Eastman Chemical Company (EMN) — Q3 2021 Earnings Call Transcript

Good day, everyone, and welcome to the Third 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, Mary, 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 market closed, we posted our third quarter 2021 financial results news release, and SEC 8-K filing, as well as our slides and the related prepared remarks in the Investors section of our website, www.eastman.com. Now, 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 third quarter 2021 financial results news release. During this call in the proceeding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for Second Quarter 2021 and the Form 10-Q to be filed for Third 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 third quarter of 2021 Financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight to Q&A. Mary, please let's start with our first question.

Thank you. And good morning, everyone. And thank you for the updated outlook on 2022. And to that effect, if I could just ask you Mark, what are you assuming for auto production 2022 versus 2021?

Good morning, Vince. And what we're assuming is that the auto production situation remains pretty challenged as it has been the back half of this year as we go into next year. But things get modestly better through the year, especially in the back half, but there are no heroic assumptions about auto recovery next year versus this year in the forecast. So depending on everyone's view, you can adjust up or down relative to that assumption.

Okay. In the third quarter, could you explain how the specialty portfolio volume would have performed if we set aside the impact from auto? What are the underlying trends in your other businesses?

Good morning, Vincent. What I would highlight, first of all, is again, we have mix included in that for the quarter. And specifically in our enhanced materials, which are more exposed to the OEM. And if you back that out, volumes would have actually been down because we had very favorable mix in the quarter as we think about year-over-year performance especially. But sequentially, it was definitely down in the premium areas. If you think about it, in the first half of the year, mix was incredibly strong and drove a lot of margin growth and margin improvement. And there was a mix shift a bit in the third quarter. It wasn't just autos; it was also outbound logistics constraints on our specialty plastics business getting high-value products like Tritan to the market. Demand is incredibly strong out there, but logistics, as you all know, are also challenging, so the earnings could have been considerably better with those two factors, had they been a bit better.

Thank you very much.

Thank you. Good morning. And Mark, again, thank you for this '22 guidance. On that guidance, could you just walk through the segments and how you expect them to perform in '22 versus '21?

Sure. It's nice to hear from you, David. When we consider the overall segments, especially the specialty businesses, we see significant growth potential driven by several factors. The volume mix should be a major contributor as the economy continues to grow to some extent. Additionally, there's considerable pent-up demand that will further drive growth beyond GDP as consumers seek to fulfill needs that have been unmet due to supply chain issues. We're also in the process of restocking inventory, which hasn't occurred yet this year, adding to the positive outlook. Particularly regarding pent-up demand, it plays a more significant role in the AM segment, which represents about 70% of the margin improvement compared to AFP. Innovation remains strong in AM, where we expect to continue outperforming the underlying markets, a trend we've seen over the past year and even the last decade. Our circular offerings are also boosting growth in the AFP business, with $600 million in new revenue from innovation providing good momentum heading into next year. While there's a bias towards AM, the AFP businesses are also gaining traction. We are focusing on growing markets, such as luxury EVs and water treatment, where we naturally benefit from market growth. It's important to note that much of the growth I mentioned is high-value mix at both the segment and corporate levels, providing significant leverage. AM is set for a substantial earnings increase next year, which is also true for AFP, leading to solid growth. On the spread side, we faced headwinds this year as prices adjusted throughout the year. However, with the pricing actions we plan for the fourth quarter and effective price increases starting January 1, we anticipate a notable increase in earnings due to improved spreads, provided raw materials stabilize and decrease in the second half of next year, which aligns with our expectations. AFP has managed to keep pace with prices better this year due to more cost pass-through contracts, with half of the price increase in the third quarter linked to these contracts. In contrast, the interlayers business in AM has many annual price contracts, making adjustments slower. This supports the 70-30 split regarding spreads. Both segments are positioned for considerable earnings growth, including AFPX on a recasted basis minus divestitures. In fibers, we'll likely negotiate prices for over half of their revenue by January 1, which will enhance earnings. Although we anticipate normalization, this will be offset by substantial volume growth next year in plasticizers and other opportunities, along with fewer shutdowns. All these factors contribute positively, complemented by cost tailwinds across all segments that support high growth. That summarizes our expectations, David.

Perfect. And just on buybacks, Mark, could buybacks approach a billion dollars next year?

Let Willy take that one.

Well, David, thanks for the question and maybe a little bit, as we think about every year, we're focused on growing free cash flow to that billion dollars level. As we go into 2022, obviously we'll have the impact of the divested EBITDA, but we believe fundamentally with the working capital abating, given the raw material assumptions that Mark just outlined. Right now, year-to-date, we've had roughly $450 million of inflationary pressure on working capital. We see that reverting. Also, as we continue to invest in circular and growth in our capacity assets, we think excluding the dividend that being backlog of $600 million of free cash flow. If you take proceeds from our divestitures on top of that, it definitely is possible.

Very good. Thank you very much.

Yes. Good morning. Mark, you announced a nice deal to divest the adhesives business, and of course the Crystex deal is still pending. I was wondering if you could just walk us through, at a high level, what your thoughts are on capital redeployment and just the portfolio composition moving forward. Does this bring the Company to a reasonably steady state in 2022 or is there more work to do in terms of the mix in the portfolio over the next couple of years?

And so, we certainly like the portfolio we now have. We think that our businesses are very well-positioned to deliver strong growth in earnings, improving margins, and the fibers and the Olefins part or the CI part of the business is an integral part of our integration scale, cash flow, etc. We like the portfolio as it's configured right now as we look at deploying capital. To your question, Kevin, on delivering more growth from the total Company, when it comes to capital deployment, obviously, our free cash flow remains incredibly strong, and our balance sheet now is also strong with delivering being in our rear-view mirror. So as we look forward, I think we should think about how we deploy capital on multiple fronts. First, you should expect capex to increase a bit next year as we have the combination of specialty growth and the first methanolysis plant that we're building here in Kingsport. Normal capex growth to support our specialty strategies is in that $500 to $600 million range. Of course, you've got a good portion of that $250 million of the Kingsport plant being spent next year. Now we're balancing some of the specialty capex between next year and pushing some of it to '23 to maintain this in balance across the two years. Capex will be a bit higher for that. Then after that, you look at how am I going to deploy my balance sheet and cash? There are really four buckets. The first is the potential to continue investing in the circular economy. We're pursuing multiple projects beyond this first plant. If we can achieve the conditions that we've talked about in the past about those being very attractive investments and very stable sources of earnings, those projects could be very accretive to earnings and our ROIC. They're very attractive from a return point of view, and that could be a use of where we go with our balance sheet. The second, of course, is bolt-on M&A, where we like to ramp up that level from where we've been in the last couple of years. Returning cash to shareholders will be significant as we move forward. And of course, our growing dividend will play a role. It will be a balance of capital deployment I think, as we've always had across these areas. There's a lot of attractive investment opportunities for us right now, and so we're really excited about how we can deploy capital and create growth for our shareholders.

Great. Thank you very much.

Hey, good morning, and congrats on the divestitures. And just a follow-up, Mark, you talked about uses of cash and possible bolt-on M&A. What are the current valuation levels like? What does your current pipeline look like in that regard?

The bolt-on M&A pipeline has a number of ideas that we think can be attractive in advanced materials in AFP as we try to build out our additive portfolio in AFP and accelerate our access to additional markets in advanced materials, especially in Specialty Plastics. But as you've noted, Frank, you have to be careful; there is a lot of buy-side interest in pursuing M&A right now, as everyone has improved balance sheets and cash. So, we're going to be disciplined as always. We're proud of the fact that we don't overpay for assets, whether they're the large ones we've done in the past or the bolt-ons we're focusing on now. We'll see how it goes. There may be some constraints because we're just not going to run around overpay.

Got you. Got you. And if I could come back to the automotive piece, you referenced that you are doing better than you had back in 2018, and obviously, with builds being off, where do you stand in the interplay between your sales into the automotive space versus where the build rate is today? How should investors think about that interplay going into next year?

With advanced materials, our exposure to OEMs is greater than that of AFPX. A key difference is that AFPs have an automotive exposure that consists of roughly half refinish and half OEMs, resulting in a more balanced approach to OEM production as it continues to improve. On the OEM side, the supply chain is tightly connected between OEM production and our interlayers, allowing for quick adjustments alongside their weekly production rate changes. We're seeing realizations in this adjustment happen swiftly. The performance films business has performed well through the third quarter, as auto dealers are working to enhance the value of the cars they are selling. Offering our paint protection films and window films has been a beneficial addition to the limited inventory they have available. However, we are beginning to feel the effects as we approach the fourth quarter. As they begin to sell or produce more cars, we anticipate a rapid increase in our sales, given the lack of inventory in the distribution channel between us and the primary market. The positive aspect is that supply chains will eventually recover, and production will increase. There remains strong demand in the market, reflecting significant pent-up interest from consumers wishing to buy cars. The current prices for used cars indicate a robust demand. If recovery occurs, it should happen quickly, although it may take longer for AFP due to a more extended supply chain.

Great. Thank you very much.

Great. Thanks. I just wanted to talk about '22 initially or what's your initial comments there. What are you expecting on the last question as far as global auto production? It appears to us that many Companies in your position are actually assuming rates below the IHS recovery. Could you comment on that first? Thanks.

So on a 4Q basis, I think our view is below IHS. I think IHS is from what I can tell monitoring their view downward for the fourth quarter. Production, obviously, what we're assuming is similar to maybe a little bit better than third quarter but no significant change to help in the quarter. When it comes to next year, let's be honest, it's anyone's guess, right? When the supply chain on components is going to improve and production is going to improve. I think we are being cautious and not assuming much improvement in the first half of the year. However, we do assume that eventually these issues are going to get addressed, and so, there will be some modest improvement in demand in the back half of the year. Our guidance is not based on some substantial improvement in order demand.

Thanks for that. I just wanted to also ask about strategy. Following the sale of Crystex here, are there other properties within the portfolio that you think are non-core anymore? Thanks.

No, not at this time. So, we're very happy with the portfolio. The two obvious questions that come up in the past are fibers and Olefins. On the fibers front, I remind everyone that it is deeply integrated into our overall business. We have a lot of biopolymers, especially as we're selling off the stream in advanced materials and the AFP and with the significant change in the world's view around waste, plastic, and climate, we just have tremendous growth opportunities in front of us in both AM and AFP with that integrated stream. You'll learn a lot more about that at innovation day where we're going to identify a bunch of new opportunities we're pursuing that can be quite substantial. Textile growth has been actually quite strong. It's incredible how the textile growth has been 80% up year-over-year. Obviously, in the challenging market that still creates tremendous growth, offsetting not just tow market decline but also that discontinued product. That business is at a position now where textile growth will offset tow market decline or better, and in fact, demand is exceeding our expectations where we're having to pull forward conversion of total assets to making textiles. That business is on track and generates a huge amount of cash flow that supports all the investments we're making for growth in AM and AFP. Olefins, it's bit of a similar story where we're dramatically improving the quality of earnings in that business. It's doing really well. But we've been taking a lot of actions over the last three years to improve what is the new normal for this business, which is more likely around $300 million. Things like closing the Singapore plant where we had a very disadvantaged raw material energy position, that’s a big upgrade in the quality of that business with it closed. A lot of operational cost transformation work that we're doing across the Company flows into the big assets that flow into chemical intermediates. The investments give us flexibility to reduce ethylene when it's not attractive and to produce it when it is; that reduces volatility around that. We've got a new investment; we'll tell you about it in innovation day, for modest capital that will significantly improve our Olefin production flexibility. The mix is getting better, meaning business inside that overall portfolio is great, growing, and stable. We have a lot of our businesses on cost pass-through contracts that provide a certain amount of stability, probably about 40% revenue. There's a lot of things in the Olefins space we've done to improve it. We're obviously disciplined about our portfolio. But when we look at the significant growth opportunities we have in front of us, and that balance sheet strength that we want to leverage to deploy and grow the Company, the cash from both fibers and Olefins creates a lot of value. When we look at the portfolio today for what we want to do now, this is the right portfolio to grow.

Excuse me. Good morning, Mark.

Good morning.

Congratulations on being named in Fortune Magazine. I believe you are one of the few chemical companies recognized. You're also establishing a specialty brand within the circular economy, particularly with products like Tritan. On one side, you have to contend with the challenge of commoditizing businesses, such as additives. Like many other chemical companies, you face the ongoing struggle between maintaining innovation and battling commoditization. Do you think your current portfolio is well-suited to transition solidly into specialty products? Are you considering a significant specialty acquisition, or are you planning to focus on smaller, incremental additions?

It's a fair question, P.J. We're always looking at how to enhance our portfolio. We did significant portfolio change way ahead of many with the addition of Solutia, Taminco, and divesting a lot of commodity business. We moved out about $3.5 billion of commodities and added $4.2 billion of revenue in specialties out of $10 billion; it was a huge portfolio change. We do really like the portfolio we have now. Yes, we've optimized it around some underperforming businesses. I'm proud of our teams delivering on that restructuring activity, which is never easy, to get to where we are. We don't really feel the need to get a lot bigger. We think we're at a good scale to continue to invest in fundamental R&D, product development, as well as application development to grow. I think that the circular economy on top of very attractive specialty growth is a game changer for how we can grow the Company and how it could be valued. We see a lot of growth in capital deployment in that direction to deliver a lot of organic growth from the portfolio we have right now where we don't really feel the pressure to run out and do some large M&A. At the prices today for large M&A, that's really attractive. You're going to have a challenged situation in getting a good return. So, we're not really focusing on that.

Okay, great. You made more propylene in the quarter using your refinery propylene investment and you had to buy less propylene as a result. That looks like that refinery investment made a lot of sense. When you look back, what kind of returns do you think you achieved on that? Can you just talk about that? Thank you.

Yes, P.J. This is Willy. That paid off in less than a year and we're at multiples now. It's a great investment, and we're excited to tell you about some additional options that we have to further raise the bar as we think about the long term because of our ability to optimize our Olefins at the Longview side. Most of our capital, as Mark just highlighted, is focused on the specialties and the new vector of circular; but we're still going to make the right optimizations to improve the quality of the portfolio long term.

Great. Thank you, Willy.

Thank you. And good morning, everyone. Could you discuss free cash flow conversion? What kind of conversion in terms of percent of EBITDA? What percent of net income do we see next year?

Alex, this is Willy. What I would say is, if again, at a growing EBITDA number, we strive to be around that 50% level. If you think about a billion dollars, $1.1 billion, and $2.2 billion of EBITDA pre-divestiture, we're going to grow back to that level as our focus based on our earlier numbers. So think around that 50% level.

Thanks, Willy. And Mark, a question for you on circular polymers; business feedstock availability is a major issue, as you know. Could you discuss what progress you're making this year in securing access to necessary waste streams to grow that business?

Sure. We're making great progress. The advantage we have right now is we're ahead of the industry in going to commercial scale in building the largest molecular recycling plant. That gives us an advantage on how we show up with different suppliers for what we need. There's no doubt that there's plenty of plastic waste. When you look at polyester just in the U.S., over 20 billion pounds of possible waste a year. About 40% of that is packaging, and only about 25% to 30% that can be recycled today. When it gets recycled, frankly, most of it goes into textiles, not bottle to bottle. As you tap into that stream and vanish to methanolysis, they can use what can't be mechanically recycled from packaging but can also use carpet textiles which almost all end up in landfill. Accessing a 100,000 tons of feedstock out of that significantly large number when you're the first showing up to secure it is challenging but doable. Infrastructure clearly needs to improve in the U.S. as we help consumers recycle more and support that with the infrastructure to recycle it as we look at plants 2, 3, and 4. But as we look at the first one, we're confident that we can do this, and we will provide more detail at Innovation Day. You'll hear that a lot today about you'll get more detail in Innovation Day, but it's a better forum to provide more detail on this question, which is incredibly important, and we're very focused on it.

Good morning, everyone. I didn’t realize you had a lot of information on Fermi and Ferrari. Regarding AFP, could you discuss the businesses mentioned in your prepared remarks that you believe are well-positioned for growth? Can you elaborate on the growth prospects for the other businesses in AFP?

For next year, when considering the Specialty Plastics sector, we are experiencing significant growth. Market demand surpasses our logistics capabilities, and we are even facing capacity constraints into the second quarter. This is why we switched a production line to focus on Tritan. We have increased capacity through the third quarter and are ready to support growth next year, which is coming from various markets. Traditional markets, such as hydration and housewares, are seeing accelerated growth due to our renewed recycled content. Additionally, we are gaining access to new markets that were previously unavailable to us. The businesses we highlighted, particularly black conductors, illustrate this expansion, as does our entry into the power tools segment. Our partnership in power tools stems from a customer’s commitment to climate goals, where recycled content plays a vital role in their progress. They aimed to maintain quality—a crucial factor since many applications can't utilize mechanical recycling without compromising product quality. We offer recycled content, reduced carbon footprint, and no sacrifices on performance, which was pivotal for their choice. Recently, ten other brands have joined us for similar reasons, and we are well-positioned for future growth. Beyond Tritan, we also have Crystal Renew, a high-clarity copolyester for recycled content in cosmetic packaging, along with a broad range of options, including cellulosics and eyewear. There is considerable growth potential in Specialty Plastics. The interlayers in our performance films businesses are linked to the recovery in automotive production, and while the mix is still critical, we observe improvements in the mix outpacing the overall volume. The first vehicles OEMs are producing are typically more luxurious and high-value, especially as they resolve chip and component shortages. We are poised to capture that volume with our products tailored to that market, making the mix value highly significant. Overall, there is ample opportunity for growth across the entire segment.

Hey Mike. You might want to do something similar for Additives and Functional Products as well?

Sure. In AFP, coatings have had tremendous growth this year and that growth will continue. There's a lot of pent-up demand in coatings with our customers struggling significantly with supply chain challenges. Those customers are ramping up just to build inventory to serve the seasonal demand next year. That's good as those supply chain issues continue to get resolved. We'll continue to see very strong growth there. The care chemicals business has great steady growth, same with water treatment; that will continue going into next year. Higher-value formulated solutions through the 3F acquisition are accelerating their growth, and there is, of course, a recovery in the aviation business. Many different vectors across the segment remain well-positioned for growth in the markets it serves. Of course, we've got innovation in packaging, and that'll be a vector of growth, and continued growth in some of the care chemical opportunities and some really exciting new ones that I will tell you about at Innovation Day.

Right. And just a quick follow-up on chemical intermediates. EBITDA margins have been in the high teens for the last couple of quarters. It sounds like it will stay in that range for maybe the next three quarters. I think in the prepared remarks you mentioned that you felt it would normalize in the second half. Just curious what normal means these days, but any thoughts on where that level settles in versus much, much lower levels in the past?

I believe that when we refer to normalization, we anticipate it to be around $300 million. There is a path to normalcy as we progress through next year, during which we expect market conditions to remain relatively tight at least in the first half. However, we foresee some loosening of these markets as we approach the fourth quarter according to our guidance. Much of this stems from the exceptionally high-value spot sales and extremely tight market conditions we experienced in the second and third quarters. As supply and demand become more balanced, those spot sales will diminish, presenting a headwind from the third to the fourth quarter for CI. The overall fundamental dynamics of these markets, particularly at the derivative level, are expected to remain reasonably tight as we enter the first half of next year. We will assume normalization towards that $300 million level in the long term.

Thank you.

Good morning, thanks. I want to hammer in a little bit more on the strategy to offset dilution, given all these sales, will you look to pay off any debt given the lost earnings there and if this is all or sorry, is it all buyback? If it's the latter, I guess why not execute more aggressively on a buyback now ahead of proceed collection just given your cash balance?

Thanks for the question. Let me frame it this way, which is we expect total proceeds to be about $1.8 billion from these transactions and actually $1.7 that over the next few months. As we look ahead also, this was about 8% of our EBITDA. As you think about the flow of the market cap, we're looking at roughly $1.2 billion. I'll look at that as probably the floor. Think about offsetting dilution and paying taxes; that'll raise the number up to roughly $1.5 or so. We're going to put that money to work starting here in Q4 with the tires closing week, which we expect here in the near term. Given our balance sheet on the tires position, we don't expect to pay down any debt related to that. As we look at 2022, we'll see at the timing of getting the proceeds and also managing our debt matter. In '22, we'll have a refinancing in the August timeframe and have plenty of time to optimize that when we get there.

Okay. I know COVID obfuscates this a little bit, but if we were to look between 2015 or 2018 and 2021, what would proforma growth for AFP had been, excluding the problem child of Crystex and adhesives? What do we expect that the pickup in organic growth in the next 5 years versus the last 5, given the collapse in these businesses?

Yes. You will be providing a recast so you can see it in specific numbers. But roughly what you'd see between 2018 and '21 is a roughly flat similar to EBITDA from '18 to '21 when you have excluded the AFP as we've been discussing it. I think that's quite stable when you consider the China trade war and then the pandemic and recovering from it. Overall, that's based on when you look at it relative to '21, there's an improvement in volume and mix that's been meaningful. Spreads are probably a bit challenged relative to '18, just as pricing is still catching up to raw materials. But overall, a very well-positioned segment to deliver pretty strong earnings growth next year relative to that recast number. That volume mix comes from everywhere: coatings, animal attrition, care chemicals, water treatment, even specialty fluids, except for aviation in '21. But that will obviously start correcting itself as you go into '22 for that front. It's an across-the-board, it's our volume mix story.

Thank you. Good morning, guys. Mark, quick question on your portfolio. I mean it has definitely changed over years, but you still have a mix of specialty and non-specialty businesses. If you look over the course of 12 to 18 months, are higher raw materials good or bad for you? Or is it neutral over time?

If you look at it on a combined basis, from a raw material point of view, I would say you have to then convert that to spreads. Prompters were up everywhere; but obviously, prices are up more than raw materials and CI where we're lagging price-wise in the specialties. Those too do hedge each other out. That actually provides earnings stability. If you're focused on earnings stability, there's a bit of a balance when you've got CI, just 20% of your earnings. It provides some benefits in times like this as your prices are catching up to specialties. The opposite will be true next year as the prices in spreads improve in the specialties. Obviously, you're going to have some spread normalization CI. The important part of our strategy and our story is not spread. We've been very clear about this. Our strategy is growing volume and high-value mix in that volume against an asset base that we continue to upgrade with that mix to deliver increasing ROIC, as well as deploying more capital for that high-value mix. That’s how you drive value long-term; it’s not about spreads bouncing up and down. They sort of hedge each other out and provide a balance. That will be true next year as it has been this year.

Thank you. I have a quick follow-up regarding the bolt-on M&As. Is the focus primarily in the U.S. or are there opportunities outside the U.S.?

As we look at the pipeline, we're focused globally and, as Mark highlighted previously, obviously looking at our Specialty Plastics business and across the new AFP portfolio. We're focused on that and also on our circular projects from a growth standpoint. So, it's about focus now that we've completed the actions on the third that you can see the value of the new AFP.

Thank you very much. Mark, I've been observing that over the last six months, the '21 earnings for you guys seem to have climbed about 14% or 15%, at least the estimates and the stock's gone the opposite; it's down about 15%. You've had that rating that seems very consistent with commodity companies, commodity chemicals like...

I'm not going to answer that question, Bob, but the Board is incredibly excited about our strategy and the value creation opportunities that it presents. In the end, you, the market decide what the Company's worth, not us. As we focus on what we're doing, the specialties, as you noted, I think we're going to demonstrate incredibly strong growth next year relative to this year in that part of the portfolio. We’re going to manage capital deployment in a responsible way to leverage it for very attractive ROIC growth, leveraging the core technologies and platforms that we have. You pile on the circular, we could deploy significant capital. If we can get these projects done under the conditions that we have, they provide stable earnings as a significant vector of new growth that isn't factored into our evaluation. Huge upside as you point out and where I think our stock price can go from today. As it all plays out, our balance sheet strength that is significant gets deployed, there's a huge amount of upside. We're confident investors will see that value and invest in the Company. That's why we're doing our Innovation Day in December to lay that all out for you.

You mentioned in Advanced Materials, a decent chunk of contracts that reset annually. I was wondering if you could give us a more description there. Are those typically exclusive with the automakers? Is there any opportunity to shorten those contract durations, so you can have more market-based pricing? Give us some sense of that. Thanks.

These contracts are between us and the glass companies. We don't sell to the OEMs. We're selling to the glass companies that use our films for laminating that glass. It's been a traditional structure in this market since we bought it with these annual contracts. We are looking at how we negotiate both price and structure to these contracts going forward. Obviously, in years of declining raw materials, we like them. In years where raw material spike up, especially when they spike up like this, it's a problem. It's the same issue in fibers, where you've got these annual or multi-annual contracts where the prices are locked in. When you had that huge spike up in energy and raw materials in the back half of this year, you have to wait until January to recover that. But we are aggressively going out with price increases in both interlayers and fibers.

Great. Thanks.

Thanks. Good morning. With regard to your startup next year, there's a big demand for recycled plastic. Can you give us a sense as to what percentage of volumes are already booked or contracted? Would you announce an expansion if you say are 70% or 80% booked?

The uptake and engagement from brands has far exceeded our expectations on the Specialty side. We were thinking we have swing assets where we can make our Specialty Plastics or PET for packaging. We thought we'd actually be selling more PET for packaging, but that's looking like it's not going to be the case because the Specialty demand is so strong. We're in a very good position for loading the asset pretty quickly into the markets. We're not going to disclose the specific percent number, but I think it's going to be quite robust and quick. As we move beyond our first plant, yes, the demand is very much there. That's why we're working diligently right now with countries and brands around the world, especially in the U.S. and Europe, who want to solve those challenges. Brands are committed to very high recycled content targets, and there’s not enough mechanical recycling product to supply that need reliably. Mechanical recycled PET prices are going up dramatically in Europe and now as well in the U.S. Brands are worried about how up that's going and are doing lifecycle analyses on carbon footprints. Unfortunately, you run into a problem where alternate materials have a worse climate footprint. Wendy's switched from coated paper cups to plastic because plastic has a much better climate footprint. Brands are focused on how to recycle plastic for many applications and realize molecular recycling is the only way to keep product quality the same. Engagement is strong, and the need to build more plants is there as we're driving to find a way to do that under the right conditions.

Got it. As the CIP process can take more types of plastics than PET, how should we think about the PET versus CIP mix as both these processes start ramping up in the years ahead?

Both technologies create a lot of value and the CIP process is drawing attention. We've had a biopolymer for 100 years, going back to acetate films with Kodak. We've created a huge spectrum of applications off of that core technology in AM, AFP, and fibers. With the recent focus on climate, plastic waste, and our recycling, you can have biodegradable products as a way to have a circular life. That’s drawing a lot of attention around the cellulosic stream. We can take back polymer and reuse it in the process, or provide ones that biodegrade based on the application. So, a lot of interest and growth there as well that we're really excited about.

Thank you. I thought the formic acid business was also in the underperforming category. Are you confusing underperforming with non-core? Has that improved a lot and is it part of the core operations?

On the formic side, yes. It's a much smaller component. It's a fraction of the size of the two businesses that we sold. As we've taken operational and transformational and the operations there, we've got the results we need, and the performance is adequate.

Okay. Are automotive films and automotive coatings ingredients being impacted equally by the automotive curtailments?

From a film's point of view in advanced materials, the interlayers and the aftermarket performance films, they're more impacted, more OEM exposed than our coating additives where about half of it goes into refinishing; therefore, that’s a lot more stable in the current situation. We feel the impact on the film side more.

Thank you.

Let's make the next question the last one, please.

Thanks a lot. Just one question really is on your guidance for 2022. Hearing in the call and hearing you talk about so many factors that are going to catch up and be beneficial. Just wondering, are you being very conservative regarding your EPS range of $9.50 to $10, considering all the catch-up on raw materials and the volume leverage that you were talking about in your specialty businesses? I'm just trying to understand what is the conservative, and if there is. Thank you.

I wouldn't call it conservative or optimistic at this point. I think what I'd say is we're sharing our best thinking with you right now of what we know. There's a lot of uncertainty in the future. Things we are certain about is we know we can control costs. We have a very aggressive transformation program that, when you look at operational transformation, cost-cutting plus variable comp tailwind, that's about $200 million of tailwind that offsets about $80 million to $100 million of inflation. We know that we're going to invest in growing this business. We have tremendous growth opportunities across our portfolio, and we have growth investments in that $50 million to $75 million range. That is controllable. We can control the pace of that based on how the market is doing, and that does include some pre-production expense on starting up some other plans when you think about that number. Those are controllable. There's uncertainty about where CI is going to go. I think we've got a reasonable assumption but will defer to some other companies on that and where the markets are. On the specialty side, we feel good about the growth potential, the innovation to create leverage growth along these markets, and that spreads will be a tailwind. But there's still a lot of uncertainty about automotive demand and the questions that I highlighted. So, what we're confident in is if you look at it in three buckets, you've got divested earnings offset by share repurchases. You've got a bucket of CI spread normalization offset by cost reductions, and then you're asking the question, can specialties grow next year relative to this year in a variable margin? I think we've laid out a case where we think the answer that is very much yes, but I'm not going to get more precise about that until we get to January and have a better look at the world we live in at that point.

Great. Well done on the call. Thank you.

Thank you.

Thank you.

Just to wrap up, what I'd like to say is deeply appreciate the questions, the interest in the Company. We're incredibly excited about Innovation Day coming up in December. It's been a while since we've had that kind of opportunity to really get more into detail with investors on how we're going to grow this Company and deploy our balance sheet to create a lot of attractive growth. When we look at the Board and I, we're having this conversation in our last meeting in the beginning of October, and this is the most exciting time I think we've had, thinking about all the different ways we can grow this Company and create value. We look forward to sharing that with you in December. It will be virtual, but I hope I will get as many people as possible to show up in person as well as be available online so we can interact with you all. Thanks again for joining us this morning. I hope everybody has a great day. That's the end of the call.