The Third Quarter 2023 Eastman Conference Call began with an introduction from the operator, followed by remarks from Greg Riddle, Eastman's Investor Relations representative. He was joined by Mark Costa, Board Chair and CEO; William McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. The company's third quarter 2023 financial results were posted on their website, along with slides and prepared remarks. Forward-looking statements were made, and the exclusion of certain non-core and unusual items from earnings was mentioned. The Q&A portion of the call began with a question from David Begleiter of Deutsche Bank.

David Begleiter asks Mark Costa for more information on the potential for 2024 earnings in light of current market conditions. Mark explains that the company's forecast is intentionally neutral and focuses on factors within their control. The biggest driver of the decline in earnings this year was volume and mix, which is expected to recover next year through a lack of destocking and innovation, particularly with the Kingsport methanolysis plant coming online.

The company is doing well with costs and revenue, and their innovation across their portfolio is driving growth. They have had success in premium interlayers, Aventa products, Naia textile, and are expecting stability in their markets, with some growth in automotive and medical industries.

The company is expecting a slight decrease in building construction, but they have implemented strategies to increase volume growth and asset utilization. This may result in strong incremental margins and improved earnings and cash flow. The company also anticipates some benefits from lower raw material inventory, which will offset any potential pricing moderation. Overall, the company is focused on controlling what they can and delivering success for their shareholders.

The speaker addresses the issue of destocking in the ag market and explains that it started in the second quarter of this year. They believe it will be resolved by the end of the fourth quarter as customers start preparing for the next planting season. Normally, inventory would be built up in the fourth quarter, but this year there will be continued destocking and a ramp up of building inventory in the first quarter of next year. The speaker also mentions that Advanced Materials has had a difficult 2022 and 2023, with expected EBIT below $400 million in 2023, but they are confident that the business can reach $500 million or more in 2024.

Mark Costa, the speaker, agrees with Frank's statement about the business improving. He explains that the demand decline has been more severe than ever before, lasting for five quarters and causing destocking in certain markets. However, some markets are starting to recover, such as durables, which saw a 40% decline in the fourth quarter of last year, followed by a 30% increase in the second quarter and another 15% increase in the third quarter. Although the fourth quarter may be slower due to seasonal factors, the bottom of the market was in the first quarter and destocking has mostly been completed by the end of the third quarter.

The destocking of specialty plastics in markets like medical and packaging is expected to be completed by the end of the year. This will result in a $450 million increase in variable margin for the AM segment. In addition, the methanolysis process will add $75 million in EBITDA next year. Stable markets like packaging and medical are expected to see modest growth, while the auto market is expected to continue growing with new innovations. The company also expects a $40 million tailwind from inventory management and $35 million headwind from currency fluctuations. Overall, the company is confident in future growth opportunities once the market stabilizes and customers are willing to invest in new launches.

Mark mentioned during the earnings call that there is potential for state or federal incentives for their US methanolysis plant. He did not specify the exact amount or timing, but it could provide a significant boost to the project.

Mark Costa discusses the Inflation Reduction Act and how it is a great program for investing in sustainable projects. He mentions that they are pursuing funding for their second methanolysis plant in the US and are also seeking tax credits. The company is also pursuing additional incentives in Europe for their project in France. Costa then talks about the sale of their plant assets to INEOS and how it is a result of their ongoing partnership and strategic goals for their Advanced Materials segment.

The team did a great job in the fourth quarter, resulting in $400 million in cash that will be used to pay down debt and be immediately beneficial. There are no other similar projects in the works, but the company is always evaluating its portfolio. The 2024 CapEx is expected to be similar to this year, with potential for ramping up or down depending on the external environment. Construction on the France and second US projects will begin in the middle of the year, with other specialty growth investments dependent on the macro environment. The company is committed to being disciplined and expects to have $250 million in free cash flow in the fourth quarter.

The company is focusing on capital allocation for 2024, with a mix of organic growth and share repurchases. They are confident in their organic growth strategy, but the macroenvironment has affected their plans. They expect earnings and cash to improve in the future, with $110 million in non-cash headwinds in 2022. Their baseline for 2024 cash is $1.4 billion, with higher cash earnings and taxes. The company does not have any restocking expectations, but some end markets have precariously thin inventories while others have just trimmed safety stocks.

The company has seen signs of customers hitting bottom in terms of inventory levels, which is encouraging. They expect some restocking to occur next year, especially in the agriculture sector. The cost of the methanolisus plant in Kingsport was initially estimated to be between $700 million to $800 million, but has since increased to the higher end of that range. The company does not disclose specific project capital for competitive reasons.

Mark Costa and Jeff Zekauskas discuss the plans for expanding Triton capacity at Eastman Chemical Company's plants in Kingsport and Normandy. While the construction timeline for the Kingsport methanolysis plant and Triton expansion has been pushed back to align with the current economic conditions, there are no changes in the company's overall strategy. The expansion is expected to generate $75 million in EBITDA in 2024 and $150 million by the end of 2024, demonstrating strong returns on investment.

The company has adjusted its spending on capital in order to make room for the higher cost of finishing methanolysis. This has resulted in a shift in timing, but there are no changes in the overall value creation from the first investment. The company's assets in Tennessee are flexible and can be used to produce various products, allowing them to monetize the recycled content as quickly as possible. The French plant will have two polymer lines that can be used to make PET or co-polyesters, but Triton is more economically made in the US due to the integrated systems and monomers available.

The company is planning to use PETG products for packaging, cosmetics, bottles, and other applications. Their assets strategy remains the same, with Kingsport focusing on specialties, France on half PET and half specialty, and the second US plant on PET and textiles. In regards to the sale of the Texas City facility, the company will retain ownership and the economics will remain the same as it operates within chemical intermediates. Pulp prices have increased in the past few months, but the company does not expect any headwinds from this in the future.

The company has made improvements to their pricing and contracts in their tow business, resulting in increased profitability in their fibers segment. They are confident in the sustainability of this higher level of profitability and have secured contracts for the next few years.

The company has seen lower energy costs than expected and has gained confidence in their contracts and structures. They have also made investments and improved their facilities, leading to a strong contribution to cash. CapEx is expected to stay around $800 million or less in 2024, with potential for an increase in 2025 due to upcoming growth projects.

The speaker is discussing their company's projected earnings for the future and states that it will likely be above $800 million. They also mention a question from a conference call about increased revenues in the fourth quarter, which they attribute to the impact of oil prices on their products. They also mention a pull forward of specialty fluids in the third quarter, which resulted in a smaller drop in earnings than originally expected.

Mark Costa, CEO of AFP, discusses the changing fluids sales and the $10 million drop from Q3 to Q4, leading to a decline in AFP. However, the LNG fills are a great business opportunity and help diversify exposure to the traditional chemical construction cycle. With the Ukraine-Russia situation, there is a high demand for these fills and AFP is well positioned to meet it. The UAW strike has a limited impact on AFP's auto business as it only accounts for 20% of their global business. Overall, the auto business has been solid for AFP.

The company has experienced growth in the US and Europe, but not in China. They expected to see growth in the second half of the year, but it did not happen. This has affected their performance films business in China. The company expects to do better next year, but there are ups and downs in different markets. The company had previously guided to a cost headwind related to pension and OPEB of $110 million, which is still expected for this year. They do not anticipate any major changes for 2024.

The speaker responds to a question about the potential EBITDA additions from the second plant in the US and the plant being built in France. They state that the first plant will likely have higher EBITDA due to its specialty focus. The speaker also mentions that medical demand is currently above pre-COVID levels, but the supply chain crisis has caused some customers to build up inventory.

The company's destocking event has caused prices to come down in the third and second quarters, but the market is expected to improve next year. The company does not anticipate significant price increases for existing products in the specialties, but may increase prices in chemical intermediates due to the current challenging market situation. There is an expectation for prices to normalize and improve in the future.

Due to excess capacity and low demand for propylene, there is compression in the market. However, the company has been successful in maintaining high prices and improving their price to variable cost ratio. The market for the product from the Kingsport plant and circular products is progressing well with no issues in getting premiums for recycled content and good conversations with customers for PET premiums. The methanolysis plant is being completed and there is excitement around it, with a great marketing tool being the video showcasing the process of turning garbage into clear pellets. Customers are impressed with the low quality material being used.

The company is receiving positive feedback from customers about their ability to turn garbage into high-quality pellets. They are targeting applications where mechanical recycling is not suitable, allowing them to command a higher premium. There have been concerns about rising capital costs in the industry, but the company is focused on mitigating these issues and ensuring a good return on investment. The recent construction issues at their Kingsport project were isolated and specific.

The company had issues with cost control in the past, but they have learned from their mistakes and are taking a different approach for their next two projects. They are confident in their ability to accurately estimate and manage costs for these projects. They are also pursuing incentives to help reduce capital risk and improve returns. The processing for the first plant has gone well so far.

The speaker discusses the progress of a new proprietary process for chemical recycling and mentions that there have been some challenges but they are confident in its success. They also mention that the cost of sourcing materials is better than expected and they have long-term contracts in place. The final step is to improve the technology's economics and effectiveness in the next two months. They are excited about the potential for this process to improve earnings and create value for the company. The last question in the conference call is about the potential volatility of the estimated $450 million EBITDA from the three plants over a typical seven-year cycle.

Mark Costa discusses the stability of margins for their new plant and their focus on securing contracts that pass through changes in feedstock and energy costs. They have no plans to enter the merchant PET market. On the specialty side, they have demonstrated strong pricing power and have been able to maintain stable price to variable cost ratios. The PET market is more stable than other discretionary markets and the regional focus on solving local packaging waste issues adds further stability to the business.

The focus on solving the local impact and protecting brand equity is important for brands in the polymer industry, especially in Europe where regulators are writing policies. Investments in this industry are centered around regional aspects, and while there may still be demand uncertainty, EBITDA is expected to be stable. Eastman has sold their Texas City facility, which is not part of their strategic focus on anhydride and anhydride derivatives and cellulosics, but this sale has no effect on their rights to use or license their technology.

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