Q4 2022 Eastman Chemical Co Earnings Call
Good day, everyone and welcome to the fourth quarter and full year 'twenty 'twenty Eastman Chemical Conference call. Today's conference is being recorded this call is being broadcast live on the eastern website Www Dot 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 Emily and good morning, everyone and thank you for joining us on the call with me today are Mark Costa Board Chair and CEO .
He mcclain senior Vice President and CFO .
And Jake Laroe manager Investor Relations.
Yesterday after market closed we posted our fourth quarter and full year 2022 financial results news release.
As you see 8-K filing.
Our slides and the related prepared remarks in the Investor section of our website <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 fourth quarter and full year 2022 financial results news release.
During this call and.
In the preceding slides and prepared remarks in their filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2022, and the Form 10-K to be filed for full year 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 fourth quarter and full year 2022 financial results news release.
As we posted the slides accompanying prepared remarks on our website last night, we'll go straight into Q&A, Italy. Please let's start with our first question.
Thank you anyone who would like to ask a question stay you may do shaped by pressing star followed by the number one on your telephone keypad now.
We will now go to our first question from Josh Spector of UBS. Josh. Please go ahead. Your line is open.
Yeah, Hey, good morning, Thanks for taking my question I guess first wanted to ask can you walk through your step up in your implied guidance for the first quarter through the rest of the year I guess, mostly interested to hear how much you see that's within your control versus subject to macro conditions change it.
Sure Josh and welcome.
We expected that question, but I think it's an extremely important one we spent a lot of time on first let's just recognize we're in an extremely dynamic time in this world.
Where it is difficult to predict some of the macro and then you've got China, and a weak situation, but likely recover screen. What article centers two two trillion dollars of cash out there with Chinese consumers to be deployed.
It impacts both demand and energy.
Korean war, you've got inflation of four year highs or what the fed's going to do with it. So there's a lot of uncertainty.
In the fourth quarter was incredibly challenging as we looked at Q1 and many of those challenges continue whether its the destocking in durables and B and C that still needs to work itself out auto and that got recovery.
And.
The civil markets, Fortunately getting past destocking, but.
Not growing yet.
We will certainly see some raw material benefits in the first quarter, but not much in the way flow through works and seasonally energy is high. So the first quarter has a number of challenges not to mentioned pension and variable Cogs.
So as we look at the step up.
Into the second quarter and through the rest of the year, there's really three key elements to your point. The one that's most directly in our control is taking out $200 million of cost net of inflation.
And not much of that is really helping us in the first quarter. There are some of the non manufacturing activities that we're executing on but even that is being implemented through this quarter and the operational improvements flow of inventory and those benefits will flow out.
Until they start moving into the second quarter, so that the vast majority of that $200 million get spread across the three quarters. So that's a big step up Q1 to Q2.
The second one is how well spreads improve.
No we've had tremendous success in being disciplined.
Successful in managing our pricing with just great commercial excellence across all parts of the company.
Pretty extraordinary when you think about the amount of inflation that we faced.
Last year was about $1 $3 billion of inflation.
At the beginning of the year, we didn't really expect that much inflation. If you go back to our January call as last year.
And if you look at it on a two year basis, its $2 $4 billion deflation. If you even go back to 2019 to 22 $2 billion of inflation, so significant amount of inflation and we've caught up with most of that and.
Across that multiyear timeframe, we certainly kept up with it through last year. So as you go through each segment. The story is a little bit different. So advanced materials is probably the most important one to start with because it has a pretty significant tail.
And spread.
When you think about they had one of the most challenging raw material and energy environments across our segments with salmon P. D O H up 45%.
Relative to 'twenty on PFS up 40% energy up to 70% now they've kept up with inflation with 13% increases in price.
But they didn't improve spreads and if you go back to where we were at the beginning of last year, we had the intention of recovering spread compression in 'twenty one it was about $100 million.
No we didn't get that but we didn't keep up with inflation.
And we're starting now into this year at a much higher altitude with the prices that we've achieved in keeping up with this inflation. So as we look at this year.
We see that this segment is going to have a pretty substantial tailwind in raw materials and energy.
And we're not trying to be too optimistic about this you know if we just use the.
Where raw materials are already come down a bad pbuh in PX and you know for the first quarter of this year and think about the energy you know off of the natural gas forward curve for the year.
That's actually quite a bit more spread tailwind than what we would have thought last year about 100 million because of the higher altitude. So that's part of it and again that shows up as a step up as you move into the second quarter Theres a bit of it that flows through the first quarter, but.
But most of that is in the second quarter through the through the fourth.
You know with fibers are much shorter cleaner story, which is you had a lot of challenges and inflation here as well, especially on energy and the market are the customers that moved to be worried about security of supply. So you've been very successful in increasing prices last year as well as contractually secured much higher price.
This year to make sure the margins are back to a sustainable level to support our customers and that's $275 million outlook.
Outlook to earnings this year, which is a significant step up in fact enough to offset the spread normalization in chemical intermediates that we expect this year.
And then add P will have modest spread improvement as well, but not as much because they manage spread quite well last year, I said well less upside this year.
So when you put it all together, that's a lot of spread improvement and a lot of it flows and sequentially into the into the second quarter. So that's a big step up.
The third segment is volume and mix and this is more of a mix of what happens with the economy versus what's in our control.
Destocking at some point is going to and we're assuming right now that are predominantly ends by the end of this quarter for both durables and N B and C.
So you get a step up of demand going from destocking levels, which are pretty severe to something less than that.
In the stable markets, we can already see you're moving past that you'll have some amount of growth from those markets Importantly, innovation is something in our control and we've had a lot of success last year. Despite our challenges.
And the economy.
And securing a lot of new business wins that are going to help this year and again that doesn't really happen. During destocking. So you've got to wait to get that passed to you to start seeing some of that benefit and then of course, there's trying to recovery, but we're being very conservative not assuming much of that in our sort of outlook that we've provided until we see more proof of it. So the bottom line is there's a lot of you know <unk>.
Up across these three factors many of it is in our control.
But as you look at the guidance. We gave you for the year given the outlook for the first quarter. You know I think it's appropriate to sort of look at the lower half of that guidance for how we're gonna performance or we get past this quarter and have more insight on all of these factors.
Thank you.
Our next question today comes from David Begleiter with Deutsche Bank. Please go ahead David.
Thank you good morning, Mark just on fibers can you talk to the sustainability of this higher level of earnings going forward.
Hi, David and Dan. Thank you for the question. It's one of the bright spots of the year and we're excited to talk about.
Congress has obviously been on a tough journey since 2014.
The market structure loosened up for a variety of factors.
But the situation has evolved and changed over time first is on the demand side.
We've historically thought about demand declining in that 2% to 3% range, but what we've seen over the last few years as its only declining around 1% and partly that is driven by the strength of the heat not burn segment of the marketplace.
It is growing at 15% a year offsetting some of the other decline on the cigarette side, China has also stabilized to being pretty much flat to slightly up in demand over the last several years. So you've got stabilization demand in heat not burn market growing and the heat not burn devices require quite a bit more toe.
For.
Smoking experience.
Then a cigarette.
So that's also helping.
If you look at it.
Last decade, we've only been down about 10% of demand as you sort of put all these factors together.
We uniquely at Eastman and also have the benefit of the textile growth providing stability in margins.
Two our business on the supply side. There's also a lot that's changed in the last decade. So you can see about 15% of capacity has been shut down to repurpose those assets that had been retired the impacts that Russia has had on the capacity.
And in their country as well as well.
Yes, repurposing some of our assets towards the textiles growth.
And the move to like the slim cigarettes, especially in China as well as tier two free cigarettes is actually had a significant impact on the effective capacity and it's much more difficult to make those products. So you lose a lot of capacity at least 10, maybe 15% of the capacity lost with that so the industry has gone when you put those back.
Together to being pretty high end capacity utilization, where the conversations and the focus with our customers is how we are reliable secure supplier for their needs you have to remember the value of tow and the final price of the cigarette is a very small percent so making sure they have it to sell their product at very high margins.
Incredibly important to them and that's now a focus so that's allowed us to get quite a bit of price at last year. So already good momentum seeing some of that benefits already in the fourth quarter of last year.
To keep the trajectory we're on for this year.
So we do view these factors are sustainable.
And and improving the earnings you know quite a bit so I would say this year is going to be at least $275 million. When you put all those factors together.
The other thing that it does is gives us a much more solid base for our overall say most extreme and very strong cash flow.
To support the investments, we're making in the circular economy, not just to plug exercise that we have a huge number of opportunities on the cellulosic side with our recycling capabilities take plastic waste into that product also being bio also being biodegradable.
It is allowing us to realize a lot of growth in our textiles. We told you a lot about you don't hear a lot more this year around the venture for foodservice.
And that has a huge market opportunity to replace polystyrene in their micro beat so the cellulosic stream is shifting to being pretty attractive and sort of when you put it all together a growth business.
And then just on cash flow.
Mentioned increased to one 4 billion this year due to a number of actions you're taking.
Unpack those actions, you're taking and specifically working capital released this year.
Yes, David.
This is Willie I would highlight to your point basically 2022 I'll call. It the inflationary pressures consumed another roughly 300 million and working capital as we've looked at.
'twenty three we see a glut in absence of inflation.
Inflationary pressure as well as good as we optimize the inventory for the new demand levels.
We think.
There's at least 300 million on that front that will benefit from on a year over year basis.
Also as you think about cash earnings.
I would say you need to look at higher cash earnings year over year as we normalize for the pension.
So as you normalize for the variable comp, but coming back to normal.
Those two items you should put us.
At or.
Bob and higher taxes will bring us back down to the to the 1.4 level. So that's a high level bridge free.
Thank you very much.
Oh.
Yeah.
Okay.
Our next question today comes from Alex Yao from both with Keybanc capital markets. Please go ahead alexi.
Yeah.
Thanks, Good morning, everyone. The price of Virgin plastic has been very volatile lately.
So this is the interest in recycled content that you're negotiating changed at all given a lower burden plastic prices and perhaps weaker demand.
So good question.
Haven't seen any real change in People's interests when it comes to.
Recycled content and if you think about it.
<unk> set out very aggressive goals in 2025 and 2030.
The pressure out there for why they set those goals is just increasing not decreasing when it comes to plastic waste. So consumers are very sensitive to this topic.
There's obviously a lot of environmental Ngls, putting a lot of pressure.
On this and the politicians both.
And in the U S or you know doubling down.
On sustainability climate impact plastic waste and the policies that they're putting forward.
Europe you've got.
Extensive policy around plastic waste reduction and recycling that.
As you know was passed a couple of years ago. When the rules are being implemented now that requires you to have 30% recycled content in your packages. If you want to put them on the shelf in 'twenty five and taxes for whatever doesn't have recycled content in it.
So you know there are significant economic route.
The drivers in the in Europe that are driving our brands would be committed to that.
In the U S. You know the NGL pressure in social media pressure, our brands is pretty high and you now have at least five states already passing some version of legislation that's driving change like what's going on in Europe .
Some of those are quite big States like California.
So the policy pressure and almost a requirement to do it are there versus pay attacks and for a brand that's easier to be sustainable then can pay attacks from a choice point of view.
So the brands are these commitments the other challenge they've got as you know the mechanical industry is not remotely capable.
Applying the recycled content that's needed by this 2025 timeframe back into food grade well, having trouble getting recycled down into other applications like textiles, and park venture's et cetera.
But they got to get it back to food grade at that quality mechanical recycling just can't meet these goals. So the need for our capability is very much there the brand engagement is very strong.
And we've seen tremendous success early on especially Fred as we've shared with you with the thousands of opportunities that we're pursuing with customers around our first plant here in kingsport, but on the PT side like the Pepsi contract that we just accomplished.
We see that a central part of actually solving this crisis.
The other thing I would note, though is we see a drag Florida and in short term, yes, I just forgot to mention one thing on the our pet if youre looking at short term demand and it's dropping.
That's actually not about packaging.
The carpet people in the textile people are having such low demand.
They were also buying clear bottles and theyre not buying those clear bottles anymore for their feedstock and so that's why short term demand is coming off is purely what's going on in the durables and building construction sector. It has nothing to do with packaging.
And just a follow up on advanced materials Mark.
Raw materials to come down from where they are today to get to your targets Oh be meaningfully up versus 2021 or are you assuming sort of a card spot raw material prices prevail for the rest of the year.
Yes on the spread assumption that we've got and how fast.
So we chosen improves.
We're assuming that.
We don't have another inflation crisis like we did last year right. So again, the PVH prices were extraordinarily high because the van producers half of them in the U S were unable to operate for five months or.
So we had prices for some periods of the spring and the summer we're double.
Because of that extreme market tightness, and we had to buy a lot of very high price to material from the spot market out of Asia to continue to supply our customers. So you know getting rid of all that market tighten as you know, which is where sort of vanity beer prices is now gone.
To some degree I think there's still more coming down, but we're just using where we are today.
This quarter and how we project spread improvement versus last year same with PX, we're not assuming a dramatic improvement relative to where PX is now.
You could look at 6 million tonnes of PX capacity coming online this quarter in China, and PX prices could get lower but that would be upside we're not banking on that in our outlook. We are assuming energy costs get lower as I said, we're using the forward curve on natural gas for that.
But that's what's in the sort of outlook, we're giving you for this base case, you know could things be higher sure.
But that would require pretty significant move up in oil for them.
80 $90 range we're in.
And I think and think we feel good about this base case, given sort of the world that we're in and the macroeconomic challenges that they face right now.
Thanks, a lot.
Our next question comes from Michael <unk> with Barclays. Please go ahead Michael.
Great. Thanks, good morning.
First question just on the circular plastic build out a bit of inflation, so far and you still need to break ground on the second and third facility. So can you just talk about what youre doing today to help make sure. We don't get further capex creep here over say the next year or so.
Sure. So there's a lot that we've been doing.
Now to manage it.
Difficult capital construction environment last year for.
For the Kingsport plants and have done a great job in keeping those costs under control more frustrated by.
The challenge is going to craft labor to get the plant.
Those are completed.
Here, but the cost control is working well.
And we're confident we'll get this plant up and running early summer.
When it comes to the next two projects are there are a couple of things. We're doing one is some of the some of the commentary we provided in our prepared remarks about how we're building these plants.
We had a head of design for building these plants, where we're always going to start out with 100, Kmt a capacity, but designing them upfront to expand to be 50% bigger.
You know when you added on the second phase.
We've switched to taking a more standardized approach to sort of say look we're going to build organically what.
We're building here in Kingsport, and France and in the second U S project with Pepsi.
So a very standardized approach to leverage all the engineering procurement construction.
<unk> approach to sort of build a replica of what we're doing here in a very efficient manner. So that's one way we're going to help.
To keep the capital cost out now to be clear, we're still spending capital at the site to make sure. The infrastructure is in place for what we will do is double the capacity H D sites.
Over time.
After we get the first site first.
Modules up if you will so.
So we're actually sort of expanding what we think we can deliver between now and 2030.
You know doubling versus go up 50%, but we're taking a more standardized approach and this also allows us to.
To take a lot of insights we have around how to improve the technology on energy efficiency.
And in feedstock robustness into that second phase you know in this more modular products. So there's a variety of benefits.
The other thing we haven't really factored into our capital investments yet is a slowing macroeconomic environment.
Should create some deflation in the construction industry and you're already seeing it in the price of steel and pipes and things like that some materials are going to get cheaper.
I think the cost per labor hours go down, but I do think.
We're going to have more availability of resources higher quality resources, so productivity will improve.
And materials and equipment will probably come off in price so.
That will help also keep control on the Capex numbers.
Great. Thank you for that detail and then second just on fiber or is it in the new contract. There if I remember most of your toe business was moved to long term contracts a few years ago. So is this new pricing just reflective of a portion of your current business and will see further resets over the next two years or is this a big reset for almost all of your business you have today into two.
Sorry.
It's a big reset for most of our business. So about two thirds of our business is on contract a lot of that is multiyear or some of it is annual and even with what is not on contract you know its pretty firm agreements you know when it comes to volume on an annual basis. So.
Yeah.
The nature of when all these contracts started a turnover happened to be last year into this year that gave us the opportunity to have these negotiations and increase these prices.
That's why you're seeing this all happened now as opposed to a year ago.
The market was already started getting tight but we didn't have the contractual flexibility to make these changes until now.
Great. Thank you.
Our next question today comes from Vincent Andrews with Barclays.
Oh, sorry, Vincent Andrews with Morgan Stanley . Please go ahead Vincent.
Okay. Thank you and good morning, everyone.
Mark could you talk a little bit more about I guess two things one I was struck by the consumer durables comment in advanced materials, where your volume was down 40% that just seems like an enormous number.
So could you just talk a little bit more about how that's actually impacting advanced materials business and what the.
True cadence of improvement is it's going to be and then also could you just sort of detail a little bit your assumptions about the auto business for 'twenty three I think I read that you've got our expectations for sequential decline from <unk> to <unk> and some modest growth overall.
In 'twenty three but is there anything changing about the customer mix of your products for 'twenty three in terms of the cars. They are building in the tech that's in them or anything like that just given it seems like the automakers are starting to focus on different things in a more recessionary environment.
Sure so both very relevant and important questions for us.
The consumer durable business is incredibly important markets, where we sell are trading at very high margins and they've had tremendous growth over the last decade, but what I can tell you and we've been doing a very deep dive deep dive on what's going on in the fourth quarter as you would expect.
Really market driven.
You look at some of what's going on in the specific parts of the market, we're in which is <unk>.
Appliances.
Housewares electronics.
That part of the Durables World.
You know theres just been declining really for quite a long time right. So the underlying market started declining in the second quarter of last year modestly and then as people started switching to travel.
Travel and leisure versus buying a lot of durable goods.
You saw that in the announcements from Walmart and target. If you go back to me.
What we didn't really fully appreciate just how much you know overstocking in the retail sector was doing in ordering from everyone, who could supply them because they were so short of material and then suddenly it all showed up and they had a lot more inventory.
To get up to to get out and with inflation being so high.
Consumer durables sector is the first thing people stop buying.
And you can see that in the semiconductor data you can see that in the electronics you know.
So when we look at what's going on in the market.
You can see a lot of evidence that the primary demand level demand being off but not nearly as much as us right. So the retail sales data will show our direct end markets might be off 10%, 15%.
They were up 40%. So the rest of that is by definition Destocking and.
And that's because of these retail inventory channels that are so overstuff and it just took a while to get that momentum to try and pull down production you know through the entire chain.
It's a challenge.
And it's continuing into the into the first quarter.
And we expect it to be equally challenging this quarter is the fourth.
But at some point, it's going to end and from what we can see so far we think they will get this under control mostly.
By the end of this first quarter and then you've got a big step up in demand.
When the Destocking is over to sort of you know lower demand.
Demand than what is normal, but still a lot better than 40% down and that's part of the step up in earnings for advanced materials as you move into the second quarter on the auto side.
The man, we're being I think conservative probably a little bit more conservative than what the consultants would say about.
The band being slightly down in the fourth quarter, and first quarter and not improving much for the year.
Markets that we serve and our earnings.
But the shift in the market to get to your questions.
Is is really important that shift is very favorable to us. So we've now got about you know 10.
10% of our sales going into Evs.
At very high margins you have to remember that E. T. V is about three five times more value for us that are ice car.
And there's a lot more glass in an EV car a lot more functionality theyre, putting in it for them acoustics to solar rejection to heads up display et cetera. So the value capture there is tremendous sort of mixed lift basis of EV trend and we are aligned with the top players on this.
With our with our products.
There's a significant opportunity I would also say heads up display in general not just movies, but all cars have a lot of growth momentum who is a big mix uplift last year.
Even though downmarket in.
We think that trend is going to continue and accelerate into this year as a result of semiconductors, there's a lot going to HUD.
Here's a lot of times, if you were trying to buy a car last year. They wouldn't let you order the HUD because there's semiconductor limitations, that's going to resolve and so we see that HUD market picking up.
I'd also note that that's emulators paint protection business and the performance films business is doing fantastic very strong growth very high margins.
So we've got a lot of mix uplift relative to underlying market in auto.
Helped us offset some of the challenges last year.
And certainly it will be a significant lever versus last year into this year.
Okay.
Thanks, so much.
Our next question comes from Jeff Zekauskas with J P. Morgan. Please go ahead Jeff.
Thanks, very much of that $200 million in cost savings how does it split between SG&A and cost of goods sold.
Good morning, Jeff.
Thanks for the question I want to highlight.
We have two major.
Pillars within as we've highlighted in roughly 125 million a desk will be taking from our.
Operations, which will include manufacturing and supply chain.
And then 75 million I'll call it more in the non operations, which would be SG&A and <unk>.
And.
So.
I'll break it down a little bit for you. So on the 125 million what gives us confidence.
We expect more efficient operations as we run at lower rates due to moderating demand.
As you think about the supply chain.
Well as planned and unplanned scheduled last year, we expect a significant improvement I also think we've demonstrated even back to the COVID-19 environment.
We also leverage.
Pretty variable.
Cost structure when it comes to leveraging overtime contractors.
We are taking the actions at the end of the year, starting in Q1 to change that cost structure.
And we're very focused on operating at the most efficient level from an operation standpoint.
Since the demand environment that Mark has highlighted here.
On the supply chain and the network optimization.
See $30 million to $50 million in that space as you think about.
Having to air freight.
Use inefficient loads on a year over year basis to a substantial increase on that front.
Also as you saw in our prepared materials, we expect to have roughly $25 million lower maintenance year over year.
Hum.
We're also looking at our asset footprint. So as you saw some restructuring charges there.
Look on a go forward basis, so that's on the manufacturing front.
On the non operations I would highlight.
We've already.
Reduced discretionary and we're starting that here in Q1.
And how do you think about external spend versus.
Workforce reductions.
50 50.
Cost impact on a year over year basis.
Okay.
So these are net reductions so does it mean that.
SG&A should go down $75 million.
All in in 2023 exclusive of the $110 million less in pension expense and can you can you explain what the event was that caused the $110 million lift in pension expense.
Okay. So let me break down into a couple of parts for you Jeff So on the pension.
First on that one.
A lot of impact.
SG&A or manufacturing.
On our income statement.
Within the year.
There are two drivers as you think about pension and you are equal.
The pension interest costs, we have.
Lower discount rates you can speak to.
200 basis points.
First half 2022, and that will increase to over 500 basis points.
So the 300 basis point change in interest costs.
Assets are lower year over year as you think about the market basically being down about 20%.
Versus our assumed you return of about 6% that's about $50 million each one of them, we say there.
The SG&A question.
Our variable comp will be normalizing, so that will be a headwind on a year over year basis.
We expect.
That to be substantially offset.
$75 million.
So Jeff one way to think about sort of a waterfall across.
Across the businesses and the cost actions is.
The cost reduction actions.
Or sort of equal to offsetting both the pension costs, the return to variable comp and inflation and.
Put all of that sort of together.
So sort of a fixed cost structure. If you will is flat to fibers improvement offsets the normalization in Ci. So you have to have a point of view that the two specialty businesses are able to deliver.
Earnings growth over the annualized FX headwind for this year.
But that's.
Other way to sort of think about how we get to sort of flat EPS, including pension.
As you know those specialty businesses have to offset basically inflation. This year in growth relative to last year. When we've given you a waterfall and sort of where that growth comes from.
Okay is the pension expense cash or noncash.
It is noncash.
Impact on our cash flow.
That's why we built the guidance I just talked about we're growing earnings off.
The segments.
Thank you.
Our next question today comes from Frank Mitsch with Fermium Research. Please go ahead.
Yeah.
Hi, Yes, good morning, and Willie I'll give you a shout later on and talk about how firm you can help on your pension plan asset returns.
Mark.
You mentioned in the prepared remarks that you're going to keep the cracker down through the first quarter can you talk about some of the factors in the outlook.
That youre seeing on the CRE side of things and when it should go or should we expect that the cracker will come back up into Q.
Yeah, our expectation is the cracker starts to come back up in Q2.
Yeah.
Any way you can do the math on sort of cracking spreads right now last year remember, our crackers are a bit different where.
Where they are highly oriented towards propane versus ethane and we're trying to make as much propylene is Canada is little ethylene as we can.
Once we've made and you know switching into RG P, which we're doing as much as we can because the ethylene market is very economically challenged for basically a cash costs on bulk ethylene.
But as a propylene markets are starting to improve you can sort of see that through the through January .
The you know the spreads the crackers are recovering as.
As we go through this quarter and that feeds into our expectation that that is likely to continue or hold.
And we bring the cracker backup demand right now continues to be challenged so we don't really need as much of the output, which is why it's easy to sort of make this decision at the moment.
From both a demand and a cracker spread point of view, but we expect demand to get better in the second quarter as well as the spreads to continue to sort of stabilize at these better margins. So that's sort of how we're looking at it at this stage.
Remember that propylene prices are well below any sort of historical norm to oil right there they're very.
Depressed if you go run that analysis, it's pretty extraordinary so well.
We're really just trying to get back to a more normal relationship to the price of oil.
Coupling.
Terrific. Thank you and then if I if I can ask about the second methanol CIS unit in the U S. You didn't get in your remarks that you have made progress on permitting but you haven't selected a location as of yet can you just talk about how that process plays out I mean, I don't doubt that communities with wood.
Welcome and methodologies unit.
There you know locations, but you can you can you talk about a little more color there.
Sure. So first of all I'm really excited to have this.
Relationship with Pepsi that base loads. This facility gives us the confidence to move quickly.
On this project we are looking at multiple sites as you might imagine we're looking at existing sites, we own and whether we can leverage all that brownfield and existing infrastructure cost.
Down in Texas.
But we're also looking at some other brownfield sites and some other.
States that could be attractive and evaluating.
The capital efficiency of each of these sites the feedstock.
No benefits of each site as well as the incentives that are different states are willing to provide to promote investing in the circular economy and playing a role in solving the environmental challenge.
And the engagement frankly across the states has been really high.
And as you said I think they're all quite interested and excited to sort of participate in this kind of a green project.
But we haven't finalized that I'm, hoping within the first half of this year, we'll have that fine lives and then start moving very quickly.
On the.
On this or not.
Just incentives with the permitting and the site development and everything else.
The advantage of our new sort of standardized approach in building. These plants. So allows us to start the engineering now without knowing what the site is going to be so.
We're already Spooling up engineering for this site and designing it.
And then you know we will do.
From what is being able to call. It inside the battery limits. The actual operating this plant the sort of infrastructure will obviously be dependent on which side. We finally select.
Very helpful. Thank you.
Yeah.
The next question comes from Kevin Mccarthy with vertical Research partners. Please go ahead Kevin.
Yes, good morning.
Couple of questions on your capital deployment so.
In the prepared remarks last night, Mark I think you mentioned your methanol assists.
Investments in the aggregate, our wood cost $2.25 billion, which is up about 10% relative to your your prior projections.
Can you talk about how that flows through is it going to be ratable over the next five years or some other shape.
And then related to that or are your returns still the same in other words are you able to perhaps extract a larger premium too to offset.
The higher project costs.
And I guess more broadly for Willie you know do you think capex will run $700 million to $800 million.
Over the next several years or or again is there a different shape to that as you execute on these investments thanks very much.
Kevin Thanks for the question.
Yes, I would highlight here in 2022.
We've already invested approximately 300 million EBITDA.
About or secure investments that we highlighted in the prepared comments. So as you think about protein 2 billion as of the next.
Three to four years.
In 2022, or three we're increasing our capex budget to seven to 800 million that includes the step up on.
On a year over year basis, and yes, as you think about a normal I'll call it large capital curve.
It will definitely be over $800 million through that time horizon and probably the peak.
Around one to one two.
Yes.
And then Mark I think about capital allocation.
Sorry go ahead.
You talked about the returns.
So on the return front, yeah, I was just going to follow up on that I think in the past you've talked about 12% plus.
Yes, so on the rigs.
Turn front to be clear, what we announced in the prepared remarks today around the design of the facilities is the same as what we had in our economics back in 2000.
'twenty one innovation takes the first phase was always going to be around 110000 tons of waste being processed.
So the $450 million EBITDA has not changed and we feel more confident he knows where actually securing prices with contracts and securing feedstock.
Well its availability as well as whether it's going to cost supporting those economics.
Capital costs being a little bit higher.
And what we had talked about you know that sort of a 10% increase that we discussed.
In our prepared remarks.
Don't affect the returns we've said where our returns are above 12% for the second and third projects above 15 for the first project, we showed greater than we have room to absorb some of these challenges because you always expect them to happen frankly.
When you're doing these kinds of capital construction projects and we always want to be sure we have robust.
Plans for the economics to deliver returns.
Okay very helpful. Thank you.
Our next question comes from Matthew <unk> with Bank of America Merrill Lynch. Please go ahead ma'am.
Okay.
Yes.
Good morning, Thank you.
Good morning, I'm missing, but if we're looking at our Kingsport Messing analysis unit can we just walk through the progression from.
Cost to profit how much I must commissioning costs in 2023 numbers, what do we think for how that moves to profit in 2024 and getting back to full run rate earnings in that facility.
Yes, so I would highlight as you think about the startup we're talking about roughly $35 million, including Oh go ahead.
Appreciation as it starts up in the back half of the year.
So as we think about the first project.
You should be getting to a more normalized run rate of growth in 2024.
And by.
By the end of 'twenty five we would expect to be close to the full run rate of the plants, which we.
I wanted to approach.
$150 million per project.
Alright on that end.
That mean that 2024 is just neutral or would you see EBITDA and then I guess just a question you don't really talk much about buyback for next year and I know capex is going up but it still seems like maybe you'd have 202 hundred $50 million.
After dividend cash flow do we assume that goes to buyback or.
I mean your leverage is fine can you do in excess of that.
Yes, so definitely we expect 2024 to be accretive from our Kingsport circular melanosis projects.
We're confident in the progress you'll see revenue here in the back half of 'twenty three.
That turns into earnings and growth in 'twenty four.
Approaching those run rates as we expect these plans so again.
Plus the market excitement is around that.
Leads that we're already working on.
As you think about.
Capital on the capital front.
Share buybacks. So yes, we're on the capital allocation.
Our priorities remain the same.
<unk> increased the dividend.
Here in the fourth quarter for 2023.
Also as we think about $7 million to $800 million of Capex and.
We're looking at prioritization of bolt ons versus share repurchases, we're going to always fully leverage our cash flow to give shareholders return. So there is that capacity and we will put the cash to us. We're always have this debate around the best uses of cash and a principal basis. When we look at the circular platform the capital we're deploying.
There has.
Substantially better returns and valuation potential for the company than buying back stock today, and we think that's the appropriate way to deploy the capital versus buybacks on that front.
Sure, but that's not contemplated in the earnings guidance right.
Yeah.
Yeah.
What.
Any accretion from like.
A deal or a buyback or anything like that.
That would be upside so just.
Just to highlight.
Obviously, we executed a $1 billion of share buybacks in 2022.
And on an operating cash flow and divestiture proceeds so we will have.
Oh come on EPS accretion as a result of the full year of benefit from that right now thats, primarily offset by a higher interest expense.
Understood. Thank you.
Our next question comes from Mike Sison with Wells Fargo. Please go ahead Mike.
Hey, Good morning, guys Mark just one question.
A lot of time over the last.
Several years.
Forming a portfolio to more specialty assets.
When you think about the performance in the second half kind of starts the first quarter.
What can you point out to folks that.
That demonstrate that maybe the performances has that's the special characteristics or maybe it's more the <unk>.
<unk> back in the second half and Cleveland multiple isn't where it should be the case. So just curious what your thoughts on that.
Sure. So first of all I mean, we think we've made tremendous progress in improving our portfolio over the years, we've obviously divested a lot of commodity businesses acquired some great specialty businesses.
You know in the past if you go back to that answer in 2011, and 12 timeframe as well through the acquisition 2014, and the divestitures more recently and optimize the portfolio I think we had a very good track record in portfolio.
Portfolio discipline.
I think last year as you look at it with a uniquely challenging year.
For two reasons that.
You have to sort of consider and judging you know our history and the future of this portfolio, obviously the fourth quarter it.
It turns out was the entirety of the earnings decline from a volume mix point of view. So we were actually flat in volume and mix, leading up to the fourth quarter and.
And the entirety of the.
The volume mix decline was driven there.
And because of some of the very unique operational challenges we had last year are.
Those limited our ability to deliver growth, especially in advanced materials.
So those two factors sort of constrained.
Now on track at the beginning of January before Ukrainian word rapid inflation everything else was going to do a really impressive year of earnings growth.
So I wouldn't sort of over to work on trying to interpret too much into the 2022.
Our challenge and our proof point will be if we deliver this performance. So we've just sort of suggested.
Uh huh.
Our outlook discussion today.
And this kind of challenging economic environment, that's a really strong endorsement about the quality and strength of the portfolio.
To manage through these challenges there's no question, we create a lot of value.
And markets that has economic sensitivity, whether its P&C your durables or auto.
Auto all last year was that recession levels or 80% below 2019 is not a good year for auto demand.
And and we managed to actually still do reasonably well in that.
That business on the volume mix side. So I think we feel really good about.
You know the quality of the portfolio.
From a volume mix point of view and its ability to deliver innovation and growth through all kinds of platforms not just the big circular platform, we've been talking about but cellulosic has probably $200 million upside when we go forward over the next three or four years.
And then the.
And ladies business as I discussed earlier has a tremendous amount of growth P. P. S is great co.
Coding out is has a lot of sustainable introductions to the marketplace a semiconductor leverage we have in hyper yourselves. So growth innovation is very much there is especially business should have them to deliver good results margin stability actually is on the spread side quite good.
When you look at the portfolio and how it combines together to deliver steady spreads at the variable margin level.
And we've.
Demonstrated very good commercial discipline.
So what you really got last year is a manufacturing recession in one quarter in.
And a huge currency headwind for.
For the year.
And then some limitations on how much growth, we're going to have some one off operational issues. So.
So I don't think theres any lack of differentiation this portfolio or quality of it.
He is going to be.
Very attractive for others.
Alright, thank you.
The next question comes from John Roberts with Credit Suisse. Please go ahead.
Thank you you you had an ethylene propylene flex project for a long view and has that been delayed.
And if you had had that in place would you have still shut down the cracker.
I assume.
We're not yet constructing that project, we are completing the licensing and.
And the early engineering work around being able to pull the trigger on that project as soon as we feel it's appropriate.
We have a lot of requests for capital across our portfolio back to valuation discussion that I. Just commented on it's not just circular that has a lot of capital opportunities for very attractive returns on investment are whole specialty portfolio has those opportunities as well and certainly the current economic challenges are there.
We don't.
See you know a lack of growth opportunities across our portfolio on the specialty side. So those you know get priority call on capital relative to the ethylene to propylene investment. It's one that we will for sure do when it's at the right time, but we're gonna have to be thoughtful about how we manage our overall capex budget.
And to answer your question of ETP was in place we would not be we would not have you know.
Left this cracker down remember we had it down for maintenance, we just didn't bring it back up.
After we completed the planned maintenance.
And we would certainly have been down for maintenance in Q4, but.
Then switching to <unk> right now.
Thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Hey, good morning, two quick ones first on the renewables capacity will that inventory build show up on your P&L or will it be suppressed and can you give a sense for the magnitude.
And secondly on the end market comments that you're hearing from customers.
I guess it looks from your presentation as if the <unk>.
Overall theme is the industrial recession, driven by Destocking to recalibrate.
But underlying demand is pretty solid it's pretty stable outside the construction markets.
How confident are your customers on that.
When do you think they need to or on how much warning do you think you would have if they didn't need to recalibrate.
So I'll, let me take the first question I'll take that sure.
On the Kingsport methanol of this project.
Obviously, we've built out the supply chain, we already have the key.
Raw materials and recycled materials as part of our inventory here at year end as we are preparing for startup next year.
So you can think about there is no significant impact of transitioning.
Also fuel feedstocks to recycled content.
We go from 'twenty two to 'twenty three as we think about our projects.
Second U S project in <unk>.
The project in France, again, we can have different operating models.
And the regions.
Not significant.
<unk> capital build.
When it comes to your end market question.
When you think about the end market exposure in three buckets right. The one that's most impacted by this sort of manufacturing recession is durables.
And building construction, 40% down in durables as we talked about earlier.
30% down and building construction in the fourth quarter in AFP.
So those markets are being very heavily impacted.
And that destocking relative to the retail data.
It was pretty significant relative to end market demand, which is still quite weak.
So there is that we do think it's destocking by definition is into at some point, it's hard to say exactly when but we've told you. What we're assuming you know and you can factor what you want to believe into the model.
When it comes to auto the auto demands already recession levels, all last year right. So that's the second bucket, which is a huge driver of profit for the industry as well as for Eastman.
Really has limited downside and more upside as we go through this year, even though youre going into an economically are already in an economically challenged area, where consumers have discretionary choices on where they want to spend money.
So we do think that's going to.
So it would be stable and sort of modestly improve and within that mix. I should have also said earlier, we are levered to the luxury market with all of our products because they're very high value products that we're selling.
And that part of the market is likely has held up better last year, and certainly going to I think hold up better this year and sort of these economically.
But sort of extensive times when it kind of interest rates.
And then the third bucket, which is about half of our revenue is what we call our stable markets such as medical consumables AG food feed all of these sort of end markets. Our water treatment had a very stable now we saw quite a bit of destocking, even in the stable markets in the fourth quarter across the entire company.
People were trying to get rid of high cost inventory generated cash for themselves. So that was a big part of the headwind to <unk>.
Less than a percent basis, but you know happening everywhere.
As part of the challenge.
There, we see that destocking playing out because their markets are stable. So there's not a lot of destocking they can actually do.
So that starts to really help stabilize as we go through this quarter into the second.
The overall revenue base across the company.
Let's make the next thing and the last one please.
Of course, our final question today comes from the line of P. J <unk> with Citi. Please go ahead.
Yes, hi, good morning, Thank you.
And thanks for taking my question.
So mark on meta analysis, you mentioned your Capex is up 10%, but you don't expect a huge change in the returns you expect.
Are you passing on the increased cost to your customers.
And.
Also you know the plastics are cyclical and so you if you want to get steady returns there.
Customers willing to take the cyclicality of the plastics and volatility so that you can caf steady margins.
Yes, so I think from a spread point of view, we were sort of contracting into the PT market is with our what we call a circular contracting model.
I'm going to provide.
Steady spreads between their cost of feedstock and energy.
And the price of material so from a spread point of view, we expect to have you know quite good stability think airgas.
Company kind of model.
Demand of course, it is still a subject to end market demand so weak.
When it comes to sort of the volume, there's always going to be some variability, but we are going into packaging into consumables. So the variability in that volume.
On a on a annual basis year over year is pretty stable right. So I don't have a lot of volume concerns there.
When it comes to the specialty side of this circular platform.
We're not changing the end market.
Sort of structure in both demand or where how we do pricing. We're just adding recycled content is another dimension of differentiation to try it and then I'll go to the co polyesters and the cosmetics and everything else, we're selling so it will still be sensitive to demand.
Changes when it comes to the surgery platform that will be capturing.
Higher margins relative to what we are currently realized in these products and growing.
Total volume quite fast right.
The reasons, we win in the market places high value growth driving mix upgrade against fixed cost leverage right.
Very true.
Good times and this will lead to a much more accelerated growth.
From these kinds of products to against your fixed cost leverage, but unfortunately face an email downtime like the last fourth quarter in the first quarter of this year, where that mix is a headwind, but when you look at the upside in our stock as you get through this not just for circular but for just market recovery, there's a huge mix upside for our company as you go into the.
Back half of this year in 'twenty for you when you think recoveries coming which we demonstrated coming out of 2020.
Oh no.
Mark Thanks, everyone and I guess with the industrial gas motive hasn't really worked and plastics.
And what gives you confidence that this would work. This time is it because there's just such a specialty product and the consumers wanted to other customers who want it.
But if you can have that kind of contract structure.
Yes, so as I said and especially you know, it's just our current model, but when it comes to the P. T.
That's where the industrial gas model concept applies.
Yes, it's a unique offering right. We're the only large scale company on the planet, especially North America, and Europe , who's offering recycled content from hard to recycle plastics.
You get to the food grade industry mechanical can't remotely meet their needs.
And someone has to plug the gap if theyre going to hit their targets and we are way ahead of our competition and being able to provide that service.
And that's exactly what they were a gas company does to provide a service to convert.
<unk> into a highly needed input.
And that's sort of where we're at today and that's where our confidence as we go forward into these three projects and that's why we continue to maintain that discipline is not building. These kind of facilities unless we get these kinds of contracts.
I'm not getting back into.
As he said P. J the traditional plastics business of high margin volatility, we just wont do that.
Okay. Thanks again for joining us today, we really appreciate it I hope you have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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