Q2 2023 Eastman Chemical Co Earnings Call

While demand is the primary level I don't think is changing that much it's not getting worse in our perspective and I havent heard anyone else suggests that.

We are expecting that there is a lot more destocking that continues to go on in some end markets, which has really been the impact to our outlook in the back half of the year. So some areas whether its this year or next year. For example, automotive we have solid growth in this quarter, we expect that to continue to be solid through the back half of the year.

And there is so much pent up demand when you think about 'twenty four I would expect it to continue to be a tailwind next year relative to this year.

So that market aviation same story in very good shape.

You have a lot of sort of stable in markets, where demand has been off and that sort of three.

345% range when you look at all the fab.

Fast moving consumer goods companies out there fully recognizing that theyre holding price.

And being very disciplined to expand their margins that way with the raw material tailwind.

And accepting that they probably wouldn't gain much volume if they reduce price so disciplined.

We're maintaining frankly in our specialties.

But in addition that they're managing cash too and so we saw an.

An additional sort of 8% to 12% destocking on top of that demand in the fourth quarter first quarter, but Fortunately as we go into the second quarter lessening of that Destocking and expect much less destocking in those kind of stable markets like packaging personal care water treatment.

So that feels like it's moving in the right direction as we go to the second half and of course that would continue also into 2004 when.

When you look at.

The.

The consumer discretionary markets actually would take two other stable markets just to deal with them. So theres a couple that also took.

Took some sort of extreme negatives.

In additional Destocking in Q2, which was packaging and medical and the advanced materials segment.

And that they were carrying a bunch of safety stock from last year.

Demand wasn't improving as expected into.

They really started destocking in the second quarter, but they also seem to address their issues predominantly in the second quarter. So thats also expected to get a bit better as we go into the back half of the year.

Is that destocking reduces through the third quarter, and certainly seems to run its course and that by the fourth so again improvement relative to next year, especially when you think about all of these markets had a certain amount of destocking.

That won't repeat in 'twenty four that's a tailwind.

So the two bigger markets that drive a huge amount of value for us on a profitability point of view like automotive that has the most demand impact is sort of in the consumer discretionary areas as well like durables and building construction.

When you look at the durable market. That's the one that has gone through the most extensive deep.

Destocking.

Of any market and it really goes all the way back to last May.

Last year, when the retailers sort of got to X amount of inventory they needed.

Because they were buying everything they could think of to because of supply chain crisis and then they started destocking over 14 months ago that bullet finally hit us in the fourth quarter of last year really knocked us down about 40% when the underlying market was only down 10% to 15. So a lot of Destocking got even worse, 10% worse into the first quarter.

And then Fortunately, we saw that Destocking start to abate in the second quarter, we got 22% better than the second quarter versus the first quarter. So we saw momentum there.

Can you just don't see in the results because of the medical and packaging Destocking that occurred so that Destocking will continue to lessen as we go into the back half of the year and.

That would be another tailwind.

As you go into it and then of course building construction I would say is one that's been doing some destocking. This year demand is down and we expect that to be sort of flat to the first first half.

Because that market still has more action taken and there is also maybe some more hope with first homebuilder. So there is a spectrum of things going on.

When you look at it but it's each of them sort of add up to less destocking, but it's not as much as we had hoped for.

In April and that's really the predominance of how our volume forecast came down which is the entirety of our earnings a reduction when you combine that with the need to take inventory actions.

For this lower demand outlook.

To make sure we hit the $1 4 billion.

Cash so all of those then feed into a year next year, that's going to look better. When you don't have all this destocking going on which were assuming for 'twenty for you.

You have some normal seasonality coming back into the demand outlook.

For next year, that's going to help improve things and you've got the recovery of all of this volume or most.

And it's sort of down markets are our highest value markets right. So it's been a huge mix hit to us this year.

And as we've shown in past recessions.

When the mix comes back.

If there is a little bit of restocking the high value of these markets drops to the bottom line pretty significantly, especially with the cost we've taken out of our fixed cost structure. So it all comes together, which is building momentum in the second half to having a much better year in 2024.

Okay. Thanks, if I could just add.

So very quickly then so your volumes were down 15% in the first half what's your baked in assumption on the second half all of those things put together.

You're saying what is there a specific volume forecast, we've got it as a combined company for the second half relative to the first half.

Is that what your question is.

Yes are you assuming down 15% for the majority of that 10% top line I'm, just trying to get a kind of quantum.

Quantum of what Youre considering.

So as we as we look at it I think it's.

Altogether the volumes in the back half of the year are going to be.

A bit less in the first half of the year, but I don't think were going to provide a quantitative number to it.

It's basically just a little bit down.

When you put it all together the real headwinds in the back half of the year as the from a sequential point of view.

First half second half the entirety of our earnings decline as the inventory management.

Alright, so that's $75 million sort of.

Of additional headwind.

Sort of aligns with sort of where our earnings outlook has now moved so volumes are relatively stable. When you put all the ups and downs right. So some down in AFP some up in AAM stability in fibers and Ci.

It's sort of flat volume number from a sequential point of view, but Josh I would also say the mix should be more favorable in park as outlined with our durables markets recovering in the back half.

And if I can just add one more point, which is third quarter year over year, the volume mix decline would be less than what you see in the first half, but still meaningful when you get to the fourth quarter again on a year over year basis, the comp is a little bit different.

And so you get to a point where that decline in volume mix is even less still than it was in the first half of the year.

Okay understood. Thank you.

Our next question comes from Vincent Andrews with Morgan Stanley Nobody knows that.

Thank you and good morning.

In advanced materials and AFP when you talk to your customers about whats going on volumetric Lee.

Sure.

What are they indicating in terms of.

The desire on a go forward basis, where they want to have inventories and where things might get back to you and I guess, what I'm trying to understand is whether what's going on right. Now is just sort of a structural reset in terms of how they're going to manage their own business.

Versus something that maybe is just temporary that snaps back. It's just it's been going on for a long time, so it's starting to feel like.

And whether it's interest rates or whatever else that's happened, it's starting to feel like.

The entire supply chain is doing is doing a reset so I'm just curious what your customers are telling you in regards to their sort of medium to long term intentions in terms of holding inventory.

That's a great question, Vince and I mean, I'll try and keep it simple since my last answer was rather long but.

It's very different by end market on what's going on on the stability of underlying demand and then what they're trying to do on Destocking right. So a lot of these stable markets.

You know, it's more fine tuning.

Everyone built safety stock last year through 'twenty, one and 'twenty, two and they're trying to generate cash and adjust those inventory levels to different perspectives on end markets. So if youre in the personal care World Medical World. You know these markets are stable at the year and they might be down a little bit, but theyre very stable. So.

Destocking is clearly the entirety of what's going on there.

And many of those sort of end markets.

When you get to some of these other markets.

Where the supply chain is incredibly long like durables.

We're making things that go to China that can make the products that come back to Europe or the U S.

Really understand just how much inventory is out there through that entire chain is difficult for everyone. In these markets and exactly where end market demand is on these more discretionary markets I think is a little bit more difficult to judge.

But what I would say we've seen is a couple of cycles right. So there's a lot of destocking in the fourth quarter demand was really low in January got a bit better through March.

And then there was a realization that the banking crisis people got nervous about what's going on in the broader economy and so they went into a really low level of demand in April which was probably the low point for.

For the year.

And then started to do a little bit less destocking.

Or a lot less destocking in durables through the through the second quarter.

So as we get into the back half of this year.

I think what happened with customers in the in the June timeframe as everyone. Assuming the back half was going to be a bit better and our downstream customers across most markets, especially maybe the more sensitive ones that things would stabilize destocking. After 14 months to your point would have played its course.

Back in June after 12 months.

And they realize they all have that building their plants, they sort of said thats not going to happen.

Demand is going to be flat, which is all of our collective assumption now in everyone's in Destocking mode.

To that assumption relative to things getting better, but it's not because the markets are getting worst Vincent it's just.

Date assume things will get a little bit better, they're not and they're sort of correcting for that and it's important that it's a lack of expected growth as opposed to I think things are getting worse I don't see anyone saying things are getting worse at the at the primary demand levels does that makes sense.

Yes, thanks, so much.

Our next question comes from Frank Mitsch with Fermium Research Your line is open.

Hey, good morning.

Much of the discussion regarding inventory management, and so forth I'm just curious.

Obviously, the Q hasnt come out yet so we don't know where the second quarter inventory levels are but if can you give us an idea of where they are relative to the $1 94 that was in the first quarter.

And what are your expectations as to when you go through these actions how for how how how much further down will you be drawing your own inventories.

Good morning, Frank its Willy yes, so as we think about inventory levels I'll call. It from.

From Q1 to Q2 inventories are about flat.

As we think about.

The level of the supply chains and the demands than that Mark has just outlined we have about $300 million that we would expect inventory to decline in the back half of the year.

It is also essential to getting us to generating roughly 100 million from working capital on a full year basis, and I'm confident that our business teams and supply chain that we have a plan in place that will have already activated to execute and deliver that cash flow.

Terrific. Thank you and.

Mark I was wondering if you could talk to the raw material benefits that.

That youre seeing in your specialty businesses.

Any way you can provide some order of magnitude.

In terms of.

What sort of benefits are you seeing and what your outlook is is there.

Thank you, yes, so I think advanced materials, we're certainly seeing some pretty meaningful raw material benefits Frank.

If you remember last year, we had a tremendous spike upward in <unk> prices that created a pretty significant headwind for the.

Interlayer as part of that business those prices have now collapsed and dropped the price pretty significantly versus last year and thats translated into a tailwind for us to recover our margins there.

<unk> has not been as much of a tailwind those prices have been holding up.

Relative to last year, there's been a bunch of outages in that industry, new plants, having trouble starting up alternative fuel value all those typical explanations with PX, so not as much of a tailwind there, but we're still well over $100 million of spread tailwind in that segment for the year.

And I think that is obviously, helping with some of the demand challenges in building us into a very good margin position as we go into next year when mix comes back and how that flows through how that those margins will flow through to the bottom line.

In our fixed cost leverage.

In AFP again, we've got good raw material tailwind in that business as well.

But.

The spread improvement is not as significant because we really have a lot of cost pass through contracts, especially in the means business. So we had very stable margins last year that means theyre also going to be stable. This year by the nature of those contracts.

But those spreads are also coming in relatively good when you think about ammonia methanol.

And some of the olefin related.

Propane ethane type products going into specialty so overall spreads are better there as well.

On a full year basis.

Helping this year and we will of course build momentum as volume comes back.

With better margin as we go into next year.

Got you. Thanks, so much.

We now turn to Aleksey <unk> with <unk>. Your line is now open.

Thanks, and good morning, everyone.

You discussed slower conversion soft Mou used two definitive agreements.

Frans could you just elaborate on that.

Is it just in France or is it related to your.

Second plant in the U S as well and is this really related to demand uncertainty where price volatility in the plastics markets.

What's happening there.

I just wanted to you broke up a little bit Alexia I, just want to make sure I understood. The question Youre, asking whats happening with the pace of contracting in France, given the current market conditions was other question.

Yes, it was apologies you're talking about Mou conversions to definitive agreements could you just have to elaborate on what's going on there.

Yes, sure so first of all.

The commitment and desire to get recycled content and products remains very strong. So when you look at the specialty businesses, where we're in right now from our Kingsport plant.

The demand commitment, which is global not just in North America, but across the world for products and durables cosmetics packaging.

Recycled content remains very strong we've got 70% of our potential output.

Where customers are very.

Committed as you saw in the prepared remarks, when it comes to these PT or textile contracts that are the long term.

Sort of.

Take or pay kind of structures for those markets like the Pepsi contract.

We are having great engagement good discussions with number of companies about those contracts like Pepsi. It takes a long time to negotiate these are very complicated contracts.

In the current market conditions, I would say are sort of slowing those discussions down a little bit. So if youre looking at the PT market, whether it's a V.

Pet or our pet those market prices have come off in a pretty significant way.

Which is purely just the story of everything else in the current macro right demand is off in beverages.

People are downscaling sort of cheaper water bottles that have less material a lot of that our pet also goes into carpet and textiles, where demand is down 23%. So that's just a temporary thing the key thing to keep in mind in these contracts is.

We're targeting applications within these brands were mechanical recycling doesn't really work.

So if they want to have recycled content in those applications, they're going to have to.

Used chemical recycling, because the performance requirements and a variety of different technical aspects.

The mechanical is just not going to actually work, but I'm not going to get into details of that because I think thats a competitive advantage for us given our deep Paul coster expertise relative to other companies out there.

But thats definitely a key part of.

How we're going to win the second part is the degradation of polymer is already becoming clear in some markets that you can't mechanically get to 100% recycled content. So while.

<unk> requirements may be only 25% in 2025, a lot of brands have set targets for some key applications to be 100% recycled content and to maintain quality.

They're not going to be able to do that with mechanical so we feel very confident that these contracts will get resolved and we're going to get them in place.

The engagement is high and the regulatory requirements.

Especially in Europe .

I was going to require people to have recycled content and you look at the market situation. There right now only about 12, 5%.

PTU sort of recycled mechanical industry does not have the ability to double that capacity between now and 2025 when that number needs to be 25% recycled content or you can't put the.

Packages on the shelf.

So we feel like we're in a good position and working really productively with our customers and we are aiming to have those contracts done by end of the year.

Thanks Mark.

Our next question comes from Mike Sison with Wells Fargo. Your line is open.

Hey, good morning, guys.

I was thinking about that.

<unk> is a little bit it feels like this year, obviously, maybe hopefully trough adjusted EBIT.

<unk> had a couple of years ago.

Adjusted EBIT for the segment.

Maybe closer to $700 million do you still think that's the longer term upside and how do you bridge the gap between the two it's just hard to get there from these levels.

Sure, Mike and yes, we still think thats.

Destination for this business, obviously, that's been a pretty volatile time over the last few years from the pandemic to supply chain crisis to a recession.

As I said.

A bit earlier, the extremity of what's happened in the switch from a COVID-19 live to an experience is live and the impact of inflation.

Inflation interest costs and how people can afford to spend on goods. When they are just trying to afford to everyday life and maximize their experiences at very high prices when it comes to hotels and everything else.

<unk> created a short term constraint and how people can afford goods and <unk>.

Consumer durables as an example.

As one of the places that is most discretionary, especially after they bought a lot during COVID-19. So the manager way below anything normal in consumer Durables and then you've got this huge amount of destocking on top of it on a very high value mixed product.

So as that market stabilizes, you'll see some recovery coming in the back half of the year, especially if you back out the inventory.

Inventory utilization headwinds.

We'll build good momentum into next year from a underlying market point of view.

And then you add on top of that.

Recycle content, allowing us to add additional incremental value.

And substantial new volume.

From.

Those applications as we said just getting started to $75 million adder to next year in EPS.

For the advanced materials segment.

So that obviously is going to be significantly helpful.

Fixed cost leverage in this business as we've done this demonstrate in the last 10 years is significant right.

World as always.

<unk> grown double digits for us on the underlying markets are typically going 3% because we win so many applications because of better value proposition, just because of product performance and product safety.

And now you are adding on recycled content to further accelerate that curve. The problem is in a market like this.

Theres not a lot of new product launches right, but we'll continue to win new business. Even now that's going to help volume in the back half of the year on top of just waiting for less Destocking. We've won a lot of applications.

But theyre really ramp up next year, when things stabilize and they start launching new products. So all of that sort of brings and better value from that side and then of course last.

The last couple of years.

Inflation has been really high we've been trying to keep up with it but now we're finally recovering our margins in this space. So you've got better margins on top of this volume recovery to sort of lever you to better earnings. So as you go through 'twenty four 'twenty five driving towards that 700 is very much what we expected to do.

Got it and just a quick follow up for just kind of overall volume growth and 24.

Long way from here, but.

When you look at your customer inventory do you think they will need to restock and if that's the case.

When do you think a restocking event would occur and if not is it possibly just sort of plug along low single digit volume growth in 2000 and fortune 526.

And maybe they don't need to replenish.

Well first of all I think.

What happened from April to now the whole industry from US all the way down to retailers have gone to group think thats going to be bad for the rest of the year and everyone's acting under that assumption.

Pulling inventory down managing of that context, but theres a limit to.

How much destocking can occur at some point warehouses go empty right and in some of these markets, especially like durables its been emptied out for a long time, where automotive is theres a huge amount of pent up demand because we're talking about demand being better this year, but it's from a really bad level last year right. So there's still plenty of pent up demand, there and theres going to be plenty plenty.

A pent up demand and building construction.

With the dynamics of what's going on this year constraining, both demand and production of homes.

There's a lot of upside across the whole corporation. When you think about it from both a demand point of view.

And you've got to remember these destocking levels are huge right. So destocking is two or three times more than the underlying demand is that it goes away.

Thats all volume recovery at some point, even if the underlying market demand doesn't improve.

And then to your question around inventory.

I think it's with.

With the actions that we're taking when everyone else is taking you can see people driving inventories were very low levels, it's more likely than not that theyre going to go below what they need.

An improving demand environment.

And so there'll be some amount of restocking our back half just to be clear has no restocking assumed in the guide that we gave you.

So if that happens that's upside.

But if you look at 'twenty, four and say Destocking as you know got to run its course eventually.

So that you don't have that as a headwind for next year and then some just a little bit of restocking just to get to levels to serve that demand I think you can get a much better picture of.

Volume next year than this year.

Thank you.

Our next question comes from David Begleiter with Deutsche Bank.

<unk> is open.

Thank you good morning, Hey, Marc Thanks for the update in Kingsport.

On the project to have any forecast for estimated losses. This year as you ramp up and even updated cost of the Kingsport project.

<unk>.

Thanks, David.

First I'll just highlight that the operating costs are going to be approximately neutral on a year over year basis. If you think about the preproduction that we're incurring this year.

As well as the startup expenses.

And also.

As we are using our bridge technology with glycolysis to seed the market that's at a higher cost to bridge. So on a year over year basis. The way I think about this as revenue growth is actually accretive to EBITDA and as we outlined to within.

Our guidance on the $75 million of EBITDA on a year over year basis.

Roughly $50 million of that will be in advanced materials, and the absence of the preproduction and startup costs in our corporate other so as I see it that's roughly where we're getting the $75 million.

Also if I think about our Capex. This year, we started the year at.

Roughly 7% to 800 million for the project, we took that up to 800.

You can think about the combination of that and how we are managing.

Our overall capex.

The increases into the project this year.

For the Kingsport project.

I apologize I meant to.

What was the updated capital cost of the project itself not total company Capex.

Sure.

Yes, I don't think at this type of work and then the capital cost for the Kingsport project. So.

We're not going to we're not going to provide that at this time David.

Understood.

Mark just on on fiber and how do the contracts for next year have price increases embedded in them.

They don't have price increases embedded in them.

Next year versus this year, David if that's your question, obviously prices have gone up considerably from last year, but the idea of these contracts is to improve our.

Our margins and profitability to a level, where we can continue to reinvest in this business to be reliable supplier to our customers and we've achieved that type of pricing.

With our customers in these contracts we have also put.

Formulas in them to adjust for changes in energy costs to give stability for us and for for our customers.

<unk>.

Which we have not had in the past so we feel great about.

What we've achieved in improving or sort of ability to support our customers and our current profitability.

And these contracts.

Now in place we're about.

75% is fully contracted now.

Through next 20 for many of those are multiyear contracts.

By the end of the year, we will have that number up to 90%.

So.

Great improvement this business from its.

Performance last year, and we're very focused on stabilizing it.

On the tow side too.

To provide a very attractive cash flow to support our growth investments across the company I would also note. The textile business continues to do great on top of that.

Even in a 20% down market that we have this year in textiles.

We're growing that business. So we are winning a lot of market share versus other materials, because the value proposition of <unk>.

Very compelling its a great beginning of life story being based on bio content of recycled plastic and importantly in a bigger issue going forward now is micro plastics, which are the fibers breaking up and getting into the ocean.

And our fibers are fully certified to biodegrade when they do end up in the environment.

And so thats a very significant.

Positive as the world is becoming more concerned about that as well. So it's a it's just a great business.

Thank you very much.

Our next question comes from John Roberts with Credit Suisse. Your line is open.

Okay.

Thank you.

The second <unk> project are you growing more slowly on that.

We're not going more slowly.

In any significant way John I mean, right now what we're doing is.

Really focusing yet we haven't made a site announcement. So you could have asked that question too.

Because we are really looking at the incentives across several states. We've got three sites that are all very attractive.

The engineering work is continuing.

For whichever site we pick.

And.

And so we're just trying to get those incentives in place we feel great about our partnership with Pepsi is <unk>.

Significant baseload customer on that project.

And we are sort of moving forward with that project.

Two to make sure we can serve their needs.

<unk>.

Put that together with the French project in Kingsport to get that $450 million EBITDA.

Value for our owners, which is a great return on the capital required.

We required across those three projects.

And then on the fibers business, assuming raw materials or sequentially stable is all of the earnings step down in the third quarter, just to remind us of the frequency of the reset on the price versus cost.

The.

The contracts are quarterly so a little bit of a step down.

From Q2 to Q3 is just the prices adjusting for lower energy environment.

Thank you.

Our next question comes from Kevin Mccarthy with vertical research partners. Your line is open.

Yes, good morning.

Mark with regard to advanced materials do you have a sense today as to whether your third quarter earnings are likely to be flat up or down sequentially versus the $99 million that you posted in the second quarter and the reason I ask is.

Reading the prepared remarks last night it looks like you have a $40 million inventory related to hit in the third quarter.

But you also say the second half should be better than the first half. So it seems like theres. Some countervailing trends there so any any comments on the seasonal cadence would be helpful.

So Kevin I think we highlighted earlier that most of the $40 million headwind on the utilization rate will be in Q3. So as a result, I would expect it to be similar to slightly down sequentially in advanced materials.

Slightly down versus <unk> Willi.

Correct.

Yes of course, there will be in the lack of that sequentially from Q3 to Q4.

Where that improving in volume and spread.

Will pop back up so you cant think of normal seasonality around the back half of the year really for the for either AAM or AFP because most of the inventory reduction actions are.

Happening in Q3 more that much more so than Q4.

But the volume momentum in margin improvement is continuing through <unk> into <unk> in the <unk> not just because of our inventory actions, but because our customers are doing the same thing right. They're also taking inventory down more in Q3.

Oddly less in Q4, when you think about it.

Sort of odd year, we're living in right now.

Yes, it is it isn't it.

Thank you for that that's very helpful and secondly, I want to.

Asked about <unk>.

I think you referenced a heat transfer fluid projects that caused $15 million to be pulled into the second quarter can you just elaborate on what youre doing there and how.

How that is translating to two.

So a meaningful earnings swing.

Yes sure so.

The fluids business is a bit sort of chunky in how volume shows up right. Because you have these very large projects and so.

Some point they can complete the project and at the end of the completion they need a charge that plant with heat transfer fluids, and then start up the plant.

And in this case this was an extremely large LNG project.

That had been under construction for several years and their completion actually happened a little bit sooner than they expected and move forward with wanting to charge that system.

And so we shipped that volume we thought it was going to be in the third quarter turned out to be in the second quarter.

But this overall business is a great business and something that I'd say that we've really accomplished a lot.

In this business is diversifying our market exposure to different end markets. So historically, it's been very driven by the polyester industry.

And a few other sort of chemical facilities that use a lot of heat transfer fluid.

But we've seen a huge growth in LNG as you as you know well with the geopolitical dynamics going on right now with Ukraine in Europe .

And Theres a lot of heat transfer fluid in those plants too so we're diversifying.

Out of China into other applications like this project that creates a lot of value for this business.

And they're very high value projects, so when they when they do show up they dropped a lot of earnings to the bottom line and so it just happened to be in Q2, which.

That means as you go sequentially from Q2 to Q3, you get a $30 million swing in earnings.

Okay perfect. Thank you so much.

Our next question comes from Matthew <unk> with Bank of America. Your line is open.

Good morning, everyone.

To talk a little bit about textiles.

What's the opportunity for EBIT, if we think about next year and growth I mean I'm.

I'm, just thinking given the margin recovery in cigarette filter tow.

Does it even make sense to rotate tonnage from filters to fibers and is still growing into your excess capacity or are you now transitioning filter capacity to textiles.

So first of all <unk> is a great business and the margins are very good.

Obviously recent improvements until margins are better.

But the reality is while we're really excited about the improvement in the tow business.

It is in a stable business, that's still going to decline in volume about 1% a year, it's not a growth business.

So we continue to be very focused on serving our customers.

<unk>.

These heat not burn products are certainly growing it at 15%.

Any more filter tow, but thats just offsetting some underlying natural decline of cigarettes to get you to that sort of net 1% decline so.

We're not conflicted capacity wise between this and growing our <unk> business, but we are getting to the point where.

We are going to start using up the available capacity and we're looking at capacity expansion options to.

Continuing to support the growth rate because our goal here with cellulosic, so as not to optimize the stream as it turned it into a growth story right. Our goal here is to win in a variety of applications. So like polyester being a very high growth.

Scream for environmental reasons, and providing sustainable products our strategy as we laid out at innovation day is to get $200 million of EBITDA growth.

A stream on top of the tow business right. So when we talk to you in 2021, we werent, including improvements in tow right. So it was a new base and we're still aiming to grow $200 million EBITDA on top of that new base.

That's a very significant change from where we were in 2021. So we've got growth in Io, which we're really excited about as I explained the value proposition a moment ago, we have great growth prospects and some early wins in <unk>. This is our filmed cellular.

Cellulosic that can replace polystyrene and packaging clearly pilot polystyrene is being banned in many places.

For packaging, whether it's food.

Food packaging.

And so our protein trays for meat or the clamshell et cetera.

And we validated that our venture product will biodegrade, both in not just industrial but in residential composting, which is sort of the equivalent of landfill. So it really is a true end of life solution.

So customers are super interested in that huge market lots of volume growth opportunity there.

Then you've got micro beads, which is a super high value opportunity in cosmetics.

We've got success in recycled content, the ophthalmic business with how we're recycling.

Eyewear back into the product so there's a lot of growth going on across the Cellulosic stream and so we're going to be looking at incremental capacity expansion to support all these growth opportunities as we move forward.

Fortunately, we have a very large installed asset base. So it's not like building methanol plants, we can really leverage the capability, we have here, but there'll still be capacity, we're adding for <unk> and all these other.

Products between flake and and and fiber.

Matt are you did.

Our next question comes from Patrick Cunningham with Citigroup. Your line is open.

Hi, Good morning, Thanks for taking my question I know you have no expectation for any sort of restocking embedded in the full year guide.

Which end markets do you think are potentially that set up for restocking whether it be in <unk> or into 2024, and how should we think about this in the context of upside to earnings from the specialty businesses.

Well I think that it.

It doesn't matter what end market. We're in right now there is amount theres a lot of destocking going on as everyone focuses on generating cash.

And so I think there is probably opportunities for restocking.

Pretty much across the markets.

Building construction might be the one exception.

There's a lot of destocking still to be done from what we've seen from our customers in that space.

But everywhere else I think theres. Some degree and then just gets into proportions right. So.

Where the Destocking numbers are bigger.

Like consumer durables and the potential for restocking is higher.

And more stable markets like personal care and in water treatment and medical I think the restocking opportunities are still there but.

Because theyre just not doing as much.

As far as earnings opportunity for next year relative to this year, we're not going to sort of get into that yet it's a little early.

Yes.

Yes.

And whats driving strength in acetic anhydride and I think you referenced overall resilience in asset yields I would have expected some weakness given declining spreads than some of your earnings.

Market commentary.

So you can hydrate goes more into food pharma feed type applications that where the demand is actually a really stable. So it is not.

Let's see the gas it goes into.

Polyester where demands.

Down a lot in textiles van goes into coatings and a bunch of other more economically sensitive applications. When you think about different acetyl derivatives. So you can hydride just as much more stable end markets.

A large customers that place a lot of value on security of supply of that product for those kind of applications.

So they tend to be more focused on supplies and just what's the best price. So that just allows our business to be.

Relatively stable I mean, we're still have some price pressure there.

But it's not nearly as much as some of these other sort of derivatives or in olefins, which is the bigger part of our portfolio, where the price pressure and spread compression occurring in Ci is really more of an olefin and plasticizers story.

Very helpful. Thank you.

As a reminder, if you'd like to ask any questions. Please press star one on your telephone keypad now.

Now turning to Laurence Alexander with Jefferies. Your line is open.

Hi, just two quick ones as you think about.

The dynamics around inventories and fixed cost absorption should incremental margins next year will be above 60% or so.

Do you think some of the inventory.

Reduction efforts Youre doing now will spill over into Q1.

All access is really to your point I think we've demonstrated through various environments. One that we can deliver strong cash flow and thats what were focused on doing now how do we think about the fixed cost utilization.

I don't expect any spillovers into 2020 for the actions that we're taking will be complete this year.

So on the Incrementals I think you've seen the decrementals.

We're talking about Incrementals will be equally positive and I would add on to that to your point to get to the levels that you were talking about that includes the mix upgrade and the high value products as we think about our advanced materials.

And the more specialty nature of their.

And secondly, kind of now that your peers are facing kind of more pressure on <unk> from the credit cycle.

You always seem to have a suite Boston M&A around finding people who are under investing in the engineering.

Yeah.

How is your M&A pipeline changed or can you characterize kind of how actively you're looking at opportunities.

Yes, we're more focused on the bolt on pipeline, we did a great bolt on the earlier this year and our performance films business.

Right now focused on our organic growth strategy with our investment in the three circular platforms. We are looking at our pipeline is mostly mostly focused in smaller bolt ons and advanced materials and additives and functional products.

And we're going to be disciplined with that strategy and stay focused on executing it and executing it well.

The recent acquisition we did of.

Our manufacturing site in China is a great example performance films business has been.

Performing incredibly well in this.

<unk> auto market last year in this auto market. This year, it's very high margin business and that acquisition allows us to be domestically based on how we support customers in China, which is definitely where the Chinese government wants to go as things made in China and those are great tuck in acquisitions very highly accretive those are kind of things we're focused on.

Now because our real priority is growing our dividend and creating this sort of organic driven growth story around being a leader in the circular economy, both polyester and cellulosic.

And then just lastly can you characterize or give a little bit more detail on what you think is going on with the agriculture.

<unk>.

Inventories.

I guess.

The timing and the severity of the adjustment.

Due to call it a lot of the industry along with flat footed. So just curious about what youre hearing in terms of when people think it will end.

Because I think you have a comment on that.

Asks about is accelerating.

Smith.

Yeah, So I wouldn't say, it's accelerating the Christmas necessarily so, but what happened I think is pretty well discussed out there two things really last year.

With all that Ukraine events around ammonia and other uncertainties around supply chain.

Farmers around the world were stocking up on safety stock in their warehouses that retailers are stocking up on safety stock their distributors are stocking up on safety stock.

All the way back to the big players that make the products like Syngenta archetype of et cetera.

And so demand was really good.

That was true through the first quarter and.

Is this change started looking at.

Season, it wasn't quite need quite as much.

Product because of.

The dry weather in not needing as much.

Feeling like supply chains, we're now safe to rely on.

Sort of in the middle of Q2 kicked in Signet.

Can't Destocking downstream of us. So we started to feel some of that destocking from our direct customers in the second quarter and it ramped up to full destocking as we go into the third quarter and to some degree in the fourth quarter. There is lot of debate going on I'd say about just when does that destocking in and when they have to start ramping.

Up on production to meet the growing season next year, it's important to realize that.

The final in demand of.

For the farmers as good this year and expect it to be good next year. So this really is a whole inventory management cycle. We're in.

And at some point they will have to cut back kicked back into gear to make sure they have enough supply.

For for next year, whether thats in the fourth quarter or the beginning of the first quarter.

It has to happen sometime around it or they won't have enough inventory.

For the next growing season.

Our next question comes from Iron Viswanathan with RBC capital markets. Your line is open.

Great. Thanks for taking my question.

I guess I just wanted to go to am and AFP. There are some markets, which you are seeing which we're seeing some strengthen.

Notably, maybe the aerospace side in aviation side.

Is that what youre seeing as well and.

Some of those stronger markets, you would expect that to persist through the second half how would you comment on some of your stronger markets. Thanks.

So when it comes to aviation our view is the market was.

That's really improved through the first half of the year and will stay.

Strong in the back half of the year I wouldn't say, it's going to grow relative to the first half of the year.

Because it's been pretty strong.

But it'll it'll stay that way that airlines are obviously very confident about their demands.

Going forward.

We will track with wherever their demand goes right now that's their viewpoint and were using their view to build our forecast.

And then just as a quick follow up.

Some other markets.

Our our notably on the weaker side.

Addressed.

Some of the Destocking, that's going on in Amiens in the AG side.

What are some of the other areas that.

Maybe turned out worse than you expected.

<unk> and <unk>.

You've addressed a couple on the call already but youre going to reiterate some of the weaker areas.

Would those be.

Q2 point of view the end.

End market wise I would say.

From an end market growth point of view I don't think much has changed in our view across all of our end markets we haven't seen.

Different end markets.

Get worse or better auto strong obviously discretionary markets are under pressure.

Personal care water treatment those kind of markets are offering a 3% to 5%.

All of those downstream.

Customers of ours as you can see in the fast moving goods and everything else reporting that they are focusing on pricing.

Discipline and as a result, having a little bit less volume.

I don't think anything that's changed really it's been more of a it's all about inventory management as the entire story for some of the negative surprises like medical packaging and AG in the second quarter and.

Destocking dragging out into the back half of the year right. It's just think that the extremity of Covid and then the following stimulus and the supply chain crisis.

That's just led to a lot more inventory being.

Built throughout the world and I think any of us really understood.

And it's taking obviously a lot longer to pull it down, especially when the demand is soft to some degree in every market.

Okay. I believe that was our last question. So thank you very much for your interest and your spending for joining US. This morning, I hope everybody has a great day.

This concludes today's call. Thank you for joining you may now disconnect your lines.

Yeah.

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Okay.

Okay.