Eastman Chemical Company (EMN) — Q1 2021 Earnings Call Transcript

Good day, everyone, and welcome to the First Quarter 2021 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir. Thank you, Tracy, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; William McLain, Senior Vice President and CFO; and Jake Laroe, Manager, Investor Relations. Yesterday, after the market closed, we posted our first quarter 2021 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 2021 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 the full year 2020 and the Form 10-Q to be filed for the first quarter 2021. 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 first quarter 2021 financial results news release, which is available on our website. With that, I'll turn the call over to Mark.

Thanks, Greg. Before we answer your questions, I want to take a few minutes to make some comments. We're off to an excellent start to 2021, and I'm proud of the many accomplishments we've achieved in just a few short months. We're building momentum, and the strong operational execution of our teams is paying off as the global economy improves. There are several highlights I want to cover. First, strong demand from the end of 2020 continued through the first quarter. In many markets, demand is returning to or exceeding 2019 levels. We reported 20% higher adjusted EPS over '19 and 5% over a very strong first quarter last year before we felt the full impact of the COVID-19 pandemic. Consistent with our track record of strong free cash flow, we also delivered record free cash flow of $125 million in the first quarter, which was up substantially from a very strong performance a year ago. We achieved these solid results despite operational logistical headwinds from Winter Storm Uri. I'm incredibly proud of our team in Texas, who took proactive steps ahead of the storm to avoid a hard shutdown of any of our assets. Then they worked tirelessly to repair and restart facilities, which helped ensure supply for our customers. Thanks to the proactive planning, we were able to safely start with no injuries and well ahead of our competitors. We had half of our Texas manufacturing facility operational within one week of the storm, and we're more than 95% operational within three weeks. To all the Eastman employees who sacrificed and rose to the challenge, thank you on behalf of our customers and all of the colleagues at Eastman. Moving to other highlights, we've made significant progress with our circular economy efforts, which I'll talk more about in a moment, and our progress hasn't gone unnoticed with Barron's adding Eastman to its list of the 100 Most Sustainable Companies for 2021, a true honor for us. And we issued our inclusion and diversity report, which you can find on our website. At Eastman, we take our environmental, social, and governance commitment seriously, and transparency is of the utmost importance. We also continue to allocate our capital with returns to stockholders in mind. To that end, we recently completed a small bolt-on acquisition of 3M Food and Feed, a leading animal health and nutrition company to accelerate growth in the animal nutrition business. And finally, we think the favorable trends in the economy, coupled with our innovation investments and continued disciplined cost management, set us up for strong EPS and free cash flow growth this year and next. On our January call, we gave you an update on the progress we're making to become a leader in the circular economy. We announced that we're building one of the world's largest plastic-to-plastic molecular recycling facilities at our site in Kingsport, Tennessee. Since then, we've broken ground on the facility and continue to target mechanical completion by the end of '22. Even more impressive is the amount of momentum we're building with customers in many different markets around the world. The demand for our renew branded products, including Eastman Tritan Renew and Eastman Cristal Renew is strong. At this point, demand for our specialty products and the circular economy offerings has been better than we anticipated. And specific to the new facility we announced, we're ahead of schedule in terms of customer demand for the capacity. We have a robust pipeline for additional announcements throughout the year and look forward to sharing those with you. Turning to our outlook, as we entered the second quarter with strong demand and mix momentum, we also expect to benefit from cost discipline, including lower operating costs from our operational transformation program. However, there are specific headwinds we face, including maintenance turnaround, supplier reliability, and some slowdown in auto production. In addition, we have price increases that are continuing to catch up to higher raw material, energy, and distribution costs in some products. Despite these headwinds, we expect a sequential increase in EPS with second quarter adjusted EPS expected to be at or above the second quarter of 2018 adjusted EPS of $2.22. Moving to the full year, we expect strong market growth and product mix improvement to continue. Our innovation-driven growth model will enable us to grow faster than the underlying market recovery, and we expect a number of markets will be rebuilding inventory. We also expect much of the capacity constraints, supply reliability, and logistics headwinds to lessen alongside a potential moderation in tight commodity markets. We expect to continue to benefit from about $100 million of full year tailwind for improved capacity utilization compared to last year when we aggressively managed inventory well below the decline in demand with our focus on cash. And we're on track to keep our cost structure flat compared to 2020 and well below 2019 and '18 levels. We, therefore, expect adjusted EPS will be between $8.25 and $8.75 for the full year of '21. On cash, we expect free cash flow to approach $1.1 billion, which is consistent with our expectations for stronger adjusted EBITDA. We expect 2021 will be our fifth consecutive year of free cash flow greater than $1 billion, and we will work to grow free cash flow from here. Putting it all together, these outstanding results remind me about what gives Eastman this incredible resiliency and strategic advantage. First and foremost, it's the people at Eastman who continue to persevere and help us win as we saw during the crisis. This is what we see every day from this team. And as I reflect on how we positioned our company through the global trade disruptions of 2019 and then COVID in '20, I feel confident in our ability to grow EPS and cash off this new level of earnings. Despite a challenging macroeconomic backdrop over the last several years, we have not sacrificed our efforts to innovate and invest in our specialty portfolio and expect those investments to continue to pay off as we finish off '21 and move into '22. In the meantime, we'll continue to focus on what we can control, remain convicted to long-term attractive earnings growth and sustainable value creation for our owners and all our stakeholders. With that, I'll turn it back to Greg.

Thank you, Mark. Tracy, we are ready for questions.

Thank you and good morning everyone. Mark, wondering if you could just give us a little bit more details on the new molecular recycling plant in terms of what you mean by being ahead of schedule? And I'm wondering if you can talk a bit to the customers that are signing up for the volume and how much volume may be you've already contacted? And what your expectations are in terms of contracting level by the time you start up?

Sure, Vince, and thanks for the question. We're really excited about what we're doing on our chemical recycling technologies, both our cellulosic recycling technology as well as our methanolysis. To your question around the methanolysis plant that we announced in January, we are seeing incredibly strong interest from our customers. And they're really compelled by our value proposition that has three key elements driving their interest. I mean the first is that we have a solution to plastic waste that cannot be mechanically recycled, much of which ends up in landfill or in the environment. And we can use that as feedstock to upscale into more durable products from packaging applications or carpet and other applications that we're sourcing. And we can do it with an infinite loop, so that's incredibly important to have that solution. Equally important to them is that there's no compromise on the polymer in its performance and quality and as a drop-in replacement. Because we're rebuilding building blocks to be identical to what we normally get from fossil fuels, the product is identical. And so it's an easy drop, they're an easy switch over to our offering, and they don't have to change the brand position and the quality of what we provide. And the third element that's very important to everyone is that it has a lower carbon footprint than fossil fuels. We want to solve the waste crisis, but we also need to be sensitive to the climate at the same time, and there's no toxic waste. So it is a great story that they want to embrace and have in their brands. And so we've seen a number of customers, as you've seen on the chart with the supply in the prepared remarks, the customers adopting. So Lauder is a great win that we're really excited about. And there's many other companies in the cosmetic packaging area as well as all these other fast-moving consumer goods, etc., that are working with us right now. So we are ahead in securing volume. We're also ahead in securing the value that we wanted to get for this offering, and that's also coming in a bit better. We're not going to provide details on exactly what the volume percent of that is. But I can tell you we're well at pace in selling out that facility, which is really exciting for us. So overall, I'd say it's really, really encouraging.

Excellent. If I could just ask you a follow-up question on pricing in the overall portfolio just given all the raw material inflation that's out there, I think historically, sometimes you've talked about when there's been inflation that you view as temporary, you don't look to pass it all through. How do you view the current inflation across your product lines? And what is the pricing philosophy going to be for 2021 related to that?

Thank you, Vincent, for your question. Pricing is currently a significant topic due to the considerable rise in raw material and distribution costs. We've addressed this multiple times before, so I want to revisit our philosophy regarding pricing and value management, and discuss our journey since 2018. In the specialty business, our primary focus is on delivering the best value for our products and emphasizing the value they provide, rather than just the raw material costs. Our strategy centers on innovation and driving substantial upgrades and growth in high-value markets, which enhance our margins. Considering the long-standing relationships we have with our customers, it's crucial to maintain those connections over time to continue innovating alongside them, ensuring they succeed and grow in the market. This relationship plays a key role in our pricing strategy. We aim for stability in our spreads and want to offer our customers as much price stability as possible, taking raw material dynamics into account. Hence, we plan to share value with customers when raw material costs decrease and adjust prices to recover costs when those materials become more expensive. From a multi-year perspective, we've successfully managed pricing. Reflecting on 2018, it was a period of strong raw material pricing, even stronger than this year, which helps set a reference point. We maintained price increases while keeping stable spreads compared to the latter half of 2017, which was our best earnings year until now. In 2019 and 2020, we faced significant challenges, including the impacts of COVID-19 and the China trade war, which led to declines in volume and mix, as well as reduced raw material prices. We shared some of the benefits with customers but still managed to expand spreads to counteract those challenges. Looking into 2020, we anticipate that as we raise prices—starting in the first quarter, more significantly in the second quarter, and continuing in the latter half—we will be able to improve our spreads in specialties, targeting the 2018 levels despite challenges in tires, adhesives, and fibers. Progress in enhancing spreads to tackle these challenges and returning to 2018 levels is promising. The improvement in volume and mix is particularly significant, as seen in the first quarter, and this trend will continue throughout the year. When comparing our pricing approach to that of our peers, it’s important to note that we incorporate mix in volume, while many of our peers consider mix as part of the price. For instance, in Q1 for Advanced Materials, if we categorized mix as price like our peers do, we would show a 10% increase in price along with a 5% increase in volume. This highlights the critical role of mix in our strategy, which we've emphasized since 2014, as the key to achieving optimal returns on our assets. Another metric to consider is EBIT margins; in the first quarter, EBIT margins in Advanced Materials improved by 370 basis points. Additionally, Advanced Materials has more than doubled its EBITDA margins compared to our expectations for this year, and we anticipate that overall company margins will be equal to or greater than those in 2018. Thus, we feel confident in our ability to manage pricing effectively. Furthermore, CI is expected to have much better spreads in the current market conditions, complementing the story. As specialty prices align, CI spreads will also expand, creating a good balance. Overall, it’s a positive narrative, and we remain committed to innovation.

Hey, guys, nice start to the year. Mark, when you take a look at your outlook for 2021, the $825 million to $875 million, what do you think drives the sort of low end and the high end? And how much of that delta is within your control?

Sure. First of all, it’s clear that our outlook has significantly improved compared to January. This improvement is largely due to a noticeable increase in volume and mix growth we experienced in the first quarter, along with the momentum heading into this quarter and the latter part of the year. Volume and mix are central to our strategy and will continue to enhance our earnings this year. This is the primary factor. Additionally, we are seeing tight underlying markets in the Chemical Intermediates sector, which is contributing to the spread expansion I mentioned earlier, helping to offset the delays we are facing in price adjustments for some of our other products. One uncertainty remains the future of spreads in Chemical Intermediates. On the cost side, we are optimistic. Our operational transformation program is effectively managing the costs despite the return of some short-term measures taken last year. This is a program worth over $200 million that will benefit not only this year but also carry into 2022. In comparison to last year, we also have a $100 million utilization advantage from the transition from 2020 to 2021, which makes me confident. We have a lower cost structure compared to 2018 and the utilization benefits from 2020 still apply. The focus remains on improving volume and mix, enhancing spreads, and forecasting how the Chemical Intermediates spreads may adjust in the latter half of the year. We anticipate some moderation as the tight conditions we face are likely to return to more normalized market scenarios. Predicting this is challenging, and it adds to the uncertainty along with the ongoing macroeconomic recovery from COVID and other external factors.

Got it. And given that your earnings outlook is much stronger, your free cash flow as well stronger. Any update on what you want to use your balance sheet for going forward, given the outlook does look better?

No, Mike, thanks for the question. We agree that with the outlook improving and increasing to approaching $1.1 billion, what I would say is, as we think about capital allocation in '21, we're still, I'll call it, unchanged in our priorities. So one starts with a strong dividend, which is an increase for 11 years, and we expect that to continue. Also, we expect to continue to reduce approximately $300 million of debt. And the balance will be used for the bolt-on acquisitions and share repurchases. We announced the attractive animal nutrition bolt-on and used strategic cash of about $70 million there. And we expect to repurchase approximately $350 million of shares in the full year. Also, we'll be remaining disciplined as we go forward. But as we think about also getting our debt to EBITDA in line with our targets, that increases our flexibility as we go forward into '22.

Hi, Mark. Good morning, Willie. It seems like you are leading in molecular recycling compared to competitors in polyethylene. Eastman Kodak has some impressive technologies, and congratulations on your Barron's ranking. My question is, how much lower are the conversion costs for new PET compared to regular PET? I understand there's a lengthy ramp-up and the need for customer qualifications, but if we consider a long-term view, say by 2030, how much PET do you think you could replace with recycled molecular recycled PET? Any estimate would be appreciated.

We're very excited about methanolysis and the potential it has for us. We're aiming to lead the way in addressing the plastic waste crisis, as plastic remains the best material in many applications due to its low carbon footprint compared to alternatives like glass, paper, and aluminum. Our goal is to keep plastic as the top solution for climate issues while tackling the waste crisis. We need a method to scale our efforts, and we're showing how to do that. It's crucial to note that we're turning plastic waste into durable applications, not defending a large single-use plastic market. This approach enables us to achieve considerable growth in durable goods with higher values and margins. Our initial investments haven't focused heavily on the PET business. In terms of costs, they are slightly higher than those of PET or copolyesters at current oil prices. If oil prices rise, that cost comparison will change. We're observing a clear separation of our business from the fuel stock market, as PET is trading at significant premiums over fossil fuel PET in Europe, indicating a different economic situation for recycled PET and specialty polyesters. We see substantial opportunities for scaling up. We have customers interested in our specialty products and are also discussing how we might significantly increase PET production for packaging needs. We are engaging with customers, peers, and governments to work together on these challenges. I want to emphasize that we are not returning to the typical PET business we exited in 2011. If we do re-enter, it will resemble an airgas model focused on collaboration to solve these problems and scale up, involving technology support, construction, operations, and feedstock sourcing. As we develop multiple facilities, we'll leverage our operational and technical expertise to benefit our partners. We plan to secure demand through long-term contracts that will minimize our exposure to market volatility concerning feedstock prices. When it comes to capital allocation, we will likely participate more in partnerships rather than fully loading this onto our balance sheet. This represents a distinct model, similar to airgas, and we will see how our discussions progress. There is certainly a demand for our services, as many are making significant commitments, especially in Europe, where they are facing considerable taxes. We believe we're moving faster than many others because we've been practicing methanolysis for a long time, gaining substantial technical and operational expertise that allows us to rapidly develop robust capabilities with a diverse range of feedstocks.

Great to hear. And then coming back to more nitty-gritty, on CI, as I understood after the Texas freeze, as ethylene and other commodities spiked, propylene prices collapsed by 50% because I think refineries started up before the polypropylene plant started up. And so I guess it's hard to understand from outside, but I would have expected a benefit from lower refinery grade propylene for you and higher propylene derivative prices. But can you just explain what happened with the propylene chain? What was the benefit? Or why do you see we see more?

Yes, sure. P.J., so first of all, we don't sell propylene, right? We sell derivatives from propylene, as you just noted. We saw very strong pricing momentum before you were hit in all of our grids because the market conditions were tight. Obviously, you remade the markets even tighter. Those derivative prices have held up quite well, and they're going to continue to increase in a pretty significant way into the second quarter. You have to remember that most of our propylene is made from propane that we buy, RGP being converted into propylene and some supply agreements that are propane-based in their pricing, not propylene-based. So we're not buying a lot of merchant propylene in our total feed mix. The spreads are good and attractive. The driver markets continue to remain tight. We think we're going to have a very good second quarter. It's also important to note at the segment level when you're trying to interpret these results in CI, there's more than olefins in this segment. So 25% of our revenue is actually functional amines, which has had a tremendous and very steady track record of improving earnings from '18 through to now and is on to a great track. The vast majority of that business is on cost pass-through contracts. Same is true with a number of our acetic and hydro customers. Our strategy is to have stable earnings in CI, not to have really volatile ones as we're trying to be more of a specialty company, more predictable in our earnings and cash flow. That gave us stability in '19 and '20 relative to '18. It's going to give us stability this year, but we're not going to be popping up on spot prices as much as some others.

In describing the dynamics in your Advanced Materials business, you talked about raw material inflation, and you pointed to VAM. I would think that you would be pretty integrated in your Advanced Materials business. How much pressure is there from higher raw material costs? And what are the raw material costs that are really lifting there?

So, Jeff, thanks for the question. We are very focused on the value of vertical integration. As you just noted, it creates a lot of stability for us. So in our polyester chains, ethyl chains, and olefin chains, that's, for the most part, a way we provide significant reliability to our customers that compare it to some of our competitors. Through the first quarter, I received a number of calls from a very important large customer thanking us for our demonstrated reliability that they deeply appreciated and how well we got through the storm and supplied them. But the one place that we're not vertically integrated is from acetyl to our interlayers. We don't make VAM and rely on market suppliers for VAM. The shortages that we saw have created a constraint for us in interlayers. It is specific to the interlayer business. But we were already having sort of supply problems with some acetyl unreliability in the fourth quarter. Then the number of plants were down about three weeks ahead of the storm due to unplanned outages. So the market was already tight, then Uri took about 25% of the global VAM market offline. And while they're back operational, they're not near full rates. It has created a pretty significant global VAM shortage, as you know. Prices are high, and the volumes are forcing us to cut back on how much interlayers we can make here in the second quarter. That's the one place out of our total portfolio where I have a supply-related problem, and it is for a lack of vertical integration. But we're getting through it. The teams have done a phenomenal job of sourcing VAM from all places around the world, overcoming incredibly complex logistics, which is going to help us resolve this here pretty quickly. It will help us not just now but how to have a better diverse supply base in the future.

I know that Eastman wants to divest various business in the AFP segment. Can you describe what the magnitude is of what you want to sell? And will it be a dilutive transaction when you sell it?

Yes. Jeff, this is Willie. So thanks for the question. As we have previously said, we've been actively looking at all options for the underperforming businesses and adhesives and tires. We continue to be disciplined, and we're making progress on the restructuring activities to improve these businesses. We've actually seen strong volume improvements from both market recovery as well as innovation gains with customer wins. As you think about the overall size of these businesses on an EBITDA basis, it's going to be less than 10% for the two businesses that we're talking about.

And it will be dilutive when you sell it?

No. As we think about the value of the businesses and the underlying EBITDA and the optionality that we have there, it will be net neutral on an EPS basis.

Let me echo the nice start to the year. If I could just follow up on that last question, really. Are we looking at some action here in the first half of '21? Would you put it in that sort of timeframe in terms of a divestiture?

Frank, what I would say is we're not going to comment on ongoing processes as we're looking at continuing to improve these businesses, and we'll give you an update when it's appropriate.

Sure. There has been very impressive growth in the Performance Films sector as well as in Advanced Materials overall, with a reported 15% increase in volume. Part of this is attributed to the easier comparisons in Asia. Can you discuss how this business is performing geographically and what your expectations are for the second quarter?

Sure, Frank, and good to hear from you. The recovery of AM was substantial, and a good part of that was Asia coming back to life. So if you go back to 2020 and looked at our performance relative to '19, we had very strong performance in AFP and CI, and we actually had 15% growth overall for the company relative to '19, which is a bit unusual relative to others in the marketplace. We were going against a really tough comp. But AM was one place that did face challenges in Asia. Supply chain and interlayers is really short, as an example, and as well as buying films on cars. So that led to some of the spike up. Demand trending-wise, though, has held up really well, so well, Asia recovery. We had growth in North America and Europe as well in the quarter. What I'd say is Asia is less of a source of growth for AM and for the company in the second quarter. In the second quarter, the big driver of growth is North America as you might expect where the economy here is starting to recover quite well. China had already started to recover a year ago in the second quarter. As you follow COVID recovery around the world, just sort of our revenue sort of follows that trend. Europe is still lagging and expect it to be better as we move into the back half of the year. The overall momentum is good. Demand is incredibly strong in our specialty plastics business across a number of products, Tritan, but not just Tritan, our copolyesters as well. Tritan, in particular, is just dramatically better, driven by the normal value proposition we have, better performance in BPA free, but the circular economy is adding to a lot of growth for us and engagement with customers, so much so that we were planning on converting a copolyester line to Tritan two years from now. We're now having to pull that conversion forward to now and getting it done by the end of this quarter to be able to serve the trade growth and demand that is so strong. That's going really well. And then Performance Films, back to your original question around that. That's a great story, right? We're winning on three dimensions. We've got the best product portfolio and performance, especially with our Gen 3 paint protection film that's dramatically better than our competition. We have a great channel strategy to grow through dealers and aftermarket. We've rolled out a new software system for patterning, the installation of PPF on cars, which is incredibly important and better than our competitors, which helps them quickly install and precisely install the product. We have the best dealer network around the world and have put a lot of effort into making that dealer network better. That business is going to have a great year. It was an incredible first quarter. A little bit of that was some restocking of inventory in China, but we expect the momentum for the rest of the year to be strong on all three segments, especially when we get back past this supply constraint in interlayers and have more capacity for Tritan.

First question is just around the acetyls chain. Obviously, your Dallas competitor had a great quarter, looking at a great year in that space. Your footprint is different. Can you talk about your strategic footprint in acetyls? Do you need to back integrate more into VAM over time? What are some of the other acetyl derivatives? How much are they offsetting the hit from the VAM side if you look outside of tow on some of your other downstream derivatives, if you could kind of just net out the acetyls chain for us this year?

Comparing our steel business to that of our competitors in Dallas isn't very meaningful because their operations differ significantly from ours. They are a major player in acetic acid and have expanded into VAM and emulsions, which are currently benefiting from tight market conditions and high prices. Our production focuses on DC and hydride, supplying cellulosic products and various other acetyl, polyester, or olefin products, but we do not participate in the VAM emulsion sector at all. When considering our total integrated acetyl stream, including all the specialties produced in Advanced Materials, AFP, and fibers, we find the margins and their stability to be quite attractive. However, examining only what we do in CI, which involves silicon hydride not used for specialties, we are limited by market conditions since we sell a co-product of acetic acid from our cellulosics production. Those market conditions aren't as favorable. We do have stable earnings through fixed cost contracts, but this doesn't allow for significant fluctuations in profitability year-over-year. Our lack of vertical integration occurred when we acquired Solutia, which included the interlayers business that utilizes VAM and PVOH as raw materials. We didn't choose to integrate forward into producing those materials because our strategy is to invest capital primarily in our specialty areas. It is quite frustrating to be impacted by high prices for these products while trying to maintain our relationships with auto and glass customers in the OEM supply chain.

Hey, guys, nice start to the year. Mark, when you take a look at your outlook for 2021, the $825 million to $875 million, what do you think drives the sort of low end and the high end? And how much of that delta is within your control?

Sure. Firstly, it's clear that our outlook has significantly improved since January. This enhancement is largely due to a notable increase in volume and mix growth that we experienced in the first quarter, along with the momentum we're carrying into this quarter and the latter part of the year. As previously mentioned, volume mix is central to our strategy and will continue to drive our earnings improvements this year. This is our main contributor. Additionally, the Chemical Intermediates businesses are experiencing tight underlying markets which are contributing to the spread expansion I mentioned earlier, helping to offset some delays in our prices adjusting for other products. One uncertainty remains regarding the direction of spreads in CI. On the cost front, we are very confident in our ability to manage costs. Our operational transformation program is effectively counteracting the short-term actions we took last year, and this $200 million program not only benefits us this year but will also support us going into 2022. Compared to last year, we are also benefiting from a $100 million utilization tailwind from 2020 into 2021, which gives me confidence. We have a lower cost structure compared to 2018 and the utilization improvements from 2020 are still in play. Overall, it's about better volume mix and improved spreads, while we anticipate some moderation in CI spreads later this year as market conditions normalize. Predicting this can be challenging, contributing to some uncertainty, alongside the macroeconomic recovery we are all encountering due to COVID and other ongoing uncertainties.

Got it. And given that your earnings outlook is much stronger, your free cash flow as well stronger. Any update on what you want to use your balance sheet for going forward, given the outlook does look better?

No, Mike, thanks for the question. We agree that with the outlook improving and increasing to approaching $1.1 billion, what I would say is, as we think about capital allocation in '21, we're still, I'll call it, unchanged in our priorities. So one starts with a strong dividend, which is an increase for 11 years, and we expect that to continue. Also, we expect to continue to reduce approximately $300 million of debt. The balance will be used for the bolt-on acquisitions and share repurchases. We announced the attractive animal nutrition bolt-on and used strategic cash of about $70 million there. We expect to repurchase approximately $350 million of shares in the full year. We'll be remaining disciplined as we go forward. But as we think about also getting our debt to EBITDA in line with our targets, that increases our flexibility as we go forward into '22.

Yes, good morning, Mark and Willie. It seems that you are making more progress in molecular recycling than your competitors who are focused on polyethylene. Eastman Kodak had some impressive technologies, and congratulations on your ranking in Barron's as well. My question is regarding the conversion cost of new PET compared to regular PET. I understand that there is a lengthy ramp-up process and customer qualifications to consider, but looking towards the long-term, say by 2030, how much PET do you think could be replaced with recycled, molecular recycled PET? Any estimates would be appreciated.

Sure. So as I said, we're really excited about methanolysis and where we think it can take us. We are trying to be a leader to demonstrate that the plastic waste crisis can be solved within plastic. Plastic is in many applications, by far, the best product for the market. It has the lowest carbon footprint versus alternative materials, whether it's glass, paper, aluminum, in many cases. So we want to keep plastic being the best solution for climate by far. But we got to address the waste crisis. We do have a way of scaling up, and I think we're demonstrating how to do that. It's important to remember that we're upscaling plastic waste into durable applications. We're not trying to defend a large single-use plastic business in what we're doing. That allows us to get a lot of incremental growth in durables at high values as well as better margins. We haven't been focused in this first investment on really leaning in on the PET business. From a cost point of view, to answer your question, the costs are modestly higher than PET or co-polyesters today at oil prices around where they are today. If oil prices go up, that equation changes on a relative cost basis. What we see as a real detachment now from this business from the sort of fuel stock market. When you look at PET trading at 60% to 80% premiums to fossil fuel PET in Europe, you know that there's a completely different economic proposition going on around recycled PET or recycled specialty polyesters that we're making. We do think there's a significant opportunity to scale this up. We have customers calling us. We have peers calling us. We have governments calling us and asking us, can you sort of work with us to solve this problem. We're engaging in those conversations and trying to figure out which set of those opportunities makes the most sense for us. I want to be very clear for everyone who's listening, we are not getting back into the normal PET business that we got out of in 2011. We're staying out of it. If we choose to get back, it's going to be more of an airgas model on how we engage with solving this problem and scaling up, which means that we'll provide technology, construction, operations, feedstock sourcing. We'll have long-term contracts to secure all the demand, where we will not take market volatility risk relative to feedstock prices. We'll likely be more of an equity participation in partnerships as opposed to putting this entirely on our balance sheet. We will see how those conversations go. I think the need is there. Lots of people are making very significant commitments. In Europe, they're facing very significant taxes. We are moving faster probably than many others because we did practice methanolysis for a very long time as part of Kodak. We have a lot of technical and operational expertise that's allowing us to move very quickly in how we build this up and have a robust capability with a wide set of feedstocks.

Great to hear. And then coming back to more nitty-gritty, on CI, as I understood after the Texas freeze, as ethylene and other commodities spiked, propylene prices collapsed by 50% because I think refineries started up before the polypropylene plant started up. I would have expected a benefit from lower refinery grade propylene for you and higher propylene derivative prices. Can you just explain what happened with the propylene chain? What was the benefit? Or why do you see we see more?

Yes, certainly. First of all, we don't sell propylene; we sell derivatives made from propylene. We experienced strong pricing momentum before the market conditions became tighter. You have created even tighter market conditions, but those derivative prices have remained strong and are expected to continue increasing significantly into the second quarter. Most of our propylene is derived from propane that we purchase, with RGP being converted to propylene, and we have some supply agreements based on propane pricing, not propylene. We're not acquiring much merchant propylene in our overall feed mix. The spreads are favorable and appealing. The driver markets remain tight, and we anticipate a very successful second quarter. It’s also important to recognize that in the CI segment, there's more than just olefins. Approximately 25% of our revenue comes from functional amines, which have shown a strong and consistent track record of improving earnings from 2018 to now and are on a positive path. The majority of that business operates under cost pass-through contracts. This is also true for many of our acetic and hydro customers. Our strategy aims for stable earnings in CI rather than volatile ones, as we strive to be more of a specialty company with predictable earnings and cash flow.

In describing the dynamics in your Advanced Materials business, you talked about raw material inflation, and you pointed to VAM. I would think that you would be pretty integrated in your Advanced Materials business. How much pressure is there from higher raw material costs? And what are the raw material costs that are really lifting there?

So, Jeff, thanks for the question. We are very focused on the value of vertical integration. As you just noted, it creates a lot of stability for us. So in our polyester chains, ethyl chains, and olefin chains, that's, for the most part, a way we provide significant reliability to our customers that compare it to some of our competitors. Through the first quarter, I received a number of calls from a very important large customer thanking us for our demonstrated reliability that they deeply appreciated and how well we got through the storm and supplied them. The one place that we're not vertically integrated is from acetyl to our interlayers. We don't make VAM and rely on market suppliers for VAM. The shortages that we saw have created a constraint for us in interlayers. It is specific to the interlayer business. But we were already having sort of supply problems with some acetyl unreliability in the fourth quarter. A number of plants were down about three weeks ahead of the storm due to unplanned outages. The market was already tight. Uri took about 25% of the global VAM market offline. While they're back operational, they're not near full rates. It's really created a pretty significant global VAM shortage. Prices are high, and the volumes are forcing us to cut back on how much interlayers we can make here in the second quarter. That's the one place out of our total portfolio where I have a supply-related problem, and it is for a lack of vertical integration. But we're getting through it. The teams have done a phenomenal job of sourcing VAM from all places around the world, overcoming incredibly complex logistics, which is going to help us resolve this here pretty quickly. And it will help us not just now but have a better diverse supply base in the future.

I know that Eastman wants to divest various business in the AFP segment. Can you describe what the magnitude is of what you want to sell? And will it be a dilutive transaction when you sell it?

Yes. Jeff, this is Willie. So thanks for the question. As we have previously said, we've been actively looking at all options for the underperforming businesses and adhesives and tires. We continue to be disciplined, and we're making progress on the restructuring activities to improve these businesses. We've also seen strong volume improvements from both market recovery and innovation gains with customer wins. As you think about the overall size of these businesses on an EBITDA basis, it's going to be less than 10% for the two businesses that we're talking about.

And it will be dilutive when you sell it?

No. As we think about the value of the businesses and the underlying EBITDA and the optionality that we have there, it will be net neutral on an EPS basis.

Let me echo the nice start to the year. If I could just follow up on that last question, really. Are we looking at some action here in the first half of '21? Would you put it in that sort of timeframe in terms of a divestiture?

Frank, what I would say is we're not going to comment on ongoing processes as we're looking at continuing to improve these businesses, and we'll give you an update when it's appropriate.

Okay. Sure. There has been notable growth in the Performance Films sector and Advanced Materials overall, with a reported 15% increase in volume. Some of this can be attributed to the easier comparisons in Asia. Can you explain how that business is performing geographically and what the expectations are for the second quarter?

Sure, Frank, and good to hear from you. The recovery of AM was substantial, and a good part of that was Asia coming back to life. So if you go back to 2020 and looked at our performance relative to '19, we had very strong performance in AFP and CI, and we actually had 15% growth overall for the company relative to '19, which is a bit unusual relative to others in the marketplace. We were going against a really tough comp. But AM was one place that did face challenges in Asia. Supply chain and interlayers is really short, as an example, and as well as buying films on cars. That led to some of the spike up. Demand trending-wise, though, has held up really well, so well, Asia recovery. We had growth in North America and Europe as well in the quarter. What I'd say is Asia is less of a source of growth for AM and for the company in the second quarter. In the second quarter, the big driver of growth is North America, as you might expect, where the economy here is starting to recover quite well. China had already started to recover a year ago in the second quarter. As you follow COVID recovery around the world, just sort of our revenue follows that trend. Europe is still lagging and expect it to be better as we move into the back half of the year. The overall momentum is good. Demand is incredibly strong in our specialty plastics business across a number of products, Tritan, but not just Tritan, our copolyesters as well. Tritan, in particular, is just dramatically better, driven by the normal value proposition we have, better performance in BPA free, but the circular economy is adding a lot of growth for us and engagement with customers, so much so that we were planning on converting a copolyester line to Tritan two years from now. We're now having to pull that conversion forward to now and getting it done by the end of this quarter to be able to serve the trade growth and demand that is so strong. That’s going really well. Performance Films is a great story, right? We're winning on three dimensions. We have the best product portfolio and performance, especially with our Gen 3 paint protection film that's dramatically better than our competition. We have a great channel strategy to grow through dealers and aftermarket. We've rolled out a new software system for patterning, the installation of PPF on cars, which is incredibly important and better than our competitors, which helps them quickly install and precisely install the product. We have the best dealer network around the world and have put a lot of effort into making that dealer network better. That business is going to have a great year. It was an incredible first quarter. A little bit of that was some restocking of inventory in China, but we expect the momentum for the rest of the year to be strong on all three segments, especially when we get back past this supply constraint in interlayers and have more capacity for Tritan.