Q4 2023 Eastman Chemical Co Earnings Call

Alex Stewart: Good day everyone, and welcome to the fourth quarter of the year 2023 Eastman conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead.

Good day, everyone and welcome to the fourth quarter full year 2023, <unk> conference call.

Today's conference is being recorded.

School is being broadcast live on the Eastman website Www Eastman Dot com.

I will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead.

Gregory A. Riddle: Thank you, Alex and good morning, everyone and thanks for joining us.

Gregory A. Riddle: Thank you, Alex, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO, Willie McClain, Executive Vice President and CFO, and Jake Lareau, Manager, Investor Relations. Yesterday after market close, we posted our fourth quarter and full year 2023 financial results news release and SEC 8K filing. Our slides and the related prepared remarks are posted in the investor relations section of our website, www.eastman.com. Before we begin, I'll cover two items. First, during this presentation, you will hear forward-looking statements concerning our plans and expectations. However, actual events or results could differ materially.

Gregory A. Riddle: On the call with me today are Mark Costa Board Chair and CEO.

Gregory A. Riddle: Well, they Mclean executive Vice President and CFO, and Jake Laroe manager Investor Relations.

Gregory A. Riddle: Yesterday after market closed we posted our fourth quarter and full year 2023 financial results news release, and SEC 8-K filing.

Gregory A. Riddle: Our slides and the related prepared remarks in the Investor Relations section of our website Www dot he spent dot com.

Speaker Change: Before we begin I'll cover two items.

Speaker Change: First during this presentation you will hear forward looking statements concerning our plans and expectations actual events or results could differ materially.

Gregory A. Riddle: Certain factors related to future expectations are or will be detailed in our fourth quarter and full year 2023 financial results news release, during this call, in the preceding slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2022 and the Form 10-K to be filed for full year 2023. Second, earnings referenced in this presentation exclude certain non-core and unusual items.

Speaker Change: Factors related to future expectations are or will be detailed in our fourth quarter and full year 2023 financial results news release.

Speaker Change: During this call and the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission include.

Speaker Change: Including the Form 10-K filed for full year 2022.

And the Form 10-K to be filed for full year 2023.

Speaker Change: Second earnings referenced in this presentation exclude certain noncore and unusual items.

Gregory A. Riddle: Reconciliations to the Most Directly Comparable Gap Financial Measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the fourth quarter and full year 2023 financial results news release. I'd like to now turn the call over to Mark for some remarks. Before I jump into the Q&A, I wanted to take the opportunity to recognize the team that's been working on the methanolysis plant. There's a huge team out there that's been working tremendously since our last call in October to commission and start up this facility and get us to the point where we're introducing feedstock. And that's a really remarkable accomplishment when you look at this time frame. They've worked incredibly hard through the holidays, they've made a lot of personal sacrifices, and they've got us to this stage. And it's a real testament to their dedication and belief in the company and the excitement that everyone at this company has around building the circular economy. And it's also a really great example of the power of our Tennessee site.

Speaker Change: Conciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the fourth quarter and full year 2023 financial results news release.

Speaker Change: I'd like to now turn the call over to Mark for some remarks.

Mark J. Costa: Jump into the Q&A.

Mark J. Costa: Want to take the opportunity to.

Mark J. Costa: Recognize the team that's been working on the methanol plant.

Huge team out there that's been working tremendously since our last call in October to commission and start up the facility and get us to the point, where we're introducing feedstock.

Mark J. Costa: And Thats, a real remarkable accomplishment when you look over this timeframe.

Mark J. Costa: We've worked incredibly hard through the holidays.

Mark J. Costa: We've made a lot of personal sacrifice.

And they've got us to this stage and it's a real testament to their dedication and belief in the company and the excitement that everyone. At this company has around building the circular economy.

Mark J. Costa: It's also a great example of the power of our Tennessee site at scale and integration has really enabled this startup process goes as quickly.

Mark J. Costa: The scale and integration have really enabled this startup process to go this quickly and well because we have such a huge, vast set of resources and capabilities. It has really allowed us to swing a lot of those people from different parts of the plant into this startup process and make a significant difference. So I just wanted to express my thanks to all of the people who have been involved in this process. It's been a tremendous program and one that they really did make a lot of sacrifices, and we deeply appreciate it. With that, we'll open it up to Q&A. Thank you. As a reminder, if you'd like to ask a question, you can press star 5 by 1 on your telephone keypad. Please ensure you're unmuted locally when asking your question.

Mark J. Costa: Well.

Mark J. Costa: Because we have such a huge vast set of resources and capabilities.

Mark J. Costa: It was really allowed us to swing a lot of those people from different parts of the play it into the startup process to make a significant difference. So I just wanted to express my thanks to all of the people who are involved.

Mark J. Costa: And this process has been tremendous.

Mark J. Costa: Program.

Mark J. Costa: They really didn't make a lot of sacrifice and we deeply appreciate it with that we'll open it up to Q&A.

Speaker Change: Thank you.

Speaker Change: Wonder if you'd like to ask a question you can press star followed by one on your kind of thank you Pat.

Speaker Change: Please ensure your unmetered lately when asking your question.

Speaker Change: Our first question for today comes from Josh Spector of UBS Josh.

Josh Spector: Our first question for today comes from Josh Spector of UBS. Josh, your line is now open; please go ahead. Hi, good morning.

Josh Spector: Josh Your line is now open. Please go ahead.

Josh Spector: Yes.

Josh Spector: Yes, hi, good morning, I actually wanted to follow up on the methanol facility personnel and office facility.

Mark J. Costa: I actually wanted to follow up on the methanol facility first, the methanolysis facility. So you're near getting on-spec product out, but I was wondering if you could talk through kind of the milestones as you go through this year. So when do you get to the point where yields are as expected, you think you can get to full operational capacity and the cost structure, and therefore EBITDA becomes in line with your long-term expectations? It's a great question, one we're very focused on, and we are very excited to be at the stage we are at right now. As we said in our comments, we're at the point where we've been starting up the facility, completing all the commissioning, and introducing feedstock. And that will start to be processed in the front end of the plant. It takes a little bit of time to do that to get the system properly charged, and then it starts going through the plant.

Josh Spector: Youre near getting on spec product out there I was wondering if you could talk through kind of the milestones as we go through this year. So when do you get to the point, where you say yields are as expected do you think you can get to full operational capacity and the cost structure and therefore, the EBITDA becomes in line with your long term expectations.

Speaker Change: Yes, it's great question, we're very focused on and we are very excited to be at the stage were at right now.

Speaker Change: As we said in our comments, we're at the point, where we're been starting up the facility completed the commissioning introducing feedstock.

Speaker Change: And that will start.

Speaker Change: To be processed in the front end of the plan takes a little bit of time to do that to get the system properly charge and then it starts going through the plant.

Mark J. Costa: So we feel, you know, that we're in good shape to be, you know, on spec here soon with material and recognizing revenue and getting that process going and serving our customers who are very eager to get product from us. And when I say soon, I mean sort of days or weeks from where we sit right now. So we feel like we're on track with starting up the plant and serving customer demand relative to that $75 million. Now, as you talk about the plant side of this, you don't go from plants producing on-spec material to full ramp upgrades overnight. It takes, you know, a few months to line out the facility, optimize its operations, and make sure that everything's working properly as you scale it up.

Speaker Change: So we feel that we're in good shape to be.

Speaker Change: On on spec here soon with material and recognizing revenue and getting that process going and serving our customers who are very eager to get product from us.

Speaker Change: And when I say soon I mean sort of days or weeks.

Speaker Change: Where we sit right now so we feel like we're on track.

Speaker Change: With starting up the plant and serving customer demand relative to that $75 million now as you as you talk about the plant side of this.

Speaker Change: You don't go from the plant is producing on spec material the full ramp up rates overnight. It takes.

Speaker Change: Months to line out the facility optimize its operations.

Speaker Change: And make sure that everything is working properly as you scale it up.

Mark J. Costa: And so we'll be doing that and ramping up the production. But, you know, the way this plant works and the way we can get the recycled content out, we should be able to start getting revenue relatively soon. When it comes to the demand side of things, and how the cost structure will line out over time, right now, we're still in that pre-production phase, and the expenses are a bit higher than when you just are pulling the operating resources back to sort of steady state. So the front end of this, from a cost point of view, is a little loaded. As you would expect,

Speaker Change: And so we'll be doing that.

Speaker Change: Ramping up the production but.

Speaker Change: The way this plant works and the way we can get the recycled content now we should be able to start getting revenue relatively soon.

When it comes to the demand side of things.

Speaker Change: The cost structure will widen out over over time right now we're still in that preproduction phase as expenses are a bit higher than when you are pulling their operating resources back to sort of steady state.

Speaker Change: So front end of this from a cost point of view is a little loaded.

Speaker Change: As you would expect.

Mark J. Costa: The demand side, I'd say, is actually quite good. So what's different than most plants in this situation is we didn't start selling recycled content when the plant started. We started it over a year ago. We have a technology called glycolysis. It's a bridging technology where we can use our existing assets. You can use sort of clean, clear bottles, which is what you have to have with glycolysis to then make recycled content.

Speaker Change: The demand side I would say is actually quite good so it's different than most plants. In this situation is we didn't start selling recycled content. When the plant starts we started over a year ago, we have a technology called glycolysis, it's a bridging technology, where we can use our existing assets you can use sort of clean clear bottles, which is what you have to have.

Speaker Change: Glycolysis to then make recycled content. So long term, it's not a great strategy, because it's very high cost to buy those clean bottles.

Mark J. Costa: So long term, it's not a great strategy because it's a very high cost to buy those clean bottles, and it's not a very efficient process to use your existing assets. But what it did allow us to do is supply recycled content polymer to a number of brands. In fact, the brands that you can see on that slide in the presentation we provided have already been selling our recycled content from that technology in the marketplace. So we're not trying to, you know, ramp them up.

Speaker Change: It's not a very efficient process.

Speaker Change: And using your existing assets, but what it did allow us to do is supply recycled content polymer to a number of brands. In fact, the brands that you can see on that slide in the presentation. We provided have already been selling our recycled content from that technology into the marketplace.

Speaker Change: We're not trying to.

Speaker Change: Ramp them up they're already ready to go in the market and very anxious to get material from us to sort of accelerate volume built into this year. So that really helps us both know that we can get the price premiums we want to support their economics as well as we have a number of customers that are going to sort of buy the moment, we have product coming out of the plant.

Mark J. Costa: They're already, you know, ready to go in the market and very anxious to get material from us to sort of accelerate volume build into this year. So that really helps us both know that we can get the price premiums we want to support our economics, as well as we have a number of customers that are, you know, gonna sort of buy the moment we have product coming out of the plant. And then there are a bunch of other brands we've been working on that we just didn't have the capacity to serve last year that are also very interested in the product. And so we'll be qualifying them and ramping them up.

And then there are a bunch of other brands we've been working on that we just didn't have the capacity to serve last year that are also very interested in our products and so it will be qualifying them and ramping them up so what you have is.

Mark J. Costa: So what you have is a situation where the ramp up, you know, will start to help Q2 relative to Q1, but really sort of make a big difference in the second half relative to the first half, where you see this incremental EBITDA. The last point I would mention is on the cost side; normally, when you build a big specialty plant, you have a huge headwind in operating costs as you start up, and we certainly have operating costs for this plant, but they are really sort of offset by the pre-production expenses of last year and the higher cost of this glycolysis process I just mentioned, so the costs are relatively neutral. And so that helps the revenue flow pretty fast to EBITDA through that sort of year over year, sort of steady cost structure, if you will.

A situation where.

Speaker Change: The ramp up will start to help Q2 relative to Q1, but really sort of make a big difference in the second half relative to the first half of where you see this incremental EBITDA.

The last point I had mentioned is on the cost side normally when you build a big specialty plant do you have a huge headwind in operating costs as you start up and we certainly have operating costs of this plant, but they are really sort of offset by the preproduction expenses last year and the higher cost of this glycolysis process I just mentioned so the costs are relatively neutral.

And so that helps the revenue be flow pretty fast to EBITDA.

Speaker Change: Through that sort of year over year sort of steady cost structure, if you will.

Mark J. Costa: So those are sort of the key components of it. We're very focused on just keeping the process going right now. And as I said earlier, it's just a tremendous example of teamwork out there who are doing this through winter weather and freezing conditions, et cetera, to get this plant running. Thanks. Maybe just quickly, so as you go through all that, you made some comments that you wouldn't FID the next plant until this plant was done.

Speaker Change: So thats sort of the sort of key components of it we're very focused on just keeping the process going right now and as I said earlier, it's just a tremendous example of team work out there.

Speaker Change: Who are doing this through winter weather and freezing conditions et cetera to get this point running.

Speaker Change: Thanks, and maybe just quickly so as you go through all of that you made some comments that you wouldn't need the next plant until this plant is done I guess is that yes on spec product or is there at some point production yield or some other metric you're looking at to say, we're good designs fine.

Mark J. Costa: I guess, is that just a spec product, or is there at some point production yield or some other metric you're looking at to say, we're good, the design's fine, we're going to move ahead with that project? Because you seem pretty bullish about getting the customer commitments at a second plant soon. So I'm just wondering what's the limiting factor there. Thanks.

Speaker Change: We're going to move ahead with that project.

Speaker Change: I'm pretty bullish about getting the customer commitments that second plant ceiling. So I'm just wondering what's the limiting factor there.

Speaker Change: Yes, there are there are.

Mark J. Costa: Yeah, there are a couple of limiting factors. One, obviously, is that we want to see the Kingsport plant technology up and running. And as you said, we want to see that the yields and efficiency are what we expect them to be, the plants running operationally well. And as I said, it's in the next couple of months that we'll sort of get those insights and knowledge to feel comfortable about the quality of this plant. Because it's important to keep in mind that to minimize capital risk and construction risk, we're going to leverage and build the same plant, right, in France, in the second plant.

Speaker Change: A couple of limiting factors. One obviously is we want to see the Kingsport plant technology up and running and as you said, we want to see that the yields and efficiency are what we expect them to be the plant's running operationally well and as I said that's in the next couple of months that will sort of get those insights and knowledge to feel comfortable about the quality of this plant.

Speaker Change: Because it's important to keep in mind that to minimize capital risk and construction risk, we're going to leverage and build the St plant right in France in the second plant and there is obviously improvements we'll learn through this process that same scale same design.

Josh Spector: And there are obviously improvements we'll learn through this process, but same scale, same design. So, you know, really leveraging all the learning that we've gone through in this plant to do a better job than how we built the second and third plant. So that, I think, in the timeframe of what we're talking about right now from an FID point of view, the customer contracts are obviously the second component of making that decision, and the incentives for the project getting finalized are the third part. We feel good about all those, and we think, you know, again, in the same kind of timeframe in the next several months, we should be in a position to, you know, have FID.

Speaker Change: So that really leveraging all the learning that we've gone through this plan to do a better job in how we build the second and third plants.

Speaker Change: So that I think is.

Speaker Change: In the timeframe of what we're talking about right now from an <unk> point of view of the customer contracts are obviously, the second component of the of making that decision and the incentives for the project getting finalized.

Is the third part we feel good about all of those and we think.

Speaker Change: Again in the same kind of timeframe in the next several months, we should be in a position to have that.

Josh Spector: When construction starts is a little bit different than declaring FID. You know, we're still completing the engineering, and we have permitting to do on the environmental side and building permitting that, you know, is ongoing as we speak, so we're not talking about starting actual construction until as soon as probably late summer with the path that we're on right now. And that gives us all of that time to make sure we believe in how the plant's operating before you start turning dirt on the second and third plants. Got it, thank you.

Speaker Change: When construction starts is a little bit different than declaring.

Speaker Change: We're still completing the engineering, we have permitting to do on the environmental side and.

Speaker Change: And building a permanent that is ongoing.

Speaker Change: As we speak so we're not talking about starting actual construction.

Speaker Change: Until you know as soon as probably late summer with the path that we're on right now.

Speaker Change: And that gives us all of that time to make sure we believe.

And how the plants operating before you start turning dirt on the second and third place.

Speaker Change: Got it thank you.

Speaker Change: Thank you.

David I. Begleiter: Our next question comes from David Begleiter from Deutsche Bank. David, your line is now open. Please go ahead. Thank you. Good morning.

Our next question comes from David Begleiter from Deutsche Bank.

David I. Begleiter: David Your line is now open. Please go ahead.

David I. Begleiter: Thank you good morning.

Mark J. Costa: Mark, some of your customers and peers this earnings season have noticed some modest... Markets Under Long Demand. Are you seeing any of that in any of your geographies? Certainly, David, what I'd say is we are seeing stabilization. Absolutely. So our guidance is built on thinking that primary demand this year is going to be similar to last year in the sort of discretionary markets. In the stable markets, like personal care, water treatment, consumer packaging, etc., we would expect sort of modest growth from last year. Now, to be clear, last year's primary demand was low, so we're not predicting an improvement in any meaningful way from those sort of low levels we were at through last year.

David I. Begleiter: Mark some of your customers and peers. This earnings season have noticed some modest stabilization improvement in certain markets underlying demand.

Seeing any of that in any of your geographies or key markets.

David I. Begleiter: Certainly.

David I. Begleiter: David What I'd say is we are seeing stable stabilization absolutely. So our guidance is built on thinking that primary demand.

David I. Begleiter: This year is going to be similar to last year.

David I. Begleiter: In the sort of discretionary markets and in the stable markets like personal care water treatment.

David I. Begleiter: Similar packaging et cetera, we would expect sort of modest growth from last year now to be clear last year's demand primary demand was low we're not predicting it.

David I. Begleiter: Improvement in any meaningful way from those sort of low levels, we were at from from through last year.

Mark J. Costa: What I would say is, in the automotive industry, we actually are, you know, growing last year, and we think it's going to be more flattish this year. So that's sort of where we are on primary demand, as we sort of showed on the slide that we supplied to you guys. You know, the key driver for, you know, a pretty significant volume increase for us this year versus last year is really the sort of lack of de-stocking. When you think about... the sort of volume mixed impact of last year driving earnings down about $450 million. And, you know, what we said in October, I think is still true: you assume about a third of that is de-stocking. It's probably a bit more than that, but to play it safe, we'll call it a third. That's $150 million of, you know, a lack of a demand headwind from last year relative to this year. It's like an easy comp.

Speaker Change: What I would say is.

Speaker Change: In automotive we actually are was growing last year, and we think that's going to be more flattish. This year. So that's sort of where we are the primary demand as we sort of showed on the slide that we supplied to you guys.

Speaker Change: The key driver for pretty significant volume increase for us this year versus last year is really the sort of lack of destocking. When you think about.

Speaker Change: The sort of volume mix impact of last year driving earnings down about $450 million.

And what we said in October I think is still true do you assume about a third of that is destocking, it's probably a bit more than that but to play it safe we'll call. It a third that's $150 million of.

Speaker Change: A lack of demand headwind from last year relative to this year, it's like an easy comp and we can see the evidence of that playing out already in the fourth quarter in some markets.

Mark J. Costa: And we can see the evidence of that playing out already in the fourth quarter in some markets and certainly into the first. So, for example, you know, the durables business, which consumer durables business, which is the one that was most impacted. From a demand drop last year, you know, the second half of last year was 40% higher in volume than the first half of last year. So you've already seen a lot of the end of de-stocking that's occurring there. You know, we're still not where we want to be, of course, from a market demand point of view, but it's very clear de-stocking is over. You know, the same is true in a lot of stable markets, right? De-stocking occurred in personal care, water treatment, and things like that in the first half of the year.

Speaker Change: And then certainly into the first so for example.

Speaker Change: The durables business, which consumer durables business, which is the one that was most impacted.

Speaker Change: From a demand drop last year, the second half of last year was 40% higher in volume than the first half of last year. So you've already seen a lot of the end of Destocking.

Speaker Change: That's occurring there.

Speaker Change: We're still not where we want to be of course from a market demand point of view, but it's very clear destocking is over.

Speaker Change: And the same is true in a lot of the stable markets destocking occurred in personal care and water treatment things like that in the first half of the year.

Mark J. Costa: By the time we get to the back half of the year, we're already getting to sort of modest market growth. So for the overall year, demand was relatively flat to 22 in some of those markets. Building construction, I think, is probably still the most challenged. It was tough last year.

Speaker Change: Turning to the back half of the year, we're already getting to sort of sum up with some modest market growth.

Speaker Change: For the overall year demand was relatively flat to 2002 and some of those markets building construction I think it's probably still the most challenged it was tough last year. The expectation is it's going be tough this year, maybe even slightly down in primary demand.

Mark J. Costa: The expectation is it's going to be tough this year, maybe even slightly down in primary demand. But again, I think most of the supply in that market's played out. By the end of the fourth quarter, there may be little pieces and parts left over for the first quarter, so you still get that lackadaisical stocking lift. So I think that, you know, that's sort of on a full year basis, sort of how we look at it. And I would note that of that $150 million in lack of destocking, two-thirds of it is in advanced materials. And the progression, I would say, through the quarter is looking good. So we had a soft start to January. February's already here.

Speaker Change: But again I think most of the Destocking in that market has played out.

Speaker Change: By the end of the fourth quarter, there may be a little pieces and parts into the first quarter. So you still get that lack of destocking lift.

Speaker Change: In coatings and inner layers across AFP and am.

Speaker Change: So I think that that sort of on a full year basis sort of how we look at it and I would note of that $150 million of.

Speaker Change: Lack of Destocking at two thirds of it is in advanced materials.

Speaker Change: And the progression I would say through the <unk>.

Speaker Change: <unk> is looking good so we had a soft start to January February is already.

Mark J. Costa: Stronger orders than January, and March looks good at this point with what we can see. So that's another point to keep in mind is the first quarter is a pretty slow start, you know, as you can clearly see in our guide, but there's a lot of upside as you move into the second quarter from seasonal build. So we do expect a normal seasonal pattern of demand this year. So even though we're not saying primary demand is going to be a lot better, you know, first quarter is always softer, second, and third quarter stronger, and fourth quarter obviously comes off in a normal pattern for us. And that is how we've built our forecast around that. So that helps a lot for why things get better in the second quarter. And then there's some timing issues, as we identified, in fibers and fluids, where there are particularly low orders in fluids, especially heat transfer fluids.

Speaker Change: Stronger orders in January and March looks good at this point with what we can see.

Speaker Change: So thats another point to keep in mind is the first quarter is a pretty slow start.

As you can clearly see in our guide.

Speaker Change: But theres a lot of upside as you move into the second quarter.

Speaker Change: From seasonal build so we do expect a normal seasonal pattern to demand. This year. So even though we're not seeing primary demands can be a lot better.

Speaker Change: First quarter is always softer second third quarter stronger fourth quarter, obviously it comes off in a normal pattern for us.

Speaker Change: And that is how we've built our forecast.

Speaker Change: Around that so that helps a lot for why things get better in the second quarter.

Speaker Change: And then there are some timing issues as we identified in fibers and fluids were particularly low orders in fluids for especially heat transfer fluids and then.

Mark J. Costa: Fibers is the customer buying pattern thing. So those orders get a lot better in second quarter. So there's several things that come together, along with some better spread improvements that make second quarter a lot better than first quarter. Because I'm sure a lot of people have questions about that as you look at our forecast. Very good.

Speaker Change: Fiber system customer buying pattern things, so those orders get a lot better in the second quarter. So there's several things that come together, along with some better spread improvements that make second quarter, a lot better than first quarter, because I'm sure a lot of people have questions on that as you look at our forecast.

Speaker Change: Very good and just briefly.

David I. Begleiter: And just briefly on ASP, you mentioned some negative price costs. Where are you expecting to see the price and pressure in AFM? So, first of all, the spread management last year was great in AFP.

Speaker Change: Briefly on ASP, you mentioned some negative price costs in 2024 week, where are you.

Speaker Change: Let's see the pricing pressure in A&P.

Speaker Change: So first of all of this spread management last year was great in AFP. So we do have a lot of business on price sort of cost pass through contracts that give us very stable margin. So it was very helpful. In 'twenty two as raw materials were shooting upward our prices kept track.

Mark J. Costa: So we do have a lot of business on price, sort of cost pass-through contracts that give us very stable margins. So it was very helpful in 22 as raw materials were shooting upward. Our prices kept track. And then as prices came off last year, you know, raw material prices came off, the price contracts followed. But there's a lag.

And then as prices came off last year.

Speaker Change: Raw material prices came off the price contracts, followed but theres a lag. So we had an improving spread last year for AFP for.

Mark J. Costa: So we had an improving spread last year for AFP for the year. And so that was a helpful tailwind to offset some of the volume headwinds we had in that segment. But when you look at this year, you know, there's just a bit of that lag problem again.

Speaker Change: For the year.

And so that was.

Full tailwind to offset some of the volume headwinds we had in that segment when.

Speaker Change: When you look at this year, there's just a bit of that that lag problem again, so you've now got.

Mark J. Costa: So you've now got... Price is sort of stabilizing, and so if you look at spread this year relative to last year, there's going to be a bit of a headwind just in the way of those sort of costs past your contracts. So that's the primary driver, you know, of the sort of modest spread compression we expect this year relative to last year on AFP. Thank you. Our next question comes from Frank Mitsch of Fermion Research. Your line is now open; please go ahead.

Speaker Change: Prices sort of stabilizing off and so if you look at spreads this year relative to last year, there is going to be a bit of a headwind just in the way of those sort of cost pass through contracts work.

That's the primary driver of the AR.

Speaker Change: <unk>.

Speaker Change: Sort of modest spread compression, we expect this year relative to last year on Asps.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Frank Mitsch Fermium research.

Frank J. Mitsch: Your line is now open. Please go ahead.

Frank J. Mitsch: Thank you, and if I could follow up just in general on pricing, as you indicated in terms of the cost through, the pass-through contract, 22, was a very good year. And as we're entering 23 here, pricing has been taking a bit of a hit. So how how are you thinking overall about Eastman's pricing ability in 2024? For the overall enterprise. Yeah, so first of all, I think it's important to have a little history around pricing because it really is a pretty impressive story. So if you think about 2020 to 22, our company had $2.4 billion in inflation. And so we had them.

Frank J. Mitsch: Thank you and if I could follow up just in general on pricing as you as you indicated in terms of the cost through.

The pass through contracts 22 was a very good year.

And is there any 23 here pricing has been taking a bit of a hit so how are how are you thinking overall about.

Frank J. Mitsch: Eastman is pricing.

Our ability in 2024.

Frank J. Mitsch: For the overall enterprise.

Speaker Change: Yes. So first of all I think it's important to have a little history around pricing because it really is a pretty impressive story. So if you think about 'twenty two 'twenty to 'twenty two.

Speaker Change: Our company had $2 $4 billion of inflation.

Speaker Change: So we had.

Mark J. Costa: Sure, CPT is trying to keep up with it, but there's still a lag that creates a compression in prices catching up to the increases. But overall, we did an excellent job of getting prices to catch up to all that inflation by the end of 2022, but it did create a compression headwind in chasing it in the specialties, in particular in 2022. So that's sort of how we entered 23 at a pretty high elevation with that inflation. The accomplice to 22 was compression, and we moved into really doing a phenomenally good job.

Speaker Change: CPT is trying to keep up to it but there is still a lag that creates a compression in the prices catching up to the increases but overall, we did an excellent job of getting prices to catch up to all of that inflation by the end of 2022, but it did create a compression headwind and chasing it and especially as in particular in 202022, so that's sort of how we enter.

Speaker Change: <unk> 23 is at a pretty high elevation without inflation.

Speaker Change: The accomplished.

'twenty two is compression and we moved into.

Speaker Change: Really doing a phenomenally good job our teams, which has really demonstrated great commercial excellence and the real strength of the value proposition of our specialty products.

Mark J. Costa: Our teams really demonstrated great commercial excellence and the real strength of the value proposition of our specialty products by holding prices outside of the cost-pasture contract. New Sender, Mark Cross, Charles Buckley, Tom Weinberg, Harry Mills, Dr. Keith Beck, Amyigor Xiu, Agent Webb, Bob Diven, Andrew Engel training Neon Eight, Daniel Radz interface, Michael J. Rivlin, Manny Soutridos, Chris Fida, Sam Schnabel, Ralph Rabelle, Dr. Samuel Markely, Pezzotaro J. Keith Patino, David And a lot of it is structural. So about 300 of that is in fibers.

Speaker Change: And holding prices outside of the cost pass through contracts.

Speaker Change: In the specialties not to mention we dramatically improved our <unk>.

Speaker Change: <unk> and fibers. So when you think about that $450 million of volume headwind, we had in 'twenty, three and $50 million of currency, we were able to manage price.

Speaker Change: In 'twenty three in a very difficult economic environment entirely offset that.

Speaker Change: Improvements in price relative to variable cost.

Speaker Change: And a lot of it is structural so about 300 of that is in fibers.

Mark J. Costa: You know, based on all the descriptions we've given you around where that industry is at, as well as a good portion of that is in advanced materials in the interlayer business, where we had extraordinarily high raw materials in 22 that we were able to, you know, those raw material prices dropped off, our prices held, and we got a lot of just recovery back to normal margins. So we feel really good about that, and that basically means there's sort of $200 million of expansion beyond the sort of fibers and interlayers that you're managing. So our expectation this year... is for the specialties.

Speaker Change: Based on all the prescriptions, we've given you around where that industry is at as well as a good portion of that is in advanced materials and the interlayer business, where we had extraordinarily high raw materials in 'twenty two that we were able to.

Those material raw material prices dropped off our prices held in and we've got a lot of just recovery back to normal margins in that business.

Speaker Change: So we feel really good about that and that basically means there's sort of $200 million of spread expansion beyond this sort of fibers inter layers that you are managing so our expectation this year.

Speaker Change: Is on the specialties.

Mark J. Costa: Fibers is fully contracted, so the prices there are locked, and as we've said, that business will do a little bit better in earnings versus 23. For the specialties, what I'd say is that we expect some modest price reductions, reflecting how the raw material and energy environment has improved. But overall, we would say the spread and AFP will be similar to last year, so we're not going to get a tailwind out of it.

Fibers is fully contracted so the prices are locked in as we said that business will do a little bit better in earnings versus 'twenty three.

Speaker Change: And the specialties.

Speaker Change: I would say is that we expect some modest price reductions.

Speaker Change: Reflecting how the raw material and energy environment has improved.

Speaker Change: But overall, we would say the spreads.

Speaker Change: And M&A.

Am and AFP will be similar to last year. So we're not going to get a tailwind out of it maybe there's a slight compression across those two businesses.

Mark J. Costa: Maybe there's a slight compression across those two businesses, but we really believe we'll hold on to our margins with what we see so far, certainly will in the first quarter. And then, and then we expect to, you know, have volume and capacity utilization be the key drivers for the recovery and earnings, which are, you know, pretty substantial. The due stocking number I just gave you, $100 million of asset utilization tailwind, you know, are pretty significant drivers of recovery this year. I took a look year over year, and Europe actually declined less than the United States. Is that just a function of Europe entering the year in a worse position, or is there anything that you can talk about in terms of perhaps any sort of green shoots or what have you in that part of the world?

But we really believe we'll hold onto our margins.

With what we see so far certainly will in the first quarter.

Speaker Change: And then.

Speaker Change: And then we expect to have volume and capacity utilization would be the key drivers for the recovery in earnings which are pretty substantial destocking number I just gave you a $100 million of.

Speaker Change: Asset utilization tailwind.

Speaker Change: A pretty significant drivers of recovery this year.

Speaker Change: I Gotcha, Alright, terrific and then and then perhaps if you could add I took a look year over year.

Europe actually declined less than the United States.

Speaker Change: Is that really is that just a function of Europe entered the year at.

Speaker Change: The worst position.

Speaker Change: Is there anything that you can talk about in terms of perhaps any sort of green shoots or what have you in that part of the world.

Mark J. Costa: So part of the reason North America is down as much as it was is that all chemical intermediates sit in North America, predominantly. So, you know, when you look at all the revenue that came off chemical intermediates, you know, it's, you know, sort of almost all in this country. You know, when it comes to the rest of the portfolio, I'd say, you know, we're more globally diverse, and we saw, you know, demand come off and especially across the globe, as well as the destocking across the world. So that was more evenly dispersed. China's got its challenges, and so do Europe and the U.S., probably a little bit stronger in the economy than the other two.

Speaker Change: Yes.

Speaker Change: So part of the reason in North America is down as much as it was it just all of chemical intermediates sits in North America.

Dominantly. So when you look at all the revenue that that came off in chemical intermediates.

Speaker Change: It's sort of almost all in in this country.

Speaker Change: When it comes to the rest of the portfolio I'd say, we're more globally diverse and we saw really demand come off and especially sort of across the globe.

Speaker Change: As well as the Destocking across the globe that was more evenly dispersed China's got its challenges and so does Europe and U S, probably a little bit stronger in the economy than the other two.

Frank J. Mitsch: From a Green Shoot's point of view, Frank, I wouldn't say, you know, from a, you know, we have this end to destocking, which is our primary focus right now. You know, I think it's way too early to call, you know, markets recovering in the consumer discretionary world, you know, so cars, building construction, consumer durables, electronics. There may be some improvement there, but, you know, I don't think I have enough data to sort of make that declaration. But the stable markets are definitely growing, and medical is probably gonna grow four to five percent. I mean, there'll still be stockpiles in the first quarter, but the underlying market's going to grow five percent, you know, ag is growing in personal care, water treatment, you know, a lot of the packaging sector as a lot of the consumer brands are now pivoting from price to recovering volume, you know, and we'll benefit from that. So, you know, that's about half our revenue where you get that Gotcha. Thanks so much.

Speaker Change: A green shoots point of view Frank.

Speaker Change: I wouldn't.

Speaker Change: We had this in the Destocking, which is our primary focus right now.

Speaker Change: I think it's way too early to call markets recovering in the consumer discretionary world. So cars building construction consumer durables electronics, there may be some improvement there, but I don't think I have enough data to sort of make that declaration.

Speaker Change: But the stable markets are definitely growing medical is probably going to grow 4% to 5% I mean, theres still destocking in the first quarter, but the underlying market's going to grow 5%.

Speaker Change: AG is growing personal care water treatment a lot of the packaging sector is there's a lot of the consumer brands are now pivoting from price to recovering volume will benefit from that so that's about half of our revenue where you get that modest growth.

Speaker Change: In these markets that are sort of more stable.

Speaker Change: Gotcha got you. Thanks, thanks, so much.

Speaker Change: Okay.

Patrick Cunningham: Thank you. Our next question comes from Patrick Cunningham of Citigroup. Patrick, your line is now open, please go ahead. Hi, thank you. Good morning.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Patrick <unk> of Citigroup.

Patrick: Your line is now open. Please go ahead.

Patrick: Okay.

Hi, Thank you. Good morning, maybe just first on advanced materials can you help us understand the $450 million guide here and maybe the degree of upside beyond that I think you get $50 million from Keystone and Youre guiding to $100 million in the first quarter, just given the extremity of the demand decline utilization headwinds.

Mark J. Costa: Maybe just first on advanced materials, can you help us understand the $450 million guide there and maybe the degree of upside beyond that? I think you'll get, you know, $50 million from Kingsport, and you're guiding to $100 million for the first quarter. Just given the extremity of the demand decline, the utilization headwinds, and the de-stocking of 2023, is there a path to, you know, $500 million or more, even in just a modestly positive demand environment from here? So, first, given sort of the challenges we've had in Advancement Trails with, you know, pretty rough demand in the fourth quarter of 22 and the full year of 23, we're starting with earning our way in our recovery and getting back above 450 and then working to make it better than that.

Patrick: Destocking in 2023 and is there a path to $500 million and more even interest and modestly positive demand environment from here.

Patrick: So first given sort of the challenges we've had in advanced materials with pretty pretty rough demand in the fourth quarter of 'twenty two and the.

Patrick: A full year of 'twenty, three we're starting with earning our way in a recovery and getting back about 450, and then working to make it better than that but just to give you the sort of key tailwind to go with it.

Mark J. Costa: But just to give you this sort of key tale and to go with it, the biggest driver for Advancement Trails' recovery is volume and mix. As I sort of pointed out, at the corporate level, you know, the story is pretty much an AM story. So, you know, two-thirds of that $115 million in lack of destocking is sort of in the outlook for this segment. I told you Durables has already had a significant recovery.

Patrick: The biggest driver for advanced metals recovery is.

Patrick: Volume and mix as I sort of pointed out at the corporate level. The story is pretty pretty much in Aam's story. So two thirds of that $150 million of a lack of destocking.

Patrick: Is sort of in the outlook.

Patrick: For this segment I told you durables has already had significant recovery medical has great underlying growth. It just has a lot of restocking from.

Patrick: A lot of caution in the supply chain crisis, and if that's still finishing itself out in the first quarter here, but we can see that it'll be less in the second quarter.

Mark J. Costa: Medical has great underlying growth. It just has a lot of stockpiled from a lot of caution in the supply chain crisis. That's still finishing itself out in the first quarter here, but we can see that it'll be less in the second quarter.

Patrick: Then.

Patrick: We'll just have the growth in the back half of the year. So you've got markets that have done a lot of destocking sort of stabilizing and the language and the lack of.

Mark J. Costa: And then, you know, we'll just have growth in the back half of the year. So you've got markets that, you know, have done a lot of these stockings or stabilizing in the lack of, de-stocking, you know, helping you. Then you've got the return in seasonality. So even though the first quarter, it's still in recovery mode.

Patrick: Destocking, helping then you've got the return to normal seasonality, so even though the first quarter.

Patrick: It is still in recovery mode.

Patrick: When you look to the second quarter and beyond <unk> got this return to normal seasonality to this segment.

Patrick: So Q2 Q3 is always stronger and we expect that to be there in that order pattern I was talking about about January February March is very much true in advanced materials, where you can see that progression getting better.

Mark J. Costa: When you look to the second quarter and beyond, you've got this return of normal seasonality to this segment. So Q2, Q3 is always stronger, and we expect that to be there. And that order pattern I was talking about, about January, February, March, is very much true in advanced materials, where you can see that progression getting better. You've also got the ramp-up of the methanolysis plan, as you noted, so that's going to get you that incremental $50 million EBITDA that you just mentioned that shows up in advanced materials. The other $25 million is a benefit for corporate other, just to be clear, which is where the pre-production expenses of last year have been sitting. And then you've got the automotive market, though, even though it's going to be flat.

Patrick: You've also got the ramp up of the methanol plant as you noted so thats going to get you that incremental $50 million EBITDA that you just mentioned that shows up in advance.

Patrick: Advanced materials. The other 25 is a benefit for corporate other just to be clear.

Which is where the preproduction expenses of last year then sitting.

Patrick: And then you got the automotive market, though even though it is going to be flat.

Patrick: We have a tremendous track record of growing above that market with our great strengths and HUD going into more and more cars great strength of other premium products.

Patrick: The acoustics et cetera, and then importantly, even though evs, maybe not growing as fast as everyone hoped theres still growing much faster than ice cars.

Mark J. Costa: We have a tremendous track record of growing above that market, with our great strength in HUD going into more and more cars, our great strength in other premium products, the acoustics, etc. And then, importantly, even though EVs may not be growing as fast as everyone hoped, they're still growing much faster than ICE cars. And we get over three times the number of square meters in an EV than we do in an ICE car, very high-value products because there's a lot of functionality in those products.

Patrick: And we get over three times the amount of square meters in an EV than we do in a nice car at very high value products, because theres a lot of functionality and those products that we sell to the mineral there. So there's a lot of leverages their debt.

Goes beyond just destocking, where we're creating our own growth through innovation and circular in automotive.

Patrick: That.

Patrick: And then we'll drive it and.

Patrick: As I said earlier, we expect this sort of price cost relationship.

Patrick: To be somewhat neutral to last year, so that won't be a source of <unk>.

Mark J. Costa: So there's a lot of leverage there that goes beyond just de-stocking where we're creating our own growth through innovation in circular and automotive that will drive it. And as I said earlier, we expect this sort of price-cost relationship. You know, to be somewhat neutral to last year, so that won't be a source of, you know, a tailwind, but we don't expect it to really be a significant headwind either, but all that volume shows up. And then with that, you get utilization, right? So you've got it.

Patrick: Tailwind, but we don't expect it to really be a significant headwind either.

Patrick: But all of that volume shows up and then with that you get utilization right. So you've got one.

Patrick: $100 million asset utilization headwind for managing inventory last year that becomes a $50 million tailwind this year.

Patrick: With.

Patrick: With this segment. So that also will be a driver for how you get about $4 50. So if you put all that math together.

You can you can get to $4 50, you could get something greater than that but I'd like to see proof and how the market is recovering and ramps up.

Patrick: Into the spring.

Patrick: Where we start getting beyond that.

Speaker Change: And Mark the only thing I would add is as we think about the year over year increase in our depreciation expense a substantial portion of that will go to the advanced materials segment.

Mark J. Costa: The $100 million asset utilization headwind for managing inventory last year, that becomes a $50 million tailwind this year with this segment. So that also will be a driver for how you get above 450. So if you put all that math together... You know, you can get to 450. You could get something greater than that, but I'd like to see proof that the market is recovering and ramps up, you know, into the spring before we start getting, you know, beyond that. And Mark, the only thing I would add is, as we think about the year-over-year increase in our depreciation expense, a substantial portion of that will Yeah, thank you. That's very helpful.

Speaker Change: Got it. Thank you that's very helpful. And then maybe just a follow up on <unk>, how much outperformance relative to the market did you see from unit <unk> and premium volume mix impact and given that we see some of that headline deceleration in.

Speaker Change: And maybe sort of looming consumer weakness.

Speaker Change: Do you see potential that that mix improvement outperformance is decelerating into 2024.

Speaker Change: Well, certainly I think the rate of year over year improvement in 'twenty four to 'twenty three will be less than it was in 'twenty three 'twenty four for the sort of data, you're citing around EV growth rates.

But I don't think its significant rate there is still a lot of applications. We're winning so there is okay. There is a primary demand issue that's slowing down but we're also just starting to penetrate.

Patrick Cunningham: And maybe just to follow up, you know, on EVs, how much outperformance relative to the market did you see from, you know, EV and premium volume mix impact? And given that we've seen some of that headline deceleration on EVs and maybe sort of looming consumer weakness, do you see potential that that, you know, mix improvement, you know, outperformance is decelerating into 2024? Well, certainly, I think the rate of year-over-year improvement in 24 to 23 will be less than it was in 23 to 24, for the sort of data you're citing around EV growth rates. But I don't think it's, you know, significant, right?

Speaker Change: All of these <unk> accounts and win share relative to standard inner layers and ice cars. So you get this leverage within the market within the EV segment itself that helps.

Speaker Change: So I don't want oversell it.

We expect an overall flat production market.

Speaker Change: Which I think is sort of consistent with what everyone else is saying.

Speaker Change: But the growth we can get in these premium products is very meaningful in helping us grow above above that market.

Speaker Change: Great. Thank you.

Speaker Change: Thank you. Our next question comes from Vincent Andrews of Morgan Stanley.

Mark J. Costa: There's still a lot of applications we're winning, so there's – okay, there's a primary demand issue that's slowing down, but we're also just starting to penetrate all these EV accounts and win, you know, share relative to standard interlayers and ICE cars. So you get this leverage within the market, within the EV segment itself that helps. So I don't want to oversell it.

Vincent Stephen Andrews: Your line is now open. Please go ahead.

Vincent Stephen Andrews: Thank you Mark could you talk a little bit about plants two implants three there were some comments in the prepared remarks.

Vincent Stephen Andrews: I'm talking about that analysis, obviously in the prepared remarks about the teams working to sort of make.

Vincent Stephen Andrews: Make sure they can stay ahead of them.

Vincent Stephen Andrews: Inflation, and then just kind of curious.

Vincent Stephen Andrews: How youre feeling about the Capex estimates for those plants. We don't know what is obviously, an inflationary environment than we've seen.

Mark J. Costa: I mean, you know, we expect an overall flat production market, which I think is sort of consistent with what everyone else is saying. But the growth we can get in these premium products is very meaningful in helping us grow above that market. Great, thank you.

Vincent Stephen Andrews: Some some cost overruns at non related large scale projects that other folks are doing so how are you going to stay on top of that is it something that you can do technically or it can be something youre going to have to do in terms of how you price the product.

Vincent Stephen Andrews: Thank you. Our next question comes from Vincent Andrews of Morgan Stanley. Your line is now open, please go ahead. Mark, could you talk a little bit about Plant 2 and Plant 3?

Speaker Change: Yes so.

Speaker Change: You mentioned that Youre, absolutely right that it's an inflation environment certainly if you go back to Investor day.

Mark J. Costa: There were some comments and prepared remarks talking about methanolysis, obviously, and the prepared remarks about the teams working to sort of, you know, make sure they can stay ahead of inflation. And I'd just kind of be curious, you know, how you feel about the CapEx estimates for those plants. We all know it's obviously an inflationary environment, and we've seen some cost overruns on non-related large-scale projects that other folks are doing. So how are you going to stay on top of that? Is it something that you can do technically, or is it going to be something you're going to have to do in terms of how you price the product? Yeah, so, you know.

In December of 2021, the capital estimates, we had there for both Kingsport as well as these projects have gone up right.

Speaker Change: It is true for every construction project I've seen in the chemical industry and everywhere else.

Speaker Change: So, we're all managing and dealing with that inflation.

And a lot of what we saw happened in Kingsport went beyond just normal inflation right. So we had a huge issue with the contractor not having skilled properly skilled labor productivity issue is the biggest issue. We face. We also had just an endless series of severe weather events along the way.

Speaker Change: And there was a lot of engineering work, we were doing in that project.

Mark J. Costa: Vincent, you're absolutely right that it's an inflation environment. Certainly, if you go back to Investor Day, you know, in December of 2021, the capital estimates we had there for both Kingsport as well as these projects have gone up, right, you know, which is true for every construction project I've seen in the chemical industry and probably everywhere else. So we're all managing and dealing with, you know, inflation. And a lot of what we saw happen in Kingsport went beyond just normal inflation, right? So we had a huge issue with the contractor not having skilled, properly skilled labor. And that productivity issue was the biggest issue we faced. We also had an endless series of severe weather events along the way.

Speaker Change: And piloting.

Speaker Change: How to optimize the design of the project, while we're building it which is never ideal but.

I would just probably to get two years ahead of the market.

Getting the product online so we have a lot of learnings.

From from the methanol project here that we're incorporating into France and second.

Second U S projects.

Speaker Change: We're we're pretty clear on how to build them a lot more efficiently than this first one.

Speaker Change: So what I'd say is from a capex point of view there is inflation that's occurred.

Speaker Change: There is some deflation that's now in front of us and materials, even contracts contract or labor availability is improving.

Mark J. Costa: And there was a lot of engineering work we were doing on that project, and piloting ways to optimize the design of the project while we were building it, which is never ideal but, you know, allowed us to get two years ahead of the market in getting the product online. So, you know, we have a lot of learnings from the methanolysis project here that we're incorporating into the French and second U.S. projects, where we're pretty clear on how to build them a lot more efficiently than this first one. So what I'd say is, from a CapEx point of view, there is inflation that has occurred. There is some deflation that's now in front of us in materials; even contract, contractor labor availability is improving as we sort of are in this sort of more recessionary cycle for the materials industry, so it'll help sort of offset or slow down or maybe even decline some of that inflation.

Speaker Change: As we sort of are in this sort of more recessionary cycle for the materials industry, so help sort of offset or slowdown or maybe even decline in some of that inflation.

Speaker Change: We are building the same plant again as I said earlier same scale same design, obviously, whatever learnings, we havent kingsport will incorporate into it but we're not trying to build something new we're just building the same and you get a lot of capital efficiency.

Speaker Change: When you are building Cerro number two and sterile number three of the same plant.

Speaker Change: So there'll be benefits in controlling capital.

Both the cost and the predictability of it from that.

Speaker Change: Folks will be completely locked up before we start building and that will help us control capex relative to what I just described in Kingsport.

Speaker Change: We're using great firms technique fluor for this these projects and <unk>.

Mark J. Costa: We are building the same plant again, you know, as I said earlier, same scale, same design. Obviously, whatever learnings we have in Kingsport will be incorporated into it, but we're not trying to build something new; we're just building the same, and you get a lot of capital efficiency. The Engineering Director's Office, And they've got access to an excellent set of contractors to do this.

Speaker Change: And they've got access to an excellent set of contractors to do that so we feel good about controlling our capital costs, they will certainly be a bit higher.

Speaker Change: And Thats why we are also pursuing more incentives.

Speaker Change: In both France, and the U S.

As part of the projects. So I think we feel good about that what I would say is when we when we came up with the original economics and talked about returns on these projects. We gave US gave ourselves some room for inflation and other challenges we might encounter.

Mark J. Costa: So we feel good about controlling the capital costs. They will certainly be a bit higher, and that's why we're also pursuing more incentives in both France and the U.S. as part of the projects. So I think we feel good about that.

Speaker Change: So the Kingsport project still at.

Speaker Change: At 15% return on capital despite the capital increases.

Mark J. Costa: What I would say is when we came up with the original economics and talked about returns on these projects, we gave ourselves some room for inflation and other challenges we might encounter. So the Kingport project still has a 15 percent return on capital despite the capital increases. And these projects are still with, you know, the proper customer contracts and incentives, you know, above 12% return on capital. So, you know, even with inflation, we feel good about the returns and feel that we're on track to get these two projects started this year, assuming we hit our requirements that I mentioned earlier. We still have to get those three things, customers, incentives, and finalize the capital number. Thanks very much.

Speaker Change: And these projects are still.

Speaker Change: With the proper customer contracts and incentives both 12% return on capital so.

Even with inflation, we feel good about the returns and fuel that.

We're on track to get these projects started this year, assuming we hit our requirements. So I mentioned earlier, we got to still get those three things customers incentives and finalize the capital number.

Thanks very much.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Mike <unk> from Barclays Mike.

Speaker Change: Mike Your line is now open. Please go ahead.

Speaker Change: Okay.

Mike: Great. Thank you good morning, guys.

Mike: First question I wanted to circle back on the EPS outlook I think the last number of years. The first quarter is roughly 25% of what Eastman full year EPS turns out to be this year on <unk>, maybe 18% or so of the full year guidance. So can you talk through why <unk> is a bit different is it mainly the lingering destocking that gets.

Mike Lighthead: Thank you. Our next question comes from Mike Lighthead from Barclays. Mike, the line is now open, please go ahead. Great, thank you. Good morning, guys.

Mike Lighthead: First question, I want to circle back on the EPS outlook. I think for the last number of years, the first quarter is roughly 25 percent of what Eastman's full-year EPS turns out to be. This year, 1Q is maybe 18 percent or so of the full-year guide. So, can you talk through why this year's 1Q is a bit different? Is it mainly the lingering destocking that gets you a bit better into 2Q there? Thank you.

A bit better into <unk> there. Thank you.

Speaker Change: Yes, I think as Mark has outlined.

Speaker Change: We expect the traditional.

Speaker Change: Curve right, we're growing earnings through Q1, traditionally Q2, and Q3 are in past quarters and then there is a seasonal decline in Q4 also as we've highlighted and also on a year over year basis, we expect the second half as we will pick up most of the utilization benefit as well as the benefits.

Willie McClain: Yeah, I think as Mark has outlined, you know, we expect a traditional curve, right? We're growing earnings through Q1. Traditionally, Q2 and Q3 are our best quarters.

Speaker Change: From from our Kingsport methanol assist facility. So there is a combination of factors of the pace that we're seeing the order books traditional seasonality as well as the specific items that impact us in 'twenty three that are turning into a tailwind in 'twenty four those are the key items Mark.

Willie McClain: Then there's a seasonal decline in Q4. Also, as we've highlighted, and also on a year-over-year basis, we expect the second half is where we'll pick up most of the utilization benefit, as well as the benefits from our Kingsport Methanolysis Facility. So there's a combination of factors such as the pace that we're seeing, the order books, traditional seasonality, as well as the specific items that affected us in Q23 that are turning into tailwinds in Q24. Those are the key items, Mark.

Mark J. Costa: I would just add Theres a couple of unique elements of Q1 beyond just the seasonal pattern, where he's got odd.

Mark J. Costa: Oddly low orders from <unk>.

Mark J. Costa: Fibers customers no no volume risk on the contract that they are just not buying as much.

Mark J. Costa: In Q1 as they will do in Q2, Q3, and so thats sort of putting some pressure on there that's sort of beyond seasonality same is true in the just timing of fluid fills not much going on at all in Q1, but we have more in Q2.

Mark J. Costa: I would just add there's a couple of unique elements of Q1 beyond just the seasonal pattern, where you've got oddly low orders from Fiverr's customers, no volume risk on the contract, but they're just not buying as much in Q1 as they will do in Q2, Q3. And so that's sort of putting some pressure on there that's sort of beyond seasonality. The same is true in the timing of fluid fills

Mark J. Costa: So there's a few aspects.

Mark J. Costa: And just sort of normal that sort of impacting the continued destocking in AG and medical.

Beyond just the seasonal pattern.

Mark J. Costa: It will play out in Q1.

Speaker Change: Okay. That's helpful. And then just briefly on methanol plants, two and three again, Mark if I take some of your commentary about if all goes to plan hopefully breaking ground I think by later this year.

Mark J. Costa: Not much going on at all in Q1, but we have more in Q2. So there's a few aspects beyond just sort of normal that's sort of impacting the end continuity stocking in ag and medical beyond just the seasonal pattern that mostly will play out. Great, that's helpful.

Speaker Change: Is it fair to say these plants, obviously, you'll have a little bit of efficiency and a lot of efficiency gains from rebuilding the first plant, but is it fair to say that these plans commercially we'd be running something like in mid 2026, and the starting point.

Mike Lighthead: And then just briefly on methanolysis plants two and three again, Mark, if I take some of your commentary about if all goes to plan, hopefully breaking ground, I think, by later this year, is it fair to say these plants, obviously, will have a little bit of efficiency or a lot of efficiency gains from rebuilding the first plant, but is it fair to say that these plants commercially would be running something like in mid-2026 as a I know with the schedule we're on now, we're more into 27 than 26 for when these projects will start, if you go back to sort of our original estimates. There's certainly efficiency and timing we're pursuing that will allow us, you know, to build these plants more efficiently, but we're also building a lot more plants in this case, right, because it's not just a methanolysis plant we're building. We're building infrastructure on our greenfield side in France. You know, we've got polymer lines that we're also building all at the same time. So when you put it all together, it's just...

Speaker Change: I know its schedule we're on now.

Speaker Change: We're more into 27% in 2006 for when these projects will start if you go back to sort of our original estimates.

Theres, certainly efficiency and timing we are pursuing.

Speaker Change: That will allow us to build these plants more efficiently, but were also building a lot more plants.

Speaker Change: In this case right because it's not just a methanol plant we're building we're building.

Speaker Change: Infrastructure on a greenfield site in France, we've got polymer lines that were also building all at the same time, so when you put it all together.

It takes a certain amount of time to get it done.

But the key is.

Speaker Change: The market is certainly very eager for the product and they have very significant deadlines in 2030 that they have to hit so we are certainly well within.

Speaker Change: Making sure that we're ramping up and helping them get to their targets.

Speaker Change:

Speaker Change: But we want to make sure we really learned everything we can from Kingsport before we start the construction.

Mark J. Costa: It takes a certain amount of time to get it done, but the key is, you know, the market's certainly very eager for the product. They have very significant deadlines in 2030 that they have to hit. So we're certainly well within, you know, making sure that we're ramping up and helping them get to their targets. But we want to make sure we really learned everything we could from Kingsport before we start the construction. And so that's sort of that 6-9 month delay that sort of occurred from what we originally had. Great, thank you. Thank you for joining us. Our next question comes from Jeff Zekauskas of J.P. Morgan. Your line is now open; please go ahead.

Speaker Change: So that's sort of that six to nine months delay that sort of occurred from what we originally thinking.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Jeff <unk> of Jpmorgan.

Jeff: Your line is now open. Please go ahead.

Jeff: Thanks very much.

Jeff: I think in the advanced materials discussion.

Jeff: There was some noting the weak fourth quarter demand.

And Asian Auto production is always very strong in the fourth quarter, especially easy production.

Jeff: Is it the case that you're easy exposure in advanced materials, it's more with domestic and European companies.

Jeff Zekauskas: Thanks for... I think in the advanced materials, some noting of weak fourth quarters, automation, and auto production is always very heavy in the fourth quarter, especially EV products. So is it the case that your EV exposure in advanced materials is more with domestic and European manufacturers, rather than with Chinese. So, Jeff, when it comes to the fourth quarter...

Jeff: Then with Chinese companies.

Jeff: So.

Jeff: Jeff when it comes to the fourth quarter.

Jeff: There was a lot of moving parts for Ams segment involved in that so on the auto side.

Jeff: Do have good relationships and positions with some of the Chinese EV makers as well as the western EV makers.

Jeff: That has nothing to do with sort of the quarter auto demand was better government performance films is.

Mark J. Costa: There were a lot of moving parts for AM as a segment involved in that. So on the auto side, we do have, you know, good relationships and positions with some of the Chinese EV makers as well as the Western EV makers. But that has nothing to do with sort of the quarter.

Jeff: A key part of that not just in <unk>, where we're going on both <unk> as well as ice cars in our paint protection film.

Jeff: So it's only the interlayer part that really applies to.

Jeff: To your question around sort of the OEM manufacturers from the interlayer point of view.

Mark J. Costa: Auto demand was better, and government performance homes are, you know, a key part of that, not just interlayers, where we're going on the, you know, both EVs as well as ICE cars and our paint protection film. And so it's only the interlayer part that really applies to your question around sort of the OEM manufacturers from an interlayer point of view. So, I think that, you know, that's not a significant

Jeff: So I think that that's not a significant factor the bigger factors, where it's just destocking continued longer than we expected and medical.

Jeff: In packaging.

Jeff: On the specialty plastics side that caused volume mix to be a little bit less than what we were projecting in October. It was that was the entirety of the.

The difference I mean overall, the automotive market is sort of moderating a bit as you can see from the production data in total.

Mark J. Costa: The bigger factor is that destocking continued longer than we expected in medical and packaging on the especially plastic side that caused volume mix to be a little bit less than what we were projecting in October. It was that was the entirety of the difference. I mean, overall, the automotive market is, you know, sort of moderating a bit, as you can see from the production data in total, that has an impact, but we were still growing above that market in Q4 and will continue to grow above that market all year this year. I think the original idea for the methanolysis project was that you were going to spend $250 million. Project itself. Corp. with an additional $175 per capita. And I don't know if you partly built the Triton plant or if the Triton plant wasn't built at all, but in the non-tribe.

Jeff: That has an impact, but we were still growing above that market in Q4 and will continue to grow above that market all year. This year.

Jeff: Okay.

Jeff: I think in the original idea for the meth analysis projects you.

Jeff: You were going to spend $250 million.

Project itself in Kingsport with an additional $1 75 for Triton.

Jeff: And I don't know a few partly built triton plants or the Trident plant wasn't built at all.

Jeff: But in the non Triton piece. The original idea was $2 50, what did you spend.

Jeff: And in the future plans I believe the.

Jeff: Estimate was $600 million to $800 million.

Jeff: What is the estimate now.

Jeff Zekauskas: The original idea was $250,000; what did you spend? and in the future. I believe the estimate was $600 to $800 million. What is the estimate now? In that, you know, what you say is that you have a good return on capital or you think you can work that out with the customer base, but the customer bit, you know, you need to have,,,,,,,,,,, What's the number? Thank you. Thank you. Thank you.

Speaker Change: What you say.

Speaker Change: Is that you have.

Speaker Change: A good return on capital or you think you can work that out with your customer base, but the customer you need to have an expectation of what the capital expenditures are in order to negotiate on a level of a good return on capital. So I think originally all of this was supposed to call.

Speaker Change: <unk>, one 8 billion.

Speaker Change: What's the number now.

Speaker Change: Can you help us.

Willie McClain: So Jeff, you know, I would start with the last update that we gave on all the programs was saying that the three methanolysis facilities would be approximately, you know, two and a quarter billion dollars. Obviously, Mark has also highlighted that there has been quite a bit of inflation since 2021. And I think that estimate is reflective of that. And every project over this time frame, including ours, you know, is at that level. Also, I would say we've been able to handle the capex increases that have been above our estimate from a few years ago within our capital budgets that we've outlined and expenditures over the last couple of years. It was fully incorporated into our 22 and 23 spend, and I referenced earlier that we had roughly $30 million of increased depreciation expense going from 2023 to 2024, and a substantial portion of that is related to the King That direction gives you the magnitude.

Sure Jeff.

Speaker Change: Let's start the last update that we gave on all the programs, we're saying that the three methanol office facilities would be.

Speaker Change: Approximately two and a quarter $1 billion.

Speaker Change: Honestly Mark has also highlighted there was quite a bit of inflation since 2021, and I think that estimate is reflective of that.

Speaker Change: Ever project over this timeframe, including ours.

Speaker Change: As at that level.

Speaker Change: Also I would say.

Been able to handle the capex increases.

Speaker Change: <unk> been above our estimate from a few years ago within our within our capital budget that we've outlined in expenditures over the last couple of years.

Paul incorporating it into our 'twenty, two and 'twenty three span.

Speaker Change: I referenced earlier that we had roughly $30 million of increased depreciation expense going from from 2020.

Speaker Change: 3% to 24.

Speaker Change: A substantial portion of that is related to the kingsport methodologies facility.

Speaker Change: Directionally gives you the magnitude.

Willie McClain: We're going to be disciplined as we move forward as we think about both generating the cash flow to fund these and also on the returns, and we believe that advanced materials' return to growth will be accelerated by having this methanolysis facility and our renewed brands with our customers. Jeff, there's no question that the capital numbers are up. We're also pursuing a lot more incentives to offset some of those capital numbers. So until we get that all finalized, I don't want to just... keep updating the numbers. So, you know, once we have clarity on them and the total economics as well as what we achieve with customers on the pricing premiums we can get to fund them, we will, you know, be able to sort of give you a more clear answer to your questions. I mean, the incremental $30 million of depreciation, a good portion, not all, but a good portion of that is for export plants. You guys can work out with the project. Sorry, you were saying something, Jim? Did you partly build the Triton facility and the Triton expansion? Oh, sorry.

Speaker Change: We're going to be disciplined as we move forward.

Speaker Change: As we think about both from generating the cash flow to fund. These but also on the returns and we believe that advanced materials.

Return to growth will be accelerated by having this <unk>.

And our Swiss facility and a renewed brands with our customers.

Speaker Change: So Jeff let me just try and Theres no question that the capital numbers.

Speaker Change: Numbers are up.

Jeff: We're also pursuing a lot more incentives to offset some of those capital numbers. So until we get that all finalized.

Speaker Change: I want to just keep.

Speaker Change: Keep updating number so.

Speaker Change: Once we have clarity on them in the total economics as well as what we achieved with customers on the.

Speaker Change: On the pricing premiums, we can get to fund it.

Speaker Change: We will.

Speaker Change: Be able to sort of give you a more clear answer on your questions I mean, the incremental $30 million of depreciation good portion if not all but a good portion of that is kingsport plants you guys can work out what the project costs.

Speaker Change: I'm, sorry, you were saying something did you.

Speaker Change: Did you did you partly built the Titan facility and the Triton extend show sorry, Yes, we started the construction of at the early Yeah, Jeff. We started the early construction part of the of the trading line and then and then paused it.

Mark J. Costa: We started the construction of it early. Yeah, Jeff, we started the early construction part of the Triton line and then and then paused it. And we're going to restart that as we align it with our outlook on Triton demand, which is improving a lot this quarter. So we'll see how we judge Triton demand in this next quarter or when we need to get that going again to make sure we don't short the market. Thank you. Our next question comes from John Roberts of Mizzou High. John, your line is now open. Please go ahead. Thank you.

Restart that as we.

Speaker Change: Alignment with you our outlook on trade and demand, which is improving a lot. This quarter. So we'll see how we judge the trade and demand.

Speaker Change: This next quarter.

Speaker Change: Or when we need to get that going again to make sure we don't start the market.

Speaker Change: Okay, great. Thank you so much.

Speaker Change: Thank you.

Speaker Change: Our next question comes from John Roberts Ultimate Shanghai.

John Roberts: John Your line is now open. Please go ahead.

Yeah.

John Roberts: Thank you our the cig tow contracts working as expected in 2024, and do you think you'll get to a point where the decline in cig tow volume is offset by the new products and fibers. So that the overall segment has flat to up volume.

John Roberts: Are the SIGTO contracts working as expected in 2024? And do you think you will get to a point where the decline in SIGTO volume is offset by the new products and fibers so that the overall segment has flat top volume? Great question.

Speaker Change: Great question.

Mark J. Costa: I'm a big fan of the cellulose extreme these days, John. You know, we've gone through a rough patch for quite some time. It's great to have the structural market of the tow business back to where it was very stable and at profit levels that allow us to reliably supply our customers. And they're very focused on security of supply and reliability, and they place a lot of value on us in this industry being able to provide that. So our contracts, we're 100% contracted this year for volume and price, and so we feel good about, you know, the earnings stability we'll have in that business this year. We said it would be somewhat better than last year.

I am a big fan of Cellulosic stream. These days, John we've gone through.

Speaker Change: Rough patch for quite some time and it's great to have the structural market the tow business back to being where it was very stable and at the profit levels that allow us to reliably supply our customers in.

And they are very focused on security of supply and reliability.

Speaker Change: And they place a lot of value on us in this industry being able to provide that.

So our contracts for 100% contracted this year for volume and price.

And so we feel good about.

Speaker Change: The earnings stability, we will have in that business.

Speaker Change: This year as we said it'll be.

Speaker Change: Somewhat better than last year.

Mark J. Costa: And then we've got 90% of our contracts in place for 2025 and close to 70% in 2026. So, you know, we feel good about how this tow business is going to provide stable earnings and cash. A lot of cash out of this business.

Speaker Change: And then we've got 90% of our contracts in place for 25 and.

Speaker Change: Close to 70% in 'twenty.

Speaker Change: Sticks. So we feel good about how this on a tow business is going to provide stable earnings.

Speaker Change: And cash a lot of cash.

Speaker Change: Out of this business.

Mark J. Costa: And then, as you just noted, on top of that, you now have growth in the fibers business. That's part of that equation that allows us, you know, to sort of, you know, push our assets and utilization and value. And then Aventa, which is something we'll probably talk to you more about in the spring, is really on a great path. This is where we figured out how to take our cellulose acetate and foam it, so it's a drop-in replacement for polystyrene for, you know, protein trays, you know, chicken and pork trays, you know, in the grocery store that you see all the time, or other sorts of foam clamshells, etc.

Speaker Change: And then as you just noted on top of that you now have growth in the fibers business.

Speaker Change: That's part of that equation that allows us to sort of push your assets.

Speaker Change: And utilization and value.

Speaker Change: And then <unk>, which is something we'll probably talk to you more about.

Speaker Change: In the spring.

Speaker Change: It's really on a great.

Speaker Change: Path.

As we figured out how to take the our cellulose acetate and foam it.

Speaker Change: It's a drop in replacement to polystyrene.

Speaker Change: For protein trading of chicken and pork Tracy knew in the grocery store that you see all the time or.

Speaker Change: Other sort of foam clamshell et cetera.

Mark J. Costa: And, you know, that industry has a serious issue about getting out of polystyrene. We have a great value proposition with the cellulosic material where it's a drop in to their existing equipment. And it's certified to biodegrade not just in industrial settings but also in home settings, which is equivalent to landfill. So you really have a biodegradable solution to throw this stuff away with all the sort of meat, juice, and everything else that's in it that can't be recycled.

Speaker Change: And that industry is a serious issue about getting out of polystyrene.

Speaker Change: Have a great value proposition with the Cellulosic material, where it's a drop in to their existing equipment and is certified to biodegrade not just in industrial settings, but also in home settings, which is equivalent to landfill.

Speaker Change: So you really have a biodegradable solution to throw the stuff away with all the sort of.

Speaker Change: So everything else is with it on that can't be recycled so.

Mark J. Costa: So, very big market, a lot of opportunity, good margins, and something that we think will be commercial and grow this year and build into something meaningful next year. So we'll tell you a lot more about that once we have the customer announcements to go with it. But when you put all that together, it does turn the cellulosic stream into a growth stream, along with the polyester stream, both tied to sustainability and circular economy trends that are presenting a huge amount of volume growth, like Triton replacing polycarbonate BPA.

Speaker Change: Very big market, a lot of opportunity and good margins.

Speaker Change: And something that we think will be commercial and grow this year and build into something meaningful next year. So we'll tell you a lot more about that once we have the.

Speaker Change: Customer announcements to go with it.

But when you put all that together it does tend to cellulosic stream into a growth stream along with the polyester stream, both tied to sustainability and circular economy trends that are presenting a huge amount of volume growth like replacing Polycarbon BPA, we can have much higher growth rate than the underlying markets.

Mark J. Costa: We can have a much higher growth rate than the underlying markets as we're replacing polystyrene, or we're replacing other plastics with recycled content-made products that can give us a lot of levered growth. And the one thing you know about advanced materials on both sides is that there's a lot of fixed cost leverage. So you've seen the sort of pain of that in the fourth quarter of 22 and 23. But it looks exactly the same on the way up.

Speaker Change: Is it replacing polystyrene or replacing other plastics with the recycled content made products that can give us a lot of levered growth and the one thing we know about advanced materials on both sides is theres a lot of fixed cost leverage so you've seen that sort of pain of that in the fourth quarter of 'twenty two 'twenty three.

Speaker Change: It looks exactly the same on the way up so as you get volume coming back to <unk>.

Mark J. Costa: So as you get volume coming back, the fixed-cost leverage of these very high-margin products, you know, across especially plastics and now some of it inside cellulosics, which also has a lot of fixed costs, is very attractive. Thank you. Our next question comes from Mike Sison of Wales Fargo. The line is now open, please go ahead.

Speaker Change: Cost leverage of these very high margin products.

Speaker Change: Cross, especially plastics and now some of it inside Cellulosic, which also has a lot of fixed costs.

Speaker Change: It is very attractive.

Sure.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Mike Sison of Wells Fargo.

Michael J. Sison: Your line is now open. Please go ahead.

Michael J. Sison: He chairs.

Michael J. Sison: Hey, cheers. Nice outlook for 24 so far. I'm just curious, Mark, your volumes were down in the fourth. It's been quite some time since we've seen volume growth. What do you think AFP and AM will sort of turn around the quarter? And what type of volume growth do you think the businesses need to generate to hit the midpoint of your guide? Yeah, it's a great question.

Michael J. Sison: A nice outlook for 'twenty four so far I'm just curious Marc.

Michael J. Sison: Your volumes were down mid single digits, thus far at the spin.

Michael J. Sison: Quite some time since we've seen volume growth what do you think AFP and am will sort of turn the quarter and what type of volume growth do you think.

Michael J. Sison: Businesses need to generate to hit the midpoint of your guide.

Speaker Change: Yes, it's a great question I think that.

Mark J. Costa: I think that, you know, we'll certainly turn the quarter in Q2 and the back half of this year. But it's a much closer call in Q1 because of some of these unique things I've talked about overall. You know, this timing on fills and customer volume and fibers is, you know, a bit bumpy. And you still have some destocking going on in ag and medical, those kind of things that certainly weighed on Q4 and will weigh on Q1 to some degree. But, you know, we are seeing volumes improve, and sort of the core businesses are the ones, especially the ones that all started destocking earlier, whether it's consumer durables, building construction, et cetera. You can definitely see that the stocking is over. We just don't have everything, you know, done with that topic yet. I'll be happy to see it. It is extraordinary when you think about it.

Speaker Change: Well certainly turned the quarter in Q2 and the back half of this year.

Speaker Change: Much closer call on Q1.

Because of some of these unique and I've talked about overall EMEA, that's Phil is timing on films and customer buying and fibers is a.

Speaker Change: A bit bumpy.

Speaker Change:

Speaker Change: You still have some destocking going on in AG and medical those kinds of things that are certainly weighed on Q4 and will weigh on Q1 to some degree.

But we are seeing volumes improve and sort of the core businesses are the ones, especially ones that all started destocking earlier, whether it's consumer durables building construction et cetera.

Speaker Change: You can definitely see that destocking is over.

Speaker Change: We just don't have everything done with that topic I'll be happy to see it is extraordinary when you think about it.

Willie McClain: You know, we're sort of in the sixth quarter of destocking. 2020 had like two quarters, and in 2009 had like three quarters. So we are in uncharted territory with this destocking thing, and we all need to own that, but you can definitely see it's coming to an end, and we're happy to get our production volumes connected back to markets, and that will give us a nice recovery this year. I got it.

Speaker Change: We're sort of.

Speaker Change: A six quarter of Destocking.

Speaker Change: 2020 hedge like two quarters in 202019.

Speaker Change: <unk> like three quarters. So we are in unchartered territory.

Speaker Change: On this destocking thing and we all need to own that but you can definitely see it's coming to an end and we're happy to get our production volumes connected back to markets.

Speaker Change: And that will give us a nice recovery this year.

Got it and then just a quick follow up.

Michael J. Sison: And then just a quick follow-up on adjusting EBIT margins for AFP and AM. It looks like we'll see some improvement in 24 versus 23, but historically, both of those have been closer to 20%. Is that sort of where you think margins can get to over time? Hi Mike, this is Willie.

Speaker Change: Adjusted EBIT margins for AFP and am yes, it looks like we'll see some improvement in 24 versus 23, but historically they've been both of those have been crossing that 20% is that.

Speaker Change: Why do you think margins can get to over time.

Speaker Change: And Mike This is Willie yet as Mark has highlighted as we get the benefits of that fixed cost leverage as well as we get the mix upgrades with our circular solution, we definitely believe.

Aleksey Yefremov: As Mark has highlighted, as we get the benefits of that fixed cost leverage, as well as we get the mix upgrades with our circular solution, we definitely believe both AM and AFP can grow back to those and towards those 20% type margins. All right, thank you. Thanks, bye.

Willie: Am and AFP can go back to those and towards that 20% type margins.

Speaker Change: Okay. Thank you.

Speaker Change: Thanks, Mike.

Willie McClain: Thanks. Our next question comes from Aleksey Yefremov of KeyBank Capital Markets. The line is now open, please go ahead. Thanks. Good morning, everyone.

Speaker Change: Thank you our next.

Speaker Change: Next question comes from Alexia <unk> of Keybanc capital markets.

Alexia: Your line is now open. Please go ahead.

Alexia: Yeah.

Alexia: Thanks, Good morning, everyone.

Aleksey Yefremov: Are you likely to stagger construction of methanolosis numbers two and number three? Or do you think you're in a strong enough capital position and confident enough in this business to build the two simultaneously? I would highlight that we would expect that we would stagger these; there's not going to be a significant difference, but they will definitely be staggered with the French project, as Mark said, breaking ground in late summer, and then as we make progress on that, we would look to then shortly after that to start our second U.S. project. Thanks, and stay on the same topic. Do you have any significant number of customers who might be on the fence right now telling you they'd like to see the Kingsport plant start up, and then if that works well, there could be a lot more customers willing to sign up for the other two. No, we definitely think so.

Alexia: Are you likely to stagger construction of meta analysis number two and number three or do you think you.

Alexia: Strong enough capital position and confidence in this business to build the choose simultaneously.

Alexia: I would highlight we would expect that we would stagger seasonal vaccine, they're not going to be a significant difference, but they will definitely be staggered with the France project as Mark said breaking ground.

Alexia: Ground in late summer and then as we make progress on that we would look to then shortly after that.

Alexia: To start our second U S project.

Alexia: Thanks.

Speaker Change: Staying on the same topic do you have any significant number of customers who might be on the SaaS right now telling you they'd like.

Speaker Change: Do you see the Kingsport plant start up and then if that works well it could be a lot more customers willing to sign up for the end of June.

Speaker Change: No we definitely think so.

Mark J. Costa: I mean, you know, this industry doesn't have a lot of examples of inventing and having successful environmental technology solutions, whether it's recycled content or carbon efficiency. So customers are cautious about how much they want to sign up for and buy until they really have proof that it's going to be available reliably at prices that make sense to them. And so I think, you know, we're already in the market, fortunately, confirming our price expectations with the Pepsi contract, with the specialties that we're already selling, so we feel good about that. But I think there is a lot of potential pent-up demand once the plant is up and running and validated, which will certainly help load this plant. Obviously, that's part of our assumption around $75 million of incremental EBITDA this year, and that will help give us upside to it.

Speaker Change: This industry.

Speaker Change: It doesn't have a lot of examples of of inventing and having successful environmental technology solutions, whether it's recycled content or carbon efficiency.

Speaker Change: So customers are cautious.

Speaker Change: About how much they want to sign up and buy until they really are proof that it's going to be available reliably.

Speaker Change: At prices that make sense to them and.

Speaker Change: And so I think.

Speaker Change: We're already in the market, Fortunately confirming our price expectations with Pepsi contract with especially is that we're already selling so.

Speaker Change: So we feel good about that.

But I think there is a lot of potential pent up demand once the plant is up and running and validated.

Speaker Change: That will certainly help load. This plant obviously, that's part of our assumption around the $75 million of incremental EBITDA. This year.

Speaker Change: That will help give us upside to it the downside of course is markets are weak and so there's just the limitation at the rate at which customers are going to launch products in a weak market and so you have to net those together and trying to come up with.

Mark J. Costa: The downside, of course, is that markets are weak, and so there's just a limitation at the rate at which customers are going to launch products in a weak market, and so you have to juggle those things in trying to come up with. The appropriate forecast, which we've attempted to do with this $75 million UBITDA guide for the first point for this year, and then obviously, that will continue to ramp up and be a significant tailwind in 2025 relative to 2020. Thanks, Mark.

Speaker Change: The appropriate forecast, which we've attempted to do with this $75 million EBITDA guide.

Speaker Change: For the first point for this year and then obviously that will continue to ramp up and be a significant tailwind in 'twenty five relative to 'twenty four.

Speaker Change: Thanks Mark.

Kevin W. McCarthy: Yep. Our next question comes from Kevin McCarthy of Vertical Research Partners. Your line is now open, please go ahead. Thank you and good morning.

Speaker Change: Yep.

Speaker Change: Thank you.

Kevin W. McCarthy: Next question comes from Kevin Mccarthy of vertical research partners.

Kevin W. McCarthy: Your line is now please go ahead.

Kevin W. McCarthy: Yes, Thank you and good morning, Mark if the methanol USCIS startup and ramp goes smoothly such that you earned $75 million in EBITDA as you've indicated.

Willie McClain: Mark, if the methanolysis startup and ramp goes smoothly, such that you earn $75 million in EBITDA, as you've indicated, what could that earnings level become in 2025? Kevin, this is Willie, and what I would highlight is that, as we've talked about, roughly $50 million of EBITDA will come from the Advanced Materials segment. That's primarily in the second half, so as I think about where we'll be, effectively, we'll be at greater than a $75 million EBITDA run rate within that business. We've got a strong pathway to exiting 2025 as we think about brands and being able to connect them to even more brand launches in 2025. That will be at roughly a $150 million run rate as we exit 2025. And then, ultimately, we expect greater than $150 million of EBITDA from this facility on an annual basis. I appreciate that, and secondly, if I may, Mark, I want to come back to the fibers discussion. I think it's interesting that you've got so much under contract through 2026. When we talk about them,

Kevin W. McCarthy: What could that earnings level become in 2025.

Mark J. Costa: Kevin This is really what I would highlight is.

Speaker Change: As we've talked about roughly $50 million of EBITDA.

Speaker Change: We will come in the advanced materials.

Speaker Change: Segment, that's primarily in the second half so as I think about what will be effectively will be greater than $75 million EBITDA run rate within that business.

Speaker Change: We've got a strong pathway to exiting 2025, as we think about brand and being able to connect and then even more brand launches in 'twenty five.

Speaker Change: We will be.

Speaker Change: Roughly $150 million run rate.

Speaker Change: We exit 'twenty five and then ultimately we expect greater than $150 million of EBITDA from this facility on an annual basis.

Speaker Change: Yeah.

Speaker Change: Perfect I appreciate that.

Speaker Change: Secondly, if I may.

Speaker Change: Mark I wanted to come back to the fibers discussion I think it's interesting that you've got so much under contract through 2026.

When we talk about.

Kevin W. McCarthy: You know, a lot of the output being under contract. Can you speak to whether that just means the volume is committed, or can you speak to the degree to which you've got visibility into both pricing and cost? Just trying to get a sense for, you know, kind of the confidence intervals around the economics. Yeah, so the answer to the commitments we have in 25 and 26, with the market, is both price and cost. It covers both.

Speaker Change: A lot of the output being under contract.

Mark J. Costa: Can you speak to does that just mean, the volume is committed or or could you speak to the degree to which you've got visibility into both pricing and cost just trying to get a sense for.

Mark J. Costa: Kind of the confidence intervals around the economics through 'twenty six.

Speaker Change: Yes, so the answer to the commitments, we have in 'twenty five and 26.

Speaker Change: With the market is both on price and cost covers but now there is ranges in the volume side right. So they have a man and a max on volume, but the pricing formula which in most cases include.

Mark J. Costa: Now there's ranges on the volume side, right, so they have a minimum and a maximum on volume, but the pricing formula, which in most cases includes these prices, will then, you know, adjust based on changes in energy and raw materials. So, you know, the market is sort of cost faster, if you will, to some degree. So, you know, these margins, you know, if we get a tailwind, we'll share that with the customers. If costs go up, you know, we'll raise our prices formulaically. But that is the nature of most of these constructs; not all, but most, you know, have some version of price in them, and a lot of them include a CPI.

Speaker Change: These prices will adjust.

Speaker Change: Just based on changes in <unk>.

Speaker Change: Energy and raw material.

Speaker Change: So it's sort of cost pass through if you will to some degree.

Speaker Change: So these margins.

If we get a tailwind we'll share that with customers if costs go up we will raise our prices.

<unk>.

That is the nature of most of these contracts not all but most.

Speaker Change: I have some version of pricing that a lot of it concludes the CPT.

Mark J. Costa: So no, that's, that's, but there's always a little bit of potential volume decline in the market that we have to accommodate for them. So that part has room for sort of changes in market demand. Got it, thank you very much. Our next question comes from Lawrence Alexander of Geoffreys. The line is now open, please go ahead.

Speaker Change: But theres always a little bit of potential volume decline in the market.

Speaker Change: We have to accommodate with them. So that part has room for sort of changes in market demand.

Speaker Change: Got it thank you very much.

Speaker Change: Thank you.

Our next question comes from Laurence Alexander of Jefferies.

Laurence Alexander: Please go ahead.

Laurence Alexander: Good morning, can you on the renewable side, can you discuss how the policy landscape is shifting in terms of the potential incentives you may receive for the second and third plane compared to what you had initially expected or broader policy shifts that might be incentivizing? Sure. So two different sets of topics there.

Laurence Alexander: Good morning can you on the renewable side can you can you discuss how the policy landscape is shifting.

Laurence Alexander: In terms of the <unk>.

Laurence Alexander: Potential incentives you may receive.

Laurence Alexander: And third plant compared to what you had initially expected or.

Laurence Alexander: Broader policy shifts that might be.

Laurence Alexander: <unk> customers.

Speaker Change: Sure. So two different sets of topics there on the incentives.

Mark J. Costa: On the incentives, you know, the European Union and the governments within it have certain prescribed methodologies around how they do incentives, and we are, you know, working to get the higher end of what's allowed in the European Union. We're in the middle of finalizing that, so I can't talk about it right now. But there are some improvements we expect to get as the inflationary environment, you know, has impacted CapEx costs. So we feel good about where we're at on that. When it comes to the U.S., you know, the Inflation Reduction Act is out there, as I think we discussed in the third quarter call. We do have an application in to them. We have not yet been notified about whether or not we'll get that reward and what the level of the reward will be.

Speaker Change: The European Union and the government's within it has certain prescribed methodologies around how they do incentives and we are working to get the higher end of what's allowed in the European Union. We are in the middle of finalizing that so I can't talk about it right now.

Speaker Change: But there are some improvements we expect to get is the inflationary environment.

Speaker Change: The impact of the Capex costs so.

Speaker Change: So we feel good about where we're at on that.

Speaker Change: When it comes to the U S inflation reduction act is out there as I think we've discussed in the third quarter call. We do have an application in to them, we have not yet been notified about whether or not we will get that reward.

And what the level of the award will be we've asked for a substantial amount of capital because it could support some very.

Mark J. Costa: We've asked for a substantial amount of capital because it would support some very impressive environmental investments around the plant that would allow that plant to be carbon neutral, which would be extremely attractive. You know, there are two things customers want right now: 100% recycled content. They don't want anything less because they want to have a bold claim and be carbon neutral or as close to that as possible. And so the second and third plants are both capable of being carbon neutral, and they are, you know, obviously capable of delivering 100% recycled content.

Speaker Change: Impressive environmental investments around the plant that will allow that plant to be carbon neutral.

Speaker Change: Which would be extremely attractive there are two things customers want right now 100% recycled content.

Speaker Change: Don't want anything less cars.

Speaker Change: They want to have a bold claim.

Speaker Change: They want to be carbon neutral or as close to that as possible and so the second and third plants are both capable of being carbon neutral.

Speaker Change: And they are at.

Obviously capable of delivering hundred percent recycled content.

Mark J. Costa: So, you know, there's a lot of interest and attraction to making sure these kinds of plants get built. But, you know, it's a political process, and I never want to guess at politics until I know what the incentives are. We'll just wait and see what they do. When it comes to the policy for the circular economy, the European policy in place that they're finalizing the rules on as we speak is very attractive for driving demand for the product. So it requires circularity and certain percentage targets for like beverages, 25% by next year. And the industry only probably has half of the capacity mechanically to serve that. So there's a lot of demand and market need in that space, and then all packaging needs to be 30% recycled content. As I mentioned earlier, no one wants 25% or 30%. Every customer we're talking to wants 100%. So the demand is probably in excess of the regulatory requirements, but there are definitely requirements that will force people to start getting recycled content. And it also requires, you know, the content to be made from packaging placed on the European market.

Speaker Change: There's a lot of interest in an attraction to making sure these kind of plants get built.

It's a political process and I never want against politics, So until I know the incentives are we'll just wait and see what the what they do.

Speaker Change: When it comes to the policy for the circular economy.

Speaker Change: The European policy in place that they are finalizing the rules on as we speak is very attractive for driving demand.

Speaker Change: And of the products. So it's a requires circularity and certain percentage targets for like beverage is 25% by next year.

And the industry only probably has half of that capacity mechanically to serve that so theres a lot of demand and market needs.

Speaker Change: That space.

Speaker Change: And then all packaging needs to be 30% buy recycled content as I mentioned earlier no. One wants 25 or 30% every customer we're talking to you once 100.

Speaker Change: So the demand is probably in excess of the regulatory requirements, but there's definitely requirements that will force people to start getting recycled content.

Speaker Change: It also requires the content to be made from packaging place in the European market. So that allows that to be a regional circular business. So we're still waiting for all that to be finalized, but thats sort of where it is headed at this point as we understand it.

Mark J. Costa: So it allows that to be a regional circular business. We're still waiting for all that to be finalized, but that's sort of where it's headed at this point, as we understand it. The U.S. is a patchwork, so every state's, you know, developing a different point of view around the circular economy and how they want it to play out. Half the country that is the more conservative states are all passing very sort of favorable circular economy language. The other half; it's a patchwork.

Speaker Change: In the U S is a patchwork.

Speaker Change: Every states developing a different point of view around circular economy, and how they wanted to play out half the country that is the more conservative country States are all passing series are very sort of favorable circular economy language.

Speaker Change: There has it's it's a patchwork that so far everything we've seen our technology fits within the definitions of being a solution to the plastic waste crisis.

Laurence Alexander: But so far, everything we've seen, our technology fits within the definitions of being a solution to the plastic waste crisis. And then, just as we start looking towards 2025 and 2026, to what extent have you pulled forward productivity? That would make it more difficult to achieve incremental productivity gains over the next few years. Matt, are you talking about...

Speaker Change: And then just.

Speaker Change: Looking towards 2025 and 2021.

Speaker Change: To what extent have you pull forwards.

Speaker Change: Productivity.

Speaker Change: That would make it more difficult to get sort of incremental productivity gains over the next few years.

Speaker Change: Are you talking about.

Mark J. Costa: So total company on productivity, I'm sorry, I'm just not sure I understand the question. Yeah, the kind of the kind of structural productivity gains you've been delivering kind of fairly consistently. I guess my impression is that effort ramped up in a more recent period.

Speaker Change: Total company on productivity I'm, sorry, I, just I'm not sure I understand the question you're talking about just general productivity in the company or so.

Speaker Change: Yes, the kind of the kind of structural productivity gains you've been delivering kind of fairly consistently.

Speaker Change: I guess my impression.

Speaker Change: That effort ramps up in more recent periods and so I'm. Just curious have you pulled things forward or should we be thinking about there is another leg of structural productivity gains over the next couple of years.

Mark J. Costa: And so I'm just curious, have you pulled things forward? Or should we be thinking about there being another leg of structural productivity gains over the next couple of years? Just what's the next piece of that story?

Speaker Change: What's the next.

Piece of that story.

Mark J. Costa: So I think what I'd say happened to us in every company is we had extraordinary inflation in 21 and 22, and we lost productivity through COVID and work at home and everything else that I think every company, including us, is working its way through. So we aggressively went after it last year, where we got $200 million of productivity above inflation to start addressing some of that sort of extraordinary inflation and get our cost structure where it should be. This year, as you saw, we're just getting enough productivity to offset inflation. So $100 million of productivity offsetting total inflation of labor and external spending is what I'd say.

Yes, so I think what I'd say happened to us in every company as we had extraordinary inflation in 'twenty, one and 'twenty, two and we lost productivity through Covid and work at home and everything else that I think every company, including US is working our way through.

Speaker Change: So we aggressively went after it last year, where we got $200 million of of productivity above inflation to start addressing some of that.

Speaker Change: Sort of extraordinary inflation and get our cost structure, where it should be this year. As you saw we're just getting enough productivity to offset inflation, so $100 million of productivity offsetting.

Speaker Change: Offsetting total inflation.

Speaker Change: Labor and external spend.

And so thats more normal is what I would say we have to have productivity every year.

Mark J. Costa: We have to have productivity every year where we're offsetting inflation so that we have the ability to invest in growth, deliver earnings growth, and cash to the shareholders all at the same time. And so that's sort of where we are. And so you should expect continued productivity, but it's more in the offsetting inflation category going forward than some big.

We're we're offsetting inflation.

Speaker Change: We have the ability to invest in growth deliver earnings growth and cash to the shareholders.

Speaker Change: All at the same time, and so that's sort of where we're at and so you should expect continued productivity, but it's more in the offsetting inflation category going forward than some big <unk>.

Salvatore Tiano: Additional step up, right? The leverage for our company right now is volume recovery, especially in the specialties where the value, you know, the value per product is much higher than the company average. So you get volume, you get mixed lift, you get fixed cost leverage, which is how we've demonstrated a lot of success in the past.

Additional step up the leverage for our company right now is volume recovery.

Especially in the specialties, where the value the value per product is much higher than the company average. So you get volume you get mixed lift you get fixed cost leverage.

She is how we've demonstrated success in our past and certainly the strategy, we're going to be on this year and leveraging into next year with innovation.

Willie McClain: And certainly the strategy we're going to be on this year and leveraging into next year with innovation. Thank you. Let's make the next question the last one, please. Alec, my apologies.

Speaker Change: Thank you.

Speaker Change: Let's make the next question the last one please.

Speaker Change: Okay.

Speaker Change: Alex.

Alex: My apologies.

Salvatore Tiano: Thank you. Our final question for today comes from Salvatore Tiano from Bank of America. Your line is now open. Please go ahead. Thank you. I just want to ask about the M&A landscape. What are you seeing here? And now that it looks like things are finally improving, are you more incentivized to go out and look for specific targets? Yes, Salvador, this is Willie. You know, what I would highlight is that I think we've shown that we're disciplined with our portfolio overall. As we think about priorities for bolt-ons, which we're always looking for, those bolt-ons would be within our additives and functional products and advanced materials segments, but our key focus that we have right now is continuing to execute on our organic growth program, but to your point, there's probably better deal space coming as there is both recovery from a business standpoint and the rate environment is changing.

Our final question for state comes from Salvator Tiano from Bank of America.

Salvator Tiano: Your line is now open. Please go ahead.

Salvator Tiano: Thank you I just wanted to ask about the M&A landscape. What are you seeing here and now that it looks like things are finally, improving I think you are more incentivized to go out and look for specific targets.

Salvator Tiano: Yes.

Salvator Tiano: Really what I would highlight is I think we've shown that we are disciplined with within our portfolio overall.

Salvator Tiano: As we think about priorities for bolt ons, which we're always looking for those bolt ons will be within our.

Salvator Tiano: Additives and functional products and advanced materials segment.

Salvator Tiano: But our key focus that we have right now is continuing to execute on our organic growth program, but to your point there.

Salvator Tiano: Probably better deal space coming as there is.

Salvator Tiano: Both recovery from a business standpoint.

Willie McClain: All right. Thank you. Thank you, everybody, for joining us. I hope you have a great day. Thank you for joining today's call. You may now disconnect your line.

Salvator Tiano: The rates environment is changing.

Speaker Change: Thank you very much.

Alright. Thank you. Thank you everybody for joining us I hope you have a great day.

Speaker Change: Thank you for joining today's call you may now disconnect your lines.

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