Eastman Chemical Company (NYSE:EMN) Q2 2024 Earnings Call Transcript

Eastman Chemical Company (NYSE:EMN) Q2 2024 Earnings Call Transcript July 26, 2024

Operator: Good day, everyone, and welcome to the Second 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 will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead, sir.

Gregory Riddle: Okay, thank you, Chach. Good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; Jake LaRoe, Manager, Investor Relations; and the new member of our IR team, Emily Edwards. Yesterday after market closed, we posted our second 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, eastman.com. Before we begin, I’ll cover three 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 second quarter 2024 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 2023, and the form 10-Q to be filed for second quarter 2024.

Second, earnings referenced in this presentation exclude 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 second quarter 2024 financial results news release. And one more item. After we posted our materials last night, I became aware that there is a conflict on the date we chose, Tuesday, November 19th for our circular economy deep dive here in Kingsport, Tennessee. We are currently working through alternatives and we’ll let you know when we’ve decided on a path forward. With that, we are now ready for questions. Chach, please start with our first question.

Q&A Session

Operator: Thank you. We’ll now take our first question from Patrick Cunningham of Citigroup. Please go ahead.

Patrick Cunningham: Hi, good morning. Thanks for taking my question. Maybe just with — just some questions on methanolysis. Maybe first, just clarification on the feedstock preparation issues. Can you give a little more detail there? What sort of equipment modifications did you have to take? And how much downtime was there in 2Q, and any expected downtime in 3Q?

Mark Costa: Sure, and good morning, everyone. Love to talk about sort of where we are with methanolysis plant. I’m going to give a little context of the journey we’ve been on and then answer that specific feedstock question. We’re very excited to be operational with the world’s largest chemical recycling facility and we’ve made tremendous progress on this project and really showing what’s possible in the world when it comes to recycled content and dealing with this challenge that we face. We are very excited that we’re making on spec plastic from the output of this facility. We’ve actually produced on spec food grade Tritan with 75% rDMT and that’s the most difficult product we have to make, the highest standards on clarity, a wide range of performance specs, and we’re making these products with no materials of concern getting through the purification process.

So a very safe product from garbage and that’s an incredible accomplishment and a great job by our team in operating this plant and overcoming a series of challenges. We have had a lot of successes. As I said, we’re making on spec product now. We are doing all of this with hard to recycle waste. Mechanical recyclers can’t take back the food grades and send to landfill. We validated all of the unit ops and they can run at very high rates. We’ve had, as I mentioned, sustained rates in our prepared remarks of around 70% when you’re running all the units together. And there’s been one sort of small mechanical thing limiting us getting to 100% and we just recently made the change this week actually in fixing that one mechanical issue and we’re ramping up to full rates.

We have made a lot of progress on improving the mechanical reliability issues that we were facing in the startup of the process that we shared with you in the first quarter call. So when we took a variety of corrective actions on the early failures around instrumentation, valves, routine equipment, especially pumps, that has been effective, and we’ve seen much higher reliability across the plant. So as you said, the next step, as we’re now moving to higher rates and a broader set of hard to recycle feedstock, we encountered some plugging issues. So to be clear, from the beginning of this process, we’ve been using hard to recycle material that can’t be made back into food grade bottles mechanically. True to our strategy of dealing with this waste that doesn’t have an alternative life.

But we’ve been broadening that spectrum of different types of HTR recently, and we encountered some plugging issues in the front of the plant. I want to be clear that this is not about chemical impurities. It’s not about processed chemistry. It took us a few weeks to really understand what was going on, but we realized that it was in the feedstock preparation and some of the fitness for use aspects of a few sources of material. Fortunately, the issues were relatively straightforward to address once we interested them, which just involves sort of optimizing sort of the feedstock form that we’re using and dealing with some of the non-polymer waste that was in a few select sources of feedstock. So we’re now implemented all those changes. We’re ramping up, as I said, with the change also run at full rates and are confident all these changes will be effective and we’ll be running very hard with the facility as we go through Q3 and Q4.

The thing I would note is, this has been a journey. This is an incredibly complex plant to take garbage and turn it into clear, on spec polymer that doesn’t have any materials of concern that can exist in that waste feedstock. So we’ve made a lot of investments in purification and how to manage all these different feedstocks. And we’ve learned a lot over the last five months, six months of startup. That I think is a huge competitive advantage for us. And frankly, there’s a lot of strategic intellectual property we’re gathering through this process. And then look back on it, I just can’t reinforce enough the power and success of our team in enabling us to have this kind of success. I can’t even imagine trying to build these kind of technologies and plants without the depth of technical expertise and the scale we have to throw at these kind of challenges.

So, a great shout out to the team in overcoming these things. We’re feeling very good about how we’re moving forward and excited to serve customers as we ramp up volumes in the back half of the year.

Patrick Cunningham: Great. Thank you so much for the detail there. And then maybe just one quick one. Just squaring the current macro environment and maybe some of the comments you made on inflationary pressures leading to slower ramp up of Renew. Why is now the right time to move forward with the Tritan expansion?

Mark Costa: Yes, good question. So when you look at sort of where we are with the Tritan market, a lot of that goes in consumer durables as everyone I think in the industry has called out that market’s been weak. It continues to be weak. But we did see a significant amount of return in volume with the end of destocking. So a huge amount of the hit that we took in 2023 was associated with destocking. That volume has come back and the very high margins that go with it are certainly very helpful this year and will be going forward. We also continue to have a lot of wins just on the traditional value proposition of Tritan. So when you look at the compelling attributes of its heat resistance, its chemical resistance, its clarity, it being a safe product that’s BPA free.

We’ve always had a lot of volume wins in applications that’s driven tremendous growth in this product area for over a decade. That engine’s back in gear this year. We’re winning on those value propositions a variety of places on top of end of destocking that’s giving us good momentum. And then on top of that, we’re now layering on recycled content. And for a lot of brands, that’s really important. We have a lot of customers that have been with us for a long time that are using this recycled content claim as a way to enhance their product offering or drive new volume growth like P&G, NowGene, [indiscernible], LVMH, and L’Oreal, Estee Lauder, etc. You’ve seen the icon chart of all the customers we’ve had who are using in one form or another. And then we’ve — what’s really exciting is also opening up new markets for us to serve that wouldn’t have originally been available for our value proposition.

This is not a cheap polymer, so you really have to have a compelling value proposition and now you have people like Black & Decker doing a trial run as we told you about in tools and seeing that go very well with recycled content and expanding to a broader product line or [indiscernible] which is the leading supplier of housewares for food service type products for airlines and food service and them going to this product with the recycled content claim. So, lots of volume engagement. Customers are paying the premiums that we expect to make a return on this investment that we’ve made here in Kingsport. And so, as we looked at the volume bill this year and as we go into next year, we see the need for this additional capacity so we don’t short the market, right?

So we’re moving to get that product, that line online in the sort of third quarters of next year as a way to keep on growing that business. So we feel good about it. Certainly, it’s a tough economic time, but when the market recovers, that’ll just be additional volume we have to serve. So, we feel like this is the right time.

Patrick Cunningham: Great. Thank you so much, Mark.

Operator: Thank you. The next question is from Josh Spector of UBS. Please go ahead.

Josh Spector: Hey, good morning. Quick follow-up on the prior set of questions. Did you say that you’re now running back at higher rates at methanolysis? So the issue is resolved or is that yet to be determined?

Mark Costa: We’re actually in the process of ramping back up to higher rates. That sort of small mechanical change we made in the middle of the plant that was limiting rates, we just implemented and we’re ramping up towards those higher rates right now. So we’re not there yet.

Josh Spector: Okay, thanks for that. And just another point around methanalysis, and specifically your comment around Tritan and Renew and some slower adoption, you referred to inflation being a factor. I was curious, is that at the customer level when you’re talking about consumer buying of higher-priced goods, or is that on their spending and perhaps any comments or read through on willingness to buy a higher price feedstock for their applications?

Mark Costa: Yes. So, I’m not going to repeat all the answer I just gave you, but we have a lot of customers obviously out there in the durable space as well as packaging cosmetics that are very interested and committed to using Tritan. Maye be they were buying it last year at certain premiums or continuing to buy it this year and we’re accessing new markets. So the demand out there is real. The issue we face that I think everyone in the industry faces right now is that, it’s a really tough economic environment. We have some version of stagflation. We have inflation still impacting consumers and demand being quite weak in many sort of discretionary markets. And durables is very connected to B&C, so when you see all that challenge, that’s very real.

And its duration, it’s not just demand’s weak, it’s been weak for over two years now. And so that weighs on companies and their economics. So while they’re very committed, we haven’t seen anyone sort of cancel a program. They’re also focused on managing their cost structure like everyone is right now. And so, the rate at which they’re ramping up volume on some of the programs that we’ve won with these customers is going a bit slower than we thought. To be clear, that’s a modest part of the overall adjustment we made in the $75 million of EBITDA incremental to last year down to $50 million. More than two-thirds of that adjustment is the cost of the conversation we just had about sort of run rates in the second quarter as we worked through some different issues.

But there is a sort of modest adjustment we’ve made in our expectations around sort of volume ramp. I don’t think it has any impact on next year. When we look at the number of wins we’re having in different applications, the fact that at least the end market is now stable and destocking is behind us. Company that are now looking for ways to grow and create their own growth, just like we are trying to create our own growth with better value propositions in the marketplace. The brands are now switching to thinking about how do they do that as well. And so, I think those collaborations will be there. So we still feel like we’re on track to go from our incremental $50 million of EBITDA this year to a run rate of $150 million of EBITDA by the end of next year.

Otherwise, we wouldn’t be starting to completing the Tritan line if we didn’t see that volume coming.

Josh Spector: Understood. Thank you, Mark.

Operator: Thank you. The next question is from Frank Mitsch from Fermium Research. Please go ahead.

Frank Mitsch: Good morning and congrats on the [2QB] (ph). Which Mark does beg the question, you narrowed the range for 2024, but maintained the midpoint of the guide. I was just curious, given the upside in 2Q, was there a thought to possibly raising the midpoint and what may have been arguing against that? Thank you.

William McLain: Yes, Frank, good morning and thank you. As we think about the guidance, obviously, we focused on keeping the midpoint at the guide of where we had it to start the year. Also, at the segment level, you saw some modest improvements in the AFP midpoint, as well as the midpoint decline in AM as Mark already highlighted around our view of the benefits of methanolysis and the ramp there. So as we think about it, we’re driving strong growth year over year, 20%, narrowing the range we think was appropriate at this point in time. As we started the year, there’s no significant primary demand increasing in the second year. We’re doing well with driving our own growth. And we think, again, as we enter the second half, we’re doing it from a strong position. And it’s the factors of the $0.15 beat in Q2 being offset by the reduction in our methanolysis expectations.

Frank Mitsch: Thanks so much for that Willie. Can you talk about the factors that will drive you towards the low end versus the high end of the full year guide?

Mark Costa: Yes, so when you think about the variables on that, Frank, the biggest factor is demand. That’s true for the impacts we had last year through how we had good results in 2021, 2022. And so, it’s a macroeconomic question around just where does demand trend. I think we went out at the beginning of the year with a very sort of neutral approach about end markets being sort of similar to last year from an end market point of view, but benefiting from de-stocking. That seems to be playing out as we expected at this stage. So if the economy gets better, that’ll be upside. If the economy gets worse, obviously, there’ll be some risk within the range that we’ve given you. But I think that’s the main factor. I mean, we feel good about our price management and feel confident in our commercial excellence to maintain our sort of price-cost relationships across our specialties.

Obviously, there’s a certain amount of spread and predictability in olefins and acetyls where you could get some volatility that’s in the CI sector. Cost structure, we’re very much on track to manage our costs. So the element that’s material is really about the economy. We feel good about how we’re creating a lot of our own growth this year with all the application wins that we’ve had in the sort of traditional specialty model plus the growth we expect in the circuit platform.

Frank Mitsch: Great. So just to be clear, the midpoint of the guide assumes absolutely no change from the economic activity as we stand here today.

Mark Costa: That’s correct. We’re assuming — to be clear, in consumer discretionary markets, whether it’s autos, B&C, durables, we’re assuming that there’s no improvement in the end market demand relative to last year. And that’s been true how we’ve built our forecast every quarter. The stable markets, we do have a little bit of modest growth, call it, 2%, 3% in there that we’ve already seen in the first half of the year and we expect that to continue in the second half of the year. Those markets are like ag in its normal sort of cycle and pattern. Personal care, water treatment, those kind of more special sort of stable markets, which is about half of our revenue. So half of revenue has modest growth in it and half our revenue has no end market growth.

But we have completely confirmed that the theory of a lack of de-stocking adds a lot of volume back is very true. We told you that we had a $450 million hit in variable margin last year from 2022 to 2023 when volume and mix declined. And part of our guidance, as we said, about $150 million of that, call it a third, would come back as a lack of de-stocking. And we very much have seen that in the first half and see that in the order books and in 3Q. So that sort of logic is playing out and that’s sort of where we’ve built our midpoint of our guide.

Frank Mitsch: Terrific. Thank you so much.

Operator: The next question is from Jeff Zekauskas from JP Morgan. Please go ahead.

Jeff Zekauskas: Thanks very much. I was hoping you could clarify what’s going on in the acetyl chain. In that you talked about higher plant maintenance of $50 million related to a shutdown in the acetyl chain and half of that is the acetyl which is $25 million, is that in the third quarter or the fourth quarter. You talked about unfavorable price cost in acetyl’s, what’s that about? Does that have to do with the divestiture or not? And forgive me, is the divestiture already done or when does the divestiture close?

William McLain: Yes, Jeff, happy to clarify. So, as we think about the second half versus first half higher plant shutdowns, Q3 is primarily our acetyl cellulose extreme, which is about half, and then in Q3 and then in Q4 would be our polymer turnaround. And again, that represents about half. Yes, the transaction has closed last year also — so that impact is not in our guidance. That’s a headwind as we think about in our chemical intermediates business. The combination of, I’ll call it, the Texas City divestiture as well as the key customer shutdown that we’ve highlighted was roughly $30 million headwind on a year-over-year basis.

Mark Costa: So that’s on the cost side and the investor side, Jeff. On the market side, there’s two dynamics going on. The one is the acetyl margins are just lower this year and continue to be challenged from a market point of view. And then the second part is, as we divested the acetyl business, we had to shift our business model a bit in how we were taking our acetyl product to market. And so, there’s just some readjustments in logistics costs and how we manage our acetyl output out of Kingsport when we no longer have that plant down in Texas and how we were working in the market. So those two things are sort of some hits to the economics. The spread will obviously come back one day and a lot of these sort of one-time logistics costs and reconfiguring supply chains to serve customers will also sort of be a bit of a modest tailwind for next year too as we line them out.

So those are sort of the combined factors that’s going on in that acetyl business. I would note that we are predominantly acetic acid — I’m sorry — acetic anhydride in our production. So that’s the market you should be paying more attention to for us relative to the acidic asset market that some other companies produce into. And we feel good about how that market will sort of be a tailwind next year relative to this year.

Jeff Zekauskas: Okay. You have another segment that’s now losing a couple of hundred million a year, roughly, and that line used to lose $50 million a year. Is 200 — Can you talk about the difference between $50 million in the old days and $200 million in the new days? And does that just extend out in time as the normal run rate, $200 million? And then going back to acetyls, what’s the total acetyl year-over-year penalty?

William McLain: Okay, Jeff. On your question of other, obviously, as we talked about from 2022 to 2023, one of the major resets in that was with regards to pension, and that being roughly $100 million headwind. So I would highlight that as one of the accounting outcomes of higher interest rates. Also, as we’ve increased in the back half of 2023, the pre-production and the startup costs regarding our methanalysis and circular platforms, you saw that increase and that’s more connected to, I’ll call it, the project timing and our progression through those. As you saw here in Q2, you saw roughly almost $30 million reduction in the expenditures and other and that is with our Kingsport methanalysis plant coming online and going from pre-production into producing inventory.

So, as I think about it over time, obviously the factors matter, and as we see interest rates decline, that could be a tailwind into the future. So I wouldn’t say $200 million is the run rate. It’s just with the current, I’ll call it, macro situation as well as us progressing successfully projects through the pipeline and now you’ll see those results in advanced materials. And that’s also how you will see some of our cellulosic products as well. And if we continue to invest there, those will then turn into the businesses in the future. About, say, $200 million or less in the current macro environment.

Mark Costa: So in addition to just the pre-production expense and efforts around the first plant, the engineering expense and project development expense around France project and Texas project, those costs are in that segment. So that’s sort of been driving it. We would also note the pension costs are non-cash, so it’s a headwind, but it’s not a cash headwind. Jeff, I didn’t understand your acetyl question. Could you expand on your question just a bit?

Jeff Zekauskas: In other words, you’ve got some pressure in unfavorable price costs, you’ve got some shutdown costs. So if you look at the year-over-year penalty that you’re experiencing from the acetyl business and you’ve summed it all up, what would that penalty be if you can do that this year?

William McLain: Jeff, I would highlight as we think about asset sales in whole, I think it’s the $30 million plus the increased logistics cost that Mark has highlighted. We’re not going to be more specific in that at this point.

Jeff Zekauskas: Okay, thank you.

Operator: Thank you. The next question is from Aleksey Yefremov from KeyCorp. Please go ahead.

Aleksey Yefremov: Good morning, everyone. In prepared remarks you’re saying that, you demonstrated ability to run methanolisus at around 70% using a diverse feedstock slate. So, I wanted to ask you what is your expectations for operating rates on average for the second half of this year? And also that 70% utilization, was it achieved on a feedstock slate that’s representative of what you’re going to be using for this plant in the long run?

Mark Costa: Yes. Great questions. So we’re not going to get into our specific operating strategy, but we certainly intend to run above 70%. This is a new plant, new technology as we just discussed, a new set of feedstocks that vary significantly from one source to another, right? That’s the significant difference in the circular economy versus the linear economy that’s making products out of very consistent feedstock when you think about fossil feedstocks every day. So, we have been using a wide range of different sources of hard to recycle material. Some are better quality than others. When I talked about the 70%, that was running representative feedstock in what we think of — what we call HTR, hard to recycle material. The limitations in run rate through really the first half of the year have been more mechanically related, or these sort of feedstock processing related issues about what we’re putting in the plant that were sort of easily addressed.

But when the plant, is it having some mechanical issues that we had to resolve, it runs really stably, right? We had this one issue about, once again, how to move some of the product from the middle of the plant to the back of the plant mechanically that took several improvements to address, the last final improvement we implemented this week. And that should get us into the sort of 90 plus percent range and how we can run the plant. But it’s — there are going to be times it’s down for another issue that pops up, and we have a plant shut down for some sort of normal maintenance. But we feel like the forecast that we’ve built has us running much better in the back half than the first half, well in excess of customer demand. So we’re confident we can serve customers with the ramp up in the volumes with the actions that we’ve taken.

Aleksey Yefremov: Thanks, Mark. And on the marketing site, have you been selling Tritan Renew mostly to customers who are already buying Tritan, or has this broadened your customer base for Tritan using the recycled version?

Mark Costa: Yes, it’s a mix of both. So we certainly have loyal customers who’ve been buying Tritan for a long time that see a lot of value in the recycled content value proposition. But there’s also — we’ve been actually surprised by the number of application wins we’re having with new customers and new end markets. So, if you ask me, from where our plan was in January to where we are today, we’re actually growing volume in new wins and new customers more than I thought. And the upgrade of recycled content of some existing volumes is a bit slower for the economic reasons I mentioned. And so, we feel good about how we’re broadening our customer base and our actual market base and where we can sell as we go into next year.

Aleksey Yefremov: Thanks a lot, Mark.

Operator: The next question is from David Begleiter from Deutsche Bank. Please go ahead.

David Begleiter: Thank you. Good morning. And Mark, just on the maintenance, can you remind us if this is a normal year for planned maintenance and how does it look for 2025? Could 2025 be lower maintenance expenses versus 2024?

William McLain: Good morning, David. Yes, I would say that this year is a normal level of maintenance. Obviously, we go through each of our streams. We talked about the polymers turnaround, the acetyls, and then — and next year we will also have an olefins turnaround, in addition to that with our crackers. But at an overall expense level, I would say this year is normal. There could be a little bit of favorability on a year-over-year basis. Additionally, in the fourth quarter [Multiple Speakers] David, I would say, as we have the polymer shutdown here in Q4, we’ve got the additional….

Mark Costa: So, David, as you think about methanolysis, the cost this year from a maintenance point of view is extraordinarily high, right, as we’re starting up the plant. So I’d say in the normal assets, maintenance will be similar to next year to this year. But when it comes to sort of methanolysis, we’ll have a tailwind next year because we don’t have all the extraordinary pre-production expenses, all the sort of maintenance and fixing all the things in the plant as we’re starting it up. So that’ll be a tailwind. I mean, that’s all embedded in our sort of incremental EBITDA conversation when we talk about circular, but for sure that part’s going to be a tailwind next year. The rest I’d call it neutral.

David Begleiter: Got it. And just two things, Mark, in methanolysis. The $50 million this year of EBITDA, can you break out between advanced materials and other? And just in the France project, reading the prepared comments doesn’t seem like there was much progress the last three months. Can you provide any more color on what’s happening with that project?

William McLain: David, on the $50 million of incremental EBITDA, what I would say is in Q1 we saw — we missed our guidance by about $10 million. So the $10 million of the decline was in other, and then $15 million, the remainder was in advanced materials.

Mark Costa: Yeah, when it comes to the next two projects, first we feel great about the Texas project. We’re really proud to have Pepsi as such a large contracted and committed partner with that project. And that combined with the DOE grant helping offset capital inflation makes us feel great about that project. And we really think that project is going to be a great example of scalability of this platform where we can solve a plastic waste problem, use green technologies on the energy side to get the carbon footprint down up to 90%. And so, we’re really helping customers with Scope 3 as well as on their mission, as well as solving this plastic waste problem. The French project, as we said before in this the first quarter call is moving along a bit slower than we originally expected.

It’s predominantly due to these customer contract conversations that we’ve had being slower than what we had expected originally. And then, of course, we’re still working on the capital inflation on that project too and trying to lower the capital costs. We do have incentives in Europe too, but not quite at the same size as the IRA. So, it’s really about those customer contract discussions, and it’s similar to the conversation we just had. All the brands are very committed to recycling content goal, right? And dealing with the plastic waste crisis, as well as we are a significant contributor helping them lower their Scope 3 carbon emissions in Europe. That’s equally, if not, more important win in most conversations with brands when you come down to — continue to have very high recyclability goals, which by the way means the product is recyclable, but you can’t actually keep that status for your product unless it’s actually recycled.

So they also have to deliver high recycled content goals in order to deliver that value. So that’s, I don’t think changed. They’re not on track to hit their targets for 2025, partly because the economic situation had them moving a little bit slower, just like I explained with specialty customers where they’re trying to manage costs in a difficult environment, partly because mechanical recycling isn’t available to solve the problems. There isn’t enough capacity to get to the targets that they have, especially in Europe, which starts for beverage bottles at 25% next year. And there’s a lot of products and packages that they make that’s not a clear water bottle, and those opaque colored trays, etc., different forms of PET. You can’t — in many of those you cannot actually use mechanical recycling to actually make those products.

So they’ve got a challenge on how they’re going to actually get recycled content into some of those products. So all that context is still very much intact and the conversations are still going on with all the customers. But you’ve got a market — the PET market’s at the bottom of the cycle right now, prices are incredibly low, economic times are tough, and so the regulations are a little unclear in Europe right now on what counts as recycled content and how that’s going to work, that’s causing the conversation to go slowly. But we fortunately don’t see anyone dropping their engagement with us. It’s just become slower in getting the contracts done.

David Begleiter: Thank you.

Operator: The next question is from Michael Leithead from Barclays. Please go ahead.

Michael Leithead: Great. Thanks. Good morning, guys. Can you just speak to the reduction of CapEx a bit. I would have thought directionally that’s still ramping up, not coming down as you move forward with Tritan, the Texas project. So is it a timing dynamic? Or can you just help refine that a bit.

William McLain: Yes, Mike. As Mark just highlighted, we’re still working towards milestones on our circular projects, both in Longview and France. And France specifically, that’s pushing the time lines out. So as we think about the CapEx required to achieve the growth, we’ve got the Kingsport project behind us here in first quarter of the year as we transitioned Also, as we highlighted, we’re starting some of our other growth projects back up as we see the end of destocking and look forward with our innovation wins. So as we balance both of those out $650 million to $700 million, we think, is appropriate to achieve what we need to this year. And obviously, with that, we’re not going to let cash sit on our balance sheet, and we increased our expectations for share repurchases for the full year to $300 million.

Michael Leithead: Great. That’s helpful. And then can you speak more to what you’re seeing in advanced interlayers today? I think you highlighted in the prepared remarks and the slides a bit. Just remind us how big that is relative to advanced materials, how you think about the growth rate there? And is it fair to assume that, that business is on average a bit higher margin than the overall segment there?

Mark Costa: So the interlayers business is having a good year and delivering meaningful earnings growth relative to last year in a flat to slightly down auto market. So it’s a great testament to our innovation strategy and delivering results, as well as operational excellence in running our plants well. So the earlier business is about a third of the revenue of the segment. And it’s predominantly focused on auto, but it also has B and C in it, which is sort of flat to last year. But on the auto side, we’re seeing a lot of earnings growth as we’re creating our own growth. We’re very much leveraged to two end markets, the luxury end market and the EV market is still growing better than the overall average auto build. So we’re getting leverage out of that by being in the right market segments.

And then within that, we’re selling more and more premium products. As we highlighted in the prepared remarks, we’ve had a great story around HUD and multiple generations of that product that we’ve been offering to the marketplace in the future we’re building for it. So that’s being adopted for better security and safety driving reasons in the car. And so, that has a lot of market upside. Also, when you get to the EVs, as we said, there’s about 3 times as much square meters of interlayer of laminated glass in an EV relative to an ICE car. And they’re buying very high-performance products. They want to have a very technology-forward car in most EVs, especially in the luxury in the market where we’re focused. And so, they want HUD. They’ve got solar control that they need to have.

And so, all of that is driving high value at times a lot more square meters. And even though EVs are not growing as much as I think many people expected, still growing better than the ICE market and giving us leverage. So you’ve had, for example, HUD, 20% up year-over-year in volume at very high margins. And we’ve had solar control up about 12% year-over-year. So these markets are growing fast in a market that’s challenged. It’s a great story.

Operator: Thank you. The next question is from Duffy Fischer from Goldman Sachs. Please go ahead.

Duffy Fischer: Yes, good morning, guys. First question is just again around methanolysis. So my understanding was the long pole in the tent has always been the cleanup on the back end and getting the impurities out. So were you able to — when you’re running at 70%, were you able to prove out that technology so that, that no longer is an issue? Or you still have to push it harder or get the MAX complexity of the H2R feedstock higher before you can kind of check that box and say that, that’s a done deal?

Mark Costa: Yes, Duffy, that’s been the big huge pleasant surprise to this whole project is, you’re correct. Unzipping the polymer is pretty straightforward on the front of the process, purification of all this variable set of impurities from garbage to make sure you had a high purity DMT output on the back end is where there’s a lot of complexity. And that’s worked incredibly well from the very beginning process technology and separating and isolating out the monomers that we want to use again and stripping out all the other impurities has worked really well across all the different HDR. The frustrating part is, a lot of construction areas and sort of vendor equipment quality problems that we talked about that sort of really caused a lot of mechanical sort of start-up delays for us that had nothing to do with the process chemistry.

They were easy to fix once you have the pump break you put a new pump. This feedstock issue that we’ve had recently, again, it was about form factor. It was about a couple of suppliers having impurities that were really not supposed to be there that we’ve now identified. But the broad spectrum [indiscernible] we intend to use and the changes we’ve already made on how to prepare that material before we put it in the plant has sort of addressed the recent plugging issues. So, we actually feel great about the process chemistry. We just need to line out the sort of mechanical operation of the plant, which is — this is a very big plant. It’s got a lot of complexity to it. And we probably should have expected more of this and we built our guide as we work through these challenges in this sort of construction environment.

Duffy Fischer: Great. Thanks. And then just on the base business, two end markets you called out is kind of doing better on coatings and the other one, ag. So on ag, where are you now kind of on a run rate relative to when it started to fall off? Are you still well below kind of that normalized level? And then on coatings, what are you seeing there in volumes because your customers still seem to be putting up pretty weak numbers, but your volumes seem to be stronger than that?

Mark Costa: Yes. I don’t know if our volumes are a lot stronger than that. I mean you’ve got to remember there’s two components. There’s this end-market demand discussion that we’re all having. And I think we see the end market demand situation similar to our customers on coatings, but you got to remember, there was a lot of destocking that those coatings customers did with us, right? And they completed that destocking. And so we benefited from that volume recovery in coatings, just like durables and everything else. So when you look at that, we’re probably up high single digits in volume in B&C, but I would attribute most of that to just a lack of destocking relative to last year. The ag side of things, what I’d say is, there was a huge amount of destocking as was well documented by all the ag companies that certainly had an impact on us through last year.

They resolved most of that destocking as we went through the first quarter. And by the time we were in the second quarter, I’d say we were sort of that normal sort of demand conditions, reconnected to demand, I think, is sort of the phrase with destocking behind us, and we’re having a normal ag season this year so far. There sort of puts and takes to that. But the products that we make, it’s I would call it a normal ag season. So Q2 was good. Q3 will be softer. We do not expect much inventory building in Q4 from our customers. I think they’re still being a bit cautious on how to manage the inventory. So we expect we’ll see a big build of ag demand for us in the first quarter of next year, which will be a nice tailwind for the next year versus this year.

Duffy Fischer: Great. Thank you, guys.

Operator: The next question is from Vincent Andrews from Morgan Stanley. Please go ahead.

Vincent Andrews: Thank you. Mark, is there sort of a go/no-go date in terms of France? Or is there a plan B in case we’re sitting here a couple of quarters from now and you still haven’t made any progress on either the gating issues to move forward?

Mark Costa: When it comes to French project, I mean, Vince, I really hope we have clear insight by the end of the year of where that project is headed. I wouldn’t say it’s necessarily a formal go/no-go decision, but we’ll have good insight as we go through the fall with customer contract discussions and finish the engineering work. The reality is, we have a lot of sort of portfolio options in how we manage these three plants and what products we put into each of them and what pace we build them. So we’re very excited about the first plant. We’re very excited about getting Texas built. Texas will have the capability to make specialty products as well as PET. So you’ve got flex in how you serve and support specialty growth and PET growth from the Texas project as we didn’t go into the French project.

But hopefully, have the sort out. We still think that that $450 million of EBITDA across these three projects is very much intact as a long-term value creation target across these projects. And depending on how you go forward, you can still get a lot of that value by shifting where you make the specialties in the first two projects. So there’s a lot of sort of robustness in this plan, but we’re very committed to wanting to build all three of these projects. But to be very clear, we’re sticking to our model, which is on the PET side. If we don’t get these long-term take-or-pay contracts as we did get with Pepsi, we will not build the French project. So, we’re being very clear to the customers that we need to get these contract commitments in place to produce product that they very much need if they want to get to high recycling content targets in Europe.

There is no way you can do it with mechanical alone, can’t be done. So if they want to stay committed to their goals, they’re going to have to support these kind of investments.

Vincent Andrews: Okay. Good to hear. And if I could just get your thoughts on — Obviously, I don’t know what’s going to happen with the election. But on one side of it, we could be entering back into a world with tariffs and things like that. And so, maybe you could just help us understand what your view on that would be? And what sort of the learnings for Eastman was from sort of that original tariff period of 2017, 2018 and what the impact could be this time around?

Mark Costa: I’m glad you didn’t ask me who’s going to win the election in November, because [indiscernible], but I actually think tariffs are an issue, no matter which person we have as a President of this country. The China government has a very explicit and public policy of exporting their excess capacity to the world, and that’s going to have an impact on markets. They’re basically exporting unemployment to the world. And for us, fortunately, we’re not got exposed to those exports from China. We do have some exposure when it comes to the CI business has some exposure. But really, most of the exports from China are going to impact Europe and Latin America. We don’t have that many sales. Over 70% of our sales are in North America with CI.

So our exposure there is somewhat limited. And ASP has a little bit of exposure. So from a direct import point of view and step one, which is where we are now, our exposure on the Chinese side is not that great, which is a good thing. The bad thing is, there’s going to be reactions that you’re already seeing in Europe and the U.S., putting tariffs in place for products are being exported at exceptional the cost out of China. And then that will be kind of response in China. So we do expect that there’s some degree of tariff tension coming our way. This is not a new issue for us. China is about 10% of our revenue. About half of that is — goes into China and then we are exported back out of China, typically, think of appliances, electronics and things like that durables.

And that’s mostly specialty plastics doing a round trip through China being made into something. The other half, our products locally consumed like some performance films and laminates for cars, windows or a few coatings specialties out of AFP. We do have a playbook on how to manage through that that we developed in the 2018, 2019 time frame. That playbook was relatively effective. And so, we’re just updating it and being prepared if that scenario plays out.

Vincent Andrews: Thanks so much.

Gregory Riddle: We are ready for the next question.

Operator: Thank you. The next question is from John Roberts from Mizuho. Please go ahead.

John Roberts: Thank you. Mark, in Fibers, could you provide some color on [sigto] (ph) versus textile fiber. And now that textile is as profitable as sigto, what’s the constraint on how quickly you could shift volume from sigto to fibers — to textile fibers?

Mark Costa: So 80% of our revenue is tow. And obviously, that market has changed pretty substantially over the last two years as the utilization rates have become very high and customers have been focused on security supply. So we expect that market to continue to be stable. As we’ve mentioned, we have 100% of the business sort of contracted this year, 90% next year and 70% in 2026. So we feel pretty good about the contracts in place. There are obviously our provisions for natural market decline in the volume in those contracts, because it is still modestly declining industry when it comes to tow. And it does have pricing structures in there to adjust for changes substantial changes in raw material costs. So we’re providing stability to both our customers as well as to us.

So that part of the market, I think we feel pretty good about. When it comes to the textile business, it’s been great. We’ve seen tremendous growth in the textile market. This is also another very challenged end market. If you go look at the fashion industry, it’s not exactly growing. But yet our volumes have grown materially relative to that underlying market. The Naia fabric is just a great story. It’s got half bio content and now with replacing coal with waste plastic. We can make the other half of the [indiscernible] to make the tow from wood pulp with waste plastic. So you got a very strong beginning of life story. And then this is going to become increasingly important is the microfibers that break off of clothing in the washing machine that end up in the ocean as microplastics, if it’s a synthetic garment, ours will fully biodegrade.

So we have plenty of certifications and studies that prove that our fibers will just naturally degrade at the same pace as cotton and have no sort of life in the environment. So that’s exceptionally important and that’s going to become a bigger and bigger value proposition because textiles is by far the number one source of microplastics in the ocean or water waste. And having a product that biodegrades, I think, is going to increasingly have a significant value proposition on that end-of-life proposition, not just the beginning of life. So we feel great about that business and expect it to continue to grow.

Gregory Riddle: Let’s move to the next question please.

Operator: Thank you. The next question is from Kevin McCarthy from VRP. Please go ahead.

Kevin McCarthy: Yes. Thank you and good morning. Mark, maybe sticking with microplastics in a sense. Can you provide an update on the [indiscernible] business. How are the early days going there with Sealed Air and any other customers that you may be working with? More broadly, can you just talk about things like market opportunity, growth rate, margin profile there? Do you think it could be bigger than Naia over time or smaller than Naia? How would you frame that out?

Mark Costa: Yes. [indiscernible] is going really well. We’ve had a great successful launch with Sealed Air in the marketplace. And we’re now in a large grocery store that’s doing a lot of trials where the product performance in the counter, if you will, is going really well. For those who are not as familiar with Aventa, we can replace polystyrene, expanded polystyrene, whether it’s trays or clam shells in this case, trades for a protein like your chicken and pork and everything else that goes in the grocery store. We replaced all that as a drop in replacement to the existing polystyrene equipment with our cellulosic polymer, and it will get to the same low density as polystyrene and it is fully certified to biodegrade in home or industrial composting.

And even if it ends up in landfill, it can biodegrade pretty much similar to paper. So it’s a great story of end of life. It’s got the same beginning of life story I just told you from Naia and how we can make it. But there’s compostability where all these different food service products can just be thrown away with food and biodegrade is exceptionally important. There’s a number of states that are now banning it, polystyrene from being used other states or companies willing just to have a natural — sort of natural position. It also makes by the way, a phenomenally good straw, which is also compostable in rolling out in some major food chains right now as we speak. So the program is going well. The volume is ramping up. We have meaningful sort of commercial sales this year and expect a step up next year as we prove out this value proposition in these early trials.

To answer your question about size, it can definitely be bigger than the Naia business. There’s a significant amount of volume potential in this space, as you can imagine and the margins of this product are better than the company average. So as it grows, it’s an upgrade for corporate earnings. It’s an alternative market because it’s made from the same exact [indiscernible] assay flake that we make tow out of or Naia out of and this uses the same polymer. So you’ve got flexibility to optimize value across tow, Naia and polystyrene off the same sort of fixed asset base. And when we look at it all together, we think that the growth curve of this will allow us and support us in expanding our [indiscernible] flake business over time. We look forward to telling you a lot more about this in the sort of circular day that Greg’s scheduling.

Because it’s — we’ll cover the whole cellulose experience, as well as the polyester circular stream as we hope we better understand that when we break it down here at Kingsport. We’re very much looking forward to getting all of you down here in Kingsport to see all these different products and assets in action.

Kevin McCarthy: Great. And then as a follow-up, if I may, Mark. Can you speak to the forward volume trajectory in advanced materials? You posted 12% there. But if I look at the two year stack, it’s still down. So do you see additional runway to grow at double-digit pace in the third quarter, for example? Maybe you could kind of talk through what you’re baking into the guide there.

Mark Costa: Yes. So our guide is basically a similar — from an earnings point of view, a similar quarter in Q3 to Q2. And we’ve got, the methanolysis coming online, as we said, where the volume is now ramping up into 3Q and in 4Q. So you’ll see that pick up on the advanced materials side. We’ll continue to have innovation driving growth above underlying markets in the automotive sector, [indiscernible] win sort of applications across the portfolio on our innovation like we do every year in our past in the more traditional sense, if you will. So we see all that sort of volume helping us as we go into the back half of the year. You will, obviously, see some normal seasonality drop in demand in the fourth quarter. We expect that to be not as much as you would normally see net because of the ramp-up in methanolysis and everything else.

So the fourth quarter will be better than typical because of methanolysis and some of these other end market ramp-up of innovation sales. So I think that all that will sort of come together to sort of help. There’s also spread tailwind that helps in the back half of the year. When you look at some of the trends in energy costs that are still the lower energy cost at the beginning of the year still flowing through inventory and PX is a bit lower now than where it was in the first half of the year. So those are all tailwinds. Then the headwind is about $25 million higher shutdown costs in the back half of the year, but that’s mostly in Q4 than the first half, right? That nets off some of that volume growth.

Gregory Riddle: Let’s make the next question the last one, please.

Operator: Thank you. So the final question we have today is from Laurence Alexander from Jefferies. Please go ahead.

Laurence Alexander: Good morning. Two quick ones. Just on heat transfer fluids. Is that $30 million expected to recur in the first half of 2025? And secondly, the $50 million increase in your new projects and growth project investments, is that new platforms you’re working on? Or is that just inflation in your cost base? And how should we think about that going forward?

Mark Costa: So the first question, I’m going to answer. And the second question, I’m just not sure I understood the question. So the first question on heat transfer fluids, timing is everything in that business, and it’s very hard to predict by quarter. So we’ve had a great year last year, $30 million lower this year. A lot of that $30 million will come back next year, specifically in the LNG space that are very high-value fills for us. But I would just think about it on an annual basis, it’s very difficult to sort of predict exactly when fills occur quarter-by-quarter. On the second question, I apologize, but…

William McLain: Yes. So Laurence, I think you’re talking about our growth, our increase in spend and our capabilities as well as continued investments in growth. And as you think about what Mark just outlined on Aventa and the increased expenditures there that I referenced in our other segment. That’s where — again, this year, we’re increasing those. We expect to see the ramp-up of revenue that Mark just referenced in the cellulosics and including the Aventa product line. So we’re making the investments also to be efficient with the working capital, et cetera, and expect returns on those as we go into 2025.

Laurence Alexander: Thank you.

Gregory Riddle: Thanks, everyone, for joining us. We appreciate you being on this call with us. As Mark mentioned, we look forward to also having you in Kingsport later this year as we do a deep dive on our circular economy platform. Everybody, have a great day.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.