Q1 2023 Eastman Chemical Co Earnings Call

Speaker 2: Good day everyone and welcome to the first quarter 2023 Eastman conference call. Today's conference is being recorded.

Speaker 2: This call is being broadcast live on the Eastman website www.eastman.com

Speaker 2: We will now turn the call over to Mr Greg Riddle of Leesman Chemical Company Investor Divulation? Please go ahead, sir.

Speaker 3: Thanks, Brida and good morning everyone and thanks for joining us. On the call of me today are Mark Costa, Bord Chair and CDO, William McLean, Senior Vice President, CFO and Jake Floreau, Manager of Best Relations.

Speaker 3: Yesterday after market closed, we posted our first quarter of the 2023 financial results news release and SEC AK filing, our slides and the related prepared remarks in the investor section of our website, eSpin.com. Before we begin, I'll cover two items.

Speaker 3: First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations.

Speaker 3: Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our first quarter of 2023 financial results news release. During this call, in the preceding slides, we prepared remarks and our filings for the Federal Industries Exchange Commission, including the Form 10K filed for full year 2022.

Speaker 3: and the 14Q to be filed for first quarter of 2023.

Speaker 3: Second, earnings referenced in this presentation exclude certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the first quarter of the 2023 Financial Results News Release.

Speaker 3: As we posted the slides and accompanying remarks on our website last night, we'll go straight into questions.

Speaker 3: Breda, please let's start with our first question.

Speaker 2: Thank you. Our first question comes from the line of David Wetlinger of Deutsche Bank.

Speaker 4: Thank you, good morning. And Mark, just on fibers, I saw you increase the full year of guidance. How is the high in that and how stable is this new high level earnings in fibers?

Speaker 5: Hey, good morning, David. Great question. One we're really excited about. It's just fantastic to see this kind of improvement in the fibers business, which we do think is structural and stable going beyond this year into the future. The key drivers for the improvement were obviously a pretty significant increase in price associated with C

Speaker 5: making sure we're providing enough earnings and cash flow from this business to invest in it and be a secure supplier. So we've got improvements on the price cost relationship. We've got improvements in our operational performance, which has turned out to be better than expected because we've also raised our guys from 275 to 350.

Speaker 5: are really driving a lot of growth for us relative to the underlying markets. There's just another example of how our innovation model creates a lot of growth even in tough markets. When it comes to this stability question, there are some factors that I discuss in January and I'll just hit them again quickly in the market structure in the tow business.

Speaker 5: has fundamentally changed from what we've been facing over the last decade. Part of it is the demand didn't decline nearly as much as we feared over the last 10 years, really declined only about a 1% a year decline.

Speaker 5: versus two to three percent. And we've had the heat not burn segment really growing quite strongly that also still uses filter toe, in fact more filter toe than a traditional cigarette growing over 15% a year, creating stability in that market. So. sold. submission.

Speaker 5: Market's only down about 10%. When you look at the last decade, and now China's even showing some modest growth in the 1% range, which is about half of the cigarette global market. So that's been really helpful. When we audition our growth in textiles, it allowed us to focus and fill up our assets, and repurpose assets towards textiles.

Speaker 5: and a way to sort of see value, not just on focusing on the tow market.

Speaker 5: On the supply side, we've also seen pretty significant reduction in supply on two fronts. First, about 15% of capacity has been shut down by a number of players in the industry, including us repurposing some of our capacity towards the textile business.

Speaker 5: And we've probably lost effective capacity in the 10 to 15 percent range as we've gone to making much more specialty items, these slim toad filters as well as T2 free, the heat number are all more complicated and run slower in the assets. So we've lost a lot of effective capacity. So you're at a, we've done that 15 percent reduction capacity putting us in the,

Speaker 5: 90 to 100% range on utilization. So the markets are tight and that's resulted in customers being very focused

Speaker 5: Again, on security supply, the cost of the towfields are as small percent of the price of the cigarette. So you don't want to be missing out on supplying the market for such a small cost item. And we're working very closely to make sure we've got contracts in place that we do for this year by the summer probably.

Speaker 5: The vest that during the contract will be completed for the next two years beyond this one, that sort of puts these kind of improvements in place. So we feel really good about where we're at, and this is a great source of earnings and cash flow to invest in the growth of the overall portfolio.

Speaker 4: Very good. And just the method analysis given the delay you highlight today and the project in Kingsport, do you have an updated forecast of losses or EBITDA drag from this business in 2023? Yes, I did. One of what I would highlight is I don't expect a significant increase in the

Speaker 4: spend expectations for 2023 and 800 million. I'm confident that we'll be able to complete the construction within that level of investment as well. And we will deliver the investment returns that we've committed to for this project.

Speaker 4: Thank you very much.

Speaker 4: Thank you very much.

Speaker 2: Our next question comes from Vincent Andrews of Morgan Stanley .

Speaker 4: Thank you and good morning everyone. Mark, I saw this week an article talking about that you'd had a successful completion of sort of recycling project for automotive mixed plastic waste. I think they call it automotive shredder residue. Could you talk a little bit about that and what you think the opportunity status for you here is a similar?

Speaker 5: and our so-called growth. We're looking at all forms and fashions of how we can lean into this trend that's disrupting the markets and creating a lot of growth opportunity.

Speaker 5: You know, we're looking at all forms and fashions of how we can lean into this trend that's disrupting the markets and creating a lot of growth opportunity. Do you know the automotive market?

Speaker 5: has a huge need to do with how to recycle all these cars and all the components of the cars as well at the waste in the process before making, you know, through making the car. Until we have several programs we're doing both in Europe and the US, I'm looking at every place that we can lean into that. So, for example,

Speaker 5: You know, with all the interiors, all the polyester that's involved in the making of the tears or recycling that polyester, that, you know, is a take-back program we can do effectively for our polyester recycling technology project. We're also working with the auto sector on how to recycle all the PVB polymer and the interlators around glass.

Speaker 5: to the auto industry. You know, lots of companies are engaging these programs for all the interesting reasons. We're a pretty uniquely positioned for the textile part of a car as well as the glass part, you know, to really be the leader in delivering those solutions versus anyone else on the planet. So.

Speaker 5: A lot's going on in that space.

Speaker 4: And then just as a follow up in your regular business, you know, you called out autos being strong in the quarter and you also anticipate they're being growth in the second quarter sequentially. I'm just trying to compare and contrast that. Some of the other folks that are out there that have a lot of auto exposure thought that maybe, you know, one.

Speaker 5: From a total bill's perspective, incidental, I don't think our view is all that different than what you just said. I mean, Q1 was certainly a bit better than expected as we highlighted. I don't think we're seeing in a total production basis a big sequential thread of improvement from Q1 to Q2. I'd say it's holding and incrementally better. But our position in the market is very different than this.

Speaker 5: higher premium into the marketplace. So about 70% of these very high value products are targeted at high premium market, which is about 25% of auto builds. And that part of the market is actually rolling in through a high single digits. So those markets are holding up a lot better than the overall market. And so we're getting.

Speaker 5: losing any volume because we're not in the combustion engine drivetrain at all. We have no presence there. We're in glass, we're in the coatings.

Speaker 5: And so these markets do well. We get absolute growth and we don't have any offsets because we don't have exposure to the engines that are being sort of switched over to electric. So that, I think we're really in a good position about that. And as we told you, you get that additional leverage with the three and a half times of volume and EVs, et cetera. So.

Speaker 5: You know, we're doing really well because of our strategy, because of our innovation, and because of the position we have in the market. And that's particularly for AM. I would note that AFP is more connected to the broad auto production market. So they're growth rates a little more modest because they serve the broad spectrum of the market versus just the high end.

Speaker 4: Okay. Thank you very much.

Speaker 2: Thank you. You now have your spectre from UBS.

Speaker 6: Hi, thanks for taking my question. Just curious if you could talk to what you see the underlying level of volume decline in the portfolio today, kind of excluding de-stocking, and really trying to think about how you're thinking about volume developing from first quarter, second quarter, and what's baked into the second half.

Speaker 6: and drive some of your EPS uplifted that you're looking for. Thanks.

Speaker 5: Sure, so I think it's important to start with the total volume numbers and then I'll try and bring it down to the specifics in your question. So if you think about the fourth quarter and the first quarter, you know, in the consumer discretionary market, like consumer durables, B&C, those kind of markets like products have seen a just significant drop in primary demand as well as a significant amount of debt flow to the Amazon market worldwide.

Speaker 5: of the retail channel massively overstocked, you know going from sort of an image ratio one X to sale to two X plus.

Speaker 5: led to a huge amount of changing the man and then pulled out a park, that story that we told.

Speaker 5: In January about the markets, this market area being down 40 percent and retail sales being down about 10 percent You got to remember retail sales is sales dollars, so if you back out of the flation you're talking about volume is being down 15 20 percent

Speaker 5: on a volume basis. That's a pretty significant drop in demand for all the reasons I think have been well discussed about.

Speaker 5: COVID and supply chain, et cetera. And that trend continued, in fact, got a little bit worse in the first quarter, from the fourth quarter, when it came to the destocking. So we see that playing out, and that destocking in intervals continuing to go on. There's just phenomenally long supply chains in this space, especially for us, because we're manufacturing, we're very, you know, North American-centric and our manufacturing, so all of our...

Speaker 5: Especially plastics are made here, then they have to be shipped to China, you know, typically to be made into different components and then go through, you know, warehouses and then component makers and then brands and then warehouses and then finally at retail, back in the US and Europe . So it's just a very long supply chain to destock.

Speaker 5: And that's sort of what you see going on. We do see signs of that destocking ending in May, but what we would say about these discretionary markets worth whether it's durables or the same kind of story in building construction, those trends on the primary demand we are now forecasting to stay at these low levels for the rest of the year.

Speaker 5: If it's possible the world will get you know, stabilize and get better and there'll be some restocking but none of that is in our forecast. We just have the end of destocking in these discretionary markets. I wouldn't know the building construction. We're assuming things have been bad for a while in Europe and Asia. So that's not really a destocking so it just low demand. But we do see things to sell in the US and have acted that in.

Speaker 5: consistent with our coding customers.

Speaker 5: On the stable markets, I would note that we have a very different situation. Obviously, they're stable, but they're still under pressure. Low single digit, in a lower demand, when you look at some of the customers in that space, in personal care, in water treatment, etc.

Speaker 5: because even their demand is off. And yes, they are doing additional de-stocking, and that I think has mostly played out in the first quarter. And so we're now moving back to more just sort of lower primary demand as we go into the second quarter. So those are sort of the dynamics across the market. I just made comments on the auto market, which is obviously a source.

Speaker 5: at the first half to second half, we really move to our new forecast saying, you know, primary demand is going to stay at these challenge levels for the rest of the year. And the only list and demand in the back half is the entity stocking that's part of the first half challenge that doesn't continue into the second half. Okay.

Speaker 6: I don't need to rehash all that, but what number are we looking at there roughly in terms of some of those markets? That's fine, I'm swiping over are these shows involve wide-Prince and I don grade tomorrow

Speaker 5: Yeah, so I think, you know, every story is a little bit different, but to keep it simple, you know, you've got primary demand that's down.

Speaker 5: and probably explaining, you know, aggregate it's a little tough to break that out, that you know, it's a third to a half of the, you know, it was called a third of the story.

Speaker 5: probably 50% of the story is the stocking in the first quarter. And then there is a 10, 20% of the total decline that is places where we're seeding shares. So discipline and price means you don't chase every KG. And in that case, what we have is...

Speaker 5: places like it's written at the NCI very low value markets where we're just not chasing that share um architectural and china margins are incredibly low we're not gonna compete with the Chinese and on share we'd rather they serve that market than sort of export their products um and uh it hits volume but it doesn't actually hit earnings for the values of low same is true and

Speaker 5: trying to use exports hitting Europe right now in different products and we're choosing not to meet some of those very low offers Because it's very low in low market Apple low-value market applications for us

Speaker 5: Because we just sort of exacerbate price competition. And it doesn't really have that big of an impact on earnings. So some of the volume mix is certainly market-driven as I described. Some of it, which is a much smaller portion of that, 9%, is these kind of choices we make. That's how you have commercial excellence to maintain price discipline and stability in your important valuable markets and customers and regions. Just about a little bit different region.

Speaker 5: So that's how we break down this point.

Speaker 6: Thanks, and that's really helpful. Appreciate it.

Speaker 2: You now have just the UCAS for JPMorgan, please go ahead.

Speaker 4: Thanks very much. With your molecular recycling facility that will come on late this year or early next year, is all of the material that's going to be made, Triton? Triton.

Speaker 5: I know. So the molecular facility which will be coming on this fall.

Speaker 5: With the current schedule that we have, we'll be providing recycled content that goes into strike, but it also goes into a number of co-polyester. So the cosmetic sector, for example, uses our co-polyester as a great market. It's actually another place where demand is actually better. Right now with people, especially the Chinese, getting back into traveling.

Speaker 5: And those brands, LVMH, L'Oreal, Clarence, all the Chanel, etc. that we're working with in that space. There are some of the front leaders, frankly, in sustainability. They have the most aggressive, recycled content, targets, and they're the most determined to achieve those targets given their luxury position with the consumers.

Speaker 5: to get used to move away from single use plastic.

Speaker 5: It's a very high-value, very high growth market including Yeti, etc. And that market actually didn't come off as much as some of the other consumer-durable markets, and it's going to show up more growth. So, in a recycled content, I go in everything that you would think of that's natural like that. And it goes into products like the Power Tools example we told you with Black and Decker.

Speaker 5: and some of these other applications and electronics where other brands are very focused on their sustainability position and we're winning in new applications, opaque applications that are not normally where we play with Trident because our strength is chemical resistance, durability and clarity that commend the very high price for the market because no one has a product that can match us including being BPA free, but now we're getting applications where...

Speaker 5: The value propositions are a bit wider and still winning. So it's a combination of both. That's why the plant in France also will be half-specialty to serve that cosmetics market in Europe and other high-value applications, including shrink packaging, et cetera. So it's broad-paced.

Speaker 4: So maybe I'll try it again. So I think polyester demand or triton demand was negative in 2022. It's negative this year because of weakness in the durable goods market. And now you're going to bring on more capacity.

Speaker 4: which the market really wants over time, but it might not be difficult to get up to high utilization rates in 2024 given how weak the durable goods market is or the overall demand for.

Speaker 7: Triton and other polyesters, maybe it'll take you three years to wrap up your capacity.

Speaker 5: Is that right? Yes, so Jeff, Jeff, that's a very good and related question to my answer. We are adding significant drug capacity and Triton as we told you that is a way to sort of grow total volume for the company and serve very strong Triton demand and your correct Triton goes into consumer gerbals.

Speaker 5: That is one of its key in markets and...

and certainly seeing significant demand pressure in the fourth quarter of last year and this year. Something we may not have been clear about in how we manage our assets and our expansions that I'll address right now. So we have flexibility to swing our triton lines. We'll drive back to pursue a balancing.

back to copolyester right there originally you want to go back in history there originally PT lines that we modified to make our especially copolyesters and then we modified the McGin to make

But we've always retained flexibility and these assets to make different products. So our strategy was always when we brought on this very large chunk of capacity to swing one of the smaller triton lines back to making co-polyester. So the net effective ad of triton capacity will be about 25%.

either when it comes online because of how we've swung that other line back to making co-polliestors.

And this works because the co-play us from markets we have to serve there are much bigger markets and a wider set of markets to serve. And as I just explained, the recycled content value isn't constrained to try and very much applies to cosmetics. It applies to the shrink packaging, which is obviously a very big market.

where people in that business going on bottles, you need to have their sustainability and recycle content targets hit there too, as part of those bottles. And so we'll run the Mephnauze plan full in serving all those in markets. And our capacity will be balanced. And this is a huge advantage of our asset strategy, the flexibility to swing assets to make a wide range of products.

to adjust to whatever is going on in the market dynamics that we face. So no, it's not a problem. And then as we fill out that first 25%, we'll swing that asset back to Triton to get to, you know, in the end, a 50% capacity expansion. But you can do that over time. Make sure you have volume and variable margin paying for the whole fixed cost and getting that leverage spot line.

If I remember correctly last quarter you said you were looking towards the lower end of the annual guidance. Is this still the case for this update?

No, we're feeling very good about our range and how we think about it. And if you think about the guidance we gave in January .

It was a balance of volume recovery, price costs improvement with the trends that we see in raw materials, energy and distribution, and the cost actions that we were taking. The world obviously changed, but to hit the two positives first.

The price cost improvement is pretty substantial and the fiber's improvement is obviously substantial relative to the lower January guidance.

And if you look at the strength of what we already have shown in the specialties on the spread improvement in fibres and think about how that rolls through the rest of the year, that's about a dollar. It's at least a dollar per share improvement in our outlook for fibres and spreads in the specialties.

So that's a tell. So then you get to, we didn't change our range with investors. And that's due to the conversations we've just had around the weakness in the market on the demand front being pretty substantial.

And then you think about how we sort of adjusted our guidance, you know, when you look the next three quarters, you know, you're about 208, I guess, in the mean. So our midpoint of our guidance range for Q2 is 2. So it's a pretty modest adjustment for some of that demand, not being better in the second quarter, sequentially being partially offset by better spread.

I'm nutting out to that sort of 2Q number. And then we've really pulled the vast majority of that dollar for sure improvement in our outlook into the second half of the year. And that really is predominantly volume and mix in the associated asset utilization headwind that comes with it.

And you've got that, you know, as we're sort of seeing this weaker demand, we're taking actions to, you know, reduce our operating rates, pull inventory down, make sure we hit our $1.4 billion to cost in certain cash flow generation. And that led to that, you know, $50 million of asset utilization had one we identified in about half of that occurs in Q2 and the rest in the back half of the year. So that's all sort of fed into this mix. But what it really does is de-risk the guidance. You don't have as much of a step up.

forecast now is pretty conservative or balanced based on how you want to look at the world that is certainly not optimistic. And we're going to focus on controlling our costs, focus on our price discipline, focus on innovation, create value, and growth above underlying markets, and make sure we deliver our cash flow.

Thanks for this. And on one of the slides, you're talking about interleaders being better physicians or gaining content in electric vehicles versus ice. You know, I thought both EVs and ice use interleaders and especially the premium ice cars.

Could you talk about this, why is there a content game? So in the EVs versus ICE cars, they both have safety windows for sure. But we've walked through this couple of times in the EVs and there's a lot of detail of innovation down there.

There's about three and a half times more content in an EV car than an ice car when it comes to interlopers. Part of it is sitting on batteries, your head pushed up higher into the ceiling, they can't raise the outside ceiling for you know, you know, a lot of it.

Yeah, aerodynamic efficiency, so they make the sunroof a lot bigger. So you're now ready to run the bubble. And so there's a lot more glass going to laminate it. The sunroof, the side ones, the back ones, because it's also a way to take steel out of the car by getting more structural strength from the glass with the laminate. They want more functionality in it, so they want the heads up display. They want more solar rejection to reduce the load on it.

in our sales last year, over 21 from EVs. And it's now up to 10% of our exposure in that business. So it's just a great story. And, of course, we're not losing anything in the transition with being in other parts of the car.

now have my girl squeeze head of boxes.

Great, thanks. Good morning, guys. What are your two-around inventory?

morning. But first just too around inventory and working capital.

First, you talked about 50 million of incremental headwinds from lower asset utilization to manage your inventory. Can you just speak to what businesses or businesses are seeing the most pain there? And then second, Willie, just what's the working capital assumption in your cash flow guide this year?

Yeah, so what I would highlight from a business standpoint is Mark's highlight is the end market's dribbles, building a construction are the ones that are most under pressure. So you can think about that being our specialty businesses as we level out and have a fixed cost impact the remaining parts of the year.

Ultimately what we've said at the beginning of the year to achieve the $1.4 billion cash, ultimately we were expecting...

Ultimately what we've said at the beginning of the year to achieve the $1.4 billion cash, ultimately we were expecting our card.

focused on driving that cache as we hold our earnings guide flat for the full year that we deliver that through to the bottom line. So we're not waiting for the back half of the Seattle unfold. We're taking action now so that it is across the last three quarters.

kind of EBITDA run rate from the plant.

So the

ramp up of the facility will be quite fast, getting to full capacity and recycled content will be the priority valued by our customers. So we expect the facility and the recycled content to start going into a wide range of products pretty quickly through 2024. Now filling out the capacity of the Triton capacity, obviously as I discussed a moment ago, it's a just question.

So we feel good about deploying the capacity pretty quickly. It'll be a process spectrum of markets and then over time, we'll value up that mix like we always do to the higher and higher value specialties as we continue to penetrate and grow in those markets like tripping over time. So.

Great. Thank you.

Your next question comes from Matthew, Deole, it was Bank of America.

Good morning, everyone. I just wanted to ask quickly on the 2Q.

Yeah, I think the two cute guidance range. I mean the the segment commentary is fairly tight types like X, you know, AM, but I'm just kind of wondering as we look at what maybe takes you to low N first to the high end of the range.

So, you know, when you think about sequential trends, you know, we obviously did a lot better than expected in the first quarter, which was principally driven by price cost, you know, favorability, especially from natural gas. That, we can see, you know, continuing sequentially into the second quarter. So that part, you know, I think is pretty clear. The cost actions we're taking.

the full year, which is how is volume and mix going to play out, and how does that also impact asset utilization.

And that's really where things sit. When it comes to the stable markets, I think we've got a pretty good understanding of that sort of half of our revenue, that where the trends in those markets are headed. There's still a little bit of de-stocking in personal care and water treatment and AFP that's uncertain. And then the big question is in a...

associated with what's going on in these more discretionary markets in consumer durables and when that stocking ends and at what rate. I mean we do see April order books being sort of weak and similar to March. So normally you'd see a real step up in March that didn't play out.

sort of was steady through the month, even when it comes to sort of the specially plastic world. And we do see order books being a lot stronger and may now, so we're finally starting to see some actual turn here in that market place, which is encouraging. And you know, that turn is built into our into our guidance.

a month, even when it comes to sort of especially plastics world. We do see order books being a lot stronger in May now, so we're finally starting to see some actual turn here in that marketplace, which is encouraging. That turn is built into our guidance.

And then on building construction, I think that's the other wild card. I think Europe and China are presuming to be relatively stable at low levels. They're not getting worse, but not really getting much better. And we do see things getting a little bit more challenging and building construction in the US as that market started. And now you're finally faced with the lower housing starts, existing home sales, etc. So I think we feel pretty good about this range. But the wild card is going to be, we're in a pretty volatile time when it comes to demand and demand.

how much these stocking really has played out yet or not, et cetera, and that's why we've sort of pulled our view of this quarter down a bit, but we feel good about this range, and we're going to pull every level we've got to hit it.

Thanks, and if I can, on the AI Red Tech acquisition, like I'm assuming this is pretty small, but I know you like the paint protection film business a lot, and I know Asia is growing quickly. How fragmented is that market? What's kind of the margin differential for there if we look versus the U.S. and epicia and

How big of an opportunity could the paint protection expansion days of B for use men? Let's look over the next few years.

Yeah, so we're very excited about the bolt-on that we added in a performance films business and advanced materials. To your point, we're always looking for bolt-ons in AM as well as additives and functional products. Our two key end markets within the space are in the

Asia, specifically China and the US, Americas. Now we have a global asset footprint to better serve and to achieve the higher growth rate. Ultimately this is a premium set of products and we're really excited about how this is going to help AM grow in the long term and specifically the film's business.

Thank you. We now have Kevin McCarthy of Vertical Research Partners.

Good morning. Mark, you moved your functional amines business for reporting purposes over to ANFP from the chemical intermediate segment. Can you talk about why you did that? And with regards to the first quarter, what were the sales and earnings associated with that business? I saw the retrospective disclosures for...

2022, it looks like it was 310 million in annual sales with EBIT margins slightly north at 20. Are those sorts of run rates reasonable to apply to the first quarter that you just reported as well?

Thanks Kevin, great question. Functional means business is just an absolutely fantastic business. And it's one that we saw a lot of opportunities to operate and manage better by integrating it with the personal care business that's the other half of Tamingo that sits in AFP and sort of bring the band back together again. And so from operational asset efficiency business management point of view made sense to bring them together. And it also allowed us to help investors better understand the co-exist business. I mean it's got 70% of its revenue and really stable attractive markets from ag to farm and water treatment. You know very solid study businesses. The nature of its business doesn't really face competition from Asia. It's very difficult to shift these intermediates around the world for safety reasons.

So we don't compete against Asian these markets and we're by far the strongest leader in these products with a great competitive position in North American Europe .

So, you know, very solid margin position, very attractive margins, as you mentioned. And we do most of this business in both here as well as personal care and cost pass-through contracts. So the margins are very stable, you know, through the sort of ups and downs with inflation. So it's also good on that and it has some great growth opportunities as well.

We make a critical ingredient for Cortevis and Lis product called Seabase. We're a great company and we hope to continue a great partner with them and see a lot of growth in front of us on top of the normal ag market once again innovation.

partnerships leading to above market growth. So great business to have integrated. And because we're at scale.

You know, our work integration model here creates a lot of value. And Mark, if I can add, you know, as we look at our Q1 results and the, I'll call this strong performance relative to our January guide, the way I look at that is we beat our expectations about 75 million. So if you look at that, that's roughly a third and third and third across AFP.

about what's changed in that business. But at a very high level, if I look at history, your segment margins were in the low 30% range and very stable from 2013 and 2016. Then in the next four years, we descended through the 20s. And then that dovetailed into this inflationary year where they were called mid-teens.

level will be sustainable for the foreseeable future. And if so, can you talk about what's changed with regard to your contracts in terms of pricing and procurement, if that makes sense? Sure. So it's a great question. It's been a long journey for this business. It's always, if you go back to the history you're talking about. And it's a great question.

And as I said, I'm not going to repeat it, you know, the trends in demand and supply have changed a lot over the decade to get us back to high utilization rates. And the key here is the customers, you know, in a loose market, we're very focused like every procurement department does on how to get the best price. But in the end, you know, security supply is a lot more important than incremental price improvements.

and we're now in an industry situation because of the last decade, there hasn't been very much investment in this industry and the need to continue to be a reliable supplier to our customers requires us to make some investments. So we've seen inflation and costs go up a lot. We obviously raised prices to cover that. But we also need appropriate margins in this business.

to make the reinvestments and asset reliability and for us, expansion of capacity on our existing assets. So to be clear, not a new point, but to be ball-necking. Because we have so much growth in textiles and we have so much growth in this venture product flying that is going to go into food service that we're expecting in 24 and 25. The whole Taylor-Lose extreme is we talked about that innovation day is making a pivot to being understands a very useful and healthy economy does just contenido and achievement. But you are still? You are doing whomever is

the Fibers business and the margins as you look over the next five years. So this is really exciting, new dimension for us to get to the higher altitude on the base and then build on it with growth. But we do believe the margins are at appropriate levels for the importance of this product to our customers and.

and funding our investment to be a highly reliable supplier. I'd also note, as I said, contracting, you know, typically there's a lot of our contracts or multi-year contracts. We have added provisions in there to make some adjustments for how raw materials go up and down to provide more margins stability for this business. And so, we've got, we've fully contracted this year.

And we're making great progress in getting the contracts in place for the next couple of years. And so we'll share more with you about how we've progressed on that through the summer. So we do think the margins are the right altitude. There's always some uncertainty of energy cost, for example, that we'll move the number up and down a bit.

making great progress in getting the contracts in place for the next couple of years and so we'll share more with you about how we've progressed on that through the summer. So we do think the margins are at the right altitude. There's always some uncertainty of energy costs, for example, that will move the number up and down a bit. Gotcha. Thank you for that Mark. Thanks everybody for having us.

Thank you. We now have Michael Sisson of Wells Fargo. Hey guys, nice start to the year. In advanced materials, your margins did improve.

reasonably well in the first quarter versus the fourth and you're sitting here in the low teens. What do you think we can get those margins back to? It used to be a high teens, maybe 20% business and as a tip simply, volumes coming back to get there. Here.

So Mike, before I let Mark respond, I would just highlight, we've had a significant amount of inflation over the last couple of years. We're talking about, I think, almost 2.5 billion. Between that and FX, that's about 300 basis points at the corporate level and about two thirds concern.

the potential in front of us from two components, Mike. First is obviously there's prices we have increased last year, where we did keep up with inflation through last year, which was pretty extraordinary. Do you think it?

PVOHs being up 45% energy up 70% PX up 40%. So a lot of inflation in this segment, two thirds of the $2.4 billion of inflation over the last two years goes in especially as a lot of it into AM.

And we did a great job, but there was certainly a amount of compression we didn't keep up with in 2021. And so as we hold our prices up and start realizing some cost benefits.

from that in this segment, we'll see margins improve as a result of that. That's a big driver of where you'll see progressive improvements in margins through this year. But the other factor here in the short term is demand. So when demand is off as much as it is, and we're running our assets slower to control inventory in general and cashflow.

And that's just going to have an asset utilization hit to the EEPIN margins and a good portion of that $50 million that we called out, you know, land in the advanced materials segment. So the margins will get better this year, but when you go to 24 with the assumption that demand starts to improve and people bring restocking back to sort of normal levels.

of inventory, you'll see another big step up in margins next year. As we progress, then you've got the circular economy kicking in through next year, and then we're getting the premiums and existing applications and just new sales at much higher prices so that will continue to drive margins up. So I think we get back to our...

old margins and continue lifting the margins from there. Got it. Thank you.

Thank you. We now have Lauren

Thanks for taking my question.

So it looks like just given your guidance for 23 we can kind of assume maybe at the midpoint that the second half you'll be exiting the year at around a $4 EPS run rate.

And if you look at next year then, not to just annualize that number, but if you were that would get you to $8. Is that a base case from which we can build off of and maybe if you get some more normal volume growth, you get back into the mid-eighths?

into the 8 to 10 percent EPS growth range or 8 to 12 percent. Is that how you're thinking about the main drivers that will get you back into that range? Maybe volume or what else should we be expecting?

Yes, so I would highlight to your point, we're delivering $3.60 with our guy here in the first half. As we think about achieving the midpoint, that number is going to be closer to $4.25 in the back half as we're focused on achieving the midpoint.

As you take that number, roughly 850 for the full year, and as we think about getting back to, I'm calling a more normal demand environment versus an extreme demand environment, we are focused on getting back to that 8 to 12% APS earnings growth.

No, I think that's right. I mean, when you think about the portfolio, you've got fibers in much higher altitude and it's going to hold there. You've got CI at the bottom cycle kind of as spread and margins in this current competitive environment. So stable to maybe up next year. So you've got that carrying in as a solid base to next year. And then the question then focuses on to what degree are we going to have specialties.

grow versus this year. Well, last year and this year's got an extraordinary amount of destocking and very low demand. Because in the world we live in materials, we're very much in a serious recession. The service sector with consumers may not be there yet, but our industry is certainly at recessionary levels.

So you've got a lot of recovery or just stabilization in some of these markets as upside on volume mix. You've got auto that has a lot of recovery in front of it. So if any version of that where the world is better in 24 versus this year, you're definitely adding on to this back half performance. You've got to adjust for seasonality, but it's a very strong improvement in EPS next year versus this year in that macroeconomic scenario.

Thanks for that. And then similarly on the free cash flow side then, does that push you closer to $2 billion maybe by 2025? And if so, would you be allocating more capital to growth investment at that point or is it possible that we could reprioritize share with participants? Thanks. Thank you David.

So just to highlight first we're focused on delivering our 1.4 billion of this year. And yes, as we think about a more normalized demand environment and building on the back half of this year, getting back to the 1.6 billion of operating cash flow and above that we committed to innovation day is definitely within our side.

And I think again, we've been focused on discipline with our capital allocation. So one, first, the growing dividend to driving our organic growth and the innovation-driven growth model and this new vector of growth with our circular investments. And then bull times, and we will always put cash to use and not let it sit on the balance sheet. So that's it.

But yes, we'll be more than all that inflation with sharey purchases or delusion with sharey purchases.

Thanks. Let's make the next question the last one please. Absolutely. Our final question on the line comes from John Roberts of Credit Sweet.

Thanks. Let's make the next question the last one, please. Absolutely. Our final question on the line comes from John Roberts of Credit Suisse. Thank you.

Safelex film is also used in laminated window glass for commercial construction. Those are one lead time projects. Can you see the bottom yet in the US commercial construction backlog? And can some of that production be pivoted to auto? Sure.

In other assets that make the auto in the architectural windows are flexible, so they very much can swing between auto and building construction. I would note that the vast majority of our business in laminated architectural glasses actually in Europe , not here. So that it sort of slow down in this Europe construction market that's occurred for quite some time.

sort of is embedded in our forecast. We're at lower levels in that part of the industry. There really just isn't that much laminate glass near us because it's really isolated commercial here, where the regulations drive a lot more laminate glass to both commercial and residential in Europe .

So we're at lower levels in that part of the industry. There really just isn't that much laminate glass near us because it's really isolated commercial here where the regulations drive a lot more laminate glass both commercial and residential in Europe .

So that's embedded in there. That excess capacity very much will just be redeployed to auto recovery as we see it.

And then eventually your rights long lead and then the housing market will improve over time minutes honestly held up reasonably Well, it's not off that much Okay, and then what's the delay in announcing the location for the second US Method analysis plan are you pushing that out because of the delay in the Kingsport site?

Hey, John , there's no delay. We had always anticipated that we would do it in the first half of the year. And the expectation is that we'll make the announcement in the 2nd quarter here.

Okay, thank you. Okay, that's our last question. Thanks again everyone for joining us. We appreciate your time and I hope you have a great day.

That can be used to stay cool. Thank you for your participation. You may now have discussed.