logistics, which is going to help us resolve this here pretty quickly.
And it will help us not just now, but how to have a better diverse supply base and the future.
And I know that Eastman and wanted to divest.
Various dismissed and the.
ASP segment.
Can you describe what the magnitude is of what you want to sell and will it be a dilutive transaction when you sell it.
Yes, Jeff this is Willie so thanks for the question.
As we have previously said we've been actively looking at all options for the underperforming businesses and adhesives and <unk>.
Tires.
We continue to be disciplined and we're making.
Progress on the restructuring activities to improve these businesses and we've actually seen a strong volume improvements from both market recovery.
And as well as innovation gains with customer wins, but as you think about the overall size of these businesses.
On an EBITDA basis, it's going to be less and 10%.
For the two businesses that were were talking about.
And it will be dilutive when you sell it.
No as we think about the I'll call it the value of the businesses and the underlying EBITDA.
And the Optionality that we have there that will be helpful.
Net neutral.
Okay. Thank you so much on and EPS basis.
We will now take our next question from Frank Mitsch Fermium Research. Please go ahead.
Good morning, and let me Echo the nice start to the year and if I could just follow up on that last question Willie.
Are we looking at some action here and the first half of 'twenty. One would you would you put it and that sort of timeframe in terms of a divestiture.
Frank what I would say is we're not going to comment on an ongoing processes is we're looking at continuing to improve these businesses and we will give you an update when it's appropriate.
Okay sure and yes.
And obviously very impressive growth and the performance films area and advanced materials overall and.
And I think you said, 15% volume growth some of that was due I guess to the Asia.
The easy comp relative to Asia can you talk about how that business is trending on a geographic basis and expectations here and the second quarter.
Sure Frank and good to hear from you.
The recovery of a was substantial and and a good part of that was Asia coming back to life. So if you go back to 2020 and looked at our performance relative to 19.
Had very strong performance and AFP and Ci.
And we actually had 15% growth overall for the for the company relative to 19, which was a bit unusual relative to.
Others and the marketplace. So we're going against a really tough comp.
But am was one place it did face challenges.
And Asia supply chain and inner lives is really short as an example, and.
As well as buying films on cars, so that led to some of the spike demand trending wise, though has held up really well, so well Asia recovered and we had growth in North America.
And Europe as well.
<unk>.
And the quarter.
What I'd say is <unk>.
Less of a source of growth for <unk> and for the company and the second quarter and the second quarter. The big driver of growth as North America as you might expect where the economy here is starting to recover quite well.
And you know China had already started to recover a year ago and the second quarter. So.
As you follow COVID-19 and recovery around the world.
<unk> revenue sort of follows that trend.
And Europe is still idle.
And unexpected to be better as we move into the back half of the year. So.
And the overall momentum is good demand is incredibly strong and our specialty plastics business across a number of products Triton, but it's such a strike and our co polyesters as well, but trying to Maine and particular as just dramatically better driven by the normal value proposition, we have a better performance and BPA free but the circular economy.
He is adding to a lot of growth for us.
And engaged with customers so much so that.
We were planning on converting our co polyester lying to try it and two years from now and we're not having to pull that conversion forward to now.
And getting a number at the end of this quarter.
And to be able to serve that.
Try and growth and demand that is so strong so that's going really well and then performance films back to your original question around that.
That's.
<unk> story right, we're winning on three dimensions, we've got the best product portfolio and performance, especially with our Gen. III paint protection film that is dramatically better than our competition.
We have a great channel strategy to grow through dealers and aftermarket and we've rolled out a new software system for pattern.
The installation of the P. P F. One cars, which is incredibly important and better than our competitors.
And which helps them quickly install and precisely install the product and we have the best dealer network around the world and a pull.
A lot of effort and they're making that dealer network better so.
And that business is going to have a great year.
It was an incredible first quarter, a little bit of that was some restocking of inventory and China.
But we expect the momentum for the rest of the year to be stronger.
And all three segments, especially when we get back past this supply and trading constraint and earlier and have more capacity per trial.
Thank you so much very helpful.
We will now take our next question from Duffy Fischer from Barclays. Please go ahead.
Yes, good morning Fellows.
First question is just around the asset yields chain.
Obviously your Dallas competitor.
Had a great quarter and looking at a great year in that space. Your footprint is different can you talk about your strategic footprint and asset yields do.
And do you need to back integrate more into them over time and then.
What are some of the other assets those derivatives and how much are they offsetting.
The hit from the van side.
If you look outside of toe on some of your other downstream derivatives and see if we can kind of just net out the acetyl chain force this year.
Yes, sure so trying to do comparisons of our steel business to to our friends and Dallas.
A very good exercise because.
Their business is just entirely different than ours.
They are extremely large player and acetic acid and then they go forward into <unk> and emotions that obviously are enjoying exceptionally tight market conditions and high prices right now.
We don't make we make acetic and hydride.
Is what we make off of our stream that goes into cellulosic products as well as a variety of other assets you are polyester products or olefin products.
Where there is an asset yield component.
But we don't go into into them.
Emotion business at all.
So.
If you want to look at our total integrated acetyl stream, including all the specialties that we make and advanced materials and AFP and fibers.
The margins that we have and the stability of those margins as is extremely attractive.
But if you want to just look at it and isolation and what we do and Ci, which is sell exceeding and hydrate that isn't being used for making specialties, where selling the co products of acetic acid for when we make cellulosic.
No.
That business is.
And is limited to those market conditions.
And those are those market conditions are not as attractive we do a lockout in the sort of stable cost pass through contracts and hydride and that gives us and.
And stable earnings, but it doesn't allow us to have big Pops.
Or drops and that profitability from from year to year. So its totally different so from a vertical integration point of view the place where we're not vertically integrated.
And as when we bought Solutia and picked up the <unk> business, and <unk>, and PV and wages or raw materials, we didnt forward integrate into making those raw materials, because our strategy is to deploy capital predominantly and our specialties, but it is.
Very frustrating right now and we're being shorted on those products and paying very high prices for them.
As we're trying to keep our auto cuss, our glass customers and the auto OEM supply.
Perfect. Thank you and then maybe just one since you've got highlighted with the acquisition around animal health can you size your animal health business as it fits going forward and then where is your leverage both geographically and.
It's a different animal species chicken versus hubs versus cattle, how should we think about that going forward.
And so all of that will you answer the first and I'll take the second so you can think about it as roughly 10% of additives and functional products overall and looking forward to the accelerated growth that we believe that this acquisition will add.
And so the trends and Amatriciana are pretty significant and really attractive as most of you probably know.
No.
Good health and growth promotion.
And animals is obviously very very important.
Historically, the UCI Biotics and do it and most people want antibiotic free meat and.
And protein and so theres a switch organic assets, we have the broadest portfolio organic assets for this market area.
But we don't do a lot of formulation.
Of those products. So this acquisition combined with investments we've been making over the last several years.
And our share of formulation and application development capability.
And can dramatically accelerate our ability to actually formulate more comprehensive solutions to these challenges and leverage that growth and the formulations get significantly higher.
Values and selling the assets by two to four times, depending on the application so it.
It's a real classic mix play per our strategy everywhere else and our company.
Creating higher value formulations, capturing a lot more value for that solution to our customers and this acquisition brings and a lot of capability and a nice existing marketplace and Spain of products that we can then take around the globe given our broader commercial footprint. So there's a huge upside just on our global sales capable.
Relative to their focus on spec.
Great. Thanks, guys.
We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.
Thank you Mark and advanced materials, given them the for the step up and margin this quarter.
Can you discuss and margin profile of this business going forward, both through 'twenty, one as well as beyond.
Hey, Gregg Hey, David Great to good to hear from you and thanks for the question. So yes.
I think the margin profile for advanced materials.
Speaks for itself. If you all look at the last decade, right just dramatic improvement.
And we said this I remember.
And these conversations back in 2010, 11, where we've made a lot of investments and asset capability and application development capability, but we added a lot of fixed cost built Triton and.
And we said look you know when this starts to sell and grow the fixed cost leverage is going to be incredibly impressive.
If you go back to the 2018 innovation day.
Presentation of advanced materials, we laid it all out for you on how fixed cost leverage works and this business.
So in that sense I think as we look at the margin this year, which will be quite attractive and as we go forward. We think these margins will continue to improve now they're not going to improve like they did from 'twenty to 'twenty. One obviously, because we took such a hit and asset utilization, especially in advanced materials as we were pulling.
We're down.
And inner layers and performance films, you have to remember, especially plastics actually grew earnings last year relative to the 19 so.
And they provided nice stability relative to the auto exposure, we had and inner layers and P. F.
But as we continue to grow the circular economy, which is the value up and better margins.
As we continue to grow products like Triton.
And everything else, whether it's the paint protection films are pretty much anything and performance films has very attractive margins.
And the acoustics heads up display and or layers very attractive electronic vehicles are another big lever for us.
Where we see significant upside and so it turns out to me a lot more glass and and EV. When you put batteries that are need people that goes up into the ceiling of the car because you don't want to raise the roof high for roof roof high because of aerodynamics and so what they're doing is making windshield bigger and putting on bigger sun roofs to not make the cab and costs for <unk>.
So we're getting a lot more real estate of the car and glass.
Every EV and then they have much higher functionality requirements.
And that space so they want.
Better acoustics, and when you don't have the engine noise, which is sort of white noise. You now have more other noises that people focus on and they're more sensitive to and you actually have to not just have more acoustics project to be able to have the capability to tune it to different frequency bands. They still want heads up display for safety reasons. They want more color that they are using and parts of the windows.
As part of how they're adding more and more glass and.
And one solar rejection to reduced air conditioning load. So all these functionalities and it takes tremendous technical sophistication to put all of that functionality into one and earlier.
And we're the world leader and how to do that and so when we look at Evs, It's probably two to three times more value per car.
And that we're capturing and we already have some great adoption on some of these products with.
Very significant leader in this space.
And and we expect that to continue across all the brands. So.
And we see volumes growing mix growing costs being controlled.
Spreads being managed as I discussed earlier and so.
The earnings growth will improve and the margins will incrementally improve.
Sure.
Sounds very good and just on M&A can you both size the <unk> acquisition and discuss the we the rest of the M&A pipeline and Youre seeing today.
So David this is Willie again the.
And the size on the three F was roughly 70 million and acquisition price and we paid high single digits.
And from a multiple perspective, obviously as we continue to look we're focused on the organic growth and the investments there to ensure that we and the capacity as we go forward, but we're also looking at how do we accelerate that and as we think about the additional flexibility that we will have going into 'twenty two.
We're filling up our pipeline.
Potential targets.
Celebrate that growth.
As we think about creating more value than just buying back shares.
Thank you very much.
We will now take our next question from Alex <unk> Keith.
Keybanc. Please go ahead.
Thank you and good morning, everyone.
Mark you spoke about good demand for methanol is based polymers.
Point could you start thinking about additional investments and capacity would you have to.
Turn on and Ron Your initial capacity your initial plans or could you think about expansions.
Sometime earlier, if demand continues to be so strong.
So I was just a little bit hard to hear your questions I'm going to repeat it back to make sure I got it correctly are you, saying.
And what capacity, we have and even beyond the first 100000 and turned up and also plant and when would we have that.
I'm, sorry, Mark let me repeat this.
Demand for methanol is based products is strong.
So.
And at what point would you start thinking about additional expansions or kidney, possibly start thinking about additional expansion of capacity do you think you'll have to start up the plants first and see how it works or if demand is strong enough could you.
Think about expansions, maybe some time.
And the next 12 months or so.
Yes.
We're not going to wait to start this plant up before we start building another plant necessarily I mean, it will depend on the demand we see for our products internally.
And it will depend on this partnership conversation I mentioned earlier about how we're talking to people about building additional plants around the world.
That would be focused more on PT and then our specialty classics, but we could take a stream of that output and use it for specialty classics, if we wanted to.
But for sure if you're asking where are we going to be 510 years from now.
Our goal as we said and our sustainability report last December is to make all of our Cellulosic plastics and polyesters for plastic waste. That's our long term goal. So we're not stopping at this first plant.
And we're in and what we're seeing so far gives us great confidence that that vision as possible.
It's a very attractive return for shareholders, we get better margins, we get to accelerate growth of our highest growth are our highest value products and.
And it's just a great story, so yes, I expect we'll be building more than this plant that we're focused on doing this play well first and having success and filling it up and.
And if this alternative business model is something that's going to work with customers and partners.
And would also note that that's not our only sustainability play.
<unk>.
We have been the original Biopolymer company right, we've been making cellulose acetate for over 100 years.
And brought it into a wide range of products. So it's a sustainable biopolymer, its biodegradable and a lot of applications and.
Now we have a very unique capability on the planet to you.
<unk> recycled content to the other half of that polymer so half of it is made from certified.
And sustainable for us.
The other half today is obviously made from fossil fuels and the acetic and hydride to make those cellulosic products.
As we add recycled content to the other half of it it's an extremely compelling polymer compared to anything else on the other market because it's Jim.
It's biopolymer its biodegradable and it has recycled content.
And based on a wide spectrum of waste plastic, including our ability to take back products from our customers like textiles right. So now it has just been a phenomenal growth story for us this year, and especially and how fast it's recovered and the first quarter.
And it's just got a great story as a biopolymer that's led to a lot of success and now we're adding the renewable recycled content part of it to the story and.
And we expect to just tremendous about growth of that and Theres, a bunch of cellulosic plastics and advanced materials.
And you know that we see and the durable space and we also think there's probably significant upside and a single use plastics space as well.
Thats very early stage so.
That's a whole another dimension of growth at better margins higher value, great asset leverage to our existing capacity because there we don't have to add capital, it's just leveraging existing capability and capacity.
Thank you Mark as a follow up and.
And we're talking about 100 million full year benefit of higher capacity utilization.
Where do you think relative to that annualized target you stood in the first quarter do you think if we sort of as we as we ramp volume for the year theres more or it fully reflect that that benefit as of Q1.
Yes. So this is really and what I would highlight is we expect to see a tremendous amount of a year over year utilization and benefits in Q2 and Q3 as a reminder, so.
Obviously here in the first quarter.
I had a hard time building inventories, which means we're running at high rates.
Low rate utilization that we had in 2020.
Substantially in Q2 and Q3.
We're also looking at how we expand and.
And we're making higher investments this year.
To ensure that we can capture not only the.
And existing demand, but the future demand, including expanding our inner layers facilities. This year.
We're bringing on amines capacity as well here in Q2 during the shutdown.
And as Mark has already highlighted converting our polymer unit ahead of schedule on Triton, So and we Additionally, we get roughly two 3% capacity creep. So you'll get the cost benefits in Q2 Q3, but more importantly, it's about the mix upgrade and the continued growth that we're focused on and deploying the capital and to do that.
Thank you.
And we'll now take our next question from Bob <unk> from Goldman Sachs. Please go ahead.
Thank you very much good morning.
Mark I wanted to.
If you could help me figure out how the heck you guys are keeping costs flat and I know your head count hasn't changed and I would assume there is some creeping back in from last year, you get some expansionary efforts and new programs and quick.
How are you doing that.
So Bob this is Willie.
Let's say as we've been doing a great job of managing our overall cost structure across the company and our teams are delivering and it's showing up and our performance whether it's EBITDA.
Our EBIT margins cash flow and Etfs, so as we think about.
What we've delivered.
And ultimately started are.
COVID-19 action plans at the end of Q1 last year, and then we accelerated our transformational efforts towards the back and.
And as we came around here into Q1, we benefited from those cost actions year over year.
I would point out as you think about also our SG&A line, you, probably see that going up a little bit and as I highlighted.
And I believe last year, and fact that we had some market based comp specifically deferred comp that was.
A benefit last year, that's not repeating this year, just due to the financial market declines, but we're well set up and.
And and focus so that that was.
Variable margins that we talked about last year, a fall through to the bottom line, obviously there'll be a little bit of a denominator math just due to the price inflation that we're dealing with.
Yeah, Bob and overall head count is down so.
Between the assets, we shut down around the world.
As well as.
Some head count optimization that we've done.
Last year, the head count is actually down and I'm not sure where you got the it's flat part.
I was looking at the 10-K, and maybe I misread it.
Mark I did want to ask you know it's been a long time since you did have a blockbuster deal.
And it appears that you're starting to get the.
And the traction and the EBITDA run rate the earnings run rate.
Do you have enough stuff on the organic plate to keep you busy and excited or.
And we start to put on the radar screen, maybe it's you deserve the right to do something big again.
So first of all we love our portfolio and the innovation that we have in front of us Bob and.
It's producing very attractive earnings and exceptionally attractive cash flow.
And we see.
A lot of innovation positioning us for continued growth into 'twenty two.
We also like the markets that we're in and we still think Theres market recovery in front of us and 'twenty, two and beyond and things like aviation and automotive.
So the volume mixture, where I think we'll continue balance sheets, obviously getting stronger.
And we're gonna have tailwind next year as we go and.
That year with cost reductions so all of that feels good.
And our balance sheet is getting into better shape. Our strategy continues to be focused on what can we do organically what bolt on M&A is make a lot of sense.
To add to what we're trying to do.
And buyback stock with the remainder of the cash so that's our strategy now and that's what we're going to stay focused on doing.
Terrific, Thanks and will help.
We will now take our next question from John Roberts from UBS. Please go ahead.
Thanks, and I'll ask just one here mark.
Mark methanol assistance overshadowed the activity youre doing on processing waste plastic and the Gasifier.
Have you taken that as far as it can go and.
Can you help other gas supply our operators.
And as plastic waste.
Yes so.
We're really excited about what we're doing with the Gasifier.
And changing it from a gasify and cold.
And we called reforming plastic.
And so that plastic waste, we're just getting started Bob it's got huge growth potential and that's the speech I just gave a moment ago about biopolymers and all the opportunities, we see to grow and specialty plastics as well as and textiles.
So the great news is it's incremental capital to continue adding plastic waste and the great thing about the gas fire.
Is that it can take any kind of plastic waste mixed.
Mixed plastic waste, which is great. It gives us a unique advantage and buying raw materials can we because we can buy a puddle of plastic.
And then separately other polyester and put it in the and the methanol as is.
The remainder.
Into into the Gasifier, which gives us the ability by very low cost feedstock that hasnt been cleaned up.
And we're really excited about that so now we see a tremendous amount of growth and that space.
And as excited about that as methanol is this and what we can do with our polymer capacity and we have a lot of capacity to leverage.
And so no its going to be Greg.
Thank you as far as working with other people were not focused on that right now.
To your second part of your question.
At the moment, we're really just trying to deal with all the inbounds on the methanol side Thats, taking a pullover resources.
Let's make the next question the last one please.
We will now take our last question from Laurence Alexander from Jefferies. Please go ahead.
Hi, could we could you could you put the cost productivity discussion and perspective in terms of over to the next day three five years.
And would you be able to keep.
The cost structure, roughly flat barring any M&A.
Or is there an adjustment period and if you do so what would you be sacrificing like what are you what are you, giving up in order to do that.
Yes, Thanks, Laura for the question as Mark size and earlier, we started with a goal of delivering.
A flat cost structure, and 2021 and that was on top of reducing our costs by roughly $150 million.
Compared to 19 and as we look forward, we look to continue to grow that and.
We see another $50 million over the next year, plus and also what we're trying to do their launches that frees up capacity as we create the incremental gains to continue to fund our growth without substantially growing our cost structure. So that's the way I would frame and at this point.
And we continue to also look at leveraging assets and sites et cetera to continue to gain better fixed cost leverage.
Where we have additional capabilities as we've highlighted previously.
We want to assure you, we're not making any compromise on our growth portfolio and even in 18, and 19 and 20, when we could've easily cut back on R&D and innovation, we kept on doubling down and and investing in those spaces.
We knew that's our future. We frankly did the same thing and <unk>, which allowed us to come out of that crisis extremely well and 10 and 11.
Never going to compromise our long term strategy, but we do think.
Digital technologies and a variety of other things that are available to us today allow us to be much more efficient how we run our operations as well as get a lot of routine tasks done and.
And the S J world.
To enable us to invest more and growth.
Thanks, very much everyone for joining us today, a replay of the remarks, plus the transcript will be posted on our website. This afternoon and hope you all have a nice day.
Thank you everyone I appreciate the questions.
Okay.
This concludes today's call and thanks for your participation you may now disconnect.
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