Eastman Chemical Company (EMN) — Q2 2021 Earnings Call Transcript

Thank you, Christina, 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 second quarter 2021 financial results news release and the 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 call, 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 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-Q for the first quarter 2021 and the Form 10-Q to be filed for the second quarter 2021. Second, earnings referenced in this call 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 2021 financial results news release, which is available on our website. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A. Christina, please let’s start with our first question.

Hey. Good morning, guys. Nice quarter. Mark, I guess, when we think about the second half of the year, how much of the improved outlook do you think will come from specialty businesses and how much of it comes from the intermediate?

Sure. Good morning, Mike, and it’s a great day here in Appalachia, beautiful morning. And we’re really excited about the results we had in the second quarter. And to your point, I’m really excited about the momentum we’re building in our specialties as we go forward into the back half of the year, which will be the driving force for earnings in the back half. When we think about it, we had strong volume and mix growth in the specialties, especially relative to last year or 2019 or even 2018 and the progress that we’re making and that momentum will continue into the back half of this year. Now, some of that strength in volume and mix growth was offset by temporarily high distribution costs and some of the other supply chain factors that we faced in the second quarter and expect those to abate. So not only do you get the volume and mix growth, you get some improvement in spreads relative to the first half. So that’s going to drive a nice improvement for specialties. And I would say it’s going to hold up better in the fourth quarter than what is normal seasonality, as we look at the lack of restocking customers have made to-date and we don’t think that they’re going to make much progress on it really through this year and that will extend into next year. So that’s a big driver. In addition to that, you’ve got lower shutdown costs, a lot of that hit AFP in particular. So you’ve got that as a benefit. You’ve got lower operating costs from all of our operational transformation work, and as I mentioned earlier, this distribution is coming off the spike that it was. There are, of course, headwinds as we expect some moderation in spreads in chemical intermediates, and we have increasing gross spend. So there are some factors that offset some of that. But it’s definitely much more of a specialty story and how you deliver a back half that’s better than the first.

Got it. And as a quick follow up, slide six, I noticed you’ve got a lot of cool companies in the terms of the new Q2 signups or commitments for your new facility. Are you close to selling out that facility at this point and at what point do you sort of consider maybe continuing to expand given the momentum you’ve had there?

We’re really excited about our circular economy investments that address the significant issue of plastic waste while utilizing technology that reduces reliance on fossil fuels and has a lower carbon footprint compared to our traditional processes. Our customers recognize these advantages, which are crucial to our solution, and we have seen exceptional engagement. As we mentioned in the first quarter, numerous brands have committed to using our recycled content from both our polyester renewal and carbon renewal technologies for biopolymers. Signing on brands like P&G and Ferragamo puts us in a strong position to fully utilize the first facility we are building. We're already benefiting from our existing bridging capacity, allowing us to build volume and momentum this year and into next year. These commitments will enable us to quickly fill that plant with specialty products, which is an ideal way to establish a new facility. We're excited about our core specialty strategy and will continue to invest in it. Many customers in the fast-moving consumer goods sector need to focus on packaging and understand that plastic offers the best carbon footprint. It's important to consider this when tackling these challenges, as other materials like polyester and glass have a significantly higher carbon footprint, even with better recycling rates, and aluminum is 50% higher. Our brands recognize that recycling polymers is the best solution for minimizing carbon footprints and removing waste from the environment. We are collaborating with several countries to help them address their waste challenges and are engaging with brands about potentially building facilities catered to their packaging needs. However, we will not return to the merchant PET business. We are open to manufacturing this product under a more sustainable model, leveraging our proven, scalable technology and operational capabilities. We have the experience necessary for handling the variable feed streams involved. To ensure stability, we need long-term contracts with customers to secure predictable margins and reliable access to raw materials, which can be complex. If we can meet these requirements, we are keen to construct these facilities, as we believe they could generate substantial returns on capital and EBITDA. We won't provide detailed figures right now, but we are enthusiastic about this opportunity. Success will depend on the engagement of customers and countries, and we hope to build several of these plants in the future.

Great. Thank you.

Yeah. Hi. Good morning.

Good morning, P.J.

Good morning, P.J.

Yeah. It feels like Friday with the Eastman call.

It does. I am a little disoriented about 9 a.m. too. I am still trying to get used to that.

Yeah. Just a couple of questions, with the sale of the tire business, you took a big loss on the sale of $0.5 billion. Did this business decline significantly in the last few years, was the supply demand getting worse that the loss was so big against the book value?

P.J., this is Willie. Let me start out here. I would also highlight that Solutia was a transformative acquisition that’s created significant shareholder value and positioned us for growth through innovation and the innovation-driven growth model that we have and that’s been highlighted in interlayers performance films and specialty fluids which are doing incredibly well right now and we’ve highlighted that on many calls. Also over the past couple of years, we’ve highlighted the fact of the headwinds and the one-third many of those being macro, with trade, also the competition. So as we assess this business, as you know, the accounting rules don’t let us reallocate the goodwill back to the purchase date. So, overall, we’ve got a strong portfolio and it’s transformed, but we also need to move forward and I think we’ve been decisive with those actions. And yes, it’s resulting in a $500 million write-off, but we believe we’ve contributed a tremendous amount of value and now we’re going to focus on what Mark just spoke about, which is investing in the circular economy and growing the two-thirds.

Okay. Thank you. And I’ll follow up with that with Greg later on. In molecular recycling, Mark, where do you get the raw material waste plastic and at what prices? And then on the other side of that, if the recycled plastic costs, if they’re higher, are the consumer companies planning to pass that to their customers, i.e., consumers? Is that what they’re expecting to do?

The supply issue is a crucial topic in the circular economy. There's a significant amount of plastic waste generated, but a structured approach is needed to access it effectively. In the U.S., approximately 20 billion pounds of polyester waste is produced each year, primarily for packaging, textiles, and carpets, with only 40% being packaging. Of that, only 25% to 30% is realistically recyclable through mechanical processes, and most of this is processed into textiles rather than returning to bottles, which require very pure polymer for remolding. Consequently, addressing the packaging challenge through mechanical recycling is quite limited, and much of the carpet and textile waste ends up in landfills due to the inefficacy of mechanical recycling options. Although we want to maximize mechanical recycling due to its favorable carbon impact, its viability is restricted, especially since polymer quality degrades after about five recycling cycles. This makes molecular recycling, which our company is pursuing, vital for addressing the waste issue, particularly since alternative materials typically have poorer carbon footprints. We are excited to lead in this space, leveraging our significant technological and operational resources, which allows us to scale effectively compared to smaller startups in the polyester sector. Our collaboration with brands is strong due to our compelling solution and our capacity to deliver it at scale. By assigning value to waste that typically ends up in landfills, both customers and suppliers are actively engaging with us, and we feel optimistic about accessing this waste affordably. We are keeping our feedstock strategy confidential for competitive reasons, but we're confident in our ability to obtain waste at reasonable costs. On the customer side, companies understand that recycled content commands a premium. As we noted earlier this year, our PET receives a significant premium compared to fossil fuel-based PET, which is currently around 60% to 80% in Europe, and U.S. premiums are starting to rise. Clients anticipate these higher costs, and we offer greater price certainty and predictability than the fluctuating spot market for food-grade PET. This value proposition is important for our agreements, as while we require long-term commitments to ensure economic feasibility, we also provide clients with more stable pricing to help them manage their operations effectively. Overall, this approach benefits both sides.

Thank you.

Thanks very much. In your commodity business, you earned $144 million and I think last year you earned $22 million. Can you analyze the year-over-year change in that operation? And I think sometimes you talk about intermediates, plasticizers, functional amines as being the larger chunks of it. How did those subsegments do your every year? Can you talk about the dynamics here?

Sure, Jeff. It’s indeed been a notable recovery in chemical intermediates, similar to what many other companies with comparable products have experienced compared to last year. This success in our portfolio results from both improved volume and significantly better margins. Before I delve further into the broader aspects, I want to address the composition of chemical intermediates first. The 25% revenue from chemical intermediates indicates that they are primarily based on cost pass-through contracts. This structure has allowed for consistent margins since we acquired Taminco, and they've experienced steady volume growth over time, leading to predictable and attractive earnings. Additionally, there are a few accelerators beyond just normal agricultural growth. For instance, we have recently built a plant for Corteva’s Enlist product, which is driving additional growth alongside our core business. It's a solid and stable sector for us. In the plasticizers segment, we’ve been a frontrunner in non-phthalate plasticizers for an extended period, enabling us to achieve growth that outpaces the market as we replace other types of plasticizers. The margins there, linked to the olefin chains, have performed well this year. Success in this area is not only about margins but also our strong growth position in the marketplace. Furthermore, in terms of olefins and asset yields, olefins represent a more significant portion of our business. The yields and margins have considerably improved due to the current dynamics between propylene and propane, contributing to our performance. When it comes to acid fuels, it's important to note that we are not heavily involved in acetic acid; it is merely a co-product. We manufacture acetic and hydride, being the world leader in this area for producing cellulosics. The value from that integrated acetyl stream, which supports various specialties and advanced materials, as well as fibers, brings margins significantly above the company average. While we expect some moderation in olefins, we've made investments to enhance chemical intermediates and ensure stability. A notable portion of our business runs on cost pass-through contracts rather than spot pricing because we strive for predictable earnings. This strategy served us well in 2019 and 2020 compared to 2018, allowing us to outperform others. We are also benefiting this year from not being as reliant on volatile spot prices. We have made strategic investments, such as in RGP, which have enabled us to adjust ethylene production based on market attractiveness. Shutting down our site in Singapore, which was subject to significant olefin volatility, will not only enhance earnings but also decrease volatility. Overall, many initiatives are underway to optimize value here. It's crucial to keep in mind that chemical intermediates exist to support specialties, which are experiencing robust growth. A slight decrease in volume from this business results from the specialties consuming it quickly. Overall, this segment is fulfilling its role by providing reliable value for customers and optimizing our cost structure, and we're very proud of how our team has enhanced value in the first half of the year.

How much of what’s produced in the commodity segment is used internally roughly and how is that changing in the current environment?

And so, yes, what I would say is approximately 50%, and as Mark has highlighted, we continue to debottleneck and get 1% and 2% growth a year in that space. So, over time, trying to keep the reliability for our customers, but at the same time be there when our specialties need it.

Okay. Great. Thank you so much.

Hey. Good morning folks and I agree with P.J. I think like it’s Friday. Just following up on chemical intermediates in terms of the margins and the spreads, how did July turn out relative to the 2Q average? Any sort of pace that you could provide for us on how chemical intermediates profitability has been turning would be great.

Yeah. So, if we look at July, what I’d say Frank is, prices have held up similar in July to the second quarter. But propane costs are trending higher, right? So part of our commentary is that propane was about $0.90 on average in the second quarter. It’s $1.10 in July. So you’ve got some propane headwind, but prices are holding up well. Now our guidance includes some expectation that prices will start to normalize as we go through the back half of this year. I think there’s a wide range of opinions about the rate at which prices may or may not normalize in the back half of the year. I’d say we’re probably in the middle of the road on, relative to the commentary out there, where we expect some but not dramatic and we said we’re getting out the olefin forecasting business a long time ago and we’re going to stick with that.

Okay.

It’s a little hard to predict the pace at which these markets can change. But appreciate the earnings it’s actually been a nice balance, as we’re working pricing relative to raws in the specialties and so these sort of neutralize each other out in some ways. And on the spread front, our strategy is focused on growing high value, volume and mix through innovation in the specialties, which is the vast majority of who we are. It’s nice to get these benefits out of CI, but it’s also nice that’s a small part of the company and not a big driver of our long-term growth story.

Got you. And actually that feeds into my question in terms of seasonality on 4Q. It looks like the guide is more heavily weighted on the third quarter. Is that more a function of that you have greater near-term visibility? And just, in general, what are your thoughts on 4Q seasonality since there does seem to be some thought out there that it’s going to be less than typical in normal years?

Our perspective on the specialty segment is that demand will remain strong and sustain itself throughout the third quarter and into the fourth quarter. We do not anticipate the typical seasonal decline, as customers are making limited progress in improving their inventory situations, particularly in sectors such as automotive and construction. These markets are significantly affected by supply chain challenges, which impact their ability to meet robust global market demand. Consequently, they will continue to seek ways to increase production as they obtain raw materials to fulfill that demand. We believe this strength will persist in the latter half of this year and likely carry over into next year for these sectors. Additionally, we have other stable markets, such as care chemicals, water treatment, and agriculture, that consistently experience growth, providing a level of stability. Therefore, we expect better performance in this area. Regarding chemical intermediates, we have already addressed that aspect, which is a smaller part of the company and not a major driver of our long-term growth.

Yeah.

... we expect normalization spreads. I just don’t know when.

Got you. Very helpful. Thank you.

Thank you. Mark, I am wondering in the sort of molecular recycling arena. You’ve talked about the key opportunity on a take or pay basis. I am wondering like in polyester fibers, if there’s an avenue into the apparel industry or textile industry. I mean, I know you obviously have Naia through the fibers but that’s a different solution. So I am just wondering if there is another source of customer opportunity to sell recycled polyester fiber?

Yeah. So there’s two different opportunities for this, Vincent, and good to hear from you, in the textile world. First and foremost, we’re having tremendous success with our biopolymer, right? So you’ve got to remember, we have a cellulosic polymer called Naia that is half biopolymer from a certified sustainable source and the other half now is going to have recycled content in it through our recycling technology and it’s as a microfiber, it’s certified as biodegradable. So it’s the hat-trick of solving the environmental problems that are out there and we see really strong engagement from customers on that. It’s a nice high margin product for us and in a way to sort of repurpose all of the fibers capacity that was making tow. So we spent a lot of time driving that and it’s just a great success story. And when you think about just this year, the amount of growth we’re having in textiles is offsetting the decline in tow. And the one-time hit we took in that discontinued specialty product which was $10 million alone. So, really great progress by that team. And yes, there is the opportunity in addition to that to look at polyester fiber with recycled content in it. Those are some of the conversations we’re starting to have along with some of the packaging customers on where we could potentially lean in and help on that front. So it’s a possibility to add to our growth story in the biopolymer textile.

Okay. And can I just ask you on and I know you raised the free cash flow guidance, but just curious how you’re thinking of managing the sort of raw materials issues that are out there in terms of inventories. And some companies sort of were seeing a bulge, sort of during the year while they’re trying to procure inventories to make sure they have what they need for customers, others are talking about maybe they want to have more on hand in general in the future just given we continue to see sort of unplanned outages and things like that and they want to be a little bit more nimble. What’s the thinking inside of Eastman in terms of how you want to manage inventories given that you’re obviously a very strong free cash flow generator and that’s an important part of the story?

Thanks, Vincent. This is Willie. I want to emphasize the exceptional efforts our team members around the globe made to generate free cash flow in the first half of the year. We achieved nearly $450 million in free cash flow during the first six months, despite facing about $200 million in raw material pricing inflation compared to last year. As Mark mentioned earlier, supply chains remain somewhat constrained, and we're focused on ensuring a secure supply. We will make decisions to maintain our ability to meet customer demands in our specialty areas and will make necessary trade-offs. We've incorporated these considerations into our forecast and anticipate generating over $1.1 billion this year. However, we will continue to make choices based on how demand scenarios develop. It’s challenging to build up significant inventory at this time, especially considering the demand levels observed in the second quarter.

Thanks very much.

Yes. Good morning. Mark, with regard to your specialty segments, margins came down a bit on a sequential basis. In that context, I was wondering if you can talk about how much of the cost inflation has been recovered and how much you think you’ll need to recover and what role price increases might play in that process for additives and functional products, as well as advanced materials? Thanks.

Yes, I believe we are effectively managing pricing in the specialty segments. Looking ahead to the second quarter and our plans for price increases in the third quarter, we are confident in our ability to handle prices in relation to raw material costs, and I am truly proud of our teams for their efforts. In the second quarter, we faced challenges due to a spike in distribution costs alongside raw material expenses, primarily caused by increased airfreight usage. It wasn't just about the price per unit delivered, but rather the mode of transportation needed to ensure our customers were supplied. A significant amount of airfreighting was required. We anticipate that this will return to more normal logistics methods, which should lead to a reduction in those costs. While we are recovering some of those costs through price adjustments, it's not enough to fully offset the expenses we experienced in the second quarter. As we approach the latter half of the year, we feel optimistic about keeping pace with raw material prices and managing total distribution costs. Our focus remains on delivering volume and optimizing our product mix to meet customer demand, which is currently stronger than our available logistics capacity. Therefore, the main limitation will be accessing logistics resources and effectively responding to demand in the second half of the year, which may impact our growth in comparison to the second quarter. However, we are confident in managing the situation with raw materials.

I see. Thank you for that. And then, secondly, your prepared remarks released last night referenced $100 million of savings from digitization, site optimization, operations, transformation, et cetera. So a few questions, maybe if you could elaborate on what exactly you’re doing there and how these savings might spread among your segments and what the associated cash outlay might be attached to those projected savings?

What I would highlight is that we’ve identified three main areas for cost savings. In terms of site optimizations, we have significantly executed most of those through mid-year and anticipate a positive impact. We consider this to be a $50 million program, expecting about half of that to carry over into next year. We’ve also discussed how we manage maintenance turnarounds and the structure of our operations, with implementations that began at the end of 2020 and carried into 2021. As these measures are fully applied, we expect to see further benefits. Additionally, we are exploring opportunities to leverage our sites for other partners, which will also contribute value and earnings from the extra capacity we have. Year after year, our aim is to offset inflation under normal operations. Furthermore, as we transition from 2021 to 2022, we expect the variable compensation to also provide a favorable impact as we manage these three areas.

Thanks very much.

Thank you, and good morning, everyone. Mark, where do you stand in advancing this industrial gas light business model for your methanolysis technology? Are you in any specific discussions with potential partners and have those discussions been fruitful?

Yeah. So we are engaged in specific discussions with partners both at the country and the brand level, as well as sources of feedstock supply. So a lot of conversations going on and now we have a full team just dedicated to managing this area and quite encouraged by the level and seriousness at which the counterparties are taking this and understanding the challenges and what we see in their commitments to make a real difference in improving the environment with our products. So I feel good about it. But it’s not over until it’s over and so we just have to see how these discussions play out. And I’ll be excited to share the news with you once I’ve actually achieved my objective on the structure of these kinds of deals.

Great. Well, we look forward to that. And as a follow up on free cash flow, you mentioned for next year priorities are dividend increase, M&A and share repurchases. The last two categories, how do you think about the balance, if you can’t find bolt-ons, should we think of sort of share repurchases as sort of a default option or repurchases are going to be more opportunistic in nature?

I will address the first part of your question and then turn it over to Willie for more details. First, I want to emphasize how proud we are of our teams for effectively managing and delivering free cash flow, maintaining stability during both favorable and challenging conditions. Reflecting on our journey over the past decade, we've made significant progress since the Solutia transaction, which greatly enhanced our portfolio quality and allowed us to generate stronger free cash flow, aided by the capital-efficient nature of Taminco. The Solutia acquisition contributed notably to our free cash flow. Additionally, we've seen success in growing our high-value innovation products, which yield attractive margins and boost cash generation. Recent portfolio optimization actions, such as selling tires, will further increase our cash reserves. We are in a strong strategic position regarding cash and our balance sheet. Looking ahead, our priorities include ensuring capital expenditures align with our specialty innovation growth strategy to support our growth capacity. We also aim to accelerate our initiatives in the circular economy, starting with integrating recycled content into our specialty products. There is potential to develop additional plants similar to the airgas model, which could significantly enhance our EBITDA, and we'll consider this as a cash option. Following that, share repurchases and smaller M&A opportunities will be our next steps, along with sustaining a growing dividend as part of our overall cash strategy. Our priorities are clear, and I want to be explicit that we're not considering large M&A transactions. We believe that effectively utilizing these strategies together will create a balanced growth story for the company. Now, I will let Willie provide more specific details on our current cash position.

Yeah. What I would say is, with the improving EBITDA, we expect to be done with delevering at the end of this year. And I would also add that, we’re now not expecting to need to further delever for the tires divestiture. So we’ve committed to roughly $250 million of share repurchases in the back half of the year and now thinking that we would have roughly $600 million to $650 million of cash to repurchase shares and or bolt-on as Mark has highlighted as we wrap up the year. Our balance sheet is in great shape. We’re below 2.5 times net debt-to-EBITDA and expect also from a rating agency view to achieve 2.5 times and below by year end. We’re in a great position and as we think about going forward, we have roughly $1.2 billion remaining on our current stock repurchase authorization and with the cash that I talked about as we wrap up the year and think about potentially $700 million of free cash flow that’s up the strategic use of next year, we’re in a strong position as we move forward, as Mark highlighted.

Yeah. And just on the bolt-ons, we’re not going to be opportunistic. We’re going to be very strategic. In other words, we’re adding new bolt-ons if they really fit with the company, they really create a lot of value and reinforce an existing business and we’re going to be disciplined about what we pay. So we’re not giving caught up in deal fever. Having said that, we very much would like to do bolt-on M&A, but it’s got to meet those conditions.

Thank you. In AFP, when you say looking at additional actions, is that more divestments or is that taking out stranded costs from the tire rubber chemicals divestment?

We are always committed to managing our cost structure, including any residual costs that may arise from a divestiture. We will handle that as part of our overall transition work for operational and business models. Regarding adhesives, we are actively exploring both joint venture and divestiture options, where we have engaged with multiple parties, and we will see how that develops.

Okay. After converting more standard copolyester to Tritan, what percentage of the copolyester production will be Tritan? How much capacity do you have left for low capital intensity upgrades?

We certainly have low capital intensity upgrades, which has been especially true for plastics since its inception. It began with a number of PET assets that were handed down from their larger predecessor. We then repurposed those PET assets to produce our traditional copolyesters and further transformed those polymer assets to create Tritan. In 2018, we expanded significantly to support growth across our entire company portfolio and have continued with several initiatives that we started last year, anticipating a recovery from the pandemic and the need for growth assets. Tritan is one of the many projects we are currently working on; we converted a copolyester line in the second quarter of this year to Tritan, which will come online this quarter. This is a continuing trend, and we are likely reaching a point where we will add polymer capacity due to the robust growth across our portfolio since the introduction of Tritan. This has been a key driver of our progress. Greg wants to speak, so I’ll hand it over to him.

Tritan currently accounts for just over a third of the revenue in specialty plastics. We are seeking further clarification on this figure, but that's approximately its current contribution.

Yeah. It’s a grower, but it’s important to understand recycled content not just to Tritan but to all the copolyesters, our Cristal Renew product that goes into cosmetic packaging, a variety of other polyesters are also growing really fast with the circular addition to our story. That’s why we’re going to have to add total polymer capacity.

Good morning. Congrats on the P&G announcement and when I read the press release I guess I understand in the agreement for purchasing of Renew. But how are you two working together to address the infrastructure problems? You kind of alluded to that in the press release. I am just wondering what P&G is committing to doing here?

There’s a significant amount of policy and collaboration with the existing recycling infrastructure, which is enhanced when we partner with brands that have strong relationships with recyclers. These brands already purchase a lot of recycled content from these companies, and by working together, we can encourage them to expand their efforts beyond just easily recyclable products to include a wider range of waste streams. This collaboration involves engaging with the current infrastructure while also encouraging improvements in their capabilities. Additionally, there is collaboration on policy at national, state, and local levels that supports the enhancement of recycling infrastructure and promotes appropriate consumer behavior. Various strategies like expanded producer responsibility and bottle bills can further drive recycling efforts. It’s crucial to ensure that the value of recyclable materials is emphasized over sending them to landfills, and policy plays a vital role in this aspect. There is much work to be done across multiple levels, and P&G, along with several other brands we are engaging with, is expected to be a valuable partner in advocating for responsible management of this important resource, ultimately helping to establish a true circular economy.

All right. That makes sense. And as a follow-up, so paint protection film has been a nice source of growth for Eastman over the last couple of quarters. Have sales expectations for the year kind of decelerated for that business in line with auto sales forecasts or is the adoption cycle making up for that kind of downshift in the underlying?

No. It’s doing great. And it’s not been a couple of quarters. It’s been many years of how well this performance films business has done both in the window film and the paint protection film. It’s been a tremendous growth story. Last year they grew in a very down market, because this category of paint protection film in particular is just dramatically growing and how people want to protect their paint. And we just launched a new Gen 3 product that is substantially better than our existing products which were still market leading in their performance. But it’s much easier to install. It performs better in protecting the paint. And it now actually has the gloss of ceramic coating if you’re familiar with the car industry. So it actually has a better gloss when you put this on than the original clear coat of the car. I just came back from visiting a bunch of dealers out west and getting their direct feedback about how this is going and they’re just incredibly excited about that and it’s not just the product. We’ve also rolled out a new software program called Core that has superior pattern cutting, which is a really difficult part of doing paint protection film. Well, when you think about all the different car shapes there and you need the film to fit properly around the car and this software allows them to make very precise cuts and install much easier with the patterns of all the cars in the last 10 years, which is a non-trivial task to create, I might add. So it’s done really well and then the channel strategies we’ve deployed about working with auto dealers and additional the retail market has expanded our market tremendously over the last five years. So it’s a great business, growing well high value mix upgrade to the segment and even with the other markets slowing down, we’re seeing this business continue to do well, because our dealers are trying to focus on what they can upsell on to the car within the limited volume they have to sell. So, we’re getting good engagement as they’re trying to add features to what they’re selling.

Would you consider entering the installer market for paint protection film, as I understand that the profit margins are quite substantial, or is that not a direction you would take?

No. We’re examining all models to ensure that our dealers, both retail and auto, have the necessary resources for installation. I believe that’s what you're referring to, and there are many different approaches to achieve this. We have no intention of competing with our customers, as we believe that's not a sound business strategy, especially considering how loyal and valuable our retail partners have been. However, we acknowledge the current labor constraints, so we need to explore various options to support installation and ensure resources are available. That's our perspective on the situation. It's also vital to assist them in developing high-quality installers.

Thanks. Good morning, guys.

Good morning.

Good morning.

Mark, I wanted to ask you about your specialty story. The CI earnings may be making it a bit challenging for people to embrace. We’ve noticed a significant devaluation in your stock in recent months, possibly causing it to be viewed alongside some of the broader concerns affecting more commoditized companies. How do you view CI? Do you think it will fade away and lead to a substantial decline that impacts overall growth as your specialty businesses expand, or do you believe it can stabilize? Looking at consensus projections, it appears there is around 2% EBITDA growth expected for 2022 and 2023. Can you provide some insights suggesting that this might be insufficient?

Thanks for the question, Bob. We believe we are making significant strides in transforming our portfolio and performance towards specialty. Our analysis shows that our margins have remained strong from 2018 to now, and we have been delivering earnings performance that aligns more with the specialty category compared to our peers in the commodity sector. The data supports this perspective, and I can share it with you at a later time. Overall, we have maintained a solid position. While there is a focus on the CI aspect right now, I view CI as an essential part of our vertical integration and reliability for customers. We've demonstrated its value multiple times, especially during times when prices are rising in other segments of the business, providing us with more stable earnings. This diversification fosters economic stability, which I see as a positive outcome. Looking ahead to 2022, we do anticipate some moderation in CI spreads compared to this year. However, considering the growth opportunities and improvements in our cost structure, we are confident in our ability to achieve attractive earnings growth in 2022 compared to 2021, even with the expected moderation in CI. From a market perspective, many markets will still be recovering next year, including automotive, construction, medical, and aviation, with restocking likely continuing into next year. Additionally, we have steady growth markets such as chemicals, agriculture, water treatment, and consumables that comprise around 40% of our revenue. Furthermore, we are driving growth through innovation across our portfolio, including performance films, Tritan, next-gen acoustics, HUD technologies, tetra shield in food and beverage packaging, textiles, and animal nutrition, among others. The circular economy is also contributing to our growth, paired with smart segmentation strategies in our business. We are targeting the right markets, like luxury cars and electric vehicles. It’s important to note that many of these growth areas involve high-value products. The challenges we faced in 2019 and 2020 did not stem from spreads but rather from a decline in high-value product mix, which is now recovering. You will see the benefits of this shift this year and into next year. Additionally, we expect to reduce operational costs by $100 million along with another $50 million in lower distribution and shutdown costs as one-time savings. With considerations for where spreads might go and increased gross spending, we are well-positioned to achieve EPS growth in 2022 compared to this year.

All right. I’ll give you check-in more inspired then. Thank you.

All right. Thanks for taking my question. Maybe I could just ask a similar question to Bob’s here. So if we look at 2021 versus, say, 2019 or even 2022 versus 2019 EPS in the $9 or so range this year. If we look at a three-year average CAGR maybe it’s around 9%, which is definitely commendable and within your 8% to 12% earlier comments from a while back. I guess is that still kind of how you’re looking at it and then maybe you could just put a finer point on some of this. So if we look at next year, you have potentially some parts of the $50 million coming on from the recycling technology. Maybe CI falls off a little bit but how much of AM and AFP is still left for recovery if you could help us with that, that be great? Thanks.

We have been comparing our performance to 2018, which was our last peak, and we are excited that our EPS will be significantly higher than it was in 2018. Additionally, we are confident in our growth from 2021 into 2022. Everything we presented on Innovation Day remains valid, and we have included even more growth opportunities through the circular economy in our story. We believe an 8% to 12% growth rate is a reasonable expectation for next year regarding EPS. It's important to note that if our divestitures are successful, it will affect EBIT, and we plan to buy back stock to mitigate that impact. Our guidance and comments today do not account for EBIT or the effects of divestitures.

And I am sorry, how much of AFP and AM you think is still up for recovery?

I believe there is still significant growth potential in both businesses. With the acquisition of Advanced Materials, we anticipate strong growth in that sector next year compared to this year. This narrative will continue to strengthen and become even more compelling. It's truly exciting. When examining AFP, specifically two-thirds of it excluding tires and adhesives, we expect this year's earnings to exceed 2018 levels for that segment, driven by substantial growth in coatings aligned with our customers. Additionally, we are seeing steady growth in areas like agriculture and animal nutrition, as well as in our chemicals and fluids. Overall, the outlook is positive, even considering the challenges in aviation which won't hinder the growth of the other two-thirds of AFP compared to 2018. This segment is also well-positioned for further growth through recovering markets and innovation next year, albeit not at the same pace as Advanced Materials since they are still developing innovations. Nonetheless, both segments are on track to deliver healthy growth, while the fibers segment remains stable with an improving cost structure, providing a strong overall position.

Christina, let’s make this next one the last question, please.

Thank you. Mark, first on the molecular recycling facility, won’t you be in position to announce that additional capital investment either as an addition to that facility or a new one? Could it be in 2022 or do you think after that for another investment in molecular recycling?

Great question, David. And it sort of depends on the pace on which we go in our discussions with these customers and countries. But for our internal needs, I think that this first facility is what we’re going to need for 2023, 2024, so we’re not going to be starting a new specialty plant until we get this one up and running. But when you look at these other additional growth opportunities, I hope in the next 12 months or sooner, we could have an announcement around making progress on these other additional plants.

Very good. And just really on free cash flow, if we do achieve EPS growth, which you say will be attractive in 2022. How much above the $1 billion or $1.1 billion of cash flow do you think you could achieve next year? Thank you.

Yeah. David, thanks for the question. So, as I think about it, as we’ve talked about all the content being, I’ll call it, accretive now on the tire as we think about putting more cash to use on repurchases. It’ll be a headwind as we think about cash flow next year. So, again, we’re looking, I’ll call it, to be in the $1 billion to $1.1 billion as a starting point and that’s taking into consideration the headwind that we’ll see from the divestiture of the tires business.

So, just to wrap up, I wanted to make a couple of quick comments really to my employees and to the investors, which is I can only sit here and talk about the success we’ve had this year, how well we performed even in holding up last year and our ability to actually deliver growth next year on top of this year is the employees. They have just done a phenomenal job. There’s a lot of stress and fatigue out there when it comes to trying to keep this market supplied with how strong demand has been and every day they show up and just do remarkable work, not just in sort of operating delivering against the demand we have in this marketplace, ensuring we get the raw materials that we need, but also keeping innovation alive. To get to $600 million of revenue from innovation this year on top of all the chaos that comes from working our way through this dynamic environment is a real testament to the team, to our growth model and to the way they engage the marketplace. And I just wanted to express my deep appreciation to all of them for the phenomenal job that they’ve done. And with that, I want to thank you for all your questions and wish you all a good day.