Q3 2021 Eastman Chemical Co Earnings Call
Good day, everyone and welcome to the third quarter 2021.
Eastman Chemical conference call today's conference call.
This call is being broadcast live on the Eastman website www dot eastern dotcom.
I'll now turn the call over to Mr. Greg Riddle of Eastern Chemical Company Investor Relations. Please go ahead Sir.
Thank you Mary and good morning, everyone and thanks for joining us on the call with me today are Mark Costa Board Chair and CEO.
Well, the Mcclain, senior Vice President and CFO and COO.
<unk> manager of Investor Relations.
Yesterday after market closed we posted our third quarter 2021 financial results news release and SEC filings.
Well as our slides and the related prepared remarks in the Investor section of our website Www Dot <unk> dot com.
Now 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 third quarter 2021 financial results news release during this call in the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2021, and the Form 10-Q2.
<unk> filed for third quarter 2021.
Second earnings referenced in this presentation excludes certain noncore and unusual items reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the third quarter 2021 financial results news release.
As we posted the slides and accompanying prepared remarks on our website last night and we will now go straight into Q&A Mary Please let's start with our first question.
Thank you, we'll now take our first question from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you and good morning, everyone and thank you for the updated outlook on 2022.
To that effect, if I could just ask you mark.
What are you assuming.
For auto production in 2022 versus 2021.
Good morning, Vince and what we're assuming is that the auto production situation remains pretty challenged as it has been in the back half of this year as we go into next year.
But things get sort of modestly better through the year, especially in the back half, but but theres no sort of heroic assumptions about auto recovery next year versus this year and the forecast so.
Hitting on everyone's view, you can adjust up or down relative to that assumption.
And if we just look at the third quarter.
Can you sort of help us bridge sort of how that.
The specialty portfolio volume.
Would have performed if you X out the impact from auto so whats your what the other businesses are doing on an underlying rate.
Yes.
Good morning, Kevin.
What I would highlight first of all is.
Then we have mix included in that.
For the quarter, specifically in our advanced materials, which is more exposed to the OEM.
And if you back that out volumes would've actually been down because we had very favorable mix in the quarter.
As we think about year over year performance, especially but sequentially. It was definitely down in the premium areas.
If you think about it.
First half of the year mix was incredibly strong and driving a lot of <unk>.
Variable margin growth and margin improvement.
And there was.
Mix shift a bit in the third quarter. It wasn't just autos. It was also outbound logistics constraints on our specialty plastics business of getting high value products like Triton to the market.
Demand is incredibly strong out there, but logistics as you all know or are also andrology. So.
The earnings could have been considerably better.
With those two factors.
If they were a bit better.
Thank you very much.
And we can now take our next question from David Begleiter with Deutsche Bank. Please go ahead.
Thank you and good morning, and Mark again, Thank you for the 'twenty two guidance.
On the guidance can you just walk through the segments and what how do you expect them to perform and 22 versus <unk> 21.
Sure so.
And good to hear from you David.
When you think about the overall segments, obviously when you start with.
The specialty businesses.
As we've noted here theres just tremendous growth that we see possible.
On a number of factors right, where you've got volume and mix that should be a significant driver.
With the economy to some degree growing with the markets in it and there's also a lot of pent up demand out there.
To drive additional.
Additional growth versus GDP as consumers will fill desires that they can't get due to supply chain constraints and we're restocking inventory, which is not at all happened yet in this year. So that's all quite positive and when you think about that especially the pent up demand part.
I think thats more significant in the EM segment. So we've given you a breakdown of M being about 70% of that.
Several margin improvement versus AFP.
The innovation is also incredibly strong, especially at a time, where we're going.
<unk> continued to outperform the underlying markets in a significant way you've seen this in this year you saw it last year and we've seen it for the last decade.
The circular offerings, we're also accelerating a lot of growth for us.
In the OSP business.
Are you seeing $600 million new business revenue from innovation. So that's a good momentum that we take into next year.
So again those are a bit more biased towards the a M is AFP.
Businesses also getting traction.
And then market segment strategies, we continue to sort of focus on the markets that are growing whether it's luxury evs water treatment care chemicals, where we can pick up a lot of just natural market growth.
And importantly, keep in mind, while the growth I just described all of its high value mix, both within the segment and certainly at the corporate level. So there's a lot of leverage to have a M have a significant increase in earnings next year. When you think about those elements.
And that's also true.
We're happy to have good solid.
Growth and then on the spread side, it's the same thing <unk> got really.
Headwinds, obviously, this year and prices catching up to raws through the year.
And there will be with the price actions, we're taking through the fourth quarter and a lot of effective price increases on January one and businesses youre going to see a pretty big step up in earnings there.
From spreads getting better as long as you believe raw materials are going to plateau relative to the back half of this year and then trend off in the back half of next year, which is sort of our underlying assumption.
So then you pick up a pretty significant spread tailwind. It's the same thing <unk> done a better job of sort of keeping track with prices. This year, because they have a lot more cost pass through contracts.
Half of the price increase in third quarter was <unk> and AFP, whereas the.
The <unk> business in particular has a lot of annual price contracts. So it takes a while to get those prices moving up.
So again that sort of supports that 70 30 split on the spread side too.
So those businesses are both going to deliver considerable growth in earnings.
As well as when you look at AFP on a recast basis minus the divestitures.
That's a lot of the growth there fibers I think will also be renegotiating, putting prices in on probably more than half of their revenue.
Come January one and so earnings will improve there and then of course since <unk> got normalization.
That's going to happen in that business, but it's going to be offset by volume growth that will be pretty substantial next year relative to this year in AG plasticizers.
And some other.
Growth opportunities that we have as well as less shut down so.
That all helps out and of course, there's the cost tailwind that we've given to you that spread across all of these segments that give them sort of added growth. So that's sort of how it balances out.
Perfect and just on buybacks mark cause buybacks approached $1 billion next year.
But we'll take that one.
David Thanks for the question and maybe a little bit as we think about every year.
We're focused on growing free cash flow to that $1 billion level.
As we go into 'twenty, two obviously will have the impact of the divested EBITDA, but we believe.
Fundamentally with the working capital abating, given the raw material assumptions that Mark just outlined.
And right now year to date, we've had roughly $450 million of inflationary pressure on working capital, we see that reverting.
Also as we continue to invest in the circular and.
Growth in our capacity assets.
Net net we think excluding the dividend being backfill half $600 million of free cash flow. Then if you take proceeds from our divestitures on top of that.
Definitely as possible.
Very good thank you very much.
And we can now take our next question from Kevin Mccarthy of Clarkson Research Partners. Please go ahead.
Yes, good morning, Mark you announced a nice deal to divest the adhesives business and of course, the KRYSTEXXA deal is still pending I was wondering if you could just walk us through at a high level. What your thoughts are on capital redeployment and just the portfolio composition moving forward does this spring.
The company to a reasonably steady state in 2022 or is there more work to do.
So the mix in the portfolio over the next couple of years.
And so we certainly like the portfolio. We now have we think that the am and AFP businesses are very well positioned to deliver strong growth.
And the earnings and increasing increasingly improving margins.
And.
The fibers in the olefins part or the Ci part of the business.
Part of our integration scale cash flow et cetera. So we like the portfolio is configured right now as we look at.
Deploying capital to your question, Kevin on delivering more growth.
The total company.
When it comes to capital deployment, obviously, our free cash flow remains incredibly strong.
And our balance sheet now is also strong with delevering being in our rearview mirror. So as we look forward I think we should think about how we deploy capital on multiple fronts. First you should expect capex to increase a bit next year as we have the combination of specialty growth.
The first methanol plant that we're building here in Kingsport, so normal capex growth to support our specialty strategies in that $5 million to $600 million range.
And then of course, you've got a good portion of that $250 million of the Kingsport plant being spent next year now we're balancing some of the specialty capex between next year pushing some of the 223 to keep this sort of and balanced across the two years, but.
Capex will be a bit higher for that.
After that you look at how am I going to deploy my balance sheet and cash and there's really sort of four buckets.
The first is.
Is the potential to continue investing in the circular economy, we're pursuing multiple projects beyond this first plant. If we can achieve the conditions that we've talked about in the past about those being very attractive investments and very stable.
<unk> of earnings.
Those projects could be very accretive.
Earnings and ROIC.
They're very attractive from a return point of view and there could be a use of where we go with our balance sheet. The second of course is bolt on M&A.
Where we'd like to ramp up that level from where we've been in the last couple of years than there is returning cash to shareholders, which I think will be significant as we move forward and of course, a growing dividend.
So it'll be a balance of capital deployment I think like we've always had a across these areas.
There's a lot of attractive investment opportunities for US right now and so we're really excited about how we can sort of deploy capital and create growth for our shareholders.
Great. Thank you very much.
And we can now take our next question is from Frank Mitsch Fermium Research. Please go ahead.
Hey, good morning, good morning, and congrats on the divestitures and just a follow up Mark you did talk about uses of cash and possible bolt on M&A as you know.
What are the current valuation levels like and you know what is your current pipeline looked in that regard.
Yeah. So the bolt on M&A pipeline, there's a number of ideas that we have that are can be attractive in advanced materials and AFP as we try and build out our additive portfolio in AFP.
And accelerate our access to additional markets and advanced materials, especially in specialty plastics.
But as you've noted Frank you have to be careful there is a lot of.
Buy side interest in.
And pursuing M&A right now as everyone has improved balance sheets and cash so we're going to be disciplined as always we're proud of the fact that we don't overpay for assets whether it's the.
You know that.
The larger ones, we've done the paas or the bolt ons, we're focusing on now.
And so we'll see.
There may be some constraints, because we're just not going to run around overpaying.
Got you got you and if I could come back to the automotive.
You referenced.
You know that you are doing better than than you had in back in 2018.
Obviously with builds being off where do you stand in the interplay between your sales your automotive space versus where to build rate is today and how should investors think about that interplay going into next year.
So in advanced materials, our OEM exposure is bigger than <unk>. That's another one of the differences.
Their automotive exposure is about half refinish and half OEM. So there are a lot more balanced.
OEM production drama.
Refinish is just continuing to improve.
But on the OEM side, the supply chain is really short between OEM production and.
The production of our inner layers.
So that actually happens pretty quickly so as they are adjusting their production rates weekly we're adjusting right there with them. So we are realizing that.
And a pretty quick fashion the performance films business has actually done really well.
Through the third quarter because.
Companies, where the dealers the auto dealers are out there trying to upgrade the value they were getting on each car and so selling our paint protection films window films was a nice adder to the few cars that they have to sell but even that seem to start to catch up to us on what they have to sell right. Now so we're feeling I'm feeling a bit of that as we go into the third quarter to the fourth quarter.
But I think that is more cars to sell or produce more cars youre going to see that.
Pickup in sales happened pretty quickly for us because theres really no inventory in the channel between us and the in the primary market.
So that I think is good news.
As supply chains at some point are going to start marketing are getting back in control and production will be there clearly end market demand is quite strong. So there's plenty of pent up demand of people who want to buy cars.
When you look at just how much they are paying for used cars right now.
They are clearly.
There's a lot of demand out there so I.
I think if we can if we have recovery it'll be pretty fast.
And there'll be a little bit slower in AFP and supply chain smoker.
Sorry.
Great for me it was going to do its part to increased car sales. So just so you know and looking forward to December seven thanks, So much mark.
You bet.
And we can now take our next question for.
RBC capital markets. Please go ahead.
Great. Thanks, I just wanted to I guess talk about 'twenty, two initially or at least your initial comments there.
What are you expecting.
On the last question as far as global auto production and.
It appears to us that many companies in your position are actually assuming rates below the IHS recovery. So maybe you can just comment on that Chris.
Yes, so on a <unk> basis.
I think our view is below IHS.
And I think IHS is from what I can tell monitoring their view downward for the fourth quarter. So production obviously, what we're assuming is similar to maybe a little bit better than the third quarter, but.
Not not any significant change.
To help in the quarter.
When it comes to next year, let's be honest, it's anyone's guess right when the supply chain on components.
Is going to improve and production is going to improve.
I think we are being cautious and not assuming much improvement in the first half of the year.
But we do assume that eventually these issues are going to get addressed and so there'll be some modest improvement in demand in the back half of the year.
But.
Our guidance is not based on some substantial improvement in auto demand.
Thanks for that and then I just wanted to also ask about the strategy I guess going forward.
Following the sale of Chris taxi or are there other properties within the portfolio that you think are noncore anymore.
Thanks.
No not at this time so.
We're very happy with the MAA portfolio. The two obvious questions that come up in the past is.
Fibers olefins on the fiber front I'll remind everyone that it is deeply integrated into our overall cellulosic biopolymer.
Business, we have a lot of biopolymer, especially as we're selling off of the stream in advanced materials and AFP and with the.
Significant change in the world's view around waste plastic in climate.
We just have tremendous growth opportunities in front of us and both am and AFP with that integrated stream, you're going to learn a lot more about that.
Innovation day, where we're going to identify a bunch of new opportunities. We are pursuing that can be quite substantial and textiles growth in itself in fibers has been actually quite strong it's incredible how the textile growth been 80% up year over year, obviously on the challenged market, but still tremendous growth.
Offsetting not just tow market decline.
But also that discontinued product.
So thats business as well as at the position now where textile growth will offset tow market decline or better.
And we're in fact demand is exceeding our expectations, where we're having to pull forward conversion of tow assets to make them textiles. So that business is on track and it generates a huge amount of cash flow that supports all the investments, we're making in growth in am and AFP.
Olefins its bit of a similar story, where we are dramatically improving the quality of the earnings in that business, obviously, it's doing really well, but we've been taking a lot of actions over the last three years.
To improve.
What is the new normal.
For this business, which is more likely to probably around $300 million.
And.
There are things like closing, our Singapore plant, where we had a very disadvantaged raw material energy position, that's a big upgrade in the quality of our business with it closed.
Lot of operational cost transformation work that we're doing across the company does flow into the big assets that flow into chemical intermediates, the RCP investments, giving us flexibility to reduce ethylene when its not attractive and make it when it is.
It reduces sort of volatility around that and we've got a new investment will tell you about an innovation day for modest capital that will significantly improve our olefin production flexibility and.
And mix is getting better right.
It means business inside that overall portfolio is great growing and stable.
We have a lot of our businesses on cost pass through contracts that gives us a certain amount of stability probably about 40% of revenue. So there's a lot of things.
And the olefin space, we've done to improve it.
We're obviously disciplined about our portfolio.
But as you look at the significant growth opportunities, we have in front of us.
And that balance sheet strength, and we want to leverage to deploy and grow the company.
Cash from both fibers olefins creates a lot of value so.
When we look at the portfolio today for what we want to do now this is the right portfolio to grow.
Okay.
Okay next.
Our next question from P J Jessica.
Please go ahead.
Excuse me.
Good morning, Mark.
Good morning.
Congrats on being named in Fortune magazine.
I think one of the few chemical companies.
Also creating this specialty brands with the economy.
In this particular economic products like Titan.
On one hand, and then you have to fight Commoditizing businesses on the other hand, like adhesives and tire additives.
And so like many other chemical companies you have to constantly fight that battle.
Business is commoditizing and innovating.
So and.
And given that do you think you have the right portfolio to move that portfolio solidly solidly into specialties.
You look at making a big acquisition or would you look at.
Just sort of continuing more bolt ons.
It's a fair question P. J, we're always looking at how to enhance our portfolio and obviously.
We did significant portfolio change.
Way ahead of many.
With the additional solutions to Mako and divesting a lot of commodity businesses.
It's easy to forget history, sometimes but we.
We moved out about three.
Three 9 billion of commodities and added $4 2 billion of revenue and specialties out of $10 billion is a huge portfolio change. So we do really like the portfolio. We have now and yes, we have to optimize it around some underperforming businesses and I'm proud of our teams delivering on that restructuring activity, which is never easy.
To sort of get to where we are we.
We don't really feel the need to get a lot bigger we think we're at a good scale to continue to invest in fundamental R&D product development as well as application development to grow.
And I think that the circular economy on top of very attractive specialty growth.
Where we could take that with multiple plants is a game changer for how we can grow the company and how it can be valued.
So we really are focusing a lot on how we focus on circular we've got two extremely advantage streams polyester and the way we can do the circular economy is a very advantaged stream to grow in this current macro environment that wants to get rid of plastic waste.
And improve our impact on climate.
And in the Cellulosic stream is also incredibly compelling there's just a tremendous amount of opportunities when you've got a polymer that 60% biopolymer and with our new recycling technology, there, 40% recycled plastic waste.
The biodegrade ability of the product is tunable for different applications and that last part about biodegrade ability is increasingly important and we'll tell you more about that.
An innovation day and some of the opportunities in front of us. So we see a lot of growth and capital deployment in that direction to deliver a lot of organic growth from the portfolio, we have right now.
We don't really feel the pressure to run out and do some large M&A.
At the prices today for large M&A, that's really attractive.
Youre going to have a challenged.
Situation in getting a good return so we don't really we're not really focusing on that.
Okay, Great and then you made more propylene in the quarter using your refinery propylene investment.
And you had to buy less propylene as a result of propylene that spiked.
So when you look back it looks like that refinery investment made a lot of sense, but when you look back what kind of returns do you think you achieved on that and can you just talk about that thank you.
Yes P. J this is willie.
Paid off in less than a year and were at multiples now so as I said.
<unk> investment and we're going to be excited to tell you about some additional options that we had to further raise the floor as we think about the long term because of our ability to optimize our olefins.
Along these site so again.
A modest investment that Mark talked about is another option that we think are similar to our GP that will be multiples.
Again, most of our capital as Mark just highlighted is focused on the specialties.
And the new vector of circular, but we're still going to make the right optimization to improve the quality of the portfolio long term.
Great. Thank you Ali.
And we can now take our next question from Alex <unk> from <unk>.
Keybanc. Please go ahead.
Thank you and good morning, everyone.
Could you discuss free cash flow conversion.
What kind of conversion in terms of percent of EBITDA what percent of net income. So we see next year.
Yeah. Alex This is Willie what I would say is again at.
A growing EBITDA number.
We strive to be around that 50% level.
If you think of that $1 billion $1 one.
1 billion $2 2 billion of EBITDA.
Pre divestiture and we're going to grow back to that level as our focus based on our 22 bridge that we gave you earlier, so think around that 50% level.
Thanks, Lily and Mark a question for you on a circular polymers business feedstock availability is a major issue as you know could you discuss what progress you are making this year in securing access to necessary waste streams to grow that business.
Sure, Yes, we're making great progress the advantage, we have right now as well.
We're pretty much ahead of the industry and going to commercial scale.
In building the largest.
Our recycling plan.
On the on the planet I think at this point.
So that gives us an advantage in how we show up.
With different suppliers for what we need.
There is no doubt that there is plenty of plastic waste I mean, when you look at polyester just in the U S. You've got over 20 billion pounds of waste a year.
40% of that is packaging and only about 25% to 30% of that can be recycled today. So.
When it gets recycled frankly, most of it goes into textiles, not bottle to bottle.
So as you tap into that stream an advantaged methanol CIS is can use what can't be mechanical recycle from packaging, but it can also use carpet textiles, which almost all end up in landfill.
So accessing.
100000 tons of feedstock out of that.
Significantly large number when youre, the first showing up to sort of secure it is challenging but doable.
And the infrastructure out there clearly needs to improve in the U S. As we get consumers to recycle more and policy to support it and infrastructure in place to sort of recycle it.
As we look at plants, two three and four but as.
As we look at the first one we're confident that we can do this and we will provide more detail and innovation day here.
Is that a lot today about you'll get more detailed innovation David.
It's better for them to provide more detail on this question, which is incredibly important and we're very focused on it.
We can now take our next question from Mike Sison of Wells Fargo. Please go ahead.
Hey, good morning, guys.
Now you had a lot of material on Permian Ferrari, but.
In terms of your Asps.
Asps.
Could you maybe talk about.
Each of the businesses.
In the prepared remarks that you felt these are businesses that are well positioned to grow in.
And maybe just talk about some of the gross prospects for each of the remaining businesses at AFC.
For next year Mike.
Yes for next year.
Yeah.
So when you think about it in especially plastics world.
You have just tremendous growth and frightening.
Market demand exceeding our logistics capability, serving the market and we're even capacity constrained in the second quarter, which is why we converted a line over to.
To serve.
Right.
Now we've got that capacity coming in coming on line came online through the third quarter and positioned to serve growth next year.
Coming from a range of markets. There is the traditional markets that are being driven with accelerated growth with a renewed recycled content like hydration.
Delivering a lot of growth in.
In housewares those traditional markets that we've always grown in are being accelerated and then on top of that we're getting access to new markets that we wouldn't have normally had the story we shared with you at Stanley Black <unk> Decker is a great example, I mean, it's a power tool we're not normally in power tools, we normally go into.
Optical clarity kind of applications with Triton.
But this is.
The housings for power tools.
And that customer adopted us because one they are committed to addressing their scope III climate from suppliers and recycled content was a way to start making progress on that especially as our technology is a lower carbon footprint in a meaningful way relative to a normal fossil fuel process.
And they wanted to maintain their quality right. So in a lot of these applications you can't use mechanical recycling at all because when youre, just blending mechanical recycling with Virgin and the quality of the product goes down on.
On multiple dimensions, and you can't have that kind of a compromise in the power tool. So we were able to provide recycled content carbon footprint improvement and zero compromised on the performance of the product I mean, that's an incredibly important aspect of why we're growing.
And then the third part of it.
Was.
Actually partnership for them. So they want to make sure. They are aligned to the company that could scale with them and it was going to be a reliable supplier of this product and theres a lot of.
Companies, starting up out there, but they're startups rates and they haven't scaled up their technology. So when we can show up and provide a product where we've been have a 40 year history in doing methanol Sis and we've got 100 years of history of supplying products to people very reliably.
That was incredibly important to them and who they are going to choose and we've had 10 other brands sign up in this quarter in the third quarter for those sort of similar set of reasons, which we'll tell you more about but we're really well positioned such as Triton, It's crystal renew which is our high clarity <unk> recycled content in.
Packaging.
A wide spectrum of things, including our Cellulosic center eyewear et cetera, So a lot of growth in SP.
Obviously, the inner layers.
As films businesses are tied to the auto production.
<unk> as we discussed but mix is still important and we still see.
The mix improving faster than the absolute volume and production because the first thing that the Oems.
Oems are going to produce at or more luxury high end value cars when they start addressing their chip and component charges and we will pick up that volume with our products are aligned with that market.
And the mix value of that is also incredibly important so a lot of growth that can occur across the entire segment, Hey, Mark you might want to do something similar to that for additives and functional products as well sure.
Question for my own team.
So Greg.
On <unk> I think it's the same thing coatings has had tremendous growth this year and that growth will continue.
And Theres a lot of pent up demand in coatings as you all know.
Our customers are struggling significantly with supply chain challenges, so odd to them ramping up just to build inventory to serve the seasonal demand next year is good as the supply chain issues continue to get resolved.
Availability point of view, so I think we'll continue to see very strong growth there.
The care chemicals business has great steady growth same with water treatment that will continue going into next year.
And then M attrition is really accelerating their growth in higher value formulated solutions through the <unk> acquisition and Theres of course recovery in the aviation business. So theres a lot of different vectors across the entire segment.
That remains.
Well positioned for growth in the markets that it serves and of course, we've got innovation like Tetra shield into packaging that'll be a vector of growth.
And.
And continued.
Growth in some of their care chemical opportunities in some really exciting new ones that will tell you about our innovation team.
Great and just a quick follow up on chemical intermediates.
EBIT margins have been in the high teens for last couple of quarters. It sounds like it'll stay maybe in that range for maybe the next three quarters and then I think in the prepared remarks, you mentioned that you felt it would normalize in the second half. So just curious what normal means these days, but.
Any thoughts of where that level kind of settles in versus how much much lower levels in the past.
Yes, Mike so.
I think that when we think about normalized we think thats going to be around $300 million.
Obviously, there is a path to normal as we go through next year.
We expect at least in the first half market conditions to stay.
Relatively tight obviously there is some loosening of those markets even as we go into the fourth quarter based on our guidance.
A lot of it is we had tremendously high spot.
High value spot sales and incredibly tight market conditions. When you look at the second and third quarter.
As supply demand gets a little bit more sort of balanced.
Those spot sales go away and Thats a bit of that headwind youre going to see from <unk> to <unk> <unk> for Ci, but the overall fundamental dynamics of these markets. The derivative level in particular, I think we expect to remain reasonably tight as we go into the first half of next year.
Then.
Assume normalization.
Towards that $300 million level.
Long term so.
And I already went through all the details of how we've raised debt.
What is normal up and the actions that we've taken a I want to repeat it but there's a lot of things we've done to improve this business and this new investment will be another step change improvement when it comes online.
Thank you.
We can now take our next question from Matthew Deyoe.
With Bank of America. Please go ahead.
Good morning. Thanks.
So I want to hammer in a little bit more on the strategy to offset dilution given all of these sales.
We look to pay down any debt given the lost earnings and if this is all or sorry is it all buybacks and if it's the latter.
I guess why not execute more aggressively on a buyback now ahead of proceed collection just given your cash balance.
Thanks for the question.
Yes.
Let me frame. It this way, which is we expect total proceeds to be about $1 8 million from these transactions and actually one seven of that over the next few months.
So as we look ahead also this one is about 8% of our EBITDA. So as you think about the flow of our market cap and we're looking at.
Roughly $1 2 billion and I'll look at that as probably the floor.
As you think about an offsetting dilution and paying taxes that will raise the number.
Roughly one five or so.
We're going to put that money to work starting here in Q4 with it.
The tires closing, which we expect here in the near term.
With that also given our balance sheet on the tires position, we don't expect to pay down any debt related to that obviously as we look at.
2022, we'll see at the timing of getting the proceeds and also managing our debt honor as we look at.
22 will have a refinancing in the August timeframe and had plenty of time to optimize that when we get there.
Okay, and I know COVID-19 opt escaped us a little bit, but if we were to look between I don't know 2015, or 2018 and 2021, what was pro forma growth for <unk> He had been.
The problem child, with KRYSTEXXA and <unk>.
Just given.
Maybe even a better question.
What do we expect it to pick up in organic growth in the next five years, especially the last five given that.
Lapses businesses.
Yes, so if you looked at.
We will be providing a recast so you can see it in specific numbers.
But roughly what you would see between 2018 in <unk> and.
'twenty one.
Is.
A roughly flat similar to EBIT from 18% to 21.
When you have excluded sort of the one third of AFP as we've been discussing it.
So I think that's quite stable when you consider the China trade war and endemic in sort of recovering out of it and that is based on.
And when you look at it relative to 'twenty, one and improvement in <unk>.
And volume in mix Thats been meaningful.
Spreads are probably a bit challenged relative to 18, just as pricing pricing is still catching up to raws.
But overall very well position segment to deliver pretty strong earnings growth next year relative to that recast number.
And that volume mix comes from everywhere its coatings its animal attrition is.
Care chemicals water treatment.
Even especially fluids.
Except for aviation in 'twenty, one so but that will obviously start correcting itself as well as you go into 'twenty two on that front. So that's.
That's an across the board for a volume mix story.
Thank you Tom.
We can now take our next question from Edlin Rodriguez Jefferies. Please go ahead.
Thank you good morning, guys.
Mark a quick question on your portfolio I mean, it has definitely changed over the years, but you still have a mix of specialty and non specialty businesses. So if you look over the course of.
I don't know 12 to 18 months.
I don't know what materials, good or bad for you.
Or is it neutral or whatsapp.
If you look at it on a combined basis.
It's probably from a raw material point of view.
I'd say you got to then convert that to spreads.
<unk> were up everywhere, but obviously prices are up more than raw materials in Ci where were lagging.
Price wise in the specialties those to do hedge each other out.
That actually provides earnings stability, if you focus on earning stability.
A bit of a balance when you've got CIO, just 20% of your earnings actually.
Provides some benefits in times like this as your prices are catching up to specialties.
And the opposite will be true next year as the pricing and spreads will improve in our specialties, obviously youre going to have some spread normalization Ci.
The important part of our strategy and our story is not spread right. We've been very clear about this our strategy is growing volume and high value mix in that volume against an asset base that we continue to upgrade with that mix to deliver increasing ROIC.
As well as deploying more capital for that high value mix.
And that's why you drive value long term right, it's not to have spreads bouncing up and down.
Yeah.
They actually sort of hedge each other out and provide some balance and that will be true of next year.
It is.
This year.
Thank you and a quick one follow up on I mean, you've talked about like bolt on M&A that is.
Is the focus mainly in the U S or are there opportunities ex U S.
Yes, we look at the pipeline. It's we're focused globally as Mark highlighted previously, it's obviously looking at our specialty plastics business and across the new ASC portfolio.
And we're focused on that and also on our circular projects from from a growth standpoint. So.
It's about focus now that we've completed.
Two thirds action.
Action number one thing so that you can see the value.
Of the new ASC.
Okay. Thank you.
And we can now take our next question from Bob <unk> of Goldman Sachs. Please go ahead.
Thank you very much.
Mark I was just observing that over the last six months.
Only one earnings for you guys seem to decline about.
14, or 15% at least the estimates and the stock on the opposite it's down about 15%.
This E rating that seems very consistent with commodity companies commodity chemicals like a dollar aligned all they've sort of seen that same day rating.
And yet you've been on this evolution to upgrade the portfolio and so there seems to be a pretty stark dislocation from the market.
Perception.
<unk> those efforts and what I would guess are the internal expectations and perceptions there so I.
I guess at some point does the board decide to get more aggressive or consider an LBO or maybe it was Matt suggested do it.
<unk> before the market catches on to what I would suspect you guys believe internally.
Well.
No.
I'm not going to answer that question Bob.
What I can tell you is the board is incredibly excited about our strategy and the value creation opportunity that it presents.
In the end user market decide what the Companys worth not us.
But as we focus on what we're doing the specialties. As you noted I think we can demonstrate incredibly strong growth next year relative to this year in that part of the portfolio I think we're going to manage.
Capital deployment in a responsible way to deploy it in ways that create a lot of very attractive ROIC growth leveraging the core technologies and platforms that we have and then you pile on the circular where we could deploy significant capital if we can get these projects.
<unk> done under the conditions that we have.
That they provide stable earnings.
Yeah.
As a significant vector of new growth that isn't remotely factored into our valuation from what I can see at this point so.
So there's a huge amount of upside as you're pointing out where I think our stock price can go from today.
And.
Is that all plays out.
And our balance sheet strength that is quite significant now going forward gets deployed.
A huge amount of upside.
And we're confident investors are going to see that value in and invest in the company and Thats why we are doing our innovation day in December as to say lay that all out for you to make sure. All of you can see sort of how that can create compounded growth.
In earnings and cash flow as we go forward.
Got it.
You mentioned in advanced materials, a decent chunk of contracts that reset annually I was wondering if you could give us.
Description there is that.
Typically are exclusively to the automakers is there any opportunity to shorten up those contract durations. So you can add more.
Base pricing or.
Some sense of that.
Yes. This is these contracts are between us and the glass companies right. So we don't sell to the Oems, we're selling to the glass companies that use our films for laminating that glass.
It's been a traditional structure in this market since we bought it with these annual contracts we are looking at.
How we negotiate both price and structure to these contracts going forward you know obviously in years of declining raw materials, we like them in years, where raw material spike up, especially when they spike up like this it's a problem. It's the same issue in fibers, where you've got these annual or multiyear contracts, where the prices are.
Locked in.
So when you had that huge spike up in energy and raw materials in the back half of this year.
Youre going to sort of.
You have to wait.
<unk> January to sort of recovery, but we are aggressively going out with price increases in both.
<unk> and fibers.
Gen one.
Great. Thanks.
And we can now take our next question from Paradise Mishmash of Bahrenburg. Please go ahead.
Thanks.
Morning.
With regard to your BRD startup next year.
It sounds like there's a big demand for recycled plastic can you give us a sense as to what percentage of your volumes are already booked or contracted and would you announce an expansion. If you say are 70, 80% booked.
So.
The uptake in engagement from brands has far exceeded our expectations on the specialty side, we were thinking we have swing assets, where we can make our specialty plastics or P. T for packaging and we thought we'd actually be selling a lot of PT for packaging and that's looking like that's not going to be the case.
Because especially demand is so strong so I think we're in very good position for loading the asset.
Pretty quickly into.
Into the markets, we're not going to disclose the specific percent number, but I think it's going to be quite robust.
And quick.
Regards to demand that goes beyond our first plant, yes. The demand is very much there and that's why we're working so diligently right now.
With countries and brands around the world, especially in U S and Europe right now.
Who want to solve those challenges when the brands look at this.
Situation right they've got two goals, they got adjust packaging waste specifically plastic waste.
Getting a lot of attention, but if you switch to plastic plastic something else you still got to manage that waste.
And so as you look at this.
You know they've committed to very high recycled content targets and there isn't remotely enough mechanical recycling product out there to to supply that need.
<unk>. In addition, the price of mechanical recycled pet is going up dramatically in Europe, and now as well in the U S and the brands are worried about how that how much that is going to keep going up.
And they are also doing lifecycle analysis on the carbon footprint, so not just classic, but alternative materials that they could consider and unfortunately, you run into a problem, which is all the alternate materials have a worst climate footprint.
You recently saw when they switch from coated paper cups to plastic because plastic has got a much better climate footprint and can be recycled where the coated paper cannot be recycled.
So the brands are very focused on how to recycle plastic for a lot of applications and realizing that molecular recycling is the only way forward, especially long term. If you want to keep your product quality the same than mechanical recycles limited and how it can be used and integrated over time. So if you wanted to infinite solution.
You've got to have molecular recycling is part of the solution. So engagement strong they need to build more plants is there and we're driving to find a way to do that under the right conditions.
And they are attracted to us because our scale our technology is scalable now.
Where the startups are still.
Sort of piloting and trying to figure out how to scale up. So that's also drawing a lot of attention to us.
So we feel good about where we're at we're excited about.
Doing this but to be clear, we're not going to build any additional plants.
Unless we get these sort of.
Contractual commitments for off take that give us a stable earnings.
Got it and then just as a follow up because the CRB process can take a lot more different types of plastics in PRT.
Should we think about the VIP versus <unk> mix.
Both these parts to start ramping up.
Go ahead.
Yes, well first of all Theyre actually a great complement as technologies together at this site because we have a unique proprietary way to separate unsorted waste plastic that just separated from polyester to everything else.
Much lower cost. So that's one of the feedstock sourcing advantages that we have that I should've mentioned earlier.
And that allows us to take that mixed waste plastic into CRT ticket into our acetyl stream and make Cellulosic biopolymers.
That gives us a lot of.
Sourcing flexibility.
So we see both technology is creating a lot of value in the CRT is also.
Through through the Cellulosic, drawing a lot of attention right. We've always had we've had a biopolymer for 100 years. It is going to go back to acetate film with Kodak and we've created this huge spectrum of applications off of that core technology and am AFP in fibers.
But with the recent change.
And focusing on climate focusing on plastic waste.
Instead of recycling you can also have biodegradable products.
As a way to sort of have circular life and and that's drawing a lot of attention around the cellulosic stream, we can take back polymer and put it back into CRT or we can also provide ones that biodegrade based on the application. So.
A lot of interesting growth there as well.
That we're really excited about.
Thanks Mark.
We can now take our next question from John Roberts of UBS. Please go ahead.
Thank you.
The formic acid business was also in the underperforming category. It may be confusing underperforming with noncore, but has that improved a lot now and as part of the core operations.
And John this is Willie on the forming side, yes, it's a much smaller component. It's a fraction of the size of the two businesses that we sold.
As we've taken operational and transformational and the operations. There. We think we've got the results that we need and.
And the performances.
Is adequate.
Okay, and then our automotive films and automotive coatings ingredients being impacted equally by the automotive curtailments.
Yeah.
So from a film's point of view in advanced materials, the inner layers in the aftermarket performance films are more impacted there more OEM exposed.
Then our coating additives, where about half of it goes into refinish.
And therefore, that's obviously a lot more stable than the current situation. So we feel more of an impact on the film side.
Thank you.
Let's make the next question the last one please.
Thank you we can now take our final question from J D pen yet.
On field research. Please go ahead.
Thanks, a lot.
Just one question really is on your guidance for 2022.
Hearing the call and hearing you talk about so many factors that are going to catch up and be beneficial just wondering are.
Are you being just very conservative with regards to your EPS range of nine five to 10, because considering all of that.
That shop on raw materials, and the volume leverage that you were talking about in your specialty businesses.
I'm just trying to understand.
What is it.
Conservatism. Thank you.
Yeah.
Yes, so look I wouldn't call it conservative or optimistic at this point.
I think what I'd say is we're sharing our best thinking with you right now of what we what we know obviously, there's a lot of uncertainty.
In the future things, we're certain about is we know we can control our costs and we have a very aggressive transformation program going that.
When you look at operational transformation cost cutting plus variable comp tailwind that's about $200 million of.
A tailwind it offsets about $80 million to $100 million of inflation.
We know that we're going to invest in growing this business, we have tremendous growth opportunities right there.
Our portfolio and so we are growth investments.
And that sort of $50 million to $75 million range.
That is controllable we can control the pace of that based on how the market's doing.
And that does include some preproduction expense on starting up so methanol. So some other plans when you think about that number.
But those are controllable obviously, there is uncertainty about where <unk> is going to go.
We've got a reasonable assumption, but we'll see.
We'll defer to the to some other companies on that.
And where the markets are.
And then on the specialty side, what I'd say is we do feel.
Good about.
The growth potential of the innovation to COO.
Create levered growth on these markets and that spreads will be a tailwind, but there is still a lot of uncertainty about automotive.
Automotive demand as many of these questions have highlighted there is uncertainty about where raw materials are going to trend.
And how they progress from where we are now into next year as well as distribution costs.
So there's a lot of uncertainties out there that none of us can frankly predict.
So what we're confident is if you look at it in three buckets you've got.
Versant earnings offset by share repurchases, so you've got a bucket of.
Ci spread normalization offset by cost reductions and then you're asking the question, which is can specialties grow next year relative to this year.
In variable margin and I think we've laid out a case, where we think.
Answer to that is very much yes, but im not going to get into.
Trying to be more precise about that until we get to January and have a better look at the world We live in at that point.
Great well done on Santa Maria Thank you.
Thank you. Thank you.
Just to wrap up.
What I'd like to say is.
Deeply appreciate the questions the interest in the company. We're incredibly excited about innovation day coming up in December it's been awhile since we've had that.
Kind of opportunity to really get more into the detail with investors.
And how we're going to grow this company and deploy our balance sheet to create a lot of very attractive growth.
And we're excited.
We look at the board and I were having this conversation at our last meeting in the beginning of October.
The most exciting time I think we've had when we think about all the different ways. We can grow this company.
Create value. So we look forward to sharing that with you in December hopefully they will be virtual but I hope I will get as many people as possible show up in person as well as be available online.
Uh huh.
So we can have a better chance to interact with all of you. Thank you.
Thanks again for joining us. This morning, I know everybody has a great day, that's the end of the call.
Thank you. This concludes today's conference call. Thank you all for your participation you may now disconnect.
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