Eastman Chemical Company (NYSE:EMN) Q1 2024 Earnings Call Transcript

Eastman Chemical Company (NYSE:EMN) Q1 2024 Earnings Call Transcript April 26, 2024

Eastman Chemical Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the First Quarter 2024 Eastman Conference Call. Today’s conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We’ll now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead, sir.

Greg Riddle: Okay. Thank you, Lydia, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday, after market closed, we posted our first quarter 2024 financial results news release and SEC 8-K filing, our slides and the related prepared remarks in the Investors section of our website, www.eastman.com. Before we begin, I’ll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our first quarter 2024 financial results news release, during this call, in the preceding slides and prepared remarks, and in our filings with the SEC, including the Form 10-K filed for full-year 2023 and the Form 10-Q to be filed for first quarter 2024.

Second, earnings referenced in this presentation excludes certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the first quarter 2024 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A. Lydia, please let’s start with our first question.

See also 11 Oversold Growth Stocks to Buy Right Now and 10 Leisure and Recreation Services Stocks to Buy.

Q&A Session

Operator: [Operator Instructions] Our first question today comes from Vincent Andrews of Morgan Stanley. Please go ahead. Your line is open.

Vincent Andrews: Mark, if I could ask you on the France project. Could you talk a little bit about what you think the scope of the timing delay might be? It sounds like they’re still committed to going forward there, but I have some issues to iron out on the customer and the cost side. So what type of timing delay are we talking about and what’s your confidence that both those issues will be resolved?

Mark Costa: So, good morning, Vincent, and thanks for the question. Overall, we’re incredibly excited about the circular platform, excited about how we’re operating the first plan, proving out this technology works and then have a lot of engaged customers and also excited about Longview with the DOE grant and the Pepsi contract that gives us a lot of confidence. And we believe long term, the European market is going to be structurally an extremely attractive market to serve. But there are sort of two issues we’re working with that we mentioned in the prepared remarks. There’s a sort of regulatory uncertainty and there’s just continuing to do the work we always do in dealing with inflation and getting the CapEx number to where it needs to be for good investment.

And on the CapEx, you know we feel good about how we can manage that. So it really comes down to customer contracts and EU policy. And what I’d say is the European Union has been far ahead of the world on recognizing both the carbon issues in this world of climate change and having aggressive policy that, and also recognizing that they’ve got a packaging waste problem like we do everywhere else and wanting to have policy that really drives the brands, suppliers, the market to sort of address that packaging waste, which also includes a lot of carbon emissions. And so, they developed a policy been – that is quite comprehensive that has some reduced and reused goals that will be sort of help the problem, but really focused on how do we get all of this material recycled.

And it’s still being finalized, but they’ve got aggressive targets like 25% content in beverages next year in ’25 and everything being at 30%, very high local recycling rates required in Europe, EPR taxes on people who don’t do it, strict definitions of what is a recyclable polymer et cetera. And so all that, I think, is headed to be in policy makes sense. But there was one recent change that created some uncertainty on how the brands can achieve the recycled content targets. And there’s a problem they face, especially as you go from this year to next year, which is they’re only recycling about 12% of PET back to bottles at the food grade level. They got to be at 25% next year. So they will struggle to achieve that pretty significantly, as well as there are some WTO issues that come up around imports.

And so, they changed the policy from requiring everything to be made from local material to allow imports to be included. Now they put a bunch of restrictions on what imports would qualify around, how it’s being made from a sustainability point of view as well as quality standards. And there’s still a lot of complexity in trying to understand that, but it would probably make it very difficult to import from most countries in these equivalency requirements. And it really creates a huge amount of complexity both for the implementation of policy as well as – and achieving the goals of high recycling rates and really issues around consumer brand equity when you’re using imports, right? Because if you bring imports into the country, you’re replacing local demand for recycling, which increases incineration, which also violates the carbon emission goals of the European Union.

The recyclability targets, which your material considered recyclable requires a very high recycling rate in the European Union, which is also a problem. And then consumers don’t want to be solving China’s waste problem. They want to see policy driving up recycling locally to address the local problem. So this creates some uncertainty and really goes back to why we had the circular contracting model of – we’re in this business to be a service provider to the brands to solve their plastic waste problem. And we’re not getting back into commodity business. So we’re sticking to our guns as we’ve told you we would around long-term take or pay contracts that provide stable margins. And so, we’re still highly engaged with customers, still very much working with us, but this has slowed down the discussion on how to structure these contracts in this market context.

I’d also note that we are targeting a lot of applications that can’t even use mechanical recycled material because of performance requirements in the package and long term, mechanical recycling won’t work anyway because it’s going to degrade without chemical recycling sort of keeping it refreshed. So we’re very confident in the long-term market structure. We believe this is a facility that should get built, but we got to stick to our milestones and our requirements around getting the contracts in place like we told you we would do.

Vincent Andrews: Okay. And what about on the cost side of the equation? You seems like you’re still working on that as well.

Mark Costa: I mean, inflation, I think, has been an issue for every project out there that I’ve seen in our industry. The supply chain crisis has driven up the cost of everything from labor to equipment et cetera. So all projects have had some amount of escalation to it. We have a good plan to get the capital to where it needs to be on the Longview plant. And we have developed a plan on how to get the capital down on the French plant. But it’s going to take a little more work on some of the elements of doing that. And so while we’re working on getting these contracts, we’re taking that extra time to continue working on reducing the CapEx, but we feel that we have a pathway to manage that issue.

Vincent Andrews: Okay. Thanks very much. Appreciate it.

Mark Costa: Yes.

Operator: Our next question comes from Aleksey Yefremov of KeyCorp. Please go ahead.

Aleksey Yefremov: Hi. Thank you, and good morning. Mark, just to follow-up on this. Do you have any idea to what degree this delay in France could maybe help you load Kingsport facility for specialty applications?

Mark Costa: So we have a lot of different flexibility. That’s the beauty of how we manage all of our polymer lines in how we optimize value. Today, we do it from Tritan to copolyesters to medical PET. And every line we ever build, the ones in France as well as the Texas project, we’ll have the flexibility to make both PET and specialty products. So, we’re always going to be optimizing value and mix. That’s the heart of our business model, and we’re very good at doing it. So in that sense, it doesn’t really matter which project gets built first. We’ll sort of optimize value between specialty and PET as we sort of build out our – sort of our global position. The first plant is already very much focused on specialty applications.

So we’ll be driving into Tritan into cosmetic packaging into shrink packaging into a variety of different applications and levering that up. And there’s things we’re working on to expand – extend the capacity on the first plant as we get it up and running, while we sort of work on building the second and third plants. And so whichever plant gets built first between Texas and France, we’ll optimize value between PET, which we have the contract with Pepsi on and specialty to maximize value as we build out the portfolio.

Aleksey Yefremov: Thanks, Mark. And on the annual guidance, nice beat in Q1. You have just a lot of details in the press release. But in general, strong start of the year, why not raise the full year? Did anything change in the rest of the year to keep the guidance the same? Or is it more conservative than anything else?

Mark Costa: It’s more the latter. When you – we’re very proud of the beat we had in Q1 and the fact that it was volume-driven, which is the key element of the challenges we had last year, frankly the whole industry had last year, to see that volume come back better than expected gives us confidence, especially because it came back in the specialties, which is where our highest value is generated for the portfolio. And so, we feel good about that. And as you look at our guidance, clearly, we have confidence in AM and AFP and we have confidence in fibers doing better. CI is always a little uncertain. But the main reason we didn’t upgrade the range is it’s the first quarter. There’s a lot of macroeconomic uncertainty out there, a lot of geopolitical uncertainty that we’re all living with every day.

And we wanted to really stick to our approach in January, which is this is a economy-neutral forecast, right? We’re not projecting fundamentals getting better in the back half of the year to deliver this range. We’re also not projecting fundamental – market – underlying demand is going to get worse in the back half of the year. We’re saying it’s neutral. If you believe fundamentals will get better in the back half, then that would be upside in our forecast. If you have concerns about geopolitics, then there’s some sort of – there’s risk to the midpoint of our forecast. But at this stage, I think it’s just prudent to be a little cautious until we see how things develop.

Aleksey Yefremov: Thanks, Mark.

Operator: The next question comes from Duffy Fischer of Goldman Sachs. Your line is open.

Duffy Fischer: Yes, good morning. Can you just give us some more details around the methanolysis plan that’s been running, say, for a month now? I’m sure some stuff you can’t, but things like what’s the premium looking like, what’s the breadth of feedstock that you’ve been able to run through. Maybe just kind of an update on how the plant is running and how you’d expect it to ramp from here over the next couple of quarters?

Mark Costa: Sure, Duffy. It’s great to get that question because we’re really excited about having this first plant up and running. This will be the world’s largest chemical recycling facility, and we’re really excited to show the world what’s possible, not just in generating earnings and growth for our owners, but in solving a pretty significant environmental problem. And we’re really excited that we’re on spec with the material and we’re serving our customers. It’s pretty amazing when you look at basically garbage going into the front of the plant and sort of on spec material coming out the back end. And it is a very complicated technology and plant. So it is non-trivial to start-up compared to, if you’re building a commodity asset.

And the good news is that we have fully confirmed that the process chemistry works, which was always the biggest question that I think people had, and we can confirm that’s working. We validated all the unit ops are functioning as designed and can run continuously. And so, we feel really good about the sort of design and the structural aspects of the plant. The challenge has been just on getting the plant to run reliably. And we’re certainly about four weeks behind schedule as we mentioned in the prepared remarks on that front. And really we’re still focused on reliability. So we haven’t moved into a broad feedstocks later ramped up the capacity a lot until we’ve actually addressed some of these mechanical issues. So all the issues we’re facing have nothing to do with the process chemistry, it’s literally mechanical issues.

Some of it was in the beginning, construction errors, leaks and improperly installed equipment. We believe we’ve addressed most of those issues, actually all of those issues at this stage. Then there’s been sort of more than normal early failure of some pieces of equipment like instrumentation, valves and some other equipment. This is not unique to us. We see all of our peers having the same challenge globally where just equipment wasn’t as made as well as we would hope in the supply chain crisis. And we’re all sort of dealing with these kind of sort of annoying little issues. They’re simple to solve, but they just slow you down as you have to sort of pause to address them. And we’ve also had some reliability issues on rotating equipment, especially pumps.

And that is a little more complicated. It’s a mixture of quality of – quality of assembly, some design issues and some operating learning. And we’ve done a total root cause analysis on that, feel we have a very clear understanding what’s causing it, and we’re very close to completing all the actions we need to address those issues. So I’d say from a mechanical point of view, we feel very good about where we’re at. The plant is running. Our priority right now is serving customers, which we’re doing. And we’re just in the phase of ramping up production and sort of expanding our feedstock slate to sort of try out those issues, but the 70% of the output of the plant is a monomer called DMT and that’s always clean, no matter what. So the process chemistry around sort of yield and impurities really is just about EG, which is a smaller part of the plant.

So as we ramp up, test that other material, we feel very good about supplying customers this year because their demand that we’re projecting is not close to capacity of this plant. And so, we’ve got plenty of ways to keep them served and supported. So we still feel good about the $75 million of EBITDA that we’ve got out there as having a pathway. It’s obviously a little more challenged with how we’ve had a slower start, but we feel good that we can achieve it for the year. What I’d say as far as progression goes, our plan was always to do what we’re doing right now is run at a steady state to make sure mechanically everything is fine, then you ramp up as well as start broadening the feedstock, which we’ll be doing through this next quarter.

So we’ll have a lot more to tell you about that when we get to the second quarter call.

Aleksey Yefremov: Great. Thanks. And then in the market, it seems like there’s been an inordinate number of PDH unit issues over the last couple of quarters. Maybe just bigger picture, how has that impacted your business? You obviously take a lot of propylene make derivatives, but is using that as a positive or a negative across your whole portfolio?

Mark Costa: Well, first and foremost, the sort of propylene derivatives are predominantly going to show up in CI as far as the value goes, but there are propylene derivatives that go into AFP as well as AM. So there is parts of the propylene stream that goes across the whole integrated complex. When the outages occur and the price of PGP goes up, that’s good for us, obviously. But it’s always a question of how does PGP move relative to the price of propane, you know that gets us to that spread. And through the first quarter, we certainly saw PGP move up, but we also saw propane prices come in much higher than expected. So those sort of netted out to some degree. And as we go into this quarter, those spreads look like they’re going to contract a bit from the first quarter with the way PGP prices have come off as outages have been resolved.

So it’s the nature of these olefin businesses where there’s a certain amount of up and down in spreads and that’s just factored into our guidance.

Duffy Fischer: Great. Thank you guys.

Operator: Our next question comes from Frank Mitsch of Fermium Research. Please go ahead.

Frank Mitsch: Thank you. Good morning. Mark, I do appreciate the color on what’s going on in France. And I’m trying to reconcile how the consumer brand companies are out there. They’re making promises about what percent they’re going to have recycled by what year and reasonable minds believe that they’re not going to hit those targets. And so here is an opportunity to get on board with a recycled content with you. And yet it seems like they’re waiting for government subsidies or mandates or something before they sign contracts. I mean, it almost seems hypocritical on their part in terms of making these statements. So it begs the question, how committed are they in terms of recycled content? And given where we are right now, how do you feel about the potential of – if things don’t work out the way that you anticipate walking away from the France project?

Mark Costa: Hi, Frank. So one, every customer we have that we’re meeting with, I think, is highly committed to addressing the recycled content question and making sure that they’re making their packaging with higher rates of recycled content. And frankly, many of the top brands have 100% goals on a lot of their packaging that are way above any sort of regulatory policy that’s out there. So I don’t think there’s any lack of commitment that they know this is important. I do think there is a reality, which is there is a significant lack of recycling infrastructure in this world and in mechanical recycling today. And I think most of the brands understand that a lot of what they do in packaging, mechanical recycling won’t even work properly.