Elliot, the operator, opened the Second Quarter 2023 Eastman Conference Call and welcomed everyone. Greg Riddle of Eastman Investor Relations then took over the call and introduced Mark Costa, Board Chair and CEO; William McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. The financial results news release, SEC 8-K filing, slides, and prepared remarks were posted on Eastman's website, www.eastman.com. Greg reminded everyone of the forward-looking statements and excluded and adjusted items. The call then proceeded to Q&A with Josh Spector from UBS.

Mark Costa discussed the cadence of earnings in the second half of the year, noting that while demand at the primary level is not getting worse, there is more destocking that is continuing to occur in some end markets. He mentioned that automotive and aviation are in good shape, and have a lot of pent-up demand. He also noted that some stable end markets have seen a 3-5% decrease in demand.

Fast-moving consumer goods companies are holding prices and expanding their margins with raw material tailwinds. In addition, destocking in the fourth quarter and first quarter was 8-12%, with lessening in the second quarter. Destocking in the Advanced Materials segment was extreme in the second quarter, but is expected to improve in the back half of the year. This destocking should not repeat in 2024, providing a tailwind for the year.

The demand for automotive and durable goods drastically decreased in the fourth quarter of last year, leading to a 40% decrease in the market. This destocking continued into the first quarter, but has since abated in the second quarter, getting 22% better. Building & Construction has also been destocking this year, and is expected to remain flat in the first half. This destocking, combined with inventory reductions to meet a lower demand outlook, led to a reduction in earnings.

Mark Costa states that the company is expecting a better year in 2024 due to the normal seasonality returning to the demand outlook, as well as the recovery of the volume and mix that was lost this year. He does not provide a specific forecast for the second half of the year, but states that it will be slightly lower than the first half of the year. The main headwind for the second half of the year is the inventory management and the associated $75 million headwind.

Mark Costa answers Vincent Andrews' question about what customers are telling E.I. du Pont de Nemours and Company about their intentions for inventory management. He states that they are attempting to keep it simple, as the answer was lengthy.

Customers have been destocking in various end markets, with some markets being more stable than others. Personal care and medical markets have been relatively stable, while durables have been more difficult to judge due to the long supply chain. Demand was low in January, got better in March, and then went to a low point in April. There was less destocking in the second quarter, and customers in June assumed the back half of the year would be better.

Inventory levels from Q1 to Q2 are about flat, but are expected to decline by $300 million in the back half of the year. This will help generate $100 million in working capital throughout the year.

Mark Costa explains that Advanced Materials and AFP are seeing raw material benefits, with VAM and PVOH prices dropping significantly in Advanced Materials and PX prices holding up in AFP. He notes that the spread tailwind in Advanced Materials is over $100 million, but the spread improvement in AFP is not as significant due to cost pass-through contracts. He notes that this is helping with some of the demand challenges and building a good margin position for the future.

Mark Costa discusses the commitment to recycled content and products that is still strong globally. 70% of the potential output from the Kingsport plant has customers who are committed. However, when it comes to PET and textile contracts, there is a slower pace of contracting due to demand uncertainty and price volatility in the plastics markets.

Companies are negotiating complicated contracts with Pepsi, which are being slowed down due to current market conditions. Chemical recycling is necessary for applications that require recycled content, as mechanical recycling is not sufficient. Regulatory requirements in Europe will require companies to have recycled content, and there is high engagement in these contracts which is expected to be resolved.

Mark Costa explains that the Advanced Materials segment has been affected by the pandemic, supply chain crisis, and recession, leading to a short-term constraint in consumer spending and destocking of high-value products. Despite this, the company still sees the destination for this business as an adjusted EBIT of $700 million.

The paragraph discusses the expected recovery of the market in the back half of the year and the potential for substantial new volume from recycled content applications. It also notes that there is not a lot of new product launches in the current market, but new business is being won. Additionally, margins are expected to recover, leading to better earnings in the coming years and the potential to reach $700 million in 2024 and 2025.

Mark Costa argues that the industry has gone into a groupthink that the rest of the year will be bad, and everyone is managing their inventory accordingly. However, there is a limit to how much destocking can occur and there is still pent-up demand in certain markets, like automotive and building construction. With the actions taken by the company and others, inventories are being driven to very low levels, and it is likely that they will need to be restocked in an improving demand environment.

William McLain explains that the operating costs of the Kingsport project will be roughly neutral on a year-over-year basis, and that the revenue growth from the project will be accretive to EBITDA. He estimates that the $75 million of EBITDA on a year-over-year basis will come from Advanced Materials, and the absence of preproduction and start-up costs in corporate other. The CapEx for the project started at $700 million to $800 million and was increased to $800 million this year.

Greg Riddle was unable to provide the capital cost for the Kingsport project at this time. Mark Costa then discussed the contracts for fibers and tow, noting that they do not have price increases embedded for next year but have formulas in place to adjust for energy cost changes. He also mentioned that 75% of the contracts are now fully contracted and that the textile business is doing well in a 20% down market, with Naia's value proposition being very compelling.

Mark Costa discussed the second US PET project, which is currently focusing on incentives across several states, and the engineering work for whichever site is picked. He also noted that Pepsi is a significant baseload customer in the project, and that it is expected to bring a $450 million value for the owners. He further mentioned that in the fibers business, there is a quarterly reset of prices versus cost, and that there will be a slight step-down from Q2 to Q3 due to a lower energy environment.

William McLain and Mark Costa discuss Advanced Materials and A&FP, respectively, and their expected earnings for the third quarter. McLain expects Advanced Materials earnings to be slightly down sequentially from the second quarter, while Costa explains that A&FP's earnings will be affected by a $15 million heat transfer fluid project that was pulled into the second quarter. He also explains that A&FP's volume is "chunky" due to large projects.

Naia has been a great business for the company, allowing it to diversify its market exposure to different end markets. It has seen a huge growth in LNG due to geopolitical dynamics, and the high-value projects that come with it create a lot of earnings for the company. The opportunity for EBIT growth next year in textiles is high, as the margin recovery in cigarette filter tow has enabled the company to transition filter capacity to textiles while still growing into its excess capacity.

Mark Costa explains that Naia is a great business with good margins, and that the heat-not-burn products are growing at 15%, offsetting the 1% decline of cigarettes. Costa also explains that their goal is to win in a variety of applications with their cellulosic products, and they are aiming for $200 million EBITDA growth on top of the tow business. He also mentions their foam cellulosic Aventa, which can replace polystyrene in food packaging, and is being banned in many places.

Mark Costa states that there is destocking happening across all markets, except for building construction, as companies focus on generating cash. However, there are opportunities for restocking in all markets, and it will depend on the proportions of each market.

Mark Costa discusses the resilience of acetic anhydride in comparison to other acetyl derivatives. He explains that acetic anhydride is used in more stable markets such as food, pharma, and feed, and that customers place more value on supply security than the best price. Costa also notes that while there is some price pressure, it is not as much as in olefins and plasticizers. Laurence Alexander then asks if incremental margins for next year should be above 60%.

William McLain states that the company is focused on delivering strong cash flow and the actions they are taking will be completed this year. He also mentions that the company is focused on a bolt-on pipeline, and is looking at smaller bolt-ons in Advanced Materials and Additives & Functional Products. He cites the example of the Performance Films business, which has been performing well in the auto market.

Mark Costa explains that the global farming industry was stocking up on safety stock due to the Ukraine events in the previous year. This led to high demand in the first quarter, but as the season did not require as much product due to dry weather, downstream customers began to destock in the middle of the second quarter, resulting in a decrease in demand.

Mark Costa discussed the aviation market, noting that it has been very strong in the first half of the year and is expected to stay strong in the second half. He also noted that airlines are confident about their demand going forward, and that this confidence is informing the forecast. Other markets, however, are weaker.

Eastman CEO Mark Costa addressed the destocking of amines in the ag side, noting that other end markets such as auto, discretionary markets, personal care, and water treatment have seen soft demand due to the extremity of COVID and the resulting supply chain crisis. This has led to a buildup of inventory that is taking longer than expected to pull down. The call concluded with the CEO thanking participants for their interest in Eastman.

This summary was generated with AI and may contain some inaccuracies.