As I look at it in total, basically the EBITDA is still about two-thirds Advanced Materials, one-third and other for the full year. On the margin basis question, I would say it’s above segment average margins on both EBITDA and EBIT basis in Advanced Materials.
John Roberts: Thank you.
Operator: The next question comes from Kevin McCarthy of Vertical Research Partners. Your line is open.
Kevin McCarthy: Yes, good morning, and thank you. Just to follow-up on Advanced Materials, Mark, it’s nice to see your quarterly results. And I guess if I look at the annual guide, you’re looking for a 40% growth rate at the midpoint versus 2023 annual EBIT for AM. So maybe just if we zoom out the lens, the last couple of years have been kind of dislocated for that business. You’re now seemingly coming back and regaining traction into a better place. What is your view of the likely growth rate or how do you see the puts and takes for that segment over the next couple of years? You had a few years where you did north of $500 million. Now you’ve got some methanolysis-related earnings flowing into the this segment as was just discussed. So how do you see the glide path for AM in ’25 and ’26? Maybe some color there would be helpful.
Mark Costa: Sure. So first of all, we’re extremely happy to have Advanced Materials back on track of sort of recovering out of an extremely bad demand environment and getting back on track to deliver very attractive growth and very attractive margins for our owners. At the end of ’22 and ’23 was obviously sort of the worst demand environment we’ve ever seen. When you think about how demand came off and we had over five quarters of destocking along with very low demand in all the discretionary markets, whether it be B&C or durables or even destocking in great markets like medical. I mean, we literally didn’t every market destocked out except for auto through the entire year last year. So the volume mix headwind because those were also the highest value markets was pretty significant.
So getting volume back, which is just destocking this year. Remember, we’re not forecasting any improvement in this forecast for end-market growth in the discretionary markets. We’re going to, as we’ve guided, start recovering earnings in a pretty substantial way versus last year. So as you look forward into ’25 and ’26, we believe we’ll certainly get back above where we were in 2021 and continue to grow from there, right? So we don’t have any market growth yet in this outlook for this year. So that’s upside as the markets stabilize and recover. You’ve got just getting started on the Kingsport methanolysis plant where the asset utilization is quite low and the volumes are not that high this year. So you’ve got the fill out of that plant creating a lot of value, so that you can take that $75 million to $150 million of EBITDA.
And that still has additional upside from there, but that’s just in ’25. We got wins going on in our traditional innovation model and other parts of specialty plastics that’s creating growth. You’ve got circular economy-driven growth in eyewear with our renew recycled loop for all the eyewear companies. And you’ve got automotive continuing to deliver innovative growth above-market. They’ll do that this year and they’ll keep doing that as we go forward. And so, we’ve got all these different sources of volume growth that help get back above 21 and keep going. You’ve got asset utilization tailwinds that will come with us, especially the methanolysis plant, which is a pretty large chunk of new cost into this year relative to last year and then leveraging that.
I would say on the spread side, I would assume things to be relatively neutral. So we got our margins to an attractive level to support investment in this business and from some of the challenges that we had as we caught up to inflation. And prices will probably come off a bit over time in line with how raw material and energy costs are coming off a bit. And so I would say, as you think about the modeling, I wouldn’t assume an expansion or contraction in spreads. I would assume that we’ve got attractive margins now and you’re leveraging all that volume against those margins to create pretty attractive earnings growth.
Kevin McCarthy: Thank you for that. And then just as a brief follow-up, I think your commentary cited some new application wins in Advanced Materials. What are those? And do you see yourself as gaining share relative to competitors and broader market growth rates?
Mark Costa: Yes. The model of this business has always been either growing above end markets because you’re winning in applications relative to some other material, right? And that’s been true for Tritan forever, as well as other copolyesters. So I’ll just give you a couple of examples. One, we’re growing a lot in hydration bottles in China. It wasn’t a market for us. They’re using Tritan, and we’re seeing growth in those kind of products. We’re seeing – getting into a broader set of applications with Black & Decker on their tools. Their first launch with Tritan was really successful and now they’re expanding into a broader set of tools. We have a new product for shrink packaging that’s patented and that is a recycle code one product.
So it’s fully recyclable where the historical products were not. And so, that’s gaining a lot of traction for us both in volume and margin, as we just win with a more recyclable product. Obviously, recycled content would add more value to it. So there’s always these wins we have in all kinds of places in the portfolio that sort of has allowed us to deliver attractive growth. And as much as we’re very excited about methanolysis and that is a huge priority of capital deployment and innovation effort. We want to remind investors that our core model is still active in winning business every day and we’re adding methanolysis on top of that.
Kevin McCarthy: Thanks, Mark.
Operator: The next question comes from Patrick Cunningham of Citi. Your line is open.
Patrick Cunningham: Hi, good morning. You seem to be fairly confident that we’re reconnecting the primary demand levels here. Could you get a sense that any of the volume improvement in the first quarter came from maybe some modest restocking. I know I’ve heard that potential that that’s happening on – from paints and coatings producers or maybe there’s people building safety stocks ahead of geopolitical disruption. So I’m just wondering if you’ve seen any of that in the first quarter and expectations into 2Q.
Mark Costa: Yes, I’d say, on the margin, there’s probably a bit of restocking that’s occurring. I mean, it’s almost impossible to really know the answer to that question. When you get into destocking or restocking, your customers are not exactly that clear on what’s going on. But I can definitely point to a few examples where Red Sea logistics concerns would cause some – has caused some customers to buy ahead of that risk in a few places as an example. But at this stage, I think it’s really hard to call lack of destocking, a little bit of restocking or maybe even a little bit of market growth. I mean, there’s just no way to know precisely what that is. But I can tell you it’s not a material driver of our earnings at this stage based on what we know from the customers. We’re not seeing large orders come in where people are restocking in some sort of noticeable way.
Patrick Cunningham: Got it. That’s helpful. And then just on the expanded scope for the Longview facility, is the funding you’re receiving there from the DOE simply just offsetting that expanded scope? And how should we think about economic returns, given this expanded scope? And would you expect additional premiums, or maybe are we reliant on some price for carbon abatement in the future?
William McLain: Patrick, thanks for the question. The DOE program, as it’s designed, basically provides a series of cash payments based on what we negotiate there that basically is providing an investment offset to the CapEx as we move along. So yes, it is the way I look at it as a direct offset to the capital. Basically, it will be progress payments across the almost three years of construction. So you’ve got that matching, and it’s up to $375 million as we’ve talked about. And we’re currently negotiating those exact terms of the award, but we’re targeting to have line of sight to that over the next three to six months. And it is definitely an offset to the additional as we talk about thermal batteries, as we think about the green energy source that this will offset that as well as the additional inflation on that. So that’s back to the DOE. And we’re confident that we’ll have greater than 12% returns on the project.
Mark Costa: I think it’s too early to tell on those sort of premiums associated with decarbonization. It’s very clear people are willing to pay premiums for recycled content. It’s very like product safety, plastic waste in the environment is a very emotional issue for consumers and they’re really, really not happy about it. And so, they’re not happy with the brands about it and they’re putting pressure on their politicians to address it. Carbon is still not exactly clear what premiums people are going to get for just decarbonization. So I think there’s upside as there becomes a cost of carbon as policies start getting implemented on that front, but we’re not assuming any premiums associated with the carbon side of things in our core economics. But we are going to – we are as we go forward to this project, now that it’s very compelling to see what the value is with consumers on that front, I mean with the brands.
Patrick Cunningham: Great thank you.
Operator: The next question comes from Josh Spector of UBS. Please go ahead.
Josh Spector: Yes, hi. Good morning. I have two questions I wanted to ask on volumes. So on my math, when I look at the first quarter, volumes versus 2019, it was – it appears to be your easiest comp. You were up 3% year-on-year. So the first piece is, how do you think the year-on-year comps on volumes progress through the year? Do you do better or worse on where that comp is versus the 2019 baseline? And related to that, I guess there’s a lot of choppiness in some of the numbers. Where would you say your core volumes are in your plan for the year versus 2019? Thinking about that in terms of what’s the benefit if you see a stronger demand improvement or a full reconnection versus just improvement. Thanks.
Mark Costa: Sure. So I think it’s easiest to sort of separate our revenue portfolio between what are stable end markets and what are sort of discretionary end markets. The stable end markets have consistently sort of grown through 2019 to now at very modest rates, call it, 2% to 3%, whether it’s medical, personal care et cetera, those kind of markets. But there was a dislocation that even in those markets, there was destocking last year that played out depending on the market one to three quarters to sort of finish their destocking in those markets. And then they’ve reconnected back to sort of demand and are growing again, which is true for this year. Medical being sort of the worst – ag and medical being the most stable markets that had the biggest destocking because of fears of not having inventory in ’21 and ’22.
On the discretionary markets, as everyone knows by looking at housing data or automotive build data, a little harder to see it, but appliances, electronics et cetera same story. Demand is, relative to 2019, not great. We’re at a 28-year low in existing home sales in the United States. You know B&C construction in China is off dramatically still and also off a lot in Europe. So P&C prior demand is extremely challenged. When you think about the materials world, existing home sales, just something to Eastman is more important than new homes because of all the appliances, electronics, more painting et cetera. And so, that market is very challenged. It will come back. It’s obviously, I don’t think coming back this year, but that’s upside to getting back to what is normal from where we are now and then growing from there.
So there’s a pretty big gap there relative to ’19. When it comes to auto, same thing. There’s a huge backlog of increasingly older cars that need to be replaced around the world. And first was semiconductors limiting the ability for consumers to buy cars than interest rates now slowing down the rate of buying cars, but the demand for that will certainly recover and be a significant amount of upside for us. Same thing with durables, big shift to service lifestyle post-COVID. At some point, people rebalance back to some blend of buying material discretionary items and seeing Taylor Swift. So I think that all those are still well below sort of ’19 levels in one form or fashion relative to where they should be. So as you look at this year and the way our guidance is built, all we have is a lack of destocking, some innovation-driven growth, starting to deliver real value out of methanolysis, stable markets being okay.
And all that recovery that I just described is upside to ’25 and ’26. I’m not about to tell you which year it’s going to happen. But there’s certainly a lot of upside and places that are most challenged are also our highest value markets from a variable margin per unit basis. So as those markets went down, it was a significant headwind. As those markets come back, it’s going to be a significant tailwind.
Josh Spector: Thanks. And I appreciate that. I guess if I try to wrap that all together, I mean, I struggle with if your volumes for 2019 – versus 2019, are you flat? Are you down high single-digits just considering the two offtakes? Is there a way to quantify that at all?
Mark Costa: I don’t have that answer for you at a sort of integrated company basis. We look at everything on a market-by-market basis. And so, what I told you is sort of how to view it. Half the revenue is very stable and growing, half the revenue has a huge amount of upside at very high value. And – but we – I’m not going to try and quantify that on a weighted average basis.
Josh Spector: Okay. Thanks, Mark.
Operator: Our next question comes from Laurence Alexander of Jefferies. Please go ahead.
Laurence Alexander: Hi. Given the feedback you’re hearing from customers around the recycling plants, now that you’ve started one up and you have – you’re making progress on the next two and also kind of that consumers increasingly see that alternatives are available, is that changing the way you think about your managing the balance sheet and the cadence of projects, I would say, the next five, seven years?
Mark Costa: I don’t think so. I just want to make sure I understand the question correctly before I try and answer it. We have three – we have the normal core business that has maintenance, right? So there’s always CapEx around that, call that in the $350 million range. And then there’s always specialty investments we’re making in growing our capacity to serve all the different specialty markets we have, which has always been part of our core model. And that takes you to with maintenance $500 million to $600 million range on CapEx. When you go beyond that, then you’re starting to make choices around how much am I doing in share repurchase versus how I’m deploying capital to the circular economy. Obviously, we’ve got one plant behind us at this stage.
