Q2 2022 Eastman Chemical Co Earnings Call
Good day, everyone and welcome to the second quarter 2020 to Eastman Chemical Conference call Today's conference is being recorded.
This call is being broadcast live on the Eastman website.
Www Eastman 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 Tracy and good morning, everyone and thanks for joining us on the call with me today are Mark Costa Board Chair and CEO , William Mcclain, Senior Vice President and CFO , and Jake Laroe manager Investor Relations.
Yesterday after market closed we posted our second quarter 2022 financial results news release, and SEC 8-K filings.
Our slides and the related prepared remarks in the Investor section of our website Www Dot <unk> dot com.
Before we begin I'll cover two items.
First during this presentation you will hear certain forward looking statements concerning our plans and expectations actual events or results could differ materially.
Certain factors related to future expectations are or will be detailed in our second quarter 2022 financial results news release during this call and the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2021, and the Form 10-Q to be.
<unk> for second quarter 2022.
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 second 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 Tracy. Please let's start with our first question.
Thank you Sir.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
We will now.
First question from Alex Yes.
From Keybanc. Please go ahead.
Yes. Thank you good morning, everyone.
Can you just discussed.
The reduction in the price cost expectations for advanced materials.
Do you view this as more of a timing issue or a relatively more permanent reset our expectations.
Good morning, Im sorry, I just wanted to I understand the question you are talking about how the raw material trends are going to play out and whether it's sort of temporary or long term is that correct.
Yes, correct.
Yes, so as we look at.
Raw material situation and advanced materials.
We view it.
More temporary than long term structural.
You can already see that PX prices popped up.
We're already sort of come down a considerable amount obviously the price of oil drives everything.
What do you think about the sort of margin above oil if you will.
I think that we view the short term spike really run the driving season.
Summer is something that doesn't continue going into the future.
When it comes to <unk> dam, which was the real issue from a spread point of view.
We also don't think that's a long term structural trend either.
The spike up that we've seen and PVH and dam is really a supply driven event more than demand driven event.
Particular vim production.
The U S in the second quarter about.
Two thirds of the capacity was offline.
Which is just an extraordinary number of unplanned outages.
A lot of that dam doesn't just go to the USA also go to the U S. In that Tam has also made the PV awaits which are the two key.
Key raw materials that we buy for making the inner layers and those prices went up dramatically and even more uniquely for us because it was not just a price spike it was a supply shortage.
It's quite severe so we had to go buy spot material.
Out of China at very high prices combined with high anti dumping duties and higher logistics costs.
You end up with MTV, which prices thats, 90% higher year over year, that's not remotely sustainable.
We already see them prices dropping.
<unk>.
In the recent months.
And you can see that some people are finally getting some of their capacity back online, but that's still a process ongoing through the third quarter as far as we can see so.
We do expect that to be a headwind.
Not just in the second quarter, but in the back half of the year.
Expect to trying to get a little bit better in the fourth quarter and certainly better next year and as you. All know that's the one business, where if you have kind of extreme spike is a more challenging to manage we have these long term contract in your contracts. We did a great job of getting the prices up in those contracts to cover all of the raw material increases from last year.
Raw material prices of course increases.
Inflation.
Through the first quarter and then all of the supply outages in the second quarter and while we have some flexibility in the contracts. They don't they don't give you. This much flexibility in how you manage price and so we have spread compression.
In the second.
We expect in the third quarter for that business, but overall this is all about market tightness and commodity markets, whether it's <unk> in these commodities when the market softened up whether it's demand softening a little bit in coatings for exam or.
And just the overall.
Tightness coming off a bit MPLX.
Already seeing the benefits.
Sure.
Our starting tomorrow.
Thanks, Mark and then the second question you talked about.
Signing a deal with Baseload customer for your third project in the U S is this large enough to kind of be confident that those projects will go forward.
Can you provide us any kind of.
Our frame of reference how big is the baseload customer relative to the project.
So the answer is yes. This is let me say baseload, we mean base load. So it is a big customer and a very high quality incredible customer.
We are.
We're encouraged by all the progress we've made with them.
And defining a structure that meets our needs around.
Margin stability to make this investment long term commitment on their part.
The margin stability.
Yes, we feel good about it.
We know of letters of intent or just that intent so until a contract signed we're not going to sort of talk about that customer.
Whether it's quantity or the structure of what we achieved but we feel good about it and I think we're making really good progress and hopefully youll hear some time.
Soon in the next quarter or so.
That we got that done.
It's not just our customer we have a series of other customers who are.
Also need.
This material and are engaged with us and we're making great progress with them. So when you put it all together we feel that if we achieve that milestone that's a.
A key that we need to sort of move forward on that project.
A great Testament.
Even in uncertain economic environment.
All of these customers are very committed to sustainability in the long term they know they need to deal with recycled plastic.
They need to get waste out of the environment they need to reduce their scope three carbon emissions in our project allows them to do both of those objectives at the same time.
And they know that mechanical recycling is not enough to serve the market.
And so what we have is molecular cycling is a perfect complement our partnership with mechanical guys to solve that challenge. So I feel really good about how it's growing.
Thanks, a lot mark.
We will now take our next question from John Roberts from Credit Suisse. Please go ahead.
Please go ahead, John we can't hear you.
Im sorry.
Mark are you still ramping up mixed waste plastic into the Gasifier and how far do you think you can take that what are the theoretical limits.
So John Yes, we still are wrapping up that project and thank you for reminding everyone that it's not just methanol assist which is incredibly exciting and is a huge amount of economic potential as well as impact on improving environment.
Cellulosic opportunities are also quite strong.
In this marketplace and that's where we go with this gas first so we have multiple options on how.
To wrap up the feed.
As we look at the demand curve in front of us for the next three years. We believe we can ramp it up to serve all of that demand growth, we're not going to talk about the technical details of this but.
We're very confident that there is no constraint in our ability to grow with the market.
And the market is really expanding and growing really incredibly well so you've got the NIAID textile fibers that even in a down textile market today.
Is actually demand is exceeding supply and we're working hard on how to expand capacity the value prop is the sustainable value proposition of a biopolymer, where the micro fibers that might break off from the Ocean Biodegrade is just very compelling and then you add in recycled plastic.
And it's the trifecta win on the environmental with bio recycled and biodegradable.
We've got great progress going on the micro beads.
That is a biodegradable additives for cosmetic applications that.
We told you about innovation day in the event. The program is also making tremendous progress in the marketplace.
Around how we can sort of replace polystyrene in foodservice and some other applications. So.
We're really excited to growth expectations are sort of honestly exceeding what we imagine we're working hard on how are we going to debottleneck capacity to keep pace with at all.
On the polymer side as well as how we're taking the waste plastic so it's all going really well.
Okay, and then did you finish the ethylene to propylene conversion.
The project that you were working on it sounded like that in the release, but I thought that was still yet to come.
No John it's yet to come.
We did the RTP project as you know a couple of years ago that allowed us to reduce our good portion.
Of our ethylene production.
Switching to.
Two propylene through our crackers as we change the mix to use our GP instead of ethane.
So thats on full tilt right now.
You can do the math and see that ethylene prices are pretty much down to cash cost in the second quarter as well as we go forward in the third.
So we're pushing that as much as we possibly can.
But.
<unk> is an investment we need to make going forward and it is great investment. It's just a timing question of getting it done.
But it would remove the entirety of our bulk ethylene.
Exposure in the marketplace and switching to propylene whenever we want to have flexibility to go back and forth. So if ethylene is great we can sell it.
Times like this we could completely eliminated.
Any bulk ethylene and that would take a lot of volatility out of out of the business.
When does that actually get done.
It takes about two years to get Bill John So yeah, it's not really going to have an impact until you look out into like 2425 timeframe.
Okay. Thank you from where we are today.
We will now take our next question from Josh Spector from UBS. Please go ahead.
Yes.
Yeah, Hi, Thanks for taking my question.
I wanted to dig into some of the sequential outlook for AAM.
Forecasting it up 10% sequentially Youre full year comments kind of impact for Q could be flattish sequentially typically theres, a pretty big step down in <unk> and then that's followed by a pretty big step up into the first quarter next year.
Wondering if you could walk through that for Q thought versus <unk>, what drives <unk> flattish in what should we expect a <unk> up into next year off of that level. Thanks.
So in the back half of the year.
As we look at the trend rates that we had in the first half of the year, obviously first quarter was disrupted by about $100 million earnings.
For the steam light events, you sort of have to add that back. If you will just to look at the underlying quality of the quarter.
And so when you look at it that way we.
We had a very solid second quarter and the trends remained good.
When you look into the second quarter, we made good progress in certain to recover some of the spread.
Compression that we faced last year with our pricing.
And we had some limitations on the markets that we could serve so automotive is obviously down which was not what we expected.
From <unk>.
Logistics constraints on how much of the durables demand we can serve.
That was well in excess of logistics and our production capacity.
Second quarter, given the limited production, we had in the first quarter. So as you roll into the into the third quarter.
<unk> got continued improvement in pricing.
<unk> continued capture.
And recovery of spreads.
You move into the back half of the year versus the first half of the year.
That's a tailwind you've also got pretty stable markets, it's important to keep in mind that.
While there is some softness in durables.
There's a lot of the market that's quite stable so about 40% of the demand in advanced materials very stable in medical consumer packaging cosmetics.
And in advanced materials, P&C is actually stable to commercial demand, that's actually holding up fairly well.
And then you've got automotive that's going to have some amount of recovery in the back half of the year versus the first half.
Obviously, you're a bit less than we expected.
It's still recovering so you've got that as a sequential tailwind going into the second half of the year.
And then the consumer durables, which is sort of the biggest exposure to what youre seeing from Walmart and target and all of those companies.
Land is coming off but a good portion of that demand frankly, we couldnt meet.
With our production logistics limitations, so it's not all impacting our outlook for the demand in the back half of the year.
So we're not expecting that much of a net hit of what.
How demand drops relative to what we can produce especially since we're trying to catch up with so many customers from from the production limitations in the first quarter. So overall the demand obviously is a little bit less than we expected. That's why we sort of reduced our outlook for AAM in the back half of the year.
But not not that much. So all of those are sort of the key trends continue to improve spreads continued improved volume mix on a trend basis versus sort of the limitations that we had in the second quarter.
Okay. That's helpful. I understood asking about 2003 is obviously a bit early but I think if I consider that demand kind of stabilizes <unk> levels, maybe $170 million in EBIT.
Are there one time catch up items in there that then remove that typical 30 20 million step up into the early part of next year or is that a normalized base that we should be growing also.
Okay.
Well if you look at the performance, we're going to have in the back half of the year and what we guided and annualize. It. It's a pretty good earnings number that you would carry into next year.
Continued volume mix growth you've got to remember we have a lot of innovation, especially in durables thats why our demand.
This is holding up so well as you know Triton is winning all over the place, especially with recycled content, especially as you go into next year when the methanol plant starts up.
And that will really benefit the back half of the year.
In particular of accelerating growth in this or durables area as well as cosmetics.
We continued to Cellulosic story that John just asked about a lot of that.
Is that to growth.
But we're talking about.
Foodservice products on Cellulosic or wins, we just told you about in our prepared remarks, and the eyewear market et cetera. All of those are sort of building to grow faster than underlying markets on the sustainability of trends in both polyester and cellulosic.
Got continued automotive growth next year.
And that recovery phase you've got these markets that are stable that will continue to grow like medical and consumable packaging et cetera, cosmetics and other market heavily levered to circular so demand looks really good.
I'm not going to pretend to guests at the net.
The outcome relative to the economy next year no one knows whether it's going to be slow growth mild recession, something worse. So we're not going to start giving any kind of guidance on.
Total basis, but we certainly will have a lot of vectors to grow and then you've got continued spread recovery as I just talked about.
And PVH prices are going to come off of this vuzix exceptionally extreme highs do all these supply outages.
And so you've got tailwind there probably tailwind as well in <unk>.
And so spreads also tailwind for next year. So there's a lot of different reasons that EM should have a good year and youre going to have an easy comp in the first quarter relative to this year.
Very helpful. Thank you.
Yes.
Okay.
We will now take our next question from David Begleiter from.
Deutsche Bank. Please go ahead.
Thank you.
Mark can you talk about structurally improved segment earnings quality.
Given that we're waiting on the new normalized earnings level here is in the CDI going forward.
Yeah.
David Thanks for the question and we're still trying to work our way through the math on that you have to sort of look at the long term energy cost structure applications of what's going on.
Clearly right now.
What's going on in Ukraine War with the shift.
Awards, more green energy and the lack of <unk>.
Progress on that front in the short term that means that things like natural gas or even the more need around the world than anyone ever imagined.
Got a shift in the cost structure on a global basis, where European <unk> are going to be paying a lot more natural gas relative to the U S. Even though our prices are really high right now in the U S are exceptionally high everywhere else and so thats the advantage that's going to help us.
Going into the future, but I'm not about ready to quantify what that means but certainly better than what we were talking about.
On the innovation day in December and when we built that guidance. It is important to remember that before we even get to that topic. There is a lot of.
Actions, we have taken to structurally improve this business, 40% of the revenue this business isn't really actually high quality good margin higher margin.
Businesses.
And then than the segment average on a normal basis. So you've got functional means which is the biggest part of that 40% going into AG and they have cost pass through contracts with stable margins you've got.
Nice, especially plasticizer business and the benzoic acid area that has nice stable margins good growth curves around sustainability and then you've got the <unk> business and for US it's focused on the CDK and hydride and some other derivatives that are pretty stable.
And actually.
Tied to demand growth in food feed pharma, which are all again stable attractive businesses.
And then of course, we've made the investments we just talked about on our GP, we shut down our Singapore plant that was the biggest source of earnings volatility we've had in the company.
When it came to olefins given the dynamics of the Asian market and then the future of ETP I mentioned, so a lot of different things going on there that gives us.
Confidence in the back half of this year is going to hold up a little bit better than we expected.
Three months ago.
As we go into next year should also hold up better than than we expect but I'm not going to quantify anything about next year with all the macroeconomic uncertainty.
Understood and just lastly on your implied Q3 guidance you talk about solid EPS growth year over year.
We think solid really means is it up five is up 10% year over year anything in that range.
Alright, we will take that one.
David I think as you look at what we've seen to date, if you look at year over year being.
Roughly $2 45 last year were 283 in Q2, you can look at.
Call it approaching the middle of that range.
Great. Thank you very helpful. Thank you very much.
Yeah.
We will now take our next question from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
In General do you think your domestic pricing of all kinds of products has benefited.
Rob.
But the difficulty of imports coming into the United States.
And do you think that yes.
<unk> or improves to globally that might make pricing tougher for your products in 2023.
So when I think about that Jeff I think thats, mostly a question for ci than anything else.
Yes.
Certainly logistics constraints out of Asia.
Have limited some of those products the ability to come into the U S.
That's contributed to some of the market tightness that.
All chemical here media companies around the show around the globe, especially in the North American ones are benefiting from on the specialty side I don't think Thats really a factor.
Jeff we haven't really seen.
Logistics constraints of Asian competitors be a limiting factor whatsoever on the specialties, especially as have enough value in margin for anyone that's not a limiting factor. So it's really just to <unk> question.
Great. Thanks, so much.
We will now take our next question from Vincent.
<unk> from Morgan Stanley . Please go ahead.
Thank you and good morning, everyone.
On the Kingsport.
Facility, that's going to start up in 'twenty. Three you note that you have one.
1000 sales opportunities, which is more than the capacity of the.
The plant just wondering how are you thinking about allocating that volume.
From a customer perspective demand is indeed, an excess of supply.
Are there ways that you can.
Leverage your existing relationships.
Two to improve contract structures or other things in advanced materials or how are you thinking about marketing material.
So one it's been tremendous to see such strong engagement across so many iconic brands.
Interested in the recycle content and how that can play a role in there.
And their sustainability goals and their positioning relative composition in the marketplace.
And as we said we've got over 1000 offers sales opportunities.
It's in excess of the capacity of the plant. So we are in that approach of figuring out how we align with the most strategic customers.
That provides us a long the best long term growth.
And we have relationships visit with a lot of companies.
That had been sort of loyal dedicated customers to us for a long time with our current products and how they want it as recycled content. So obviously they get preferential treatment.
Versus someone who's new.
And so we are trying to balance all that out.
And when we look at some of the when we look at the quality of end markets that drive a lot of where we want to go some markets like hydration, which is.
And the trends of sustainability reduce reuse and then recycle right so the trends moving towards.
Hydration water bottles. For example is a great market is going to grow incredibly well go in the future as people become more conscious about plastics single use products.
When you look at these high end brands like Williams Sonoma.
And cuisinart and Ninja and all these other products, where they're the leaders in the marketplace and they are winning share and growing in the markets you want to align with those winter so same thing on cosmetics.
We've got great relationships with all of the top main luxury brands Elvia makes l'oreal Chanel et cetera.
That allow us to sort of help them truly be sustainability leaders and especially.
Sure.
Future French project not just in our current project those brands are very focused on.
Their products being made in France, being global leaders in sustainability and.
<unk> engaged not just in buying from Kingsport, but.
Buying our specialty products that we'll make in our French project.
French plant so.
Aligning with the winners in the leaders as for how we are approaching it.
Great. Thanks very much.
We will now take our next question from Michael <unk> from Barclays. Please go ahead.
Great. Thanks, Good morning, guys.
First question just on fibers, one of your competitors in acetate tow last night kind of called out what they phrase sort of untenable situation. The tow market today needing a bit of a overhaul to increase the value proposition. Obviously Eastman previously made a bit of a pivot towards textiles, and nonwovens, but just curious how youre thinking about the filter tow market today or just the overall situation.
With your acetate assets.
Sure. So you know to market from a demand point of view has been actually quite stable.
The market is.
Actually declining quite as fast as we expected.
A lot of it has benefited from things like the.
The heat not burn cigarettes that also use toe.
And so you've got traditional cigarettes declining heat not burn growing sort of that offset some of that market dynamics.
And as you noted.
Our textile business is doing incredibly well right. So we put that in motion several years ago to say to some degree these mark the cigarette market is going to decline.
And the textile market is incredibly attractive where we've got a very compelling sustainability offer for the market.
And what we can offer as I mentioned earlier.
And great customer engagement and a way to sort of replace any decline in tow and were definitely at that stage for that that's going on.
So we feel good about where we are from a volume point of view.
From a margin point of view, you've seen us increase prices at a pretty meaningful way for this segment.
Because the raw material costs are higher pulp costs are higher energy costs or higher operating costs are higher.
And so we need to improve our pricing and improve our margins back to a reasonable level.
They are currently not at a reasonable level.
And so yes, we need to work with our customers to help recover those costs. So we continue to invest and support this business.
And what they need to do so we're looking for all those opportunities to partner and have those kind of conversations with our customers to find a path that makes sense.
And recover those margins.
Keep supporting this business.
Great Perfect and then just quickly can you just remind us on the Tennessee methodologies. This facility. If you do hit that mechanical completion target at the end of <unk> 'twenty three just when should we expect to see commercial production rates just wanted to see if I'm hearing your P&L them.
Yes, so it's going to take a period of time like it doesn't every plant has started up so for complete at the end of first quarter or the second quarter is going to be a process of starting it up and you're going to see the benefit in the second half of next year is that going be a huge benefit as you are ramping up.
When it comes to the bottom line earnings because you're going to have all the costs showing up as one of the plants.
But.
It will certainly start helping it didn't really make a difference and im pretty significantly in 2024.
Great. Thank you.
We will now take our next question from Michael Sison from Wells Fargo. Please go ahead.
Hey, guys nice quarter.
In terms of ASP volume growth in the first half is pretty pretty impressive.
Do you see a similar level in the second half.
That is correct.
It's good to hear from you.
So we do see volume trends, continuing probably not as strong as the first half so first half had just.
Tremendous growth across the board from animal nutrition.
Especially fluids care chemicals.
Even P&C in the in some of the restocking efforts that are going on so growth was was quite good obviously automotive wasn't where we wanted it to be.
As everyone knows.
When we look at the back half of the year, we still expect.
Strong volume growth continuing.
A lot of stable markets.
<unk>.
And so we'll see that benefit.
Patricia and specialty fluids, both the aviation recovery as well as heat transfer fluids for LNG care chemicals continuing.
We also expect some recovery.
Automotive OEM side, maybe some softness on the auto refinish side, so I'm not quite sure how that's going to net out.
<unk> will certainly be a bit softer and you can just see that you know when it comes to you know architectural paint.
With our customers and so we will see that be a little bit softer.
So overall volume mix will definitely be better.
Spreads will be better as we continue to recover.
Our spreads relative to some of the compression that we faced last year, where prices were chasing.
Raws, but it was much less of an issue you have to remember in AFP last year right. So the pricing actions. We took were much swifter given the contractual.
Contracts, we had there to.
To sort of keep up with raws. So we have a tailwind, but it's not nearly the.
Same scale as advanced materials.
Thats going along but then that's going to be offset by several factors to mitigate how much were up year over year.
You've got an FX headwind, which is pretty meaningful.
AFP, you've got higher gross spend and we have a higher shutdown schedule in the back half of this year versus last year, So all that sort of nets out.
Some of that so thats why youre going to see some decline and you need to remember there is that there's just a natural seasonal sequential decline.
In AFP when you go from first half to second half.
And with AG markets in P&C markets things like that just less busy in the back half of the year versus the first half so great strong start to the year, but not as much on a year over year basis in the back half for the combined factors.
Got it.
In terms of the outlook for AAM.
I think you outlined a pretty good portion of <unk>.
Why.
In the prepared remarks, but I wanted to.
Think about the segments.
Shortfall.
Similar between China, and inner layers and.
How do we sort of get that back I mean is that earnings power that is still there that that should come back maybe in 'twenty three.
If everything.
The headwinds kind of subside.
Yeah, So just to step back for a second around the segment from an end market point of view before I get to product for you.
When you think about the demand portfolio across.
I'd say about 40% of the revenue is stable that's medical consumable packaging cosmetics P&C.
Right, that's going to continue to be stable continue to have some growth.
You've got segments.
Like medical that are still restocking.
To get to a safe supply level.
And then you've got the auto which.
It has some upside versus last year or the first half of this year. However, you want to look at it that's about 30% of the revenue in this segment.
And then you've got a consumer durables, which is about 25% that obviously has some risk as I discussed so from an end market point of view.
A good portion of this is pretty stable or actually improving.
And then that gets offset by sort of this this durables question in particular and how that.
Backlog of demand.
Reduces relative to our production capability and we think probably is a bit below.
That in our sort of revised outlook then you've got all this innovation that drives growth across the segment. So when you think about this end market, especially plastics is on track to have a really good year.
Both in the first half of the year once we got past the first quarter.
And Theres certainly going to continue to have a good year on the demand side.
On that basis.
So in the back half of the year and they have significant amount spread recovery in the back half of the year relative to last year, that's quite meaningful.
Sps is on track to having a really good year performance films is also doing incredibly well, it's amazing to see how they kept earnings sort of stable.
Two last year.
In such a difficult market.
And so they've got a lot of programs are allowing them a win.
Great set of new channel programs to grow their dealers and auto dealers.
Tremendous ingenuity.
They've demonstrated in China, which is a big market there with no COVID-19.
Heroic agile acts of figuring out how to completely redo, our logistics system out of Shanghai, which was shut down to another one of our locations that wasn't too with everyone's.
Sleeping in the place and making sure we kept our customer supported so just tremendous business and that will and we see that continuing into the back half of the year.
<unk> is a business that has the challenge.
And I think I already covered it.
Demand will get a little bit better in the back half of the year, obviously, but.
But the spread challenge is pretty significant.
And so that's the one part of the portfolio. We don't think this continues at all into next year as I mentioned earlier, where RASM will I think improve for that business.
But certainly an issue there.
You've got all those great things going but it's important to remember we got gross spend and we've got global energy costs.
Up, especially in Europe that impact all of the business.
That's true probably for every company and so that's a headwind that's where it gets netted into the math too.
Great. Thank you.
We will now take our next question from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes, good morning, Mark.
Mark with regard to your advanced materials segment.
I think there was some verbiage in your prepared remarks last night, whereby you indicated you now see less improvement in global auto production versus the prior expectation in April but what is the current outlook for global builds that you're kind of.
Building no pun intended into your outlook for the back half some of the companies that paint cars youre talking about $80 million plus global builds is that consistent with your view or are you starting to see.
Anything more cautionary there.
No I think that's consistent with our view certainly our customers drive our demand so.
They're talking about their view on the market.
It's important to pay attention to that.
But no I think it's going to get better sequentially.
From where we were in the first half of the year.
But certainly not as much as we expected I would say, yes, but I think that that numbers fine.
Okay. Secondly, I appreciate any any updated thoughts on para xylene procurement.
Whether or not we should anticipate any any relief there.
In coming months it looks like maybe it's starting to soften a little and in Europe not sure how you view the flow through.
For for the U S.
Market that you have.
So if PX obviously.
In June .
Really spiked up.
And then into parts of.
July as well.
But it's already come off quite a bit if you look at where it was versus where it is now.
From a from an exposure point of view.
<unk>.
Produce and consume the PX here.
In the U S, but our exposure and how we pay for it we've diversified quite a bit away from U S. Tx.
And so that mitigates, a little bit of that volatility, which was more extreme here.
But we did see a spike in the last two months without a doubt that's flowing through our Cogs.
And our pricing model isn't instantaneous pricing model in our specialties.
So there's a lump there of higher PX costs occurred relative to our pricing strategy that we had in place with the increases that we were able to achieve.
And so there'll be a little bit of that sort of flowing through that will have some impact in the third quarter. I don't think it has a significant impact Kevin, but theres a bit of that but when you look at it on a total basis whether it's.
The first half or the second half.
For the year, we're making really good progress.
Improving our spreads in this business relative to last year.
It may not be quite as much as we intended but it's still quite significant improvement relative to where we were to get our margins back to where they should be so we continue to feel great about investing in this business and.
And so.
It's a business where the team has done a great job of managing price and having a disciplined in how to do it.
That's helpful. Thank you Mark.
We will now take our next question from Mark Mitch from German Research. Please go ahead.
That's actually Frank but we'll take it nice result.
Yeah.
How are you doing.
Right.
Okay.
Ah.
Frank Costa or Mark Mitch I don't know.
Hey.
In the release you, obviously, you mentioned the 75% asset base in the U S. And then obviously you also mentioned logistics, having an impact.
On your business.
Do you look at the.
The impact that you've seen so far and what's your expectations in terms of getting to a more normalized logistics.
Don't have to call that out anymore, having any impact on your business, what's going on in that area.
I'll, let Willie take that yes.
Yes, Frank to your point I think Marc described.
Look at our asset position, we look at that as a position of strength as we serve the global markets with our specialty products.
Obviously earlier in the year with our operational challenges.
Not achieving a year over year reductions in logistics costs that we had expected.
That's been compounded.
Bye.
The continued.
Inflation and continued high demand in the first half of the year. So as we think about the markets that we serve actually some salt level of softening will actually call. It improved the supply chains and allow us to better serve and teams of volumes in the back half of the year.
It has been continued inflation on that front.
And we've had to continue to use our I'll call it.
Modes of transportation and logistics that arent completely optimized and we look to get back to more optimized our business operations in the back half of the year.
Okay back half here.
And we'll be sticking with your congrats on executing the $750 million ASR.
The guidance is to get to $1 billion plus buybacks for the year. So not a lot left to how do we think about the pace of buybacks for the balance of this year.
Yes, Frank I think what you can do is continue to be disciplined.
And you can basically spread that evenly across the last the last half of the year.
And I guess, how much people remain committed to a greater than $1 billion and.
I appreciate that.
Alright. Thanks.
We will now take our next question from Duffy Fischer from Goldman Sachs. Please go ahead.
Yes, good morning, maybe.
Maybe a four parter just run the PVH Sam So one did that disproportionately hits, you, where it might be causing market share loss.
Two the price that you're using to offset that is that structural or using surcharges.
And then third would be you, obviously have some asset yields products yourselves or you're seeing some benefit in other geographies on the asset yields that you sell that might be offsetting that and then just the last one is how do you see the acetyl chain normalizing.
From now through 2023 may be thank you.
Okay.
Sure Duffy.
There's a lot of a lot of questions embedded in that one question.
So good to hear from you.
On the competitive side.
Jim.
Situation is shared by all of us.
There was some unique aspects and how that price spiked up for our European asset as I explain where we had to buy some spot material that our competitors may not have bought as much.
And so that's why we had some spread compression there.
Whereas there was limitations and how we can move pricing relative to our contracts and competitive dynamics. So I don't think we have a significant share loss issue instead.
Instead, we just had some spread compression that we're going through in the second or third quarter.
With regards to how we're managing pricing.
I think that.
We've used a combination of contract terms that allows some of the pricing and some surcharges too.
Try to relieve some of the extremity of what we're facing right now it's important to keep in mind that from a long term point of view in this business.
Theres just tremendous growth in front of US there is the auto recovery, but beyond that the evs as we told you have about three five times more value in them.
And then a combustion engine car the way those cars are designed and the way they are using glass in a different way.
So there's a tremendous amount of volume upside in mix upside right. So as we sell more HUD more advanced complicated windows, which is why <unk> are so attractive.
Those are very differentiated products and we are launching the most innovative products.
The market.
On HUD on solar and very complicated integrated.
Functionality that it also includes solar rejection.
Take air conditioning load off the car in an EV so.
We're really excited about the innovation portfolio, that's got a tremendous amount engagement at the auto OEM level to drive this business forward, we just need to get past this sort of into the supply issues that we are so extensive.
So that so the business we feel great about.
And when it comes to the broader asset yield chain.
There is someone coming up.
Couple of hours you could ask that question too on the broader estill chain, what what I'd say is we're not in van NPV O. H. So obviously, we're not seeing the opposing benefit income.
Michael intermediates.
The overall acetyl chain is holding up really well, but we're very small in acetic acid. So I can't comment on that in any meaningful way chicken hydride business, which was which is where we are the largest player in the world and that business has always been a little bit more stable doesn't have fly up as much in.
Market tightness, but it also doesn't go down as much.
So we're feeling like we've got a good sort of stability in that asset to your business.
You know both in sort of what it was last year. What it is this year and what it'll be next year. So.
It's not going through as much supply demand dynamics.
Terrific. Thank you.
We will now take our next question from P. J.
From Citi. Please go ahead.
Hey, good morning, Mark.
Good morning, you prepare good morning in your prepared comments, you talk about slowing consumer durables and construction related end markets can you give us some color on durables and appliances home related stuff and construction residential commercial.
Because downstream customers like Sherwin.
Already warned and seeing a slowdown can you characterize just slow down and how do you see that playing out.
Sure. So just to step back for a second and then I'll come to the durable question.
When we look at the overall portfolio durables is an important part of the portfolio but.
But it's not a huge part of the portfolio.
And as you think about Eastman and its overall exposure from this sort of recession question.
We've dramatically improved our portfolio.
You can go all the way back to 10 years ago, and how much $3 billion of divested businesses that were commodities and $3 5 billion, especially is added and all the innovation that we've been talking about for the last eight years in how we've improved the portfolio or divesting $1 billion of revenue in AFP that was businesses that are not performing well and so that gives us now two and end market portfolio.
Quite improved so when you look at stable markets, we think about 45% of our revenues in what we call stable, that's like medical personal care consumables, and Patricia and cigarettes water treatment et cetera.
Then you got about 20% in transportation and energy, which actually has upside going into this year and next.
And then you get to P&C and consumer durables.
Where we have.
Sort of this sort of market demand sensitivity and risk.
And about half of that is durables right. So we're talking about 15% the total corporate revenue.
And that is a place where it is.
Predominantly two places where we go into consumer durables, mostly specialty plastics, that's our triton that would be going into a cuisinart ninja blender or.
Any of those sort of.
Typical appliances that you would think about it as well.
Well as electronics, where we have some of our cellulosic.
High value business.
But it's also a place where we have tremendous innovation, creating our own growth.
Especially as we go into next year with all the renewable content the recycled content that we're adding.
So you've got to sort of for sure we're seeing demand come off in those markets as you can hear Walmart.
Target et cetera Destocking.
But it's already hit that.
Demand was well in access of our capabilities. So some of that is actually not loss volume in the forecast. It's just the backlogs going away if you will.
But there will be some moderation in that business.
And then there is some of it in the coatings business, where we have.
Coatings that go into all those different types of products as well and we'll see some softness in that business.
And so that's where we see some sensitivity D&C also has some risk to it.
I think there's another important thing to keep in mind about what happens in the back half of this year isn't just about primary demand you've got innovation, how you offset it but there's also this question around how much destocking is going to occur.
And we don't think that there is going to be the same kind of bull. If you would normally have going into a recession because supply chain constraints really limited how much how much inventory can be built through the chain getting to the retailer.
Especially in markets like auto where clearly they have no inventory at the retail at the dealer level and <unk> also had its own challenges and.
And as I said, you've got markets rebuilding inventory like medical and aviation.
As well as having upside growth and then you're back to this durable question.
When we put it all together.
There's certainly some demand risks and uncertainty we're trying to factor that into our outlook.
And we're really just trying to focus on what we control continue to drive innovation.
Keep driving the pricing on especially as you know, but be conscious about maintaining a good competitive position, while you do that.
That will certainly improve spreads to last year and gives us a tailwind for next year and manage our costs as always and so.
They focused on a circular platforms and how we return cash to shareholders.
Great. Thank you for that color and then I have a quick question on cash flow in the first half was down significantly.
It's all of your competitors that reported last night only when earlier in the week many of them had flat to up.
Operating cash flow.
Can you talk about the other week, we got a free guys.
Operating cash flow and is it maybe due to some seasonality like AG and you have big AG end market exposure or maybe that comes back in second half can you just.
And then you are when you can go through that.
P J I'm happy to go through that.
Obviously, as we think about the situation that we're in with the highest inflation in 40 years.
And actually that gained momentum.
As we looked at the beginning of the year.
We are now the raw materials and energy that we are seeing is about half of $1 billion higher and obviously that has a $1 billion translates here in the near term into an impact on working capital. So youre seeing about $100 million on a year over year basis negative impact of higher working capital.
<unk> consumption through the first six months.
Additionally.
The payout of the variable comp from last year, you can see that on the cash flow there was about $140 million.
We're taking actions on our cash conversion cycle, whether it's inventory.
Managing our receivable programs as well as looking at.
Continuing to look at our terms as we look into the back half and traditionally at Eastland, we have been more back half loaded.
Operating cash flow from a seasonality standpoint.
And you can look at.
Yes, five to six years only generated.
The robust operating cash flow of one five or one six typically that has about $1 one to $1 2 billion of operating cash in the back half.
No.
We have headwinds in this environment and acknowledges but we're still focused on delivering that approximately $1 5 billion even in the face of that.
Great.
Thank you very much.
We will now take our next question from Matthew <unk> from Bank of America. Please go ahead.
Good morning, everyone.
Do you have any patents are competitive advantages beyond just like the first mover advantage that would protect you from an entrant and textiles over time.
Maybe you have a competitor in town.
So we don't have a lot of specific patents on the on the textile side, we have a significant.
Market position advantage, where we are you know the vast majority of the market when it comes to textile filament.
Which is different technology than making tow fiber.
And so there's a pretty high capital intensity with that business. So.
The position we have is pretty solid.
Hoping and producing a product, but we don't have any patents on it.
And the.
Staples side of things, where you can use the two assets.
That's a more competitive market.
But again there is a big advantage, we have in this sort of market relationships.
Currently.
And Mark if I may add the other highlight.
All of that but I would add is we produce textiles.
Our Kingsport, Tennessee site, which is highly integrated and we have the lowest cost position from producing flake at this site in the world. So as you think about the integration and the power of our acetyl stream and Cellulosic.
Differentiate us versus our competitors.
One of the great things about this business is the.
Size of the market relative to our capacity or anyone else who wants to join in is far greater than what we can make so.
We view it as a great business for us and if there is some amount of competition theres plenty of room.
Understood and this one might be a little long so I apologize, but just looking at animal nutrition in crop protection right.
Did something like $330 million to $350 million in sales in 15, and 16, and then went all the way up to the mid five hundred's in as of the end of last year I guess, we were back in the mid 330 level.
Yes.
Is this business COVID-19 sensitive and why if it is and then it seems like it's doing pretty well right. Now so is that mid 500 and revenue number kind of the <unk>.
<unk>.
Target in the medium term again.
So what I can tell you about the annual attrition business as it is growing really well it's very stable.
Yes.
And then benefited obviously from some more foods consumption I guess you could argue.
Covid that you had more home consumption less restaurants, so those sort of net each other out.
So it's just from an end market point of view, it's pretty steady now prices go up and down.
Some of the revenue story, just based on the market dynamics that we've been going through in many products.
And the profitability of this business is materially improved the key that we're doing in this business is focusing on how we value up the business right. So we have one of the broadest organic.
Asset portfolios to replace antibiotics and animal nutrition, which is driving our growth.
But historically, we've mostly just sold them as individual assets organic assets and as we have been moving forward into.
And creating more formulated solutions.
That combine the assets and the other elements of.
Product performance together.
You step up the value two to four times as much as what we get currently today.
<unk> three <unk> acquisition, we did last year also brought in a lot of capability to sort of not just grow their business, but really value up our portfolio and the synergies on that have been fantastic. So all of that is really drive driven a lot of improvement.
And the performance of this business, so it's pretty steady.
I'll, let willie sort of try and respond to the numbers that you are.
Well, what I would say is.
Sorry.
Look at the last couple of years, it's been around $300 million and then there is a pretty good jump up here in 2022 and that is related to the <unk> acquisition. In addition to overall growth as Mark just referenced so.
<unk> not seen the big spikes that youre talking about in a year and then it coming back.
More have been spent steady at least over the last several years.
Thanks.
Sorry, Matt let's make the next question the last one please.
We will now take our last question from Laurence Alexander from Jefferies. Please go ahead.
Hi, guys, it's Dan Rizzo on for Laurence. Thank you for squeezing me in.
Just thinking about energy curtailment in Europe , and I don't know if I missed this but I was just wondering if youre thinking about how that might affect you guys towards the winter and late late this year and early next year.
So like everyone. We're working hard on making sure we've got.
Positions in place to manage any sort of risk on the curtailment side.
We're doing everything we can on that front.
Our exposure in Europe has been reduced pretty significantly so the largest plans we had in Europe . We're in the adhesives and tires business, which we have recently divested. So the two businesses that really have exposure to this in a meaningful way is.
Our amines plant in Belgium, and our <unk> plant in Belgium.
<unk> is more electricity driven natural gas driven.
It's sort of exposed to.
But.
No.
That costs exposures, there I mean, the energy prices already incredibly high and embedded in our.
Outlook in forecasting.
But from a curtailment point of view, we're doing everything we can to minimize that risk.
And what about your customers I mean have they said anything.
I think every customer around Europe is doing the same thing there's a lot of uncertainty I don't think anyone really knows whats going to happen right.
The governments across Europe , we're working hard on trying to come up with a plan. They realize it shutting down industrial facilities that don't shut down very well or come back up very well is not a great idea because it creates a lot of economic and job risk.
And safety risks in some cases, and so I think they're trying to be very thoughtful about how theyre going to manage this problem going into the winter and then it's anyone's guess and what <unk> will do between now and winter. So.
We're all working to manage that issue together right.
Alright, alright, thank you very much.
Thanks again, everyone for joining us today, we appreciate your interest in Eastman and I hope that you have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
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