Q1 2022 Eastman Chemical Co Earnings Call
Good day, everyone and welcome to the first quarter 2022, Eastman Chemical Conference call. Today's conference is being recorded this call is being broadcast live on the Eastman website Www dot spin dot com.
We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead Sir.
Thank you Keith Hello, everyone and thanks for joining us on the call with me today are Mark Costa Board Chair and CEO .
Was he mcclain senior Vice President and CFO , and Jake Laroe manager Investor Relations.
Yesterday after market closed we posted our first quarter 2022 financial results news release, and SEC 8-K finally.
Our slides and the related prepared remarks in the Investor section of our website Www Dot Eastman Dot com.
Before we begin I'll cover two items.
First during this presentation you will hear certain forward looking statements concerning our plans and expectations.
All events or results could differ materially.
Cautionary statements regarding forward looking information and certain factors related to future expectations are or will be detailed in our first quarter 2022 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.
10-K filed for full year 2021, and the Form 10-Q to be filed for first quarter of 2022.
Second second.
Earnings referenced in this presentation exclude 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 first quarter 2022 financial results news release.
As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A Keith Please let's start with our first question.
Thank you, ladies and gentlemen, if you'd like to ask a question may do so by pressing star one on your telephone keypad star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment.
We will take our first question from Vincent Andrews with Morgan Stanley . Please go ahead.
Thank you and good morning, everyone I'm wondering good morning, good morning, good talker.
I'm wondering if you could talk a little bit about.
Just sort of how the second U S project.
And molecular recycling is developing I see youre now.
Mentioning that you were talking to several global brands. So I'm wondering if anything is changing about the size scope or scale of the of the expected initiative as well as.
I think it originally said you might have something formalized in the first half of this year. You know here we are almost a day. So just curious for an update there.
Sure Vincent so on the circular economy, we're really excited about how well it's been growing across all project right. So we've got the Kingsport project.
Going to be starting up.
And the next nine months and then you've got the.
Looking at the French project, and so a lot of momentum going on in those two fronts as we look at the U S project.
We would expect it to be similar in size to what we're doing in France. It would be focused on predominantly packaging in textiles. Since we already have a nice sustained especially play in the Kingsport site.
And we do see tremendous engagement from.
Several brands on wanting to be sure of significant off takers that project. When you think about just the scoping and need these brands have for recycled content.
And the project the projects and the targets set for 2025.
They really need to endorse a molecular recycling.
When you look at mechanical recycling, it just has limitations and truly creating a circular economy because.
When you look at the packaging waste only about 2030% of it can really be looped back into food grade bottles.
And so they have real shortness of how theyre going to get this recycled content right, 70% is going to get down cycled into scrapping or park benches or in the U S landfill or incinerator in France.
That's just perpetuate the linear economy, not disconnecting from fossil based feedstocks.
Mechanicals, great that its energy efficient, but it's complete.
Completely insufficient not to mentioned it also degrades over time, so they realize that to maintain a high quality of their packaging and a long term solution molecular recycling has to be around to support that.
And enable all of the packaging waste to be recycled I mean, our position is you should reduce reuse as much as possible, but much of this we're still going to be needed to packaging.
We're in textiles same story.
We are the required solution.
To actually eliminate all the waste so.
Get that they understand it. They also understand that plastic is a much more energy efficient products than glass and aluminum. So if you first want to assume green energy is limited and the planet.
Then you should use the most energy efficient product not glass, it's four times more energy or aluminum two times more energy to make sense in plastic.
So theyre very focused on this and Thats why we got such good engagement and they understand the sort of cost pass through contract nature of what we're trying to do.
So we feel really good about where we're at but as you know with these kind of feel very complicated long term commitments. It takes time to work out the details.
Sure and maybe just as a follow up.
I noticed there were no buybacks in the quarter, but youre still committed to doing at least $1 billion in the year. So how should we think about the cadence during.
During the balance of the year to get to that at least billion dollar goal.
Sure. Thanks for the question, we did wrap up the ASR that we watched.
In December here in early March.
Completing the $1 billion or the $1 billion from last year. We are also I would say here in April .
<unk> on the transaction, we had the $1 billion of cash.
And so I want to compliment our teams.
And also wish our adhesives team's success.
A transition.
And also we're continuing to partner providing transition services on those transactions here through the end of the year.
If you think about how we've started Q2, we've already purchased $200 million shares here in the month of April .
And you can expect a pace similar to that through the rest of the quarter.
For the full year I expect again to be at the $1 billion or greater as we deliver on the commitments that we made and you can look at that on a full year basis is basically providing about 75 a share.
Offset the roughly $100 million.
The impact from the divestitures.
I would tell you that's about 30 cents in the first half.
Growing into the second half as we complete the purchases here in Q2 Q3.
Great. Thanks, very much I appreciate it.
We will take our next question from Kevin Mccarthy with vertical Research partners. Please go ahead.
Yes, Mark good morning, you affirm the annual.
EPS range I was wondering if you could speak to the seasonality in the back half of the year.
As you're recovering operationally at Kingsport.
Speak to <unk> versus <unk> and then.
The seasonality fourth quarter. For example, I think you mentioned you got a plant turnaround in chemical intermediates later in the year.
How do you see that unfolding.
Through the coming quarters.
Thanks, Kevin.
Very important question, we spend a lot of time trying to think about how our cadence of earnings and value creation goes through the year.
When you think about this year and you look at sort of the guidance we gave.
For the second quarter.
And that together with what the results that we had in the first quarter. The first quarter looks to be around 475. If you look at used the midpoint of our second quarter cadence so to get to our midpoint of our full year guidance you are talking about $5 a share in the back half, which is about 5% higher than the first half to your sequential question.
<unk> 75 a share.
On a year over year basis.
So thats a strong back half quarter for us we don't really have a normal that we can look to in the past because we've had so many different events or first or second half loaded if you look at <unk>.
2018 to now.
But we can recognize thats, a little bit stronger than normal.
And I think the easiest way to talk about it as on a year over year basis, and when you really think about delivering that $5 a share in the back half of the year.
It really comes down to a question of what is going to deliver relative to put normalization in Ci occurs because we obviously the streamline event in the first quarter.
Sort of a significant setback on it.
On that.
To the first half of the year. So when you look at it and do the math on the sort of the midpoint of our guidance.
For the full year of $6 50 to 700 that means we basically have to be $200 million over the back half of last year.
Roughly half of that actually probably greater than half of that will come from.
How we're managing spreads so almost all of the spread compression last year that occurred in this segment was in the back half of last year, we've been incredibly successful in implementing price increases.
To begin the first quarter.
And then get the spreads that we are aiming to get that we discussed in January and that sequential improvement.
And spreads is still expected in the second quarter. So we have a lot of great momentum on the pricing actions, we've taken including implementing a whole set of additional price increases in this month.
To cover the inflation that.
Occurred through the first quarter.
So you've got $100 million.
Greater than $100 million really of spread improvement in the back half of last year.
In the back half of this year relative to the compression.
That occurred in the back half of last year ratio recovering that compression. If you will so that's half of it.
Or more than that and then <unk> got strong volume growth.
The volume growth in the back half will be a little bit different first of all you've got incredibly unmet need, especially in specialty plastics, given how we were not able to serve that market. So markets are incredibly strong no. One is inventory so the likelihood of destocking in the fourth quarter is much less because theres nothing to destock.
You've got the automotive market, we're assuming starts to get better in the back half relative to the first half and we expect logistics constraints.
Constraints ease, which is really one of the bigger limiters of our ability to sort of serve demand.
And then you've got the production catch up right. So we lost about $75 million.
Volume in the <unk>.
First quarter, and we think roughly half of that will be recovered through the year, but most of that recoveries and occurred in the third and fourth quarter. Because we're just ramping up production with logistics. These days getting all of that out the door and recognized in the second quarter is going to be a bit of a challenge. So a lot of factors that drive volume to be a lot better.
So then you weigh that against whats going to happen in Ci normalization and I think we've taken our standard approach that assuming it's going to normalize at some point and for now we're expecting that in the back half of the year.
And there are some higher growth spend.
So you put all that together you net out youre going to come up with positive EBIT relative to last year.
Full way.
And then <unk> got 45 a share.
From the share repurchase we are doing to replace the divested earnings.
$5 is a very reasonable.
Improvement to get when you think about it in those dynamics and that gets you that sort of 5% sequential improvement versus the first half.
Great. Thank you for that color and then as a follow up Mark.
<unk> auto production forecasts bottomed at this point from your perspective I appreciate any updated thoughts on what Youre seeing in terms of order books in and expectations for that particular end use market.
So on the auto market.
An expectation of <unk>.
Demand being relatively stable in the first quarter in the second quarter, and then modestly improving.
In the back half of the year.
I'd say first quarter turned out to be a little bit softer than our expectations.
And we expect the second quarter to be down a bit relative to the first quarter, principally due to the Ukraine Award impact on European Auto production and some of the slowdowns, we're seeing in and.
The Covid lockdown situation in China.
But we do so a little bit lower based on what we started the year with but we still expect it to improve in the back half of the year as China gets its COVID-19 situation under control as our base assumption.
As well as.
The European situation starts to stabilize supply chain start to improve.
But we're still looking at an annual number in our forecast thats below last year a bit.
Obviously <unk> is above last year and their current forecast and we're not using that just to be clear, we're using something lower than that and.
And what's loaded into our forecast. So I think we're taking a reasonable approach to what we're estimating and what we're seeing in the marketplace.
Perfect. Thanks, a lot.
We will take our next question from Josh Spector with UBS. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question.
Just specifically on AFP.
I'd be curious on the new portfolio. If you could comment on a couple of things one how you're thinking about longer term growth and that restructure business now versus GDP over metric you look at from that perspective, and then also you have a relatively strong first half in that business.
It leaves it pretty open ended in terms of where things could be in the second half and just wondering what what drives perhaps a lower second half versus first half in AFP or is that not the right way to think about that are against you got great. Thanks.
Okay.
Yes, so we're really excited by the new AFP. It's a business. That's very focused has a lot of great end market growth rates that are both stable and things like personal care animal nutrition and has opportunities for accelerated growth in places like automotive and aviation recovery, So and <unk> also been incredibly strong. So the end markets are great.
Our innovation is starting to really gain traction so it's creating the ability to grow faster than the underlying markets. When you go get Tetra show going into packaging you look at how we're moving into higher value formulations in animal nutrition versus just selling the organic assets the micro butte opportunity not really relevant to this year, but significant upside in.
Future there. So there's a lot of growth programs that are out there allows us to grow better than the underlying market.
And then on the spread side similar to <unk>.
There is some spread recovery that's going to be in this year relative to last year, it's not quite as large as am but that accelerated.
Passive inflation last year prices were still catching up in this business as well so you see price implementation and being very aggressive in the AFP business to cover all of those raw material energy and distribution costs headwinds than we did a great job in the first quarter.
In getting prices up to sort of cover that and improved spreads.
That will continue.
Continue to be true.
Year over year in the second quarter, but sequentially, we will see the second quarter come off a little bit just because it takes a year for the CPT Im sorry, it takes a quarter for the cost pass through contracts to catch up.
So overall very strong first half both by strong volume that 10% volume mix that will continue into the second quarter.
And spread improvement as we look to the back half Theres. Some seasonality, we're just assuming and how demand comes off in some of these industries like PNC and the AG business, where that will soften up a bit in the second half of the year.
And we think that we will see.
<unk> continued to improve relative to the back half of last year. So it's still going to be very good.
Second half, but not quite as strong as the first half.
Great. Thank you.
We will take our next question from Mike <unk> with Barclays. Please go ahead.
Great. Thanks, Good morning, guys.
Maybe just three quick hitters on the methodologies facility in Tempe. So first it looks like maybe a slight delay with supply chain. So can you just flush out what's moving the timeline, whether it's equipment or labor second is the $2 50 capital costs still the right number for the facility and maybe finally, if we do get mechanical completion in <unk>.
2003, when should investors anticipate it's sort of reaching kind of full commercial operations there.
Sure. So when it comes to this sort of a one quarter delay we've identified and mechanical completion is equipment related just like the automotive industry getting all the parts to build your plant isn't the easiest to do is environment. The team has done an extraordinary job of locking down and securing.
All of those components.
Being supplied but just being realistic in the environment. We're in right now we expect about a quarter delay.
It's not a labor issue, it's just a <unk>.
Supply chain issue.
When it comes to the capital we're still on track for the capital we did a lot of securing especially on the equipment side before the inflation started when we were when you go back to when we actually started this production. So we think we're in a good position to manage that and keep that.
Around that number.
And then when it comes to startup.
We're always going to.
Aiming for a startup the first half of next year, we always assumed that there'll be some bumps along the road and how we get there. So we don't think theres going to be a significant delay in the startup of the facility for serving customers. So by summertime, you're making recycled content off of this facility in and supplying the market.
Building to full run rates by the end of the year and you'll get a full year effect as you get into into 2024.
You got to remember this is different and especially plant and how it ramps up and fills out because while the specialty use will grow like they normally do and not be a light switch and how you fill up the plant.
We have the ability to take all the excess monomer from the methanol plant and make PT or textiles for packaging and the and the clothing market answer around the plant full pretty.
Pretty quickly as the operations come up to full levels in those markets and then we just mix upgrade as we grow the specialties relative to serving those markets from this plant so much.
Much faster ROIC.
And this kind of facility with that flex than what you would normally get in a specialty plan.
Great. Thank you.
We will take our next question from Alexi.
Yes.
With Keybanc. Please go ahead.
Thank you good morning, everyone.
Got closer to the startup of this nothing analysis plan Mark I was just trying to understand how economics might work in the real World for example.
Crude jumped year to date.
Would it have been a tailwind for methanol as margins are a headwind or were not a factor. So in other words when oil moves up there is the cost of your feedstock changing and if so are you able to kind of probably raise prices.
Yes so.
Higher oil prices is very good for methanol says alright, so the competitive material in the marketplace, which is Virgin PT basin.
Fossil feedstocks.
As connected oil so the price that's in the marketplace.
Those products goes up pretty consistently every day with with the price of oil so that that raises the alternative.
Product on the marketplace.
The reality, though is our product both its feedstock and it's in our final price is not really that connected to the urgent beauty market anymore.
Because they are buying it on the value proposition of recycled content and right now what we're seeing is those prices both historically and in this environment are holding up to be substantially higher.
Then the sort of fossil based polymer.
If you look at European or roughly about a 50% premium for that recycled content value proposition of creating a circular economy versus perpetuating.
Fossil based linear economy. So the market has changed and structurally so when it comes to the value of our feedstock.
There may be sort of a modest increase.
In the prices, but the reality is it's going to landfill right price landfills and changing with the price of oil.
It's being incinerated same thing not really changing dramatically.
Or are these low value applications like park benches are strapping and where this product this sort of waste feedstock is going.
The mechanical recyclers cant upcycle into good applications.
So.
We're not seeing a significant increase in feedstocks, just because of the price of oil is up.
Thanks Mark.
We will take our next question from David Begleiter with Deutsche Bank. Please go ahead.
Thank you good morning, Mark just on the Q2 guidance in terms of the earnings Bridge do you think about the <unk> impact from the Kingsport incident.
Two O six base.
It looks at the mid point of Q2 guidance to 75, how do you what the offsets to that sort of a bridge from Q1 to Q2 with at Kingsport incident later Labor day.
Yeah, Great Great question that Dave and Thats exactly how we look at it we had a phenomenally strong first quarter when you back out the steam line event at $2 85.
It's just tremendous success well above how we guided in January for the first quarter.
Unfortunately, the event happened, but the demand for those products is very much there is.
$125 million hit what have you.
We've shown up in the quarter. So do we do start looking at saying, Okay from 285, which is the run rate now that events behind us.
What's the up and down relative to that number in the second quarter.
So on the upside.
To continue we expect continued strong demand that we saw in the first quarter and the significant mix improvement that comes with that as part of our story and our specialties. The pricing actions are doing a phenomenally good job of keeping pace real time with inflation.
That occurred through the first quarter, so spread sequentially will improve.
From first quarter to second quarter.
And AAM in fibers.
And then <unk> holding up and being stronger than expected so that'll be quite stable sequentially from first to second quarter.
And so all of that.
<unk> to a higher number right. So then what why is it why are we guiding to something a little bit less than first quarter.
First of all the $50 million of accelerate cost accounting doesn't repeat so that's a pure tailwind Q1 to Q2, but the $75 million in the steam line event, that's related to production that doesn't catch up in a quarter. So it takes some time to get production back up to get it on ships and trade.
<unk> and get it delivered through this quarter I mean, there's only so much excess capacity that we have to make up that loss production. So that's going to take the whole year to sort of recover that.
We are only expecting to recover about half of it.
Through the year so.
<unk> got a bit of a headwind.
From the event on the on the production side.
Then you've got in AFP and remember a good portion of their pricing is connected to cost pass through contracts. We had a lot of inflation in the first quarter were those contracts work it doesn't really catch up until you know until <unk>.
July one so there's just a lag.
And that part of AFP and how prices catch it up they will you saw the benefit of that in the first quarter based on catching up to fourth quarter raw materials and this will happen as we go into the third quarter.
So theres a bit of a headwind from that so if youll be slightly down.
Relative to first quarter, and then you've got a step up in growth.
Spend is.
We start ramping up the circular investments and then Theres just macro uncertainty right. So we've adjusted our outlook as I said earlier about auto as being a little bit softer.
Sequentially as well as China, and the Covid Lockdowns is certainly having an impact on some of our businesses like performance films and <unk>.
In general how we bring product into the country to get it delivered.
All of the different various lockdown. So there is some sort of headwind there that we're trying to estimate but highly uncertain on how that's going to play out for the quarter.
Very very helpful. Overall put it together it's still a.
10% increase year over year so.
It's great.
Momentum you know two building towards our full year guidance.
Got it and just on the Ci spread normalization in the back half of the year is that more supply driven or demand driven and which products. In particular are looking for the spreads to normalize that first.
Yes, so in the spread normalization.
We're obviously been in a very tight market conditions since the second quarter really since the beginning of the first quarter of last year.
And <unk> benefited from that like many other companies in these intermediates.
And the market has remained tight.
Tight because thats demand driven demand is incredibly strong for all of the products our customers that we're serving with those intermediates.
And that's obviously holding up in the first quarter expected hold up in the second quarter.
And there is also supply driven issues that are creating constraints across both olefins and asset yields as you can see them as many announcements of.
Operational issues across the planet and the third issue that's new now that we're still thinking through is the U. S has just picked up a new advantage cost structure relative to the energy costs now in Europe and Asia.
That structural cost improvement is not yet factored into sort of how that's going to play out for the back half of the year or three years ahead.
Probably I would call an upside if that continues to be true.
Two how we're looking at our forecast.
So it's really a combination of both right, we're assuming that the economy start to slow down a bit.
With all the inflation out there the China issues, Ukraine, Russia issues of market soften a little bit.
We assume people will get a round of running their plants more reliably.
And so supply will start to improve and that creates some softness but.
We all know that it's hard to call. When this normalization is going to occur.
And so we've put in something to estimate that there is some normalization back to sort of what we call sort of normal margins.
You know, but it's frankly anyone's guess when that's actually going to occur. There is no specific data any of us have to make that call.
Understood. Thank you very much.
We will take our next question from P. J <unk> with Citi. Please go ahead.
Hey, good morning, Mark.
Good morning, and there's a lot.
There's a lot of discussion about inflation in the economy, and all that where do you see it from your vantage point do you think <unk> was the peak installation.
You know inflation could be raw materials trucking logistics truck drivers all that stuff.
Do you think you know in placing S peaked when you look at the second delivery of your businesses and you talk to your own people or do you think in place that will continue to go higher.
Well I think the inflation certainly going higher as you go into the second quarter.
When you look at just all the price increases that we had to implement in April to.
To catch up to the inflation that occurred through the first quarter.
And our raw materials and energy costs, that's now higher prices in the second quarter flowing into our customers and they're going to take all of those higher prices in there, they're going have to float into their products.
Which we'll go through this quarter into the third quarter. So I don't think we're close to how inflation is going to peak.
Downstream of us because this is all got multiple steps to be passed on.
Through multiple quarters to get to the consumer.
When you think about the inflation of our raw materials and energy costs. What we're assuming right. Now is we are sort of peaking out in the second quarter.
And then it doesn't get.
Worse as we go into the third quarter and the fourth quarter in fact, maybe raw materials stabilize or come off a little bit in the back half of the year from the second quarter. So thats whats embedded in our forecast on our cost side, but if you are asking downstream, we've got I think multiple quarters before inflation reaches the consumer.
All of what's happening to our part of the industry because we're just so far up the value system.
Right so.
So consumer inflation will continue for next couple of quarters is what you were saying.
Thank you for it myself for a customer for causing for our customers and consumers, yes for US we think second quarter's peak.
An archive right.
Alright.
And just you mentioned on methodologies as Youre, putting together these contracts to buy it all materials. How did these contracts how are they structured the.
Is it fixed price or the price goes up with energy.
And the same thing on the other side when you sell your product I would presume that you would sell it at a premium.
Because as you know has lower carbon footprint and so how does how do those contracts look like can you just give us the terms and how this contract is structured thank you sure.
So.
There is a spectrum of contracts that we're securing when it comes to feedstock based on the source of the materials. So there are some contracts that are exactly what you said.
Where theyre going to the alternative value as landfill.
And so the pricing of that is set in a very stable manner.
Either that or it doesn't have an alternative value to drive the price and value of that material up or down.
And we're getting long term contracts.
With with the sources of waste.
You know on that front, there are other products, where youre competing maybe against a park bench or scrapping so downcycled applications that perpetuate the linear economy.
But and so we have to look at the alternative values.
Of those applications and how that might change so there will be some connection to where price of oil goes.
Or alternative market values go that we have to compare our pricing too.
To sort of secure that so it'll be connected to some either cost or price based index. So there is a lot of different sources.
But all of them when you look at what drives them up or down.
They're actually relatively stable compared to where the price of oil goes every day.
On the sort of fossil feedstock based market.
And then you have to keep in mind that on the on the customer side of things.
There are two models, we have in our pricing so in our specialty business pricing is going to be based as always our value as I said earlier the value of recycled content is quite high right. So.
It's not a speculation you can look at just for PT for packaging, which is a relatively low value applications compared to our specialties is trading.
On average, 50% premium to the fossil based feedstocks.
So plenty of premium there to create a circular economy and get waste out of the environment and lower the carbon footprint impact.
Our operations in the scope three of our customers when they think about improving their overall carbon footprint.
So they are paying a premium for that already that's not speculation that's just a fact.
But you have to remember that the <unk>.
Specialty pricing will just be based on that value and we will do it like we do pricing today, but for the PT in the textile applications the packaging and textile applications. As we said, we're not taking risk on the difference between our feedstock costs and market price, we're doing cost pass through contracts that give us a predictable stable.
<unk> otherwise, we won't build these plants and the vessels because I don't want to get caught in trying to speculate where.
Where the feedstock costs are going to go relative to market prices. That's the airgas model that we're taking.
For those applications so.
<unk>.
We're not trying to exploit the spread expansion or ortega spread contraction risk on those on those high volume applications that base load the second and third plants.
Great. Thank you.
We will take our next question from Matthew had void.
With Bank of America. Please go ahead.
Okay.
Thanks, So as we look at the year over year bridge to 2023, and maybe it's early but.
Yes, it seems like.
Particularly for it seems like the add back of $50 million on the accounting side is maybe a starting point.
But you won't recover the full 100, maybe 75 additional I think you said maybe half.
But you're also going to get that back through the course of the year. So I guess, what where do we where should we start when we think about building a bridge for next year.
I think that was a and you start with the bridge that occurs every year. So you know when you look at advanced materials.
As a segment.
It's value creation starts.
With strong volume growth prediction.
Look at the markets that we serve automotive I think odds are I hope good the supply chain issues get resolved and automotive demand will be better next year than this year.
The demand we have in the other end markets like durables medical all of those have continued strength that we see going forward, especially medical.
So the end markets, we expect to be relatively strong and then we have innovation that creates our own growth.
Above these end markets, we've proven that extensively over the last decade, so even in a softer economy, we're still going to create growth over those end markets.
And then you've got you know production catch up right with a certain amount of production volume because it seemed like event, we're not going to realize this year, even though demand is there for it.
So that will be upside.
In volume next year, and there's the cost accounting issue really isn't a year over year tailwind because while it's a headwind to first quarter. It sort of comes back if you will through the rest of the year. So that's not something I would include in the bridge for 'twenty three.
But tremendous amount of volume and then importantly mix upgrade across all of these volumes that we're talking about that have high growth are very high value relative to the segment average.
And am and certainly well above company average so that creates a lot of mix leverage as always.
You've got all of those drivers that are going to sort of increase of success and then on top of all that you have got to start the circular plant.
That gives you a whole another growth driver.
<unk> value up on mix because the margins are attractive there.
That's going to occur.
In 2023 relative to 'twenty two so.
That's how we create value every year as controller cost structure drive volume volume and mix spreads.
My guess are not a source of headwind or tailwind next year, because we're getting our margins back to pre pandemic levels. This year.
So it's a volume mix story as it always has been to deliver pretty attractive growth.
23 versus this year. This year is going to be very attractive growth number relative to last year. When you think about.
$650 to $700 million, that's tremendous growth relative to 'twenty one.
Thank you for that and I guess, it looked like corporate expense was zero.
For <unk> part of that look like insurance proceeds and stuff like that is any of that flow into <unk>, where do we see a more normal rate of corporate cost.
<unk> and the rest of the year.
Thanks for the question for the rest of the year, we see roughly about $85 million expense.
Obviously with the steam lineup incident, we stayed focused.
And I'll call. It a paced our level of investment in growth projects also I'll remind you that we had the adhesives business.
Still part of Eastland and it was the earnings were part of other during Q1.
As we ramp up the circular as we also look at the startup of the.
And completion of that first.
Meta analysis facility.
The cost incurred and relates to those initiatives will the pace through the back half of the year.
We'll take our next we go to our next question Yeah.
We will take our next question from Jeff <unk>.
<unk> with Jpmorgan. Please go ahead.
Thanks very much.
So when.
When you talk about the net analysis project producing packaging material.
Is what you're referring to.
Disposable PDT bottles.
I was thinking of water water bottles and what you have is.
Essentially yes.
More circular route to making the PDT bottles.
Is that.
The essence of it.
Jeff that's it so it's not disposable water bottles, it's now circular water bottles right. So.
We were in the business of making PT, obviously got out of it because it became incredibly competitive.
You want to go back to 2011.
And.
With the first point just to be clear, it's all specialties.
Thanks for a plant we're building is feeding over specialties, but when we talk about the plant in France, where the or the second plant in the U S.
We are bringing back into our product portfolio, making PT or or polyester for textiles.
Yes, both of those end markets have a phenomenal waste problem as we all know in the bottles being thrown away and frankly right. After packaging waste textile waste is the second hugest.
Second largest.
Problem going to landfill or incineration across the planet both of those issues need to be solved in significant ways.
That's why we're taking.
This act to sort of bring the circular economy in the linear economy and eliminate fossil fleet based feedstocks.
But the model is going to be very different than how we get back into a Jeff.
Versus.
Where we were before so it was market based transactions compete against China everyday in the in the traditional <unk> business.
In this business, we're not building a plant unless we have long term cost pass through contracts that give us stable margins relative to wherever feedstock costs go.
And not <unk>.
<unk> it whatsoever to the.
Sort of traditional PDT market pricing.
So we get much more predictable and reliable returns on these investments.
So that's basically you know that the heart of what we're trying to do in the model to make sure it's different than what we did in the past.
Okay, I get that and so.
In terms of the non packaging applications.
Yeah.
What youre doing is youre, making a more specialized PBT.
Thats more capital intensive and the end rather than.
People, who use I don't know recycled polypropylene.
So what is it about.
The applications for our specialty <unk>.
T.
That makes the customers want to buy a more expensive materials.
Is there some engineering characteristic that they've got.
So that they want to use specialty PBT rather than less.
A less capital intensive but cheaper polypropylene.
Yes, Jeff I, just want make sure we're keeping sort of different conversation of clear so when youre, saying, especially are you talking about our specialty co polyesters and our Triton, Yes, I'm talking about yes, that's what I'm talking about yeah. Yeah. So if you look at our.
First plant, that's going into Triton, and our and our other co polyesters. It's the same issue right. So innovation day, we told you a great story about black and Decker right, it's a drill but they want to be part of the circular economy they want to address.
There is scope three emissions.
Emissions that are occurring in their supply base to improve their impact on on climate.
They wanted to make a contract they want to be using something that is.
You know getting waste out of the environment, it's part of how they're marketing their product and they're getting a premium on their products, whether its a triton water bottle for hydration.
Were usable bottle instead of using a <unk>.
PT bottle that you throw away right. So sure reuse in the three Rs order to drill where it's a phone case, where they want to make it out of recycled content to again improve their impact on climate as well as <unk>.
As you know the branding positioning they get about using recycled content and all of these brands are getting you know meaningful premiums well above the price way way above the price that we're charging for the for the polymer.
In their final product, so it's a value up for them.
Until we get a better price for this recycled content, so there's better spread for us as we sell this versus our current products and we're getting significant accelerated growth not just in applications that we've been in like water or reasonable water bottles, but also into new applications like phone cases, where we weren't before.
And there is other electronic applications automotive applications. So it's opening up accelerated market growth that we can tap into as well.
Okay, great. Thank you so much.
Well, it's actually been tremendously.
Exciting because its a.
The scope and strength of interest in this as well exceeded our expectations. So we're rushing as hard as we can to get this plant up and running.
Yeah.
We will take our next question from Mike Sison with Wells Fargo. Please go ahead.
Okay.
Hey, guys.
In advanced materials you.
In the January quarter, you gain of 700 million EBITDA or EBIT outlook.
It's sort of a lower part of the range. This quarter. Thanks, Stephanie is that largely related to the kingsport shut down and if it is what's the impact.
Maybe Q keelan in.
In that outlook.
So like this as well you know what I would highlight.
Yes, it is a key component.
But adding a lower end of the range for 650 to 700 million as we've highlighted the impact in Q1 related to this team lineup for advanced materials is approximately $100 million.
Also we've highlighted that it will take us some time.
To get roughly half of the volume mix impact, which is for advanced materials about $60 million.
As you think about pacing that until the back half of the year. So as Mark has highlighted we remain confident in this business.
And ultimately it will put us on a strong pace in the back half of the year as we recover the $100 million of spreads on a year over year basis.
And get our volume next back more.
More normalized levels, which sets us up for more growth as we go into the.
23.
Yes, just to add one thing to that.
There are really sort of three parts of this if you think about it versus where we were in the beginning of the year, where he said, we're going to be greater than $700 million.
We obviously had the impact that <unk> line is that that really just described.
We also have expectation of the automotive market being a little bit weaker.
And then we have the China COVID-19 kind of underlying risk here that we're realizing in the moment.
But the spreads are actually the spread improvement relative to last year is very much on track relative we were in January so that has held up and we believe.
Consistent with where we were in January . So we went from you know greater than 700 to this sort of adjusted range now to reflect these are these these are headwinds.
Got it and then just a quick follow up on.
Chemical intermediates.
<unk> had five quarters now of $100 million adjusted EBIT.
Yeah.
I mean in the event that.
Oil stays high demand stays good and when I'm talking about the commodity.
I don't think a lot of them are seeing.
Sorry, this normalization in the <unk>.
Second half of the year.
Yes, I saw that sort of plays out would you stay above $100 million I think if I model out the segment he would be below.
Second half.
Yeah. So when you think about <unk> you have to keep in mind, there are sort of three factors that cause the second half to be.
Lower than the first half right. So one way of just normal seasonal volume trend off in functional means the AG market. So theres some of that that occurs.
Every year and certainly what happened. This year. We believe second is just shutdown schedule. So last year shutdown schedule is sort of loaded into the front half. This year. The shutdown schedule is loaded into the back half of the big Cracker turnaround in the fourth quarter. So.
There's just that sort of shifted and maintenance expense of that that's going to occur. So those two will moderate the <unk>.
Second half to be lower than the first half even if the spreads.
Stayed the same in the back half of the year to the front half.
So then you get into this question about sort of markets.
Softening going back towards normal versus where the margins are today.
If you go do the math you can see there are some headwinds already you know in.
And the cracking spreads.
You know that creates a bit of a headwind that you can start seeing here in the second quarter and so some of this is.
Likely to happen.
But again, we don't sell ethylene and propylene derivatives and those markets continue to be really tight. So we're not going to see much of an impact on the sort of cracker spreads in the second quarter from what we can see but we expect this will eventually start finding its way into the market as we get into the second half and some amount of normalization is going to occur.
But we've all been guessing at when and how much it's going to occur and as I said earlier.
I think we've taken a reasonable or conservative approach to say you know we're going to normalize.
We turn out to be wrong about that and it stays stronger into the second half that'll be upside.
Yeah.
We will take our next question from Laurence Alexander with Jefferies. Please go ahead.
Hi, Good morning, this is Larry.
Linda follow Lawrence the tundra.
I have a question on the impact of China look down and colleagues that you mentioned a couple of weeks ago.
Do you expect to recapture the organs. After these lockdowns or how do you.
Okay.
It's a good question so.
I would say, China Lockdowns is probably the biggest uncertainty.
We can think of at this stage, especially you know in the second quarter.
We've assumed that the lockdowns are continuing through this month and will start to get resolved in may.
So who knows what's going to happen, but I'm, just saying that's sort of what we've assumed into our forecast.
It's impacting us in a couple ways, one our ability to impact important products into China.
Which is important for all of our segments, including advanced materials with a lot of products or.
Made from our trading and then shipped around the world.
And then and then you've got the impact on just demand in the country.
You know, where you've got people buying cars and appliances and everything else and the impact that it has on our business from a direct demand point of view.
So we're keeping an eye on all of those factors automotive seems to be the market. Most impacted at this stage, especially for performance films business at the point of sale for those films in paint protection and window films.
But I think that overall.
What we think is it is still underlying pent up demand.
Especially on the export business that is still strong in Europe and the U S.
So we do expect that there could be a rebound in demand you know when we get pass how they're managing COVID-19 , but it's anyone's guess on how.
How managing Covid in China is going to go and sort of the pace and breadth of that impact.
Okay. Thank you.
We'll take our next question from Steve Byron.
Bank of America. Please go ahead.
Yes.
Okay.
Steve Your line is open.
Alright.
And we will take our next question from Arun Viswanathan with RBC capital markets. Please go ahead.
Great. Thanks.
I guess I wanted to revisit.
The outlook for 'twenty three.
You kind of laid out earlier, so if you think about.
You know your own inflation potentially peaking in Q2.
And then you look into the rest of the year you laid out the 5% increase when you look into next year I guess, you will see potentially a moderating feedstock environment as you just noted.
But do you still expect kind of 8% to 12% EPS growth in that.
And if so.
Maybe what would be some of the drivers that would get you. There that would you would you see it like 45 cent a buyback opportunity or how should we think about that as well. Thanks.
Yes.
2023 bridge I have to after me that's that's a first for me in the first quarter call but.
Right.
Look when we look at it.
423, as I said earlier strong demand growth in AFP and am will deliver earnings growth next year relative to this year.
You know and we will have a tailwind because of the.
You know sort of capacity production disruptions, we had this year that enable that volume recovery.
Also want to be a tailwind for next year.
It's a little hard to predict where spreads are going to be next year, you know in the <unk>.
Specialties, but.
If inflation, if raw materials come off that will create a tailwind relative to pricing for next year relative to this year I think that's correct.
Then you've got normalization of Ci so how those two net out at the corporate level.
Could be due to some degree neutralized as a tailwind relative to this year.
So really the volume mix story as the key drivers you know as always we manage our cost structure to make sure. There is not a headwind there outside of some gross spend.
And and so we're set up I think for improving EBITDA in a meaningful way. Obviously, we have a very strong cash flow and that will continue to be both reinvested in organic investments that we're doing for especially as well as our circular plants.
And as we said inhibition day, there'll still be money leftover for share repurchases on top of that.
As we go through next year to create that EPS growth on top of the EBITDA growth.
Relative to this year, so we feel good about the 12%, but it's a little early desserts are calling numbers.
Okay Fair enough and then I guess just wanted to ask a follow up.
Back to the strategy on methanol.
So it sounds like initially the plan is to rollout more of the specialty applications, but over time potentially progress towards replacing.
We're replacing some of the.
You said something about water bottles.
Is that really the strategy that eastern wants to pursue maybe longer term do you see this company is kind of 50% specialties.
Then maybe 50%, replacing some of these more commoditized applications or how do you think about strategy and.
A strategy you guys have been following for for many years of trying to go more downstream and more specialty and squaring that with the.
The needs to replace some of these commoditized items with circular solutions.
Yes, so from a total company point of view.
Obviously, our strategy is very much focused on specialties in a M AFP as well as textiles.
You know where they are very differentiated.
Biopolymers.
New applications that we're creating for them.
Biopolymers like micro beads in foodservice packaging et cetera. So when we think about specialty let's just be clear, what especially means to us it's attractive high stable margins over time, where we have good pricing power because of the value of our products create in the marketplace to manage our pricing relative to.
Our raw material and energy costs and creating value for shareholders.
Expanding spread over time, because the spreads are already very attractive to start off with Bob over growing volume quickly and because that has high margins that translates into significant mix upgrade at the corporate level and whether thats, especially co polyesters are trading or coating additives or personal care additives or.
Circular PT or circular textiles.
Very attractive margins that are very stable and cost pass through contracts, that's all in our category of specialty.
Where we're bringing very attractive high.
Margin growth right and you think of the circular platform. We've told you we would deploy $2 billion of capital across these first three plants. The first one being focused on specialty France being a hybrid of specialty and PT in textiles are and and the third being predominantly packaging textiles with I'll call. It specialty circular polymers.
But that 2 billion translates into $450 million EBITDA. So.
When you look at the ROIC.
ROIC C and the value creation from those three projects I call. It special.
Let's make the next question the last one please okay.
Our final question is from GDP <unk> with on field Research. Please go ahead.
Thanks, a lot.
The first question is really around.
The circular plastic projects that you have.
To your point, if you take France as an example, you want to invest $1 billion or 160 <unk> plant.
So if I just go by the returns numbers that you sort of said I mean sort of back of the envelope. It feels like it will be all else equal you would need almost three X the price of a recycle polymer versus a virgin polymer.
So if that is not the case.
Got it.
Current cost advantages.
In the us.
Cost structure, which make return attractive and prices not ridiculously different from large and polymer. That's my first question.
Question is just around cash flow sorry to ask this but I suppose is it really just the raw material inflation by you have changed your wording on the cash flow or is there something else to it as well thanks a lot.
Yes, let me start with the cash flow question first.
Yeah, So obviously, where we've seen a pretty significant.
Inflation here in the first quarter as Mark highlighted we expect that the peak.
In the second quarter.
So as we think about that.
That's at least $100 million of headwind that we see.
And what we're highlighting is the change in guidance I would say our first quarter cash flow.
Was probably pretty normal compared to pre Covid. If you look back at the <unk>.
17% to 19 time frame. Our Q1 is pretty representative we had a couple of headwinds this year in Q1, which one is a higher than normal I'll call. It variable compensation payout as well as the impact of.
The <unk> launch and to that end.
Adjusted EBITDA year over year, combining for about $100 million. So as we go into the back half of the year it'll be more traditional.
And we will use all the levers we've made investments in integrated business planning to effectively and efficiently manage our inventories as well as again, we look at.
Our net 90 programs and terms and accounts payable as well as other avenues on the accounts receivable side. So.
Again, we've been able to demonstrate and deliver cash flow in multiple environments over the last several years and remain confident in and robust cash flow this year.
So the first question.
I'm not quite sure I did the math, but it's wrong so what.
When you look at.
This plant in France first of all we've said that the first phase of the plant is going to be $6 million to $800 million not $1 billion. The second phase, where we're adding more specialty capability down the road.
Is what gets you to the $1 billion. So capital number is a bit lower than what you assumed.
Second when we look at the pricing that you got to remember that the value that we're capturing as the price in the marketplace relative to the cost of our feedstock right.
This two step investment right, we're building methanol, Sis and rebuilding PT and selling in a P T.
Revenue rose six $800 million is to build the methanol Sis and the <unk> plant.
So the margins you're generating are a lot more substantial when youre going all the way to the cost of.
Wait plastic waste, which is quite low relative to the price you can get the marketplace. So when you do that math and say, okay. What premium do I have to get above.
The sort of fossil based feedstock market, it's not all that different than the premiums that exist in the market today.
For mechanical grade feedstock and remember our material is much higher quality and its clarity as performance reliability and safety of the mechanical grade feedstocks. So it is a high value product and it is a long term solution because we can infinitely recycled plastic waste, we don't degrade sort of after five laps.
Like mechanical does work by the way that makes US also a necessary complement to mechanical to keep it a viable stream in the long term because we can revitalize what is degrading through our technology.
So lot of value, we're bringing the marketplace not just in what we provide but enabling mechanical recycling to exist in the future, which it will not do without and molecular recycling. So.
And Theres a lot of value, we can get but we're taking a pretty reasonable pricing approach relative to the market and generating the sort of $450 million EBITDA, a 2 billion capital. So good returns.
Alright. Thank you everyone for joining us today very much appreciate that and I hope you have a great day. This concludes our call.
Yes.
Ladies and gentlemen, this does conclude today's conference. We appreciate your participation you may now disconnect.
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