Eastman Chemical Company (EMN) — Q3 2023 Earnings Call Transcript

Thank you, Jordan. Good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; William McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday after the market closed, we posted our third quarter 2023 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks are in the Investors section of our website, which is 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 our future expectations are or will be detailed in our third quarter 2023 financial results news release, during this call, in the preceding slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full-year 2022 and the Form 10-Q to be filed for third quarter 2023. 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 2023 financial results news release. As we posted the slides and the accompanying prepared remarks on our website last night, we will now go straight into Q&A. Jordan, please let's start with our first question.

Thank you, good morning. Mark, thanks for the comments on 2024 in the prepared remarks. Can you provide a little more color on the potential you think for 2024 earnings in this macro?

Sure, David. That's a great question. We're focused on moving past this year and on how we can recover and achieve significant earnings and growth next year. In our forecasting, we decided to take a neutral stance on whether markets will recover or not, or how oil and energy prices will trend. We aimed for a neutral scenario to concentrate on the aspects we can control to ensure a better year next year compared to this year. The primary factor contributing to our earnings decline this year was volume and mix, which we estimate resulted in a reduction of around $450 million from a variable margin perspective, not accounting for capacity utilization. As we consider potential recovery next year, we see three main areas of focus. First, we anticipate a lack of destocking, which has played a significant role in our business. We believe destocking accounted for about 40% of this year's volume decline, but out of caution, we project that about one-third could recover next year, amounting to $150 million in variable margin. This figure does not factor in restocking or any market improvements. The second area is innovation, which we are enthusiastic about. Our innovation efforts have been central to our growth story. A key component will be the Kingsport methanolysis plant coming online, expected to add $75 million in EBITDA next year when compared to this year, including all costs, revenues, and margins. This will enhance our position alongside the lack of destocking. Additionally, we have ongoing successes across our portfolio, not just with Kingsport. Our premium interlayers are performing well, particularly with the automotive market, given the increased material use in electric vehicles compared to traditional cars. We’re also seeing progress with our Aventa products and are expanding into polystyrene replacements for food packaging, which should yield good growth. Our Naia textile business has also performed well and is beginning to expand into the beverage sector. The third aspect pertains to market conditions. As noted in our guidance, we're cautious about market trends. There is considerable uncertainty regarding potential market recovery. However, we expect some stability in our more stable markets, such as pharma, personal care, and food packaging, which are less discretionary. The medical sector may see slight growth, while automotive is projected to grow moderately. Building construction may see flat or slightly declining performance. Considering all of these factors, we expect some volume growth in addition to the projections from destocking and the Kingsport methanolysis project. On the asset utilization front, we have been proactive in managing our assets and reducing utilization rates to generate cash. We achieved over $500 million in cash flow in the third quarter thanks to these strategies. While this approach has led to accounting challenges, specifically a $75 million utilization-related impact in the third quarter, it should position us well for next year. If volumes remain steady, this should yield positive effects. We are also taking steps to manage our cost structure, which means the revenue growth from volume improvements will directly benefit our bottom line, resulting in strong incremental margins. However, we do face potential challenges, especially with pricing beginning to stabilize in certain areas. We have significant raw material inventory at lower costs still to be utilized. Since our company operates with about 50% FIFO, we expect some benefits from this in the next year, balancing out the pricing impact. Overall, when we consider all these elements together, we foresee meaningful improvement in earnings and cash flow. We are excited about the actions we can manage amid this uncertainty to achieve success for our stakeholders.

Very, very helpful. And just lastly, in the areas where you are still seeing destocking like crop protection, when do you think it will end or how long do you think it will persist? Thank you.

On the ag market, which is more than crop protection, but a number of different products. Obviously, the destocking didn't start until the second quarter of this year. Very different timing stories like consumer durables or building construction started aggressively in the fourth quarter of last year, but ag didn't start until the second quarter. So the destocking started, it got more aggressive from the second to the third quarter. And it continues into the fourth quarter. We do think it'll be played out by the end of the fourth quarter from what our customers are telling us as they start looking to the next planting season. But normally you'd have a build-in inventory starting in the fourth quarter and through the first quarter for the planting season. This year, we're going to see destocking through the fourth quarter and then a ramp up of building inventory in the first quarter of next year. So that's part of that headwind relative to what is 'normal' for a fourth quarter, is that delta between building versus pretty aggressive destocking.

Thank you very much.

Good morning. I did appreciate the video on methanolysis, so thanks for giving us the link there. Mark, Advanced Materials has had a difficult 2023 on the backs of a difficult 2022 where you're now expecting 2023 to come in below $400 million of EBIT. I took a look back, the last time that happened that you were below $400 million was back in 2014. So I know it's been a difficult couple of years, what sort of confidence might you have that that business can get to $500 million or better in 2024?

Yes, Frank, we are optimistic about the business recovering significantly from its current state. The strategies I outlined at the corporate level are equally applicable at the Advanced Materials level. To provide some context for this year compared to next, the drop in demand we've experienced has been unprecedented. We've faced challenging demand situations before, such as in 2009 and 2020, but those declines spanned over three quarters and two quarters respectively. Currently, we are experiencing our fifth consecutive quarter of low demand, with ongoing destocking in some applications. This situation is largely due to demand factors, particularly excess inventory built during the supply chain disruptions. Many of the markets we operate in have lengthy supply chains, especially in consumer durables, where products must be manufactured after multiple steps before returning to the US or Europe. This protracted process means that it takes longer to deplete excess inventory, particularly in consumer durables. On a positive note, we are beginning to see signs of recovery in certain markets. For instance, the durable goods sector saw a 40% decline in the fourth quarter of last year, which was even steeper in the first quarter, but it rebounded by 30% in the second quarter relative to the first and rose another 15% in the third quarter. While we expect a slight decrease in the fourth quarter due to seasonal patterns, it appears that the lowest point in this market occurred in the first quarter, with conditions improving as destocking has largely concluded by the end of the third quarter. Other sectors, such as medical and packaging, are still experiencing extensive destocking, which started later, similar to agriculture, and is continuing into the current quarter. Different segments of specialty plastics are experiencing varying degrees and timing of declines, but we are hopeful that the destocking phase will finish by the end of this year. We anticipate that approximately $450 million in variable margin losses due to volume and mix, nearly half of which is in the Advanced Materials segment, will recover as destocking concludes. Additionally, there is an expected $75 million of EBITDA from methanolysis that will contribute to next year, with $50 million attributed to Advanced Materials and the remaining $25 million to other areas. Furthermore, we see stable markets, particularly in packaging and medical, where demand has declined but is stabilizing as surgeries resume. Although it’s painful due to destocking, we believe we can move past it. Out of the $75 million headwind from inventory management, about $40 million is likely to return as a tailwind. We also face a $35 million foreign exchange headwind this year, and while it’s uncertain how currency will behave next year, it remains a significant factor contributing to the overall decline. With destocking reducing, market improvements, and a tailwind from utilization, combined with innovation in the auto market and throughout our Advanced Materials portfolio, we anticipate substantial growth once the market stabilizes and customers feel more secure in launching new products. We feel confident in our approach, and we're maintaining a flat cost structure, which should lead to impressive incremental margins.

Very helpful. If I could follow up on the asset utilization, just a clarification. In the appendix, the updated number on the headwind is $100 million on the lower asset utilization. It says first half versus second half versus the prior $75 million and you're expecting a $75 million benefit in 2024. Shouldn't we be expecting $100 million benefit in 2024 on asset utilization if the headwind for 2023 is higher? I mean, I wouldn't assume, are you assuming that you're going to run at lower asset utilization as we start 2024?

Frank, this is Willie. So you've got it correct on the first half, second half. That increased from $75 million to $100 million. And sequentially, as Mark has highlighted, it was a $75 million headwind to Q2. With that momentum, we would expect it to improve quite a bit as we go from Q3 to Q4. But the full year, obviously, you're taking the reference 2022, and that doesn't come into effect as you look 2023 to 2024. So $75 million is a reasonable estimate. It may be a little bit higher, but right now $75 million is close enough.

Hi, Frank. Part of it is, we built a little inventory in the first quarter, and so you've got to offset that to the $100 million, because that's the first half, second half. So $75 million implies we're running our assets in a similar manner next year and get that tailwind.

Okay. Thanks so much.

Thank you. Good morning everyone. Mark, your prepared comments talked about the potential for some state or federal incentives for the US methanolysis plant. What's the sort of order of magnitude and what might be available and when will you know?

So yes, the Inflation Reduction Act is a great program for investing, inspiring sustainable investments and we certainly see several of our projects that we're doing available for credit. When it comes to the second methanolysis plant here in the US, the one that we're doing with Pepsi baseload. That funding could be about $350 million of capital. It is what's in the application. That doesn't mean that's what we're going to get. That's what we're asking for. And so, the good news is, we've been through a couple of rounds now and we continue to be considered for that program. It's a very competitive process. There's also some tax credits that we're pursuing as well. And we should have insight on what they choose to give all of us out of our requests in the first quarter of next year. It's what we've been told. But you never know, it's a government process. So who knows how the timing will work. But it's significant. It's a considerable help. We're also pursuing additional incentives in Europe with our project there in France, not at that scale, but some additional incentives.

Okay. And could you just talk about the sale of the plant assets to INEOS. Is that something that you've been working on for a long time? Or is it something that just sort of came up this year? And is there anything else like that, that's being contemplated?

Thanks for the question. And obviously, we've had an ongoing relationship with INEOS Acetyls. And through their acquisition of the BP assets for 10 years now, so I would say it's just due to that ongoing partnership that we've had at the Texas City site. As we think about longer-term in both increasing the percentage of Eastman that specialty, as well as the highest and best use, INEOS is the best owner for that. And also, as we think about strategically feedstocks for our Advanced Materials segment long-term. So all-in-all, all those factors came into play and the team did a great job here and we expect to close that here in Q4. And that provides about $400 million of cash and we expect to use that to pay down debt here in the near-term and for it to be basically immediately accretive. Right now, I would say, there is no other items like this in the pipeline. We're always evaluating the portfolio. But nothing imminent.

Thanks very much.

Good morning. You mentioned that your 2024 capital expenditure guidance is relatively flat compared to this year. Could you clarify what this means for your plans regarding additional recycling facilities? Will any significant capital expenditures be allocated towards site construction next year? Additionally, is there an updated timeline for selecting a site for the second facility?

Yes, we expect 2024 to be similar to slightly below this year. Our capital expenditure decisions will be influenced by the external environment. As Mark mentioned, we maintain a neutral stance on the external environment and can adjust accordingly, and we've shown that discipline over time. We are committed to starting construction on the France project and the second US project, as discussed. We anticipate beginning construction around the middle of the year. Additionally, we have some growth investments this year and are waiting for the macro environment to determine the pace of those. Overall, we will remain disciplined. We are finishing the year strong with the cash flows from the divestiture and expect around $250 million of free cash flow in Q4. Our capital allocation will be focused on a mix of organic growth and share repurchases as we head into 2024.

We feel good about our organic growth strategy. We think that kind of growth clearly creates a lot of shareholder value with great returns on capital. It's unfortunate the macro environment took a turn on us just as we were launching into the circular programs and a lot of that are specialty growth. But as we've talked about with our view 2024 and the expectation that markets will normalize as you go into 2025 and 2026, we believe earnings and our cash will come back significantly as we move forward. You got to remember, this year a lot of our headwind in earnings to 2022 was non-cash, $110 million of pension, $75 million of asset utilization to generate cash. So we are just looking at earnings. A lot of it is a non-cash hit relative to 2022. So we feel very good about our cash earnings and how we're doing in this environment, as well as how we look forward to the future.

And maybe just to build on that, Mark, on the cash. As we think about 2024 cash. As Mark highlighted, our baseline is starting at approximately $1.4 billion of operating cash flow. That's through the combination of higher cash earnings, combat roughly $250 million. We always assume working capital is flat. So that would be a reduction of about $100 million year-over-year. And then, we've got higher cash taxes, which also includes some of the taxes on the Texas City divestiture.

Got it. That's very helpful. And then I appreciate that the forward outlook doesn't have any restocking expectations embedded, but based on your conversations with customers coming out of restocking, do any end markets have precariously thin inventories or do you get the sense that this has just been a trimming of safety stocks built over the last couple of years?

No, it's definitely both. There's definitely safety stocks that were built up in the supply chain crisis more than customers were sharing with us. And so, hence the sort of destocking we're seeing this year. But we're seeing signs where suddenly we get an order from a customer, some of our big customers where they've brought inventory down so low, they can't actually make product and they need an urgent shipment sent to them. So you're starting to see people hitting bottom, which is encouraging. If you look at all the data we put together here around destocking and the underlying markets, you definitely can see that we're turning in the back half of this year where the destocking has played out. As you look at next year, when you get into this question of restocking, we wanted to build a really conservative view of how it could perform next year because the macro economy, frankly, is so uncertain. So we don't have any restocking in there, but it's reasonable to expect that some restocking is going to have to happen with some of these customers if the markets start to stabilize and grow at all. And so that will happen. That would be upside to sort of how we look at next year. It's certainly going to happen in ag as I think about it. That's one place we know for sure that a rebuild in inventory will occur.

Thanks very much. How much did the methanolisus plant in Kingsport cost?

So Jeff, on the methanolisus in Kingsport, I think as we've highlighted earlier this year, we had a range of $700 million to $800 million as we started the year. And we went to the higher end of that estimate. We've been able to manage the increase for the Kingsport methanalysis within that disciplined budget that we've been able to demonstrate through the year. That's how I would summarize that.

We don't disclose specific project capital for competitive reasons.

The additional thing that I would continue to highlight, Jeff, is, as we think about $450 million of EBITDA, also the fact that we're going to be generating $75 million of EBITDA on the first plant here from a year-over-year basis in 2024, I think that demonstrates that velocity of EBITDA and we think that that's $150 million by the end of 2024. That sets us up well for strong returns on this investment.

So I remember you planned to expand your Triton capacity in Kingsport by building the methanolysis plant, but decided against it. I also thought there was a Triton component at your Normandy plant. Since you didn't build the extra Triton capacity in the United States, are you still planning to build Triton capacity in Normandy? I would think it would be better to produce Triton in the United States. Will you scale back what you intended to build in Normandy considering the changes in economic conditions?

So, yes, let me clarify a couple of points there, Jeff. First, with the Kingsport methanolysis plan and the Triton expansion that we intend to do here at Kingsport, we're still doing it, right? We've just pushed the construction timeline of that plan out to better align with the macro economy. So our intention here is to still have 85,000 tons of capacity being brought online of additional Triton capability. It’s just going to come online more in 2025 than in 2024, because the durable market where a lot of that Triton is sold is obviously down. So there's no change in our strategy whatsoever. It's just an adjustment of timing and that's part of what Willie was getting at in sort of how we adjusted our spend rate on capital this year to make room for the higher cost of finishing methanolysis by pushing that capital on the Triton project out into the next year. And so, that's what we've done here. So no changes at all in how we think about the value creation from the first investment. It's just a shift a little bit in timing in the short term. The good news around our assets in Tennessee is, they're flexible, right? We can swing our Triton lines between Triton and making copolyester. We can make PET. We can assign that recycle content to whatever products we want across our integrated system. So that allows us to monetize the value of the recycled content as quickly as we can make it as we ramp up the facility. So that's not going to be hindered by the macroeconomic environment and durables, because there's plenty of packaging out there that we can make both in our co-polyester applications like our shrink or in some PET. So we'll be monetizing the full value of all the DMT as fast as we can make it and driving that utilization rate up as fast as we possibly can. And then, as higher value markets like Triton come back, we'll shift the mix in how we assign the recycled content to the higher value markets. So we've got great flexibility that's created a huge amount of value and makes upgrade over the last decade as we grew Triton on the same assets that once made PET over a decade ago. And we can take advantage of that now. In regards to the French plant, we're not changing anything there either. So the design of that plant is to have two polymer lines, both of which are flexible between making PET or textiles or what we said is specialties, but that's actually co-polyesters, not Triton. To your point, Triton is much more economically made here in the US with the integrated systems and monomers that we have to make that very unique polymer. So this will be just more PETG products that go into packaging, cosmetics, bottles and things like that and a variety of other applications that we make with our traditional PET cheeses. So nothing's changed in our assets strategy whatsoever from a product mix point of view. Kingsport's all specialties, France is half PET, half specialty, and the second US plant here is all PET or textiles.

Okay, great. Thank you.

Thank you very much. Firstly, I want to ask about your plasticizer's footprint. How much of your total sales or earnings comes from the Texas City facility that you're selling? Can you also discuss the economics of the agreement where another party will operate the asset while you remain the owner?

Yes, so we retained the ownership of the Texas City plasticizers. That was the original strategic intent of buying the Texas City facility along with, I'll call it, the infrastructure that the site had. So first, we're retaining the ownership and the sales. Second, I would say the economics around that are substantially the same as it operated today within chemical intermediates. So the only thing that you're going to see is reduced sales of acetyls out of the Texas City site within chemical intermediates. The remaining plasticizer business is and remains intact.

Okay, perfect. And I also want to ask about pulp prices. I think there has been some traction with increases in the past one or two months max. What are you seeing there and could this be a headwind in the end for 2024?

No, we're not expecting any challenges from pulp. Part of what we did in our contracts is improve our pricing to restore our margins and ensure we can reliably supply our customers, as this product is extremely valuable to them and reliability is crucial. We've also modified the contracts. They used to be fixed price agreements, which put us at the mercy of fluctuations in pulp prices or energy costs. We've now changed those contracts to be more like our other business, allowing for costs to be passed through and adjusted for changes in energy or pulp prices. So that's not a concern as we move forward. It may not be perfect, but it represents a significant improvement from where we were previously.

Great, thank you. Good morning, guys. First, Mark, I wanted to follow up on fibers. In January, when we started the year, when you had the annual prices sort of locked in, you expected to make about $275 million this year in EBIT. Now we're looking north of $410 million. So can you maybe just talk about what's changed versus starting the year with largely costs? And just help us with your confidence in the sustainability of this higher level here?

So, what I would highlight is the fact that, one, we're confident in the base of where we've gotten to at this point in time. So we're at greater than $410 million for this year. The business team has done a tremendous job of getting the contract structure in place. That's what Mark just highlighted. From our confidence of both the margins within this business, also as we think about Fibers more broadly with the textiles and the textiles growth as we go from 2023 to 2024. I guess I would just highlight that right now, we're substantially complete with the contracts for 2024 and have a high commitment level as we highlighted in the prepared remarks for 2025. Going back to the first part of your question, ultimately part of that was growing in confidence. We do have lower energy cost than we had expected at the beginning of the year. And as we gained momentum and seeing how the contracts and the contract structures were working, we just reconfirmed that as we grew the earnings and grew the confidence by year-end.

The cost structure and utilization benefits and we were being conservative about how well some of the investments we were making and running the plant efficiently. We're going to play out until we've proven it to ourselves.

Great, that's super helpful. And then second, I just wanted to follow up on the trajectory of CapEx. Obviously, you've given us some numbers about CapEx going somewhat lower next year. But when I just think about your large growth projects, you've got about two more methanologist projects on the horizon. You mentioned earlier to Jeff about the new timing on Triton. So just high level, should we expect CapEx to roughly stay around this $800 million range the next few years? Should it trend higher or lower overall?

What you would expect is, again, that we expect around $800 million or less in 2024. To your point, obviously, we're in the detailed engineering phases right now. And then France would be probably first out of the gate on long lead and then construction, closely followed by the second U.S. So we would expect 2025 we would be building CapEx. And it's just going to depend on the timeline. So what I would say, is it will be above $800 million and we'll give you more firm answers on how we see 2025 when we actually get the project schedule set.

Hey everyone, this is James Cannon standing in for Josh. Thank you for taking my question. In your guidance for AFP, you mentioned an increase in ROS for the fourth quarter. I believe there's some propylene being transferred from the CI segment, and I'm guessing that could be a significant factor. Is there anything else we should consider related to that?

Yes, we purchase methanol, ammonia, and we also have specialty products and coatings derived from propylene. All these products are influenced by oil prices and overall market dynamics, which are creating some challenges as they increase, particularly due to changes in oil prices. There is a lag in how the contract prices adjust, so you can expect a challenge in the fourth quarter, which will then turn into a benefit in the first quarter as those pricing adjustments align.

All right, great. Thanks. And then just on the specialty fluids that you called out, some pull forward, can you give a little bit more color on what you saw there and kind of how much you expect to get pulled out of Q4?

Original guidance indicated strong activity at some LNG plants in the second quarter, which we initially expected to continue into the third quarter. The expected sequential decline from Q2 to Q3 was projected to be around $30 million. However, additional fills occurred in the third quarter, resulting in a smaller drop of approximately $20 million. With changing fluid sales throughout the year, we now anticipate an extra $10 million drop from that initial $30 million projection from Q3 to Q4. This is one reason for the sequential decline in AFP heading into the fourth quarter. Overall, the business remains strong, and we appreciate these LNG fills. There is noticeable uncertainty in traditional chemical construction, particularly concerning plants in China that utilize many of these fills. Diversifying our exposure to these LNG plants, which also rely on heat transfer fluids, has been beneficial. Given the ongoing Ukraine-Russia situation, we see numerous LNG facilities being constructed, positioning us well with our products, which are high-value for their purposes. We continue to expand our engagement in markets less influenced by developments in China, which is advantageous.

Yes, good morning. Mark, I didn't see anything in the prepared remarks that you released on the subject of the UAW strike. Can you speak to whether or not that's having any material impact? And if so, what you might be baking into the fourth quarter, or any auto-related commentary in general would be welcomed.

The impact from the UAW situation is quite limited for us. Approximately 20% of our auto and other business is in the United States, so our overall exposure is not significant. Only three brands affected by the UAW are among the many operating in the US, so it won't have a material effect. Overall, our auto business has performed well, with notable growth in the US and Europe, particularly in the interlayer and films sectors. However, we faced challenges in China throughout the year and did not experience the growth we anticipated. We had hoped for improved growth in the latter half of the year, which has not materialized, leading us to adjust our outlook. This has particularly affected our performance films business in China, where we are seeing lower sales and even contraction in certain areas. Overall, while we expect the business to improve next year, there are fluctuations in different markets.

Thank you for that. And then secondly, if I may, perhaps for Willie. I think earlier this year you had guided to a cost headwind related to pension and OPEB of $110 million, if my notes are correct. Is that still the case? And more importantly, what happens to that line item moving forward into 2024? Does it come back down or would you point to a different trajectory?

Yes, so ultimately that number is set for the year at the beginning of the year so the $110 million is just coming through quarterly as we expected. That gets market to market at the end of the year. So there will be, I call it, a gain loss from asset returns as well as interest rates. And right now as we look at where rates are, assets and returns, it's probably a modest headwind if you were to market to market right now, but again we'll give you an update. We don't expect anything material that will update you at year end.

Hi, good morning. This is Dan Rizwan for Lawrence. Thank you for taking my question. I’m wondering about the second plant in the US and the one being built in France. Should we expect those to contribute $150 million in EBITDA each once they are operational, or will the scale be greater or less than that? How should we think about it long term?

We've never given a plant by plant. We said greater than $450 million. And as Mark highlighted earlier in some of our conversations, the first plant is more specialty with our Triton portfolio, so you can expect it to be higher than the other two.

Okay. Thanks. And then if we think about you saying medical demand, there being some destocking, but getting back to more, I guess, normalization. I was just wondering if that end market is at pre-COVID levels in terms of elective surgeries and the actual overall demand versus some of the inventory adjustments we're seeing right now.

Yes, the elective surgeries that are occurring are certainly growing roughly 5% a year and definitely above pre-COVID levels if you look at it. Not a lot, but a little bit. The issue we're having in medical is not about demand at all. Consumer durables, laptops, TVs, appliances are not being sold nearly as much as they were. Medical is really stable in market. The customers though were very nervous during the supply chain crisis about having enough material. And so they built a lot of inventory to be safe, because you cannot have a problem in getting medical devices delivered in our packaging to the marketplace for obvious reasons. So, they finally got calm that there's plenty of supply and reliability and started destocking in the second quarter of this year and they're still doing it through this quarter, but it's just a destocking event. The markets are solid and expected to be better next year than this year.

Thank you very much. Hi, this is Richard on for Mike. So just a question on the 2024 outlook. Are you assuming any price improvements next year? We've seen prices come down in the third quarter and second quarter despite higher raw material pressures. So just wondering if there's any price mix improvement that we should expect, new product launches, that type of thing.

From our perspective on pricing for existing products sold this year versus next year in the specialties, we don't anticipate significant price increases except where we have cost passthrough contracts, which will adjust prices based on raw material trends. In an environment of rising raw materials, we will increase prices across the specialties. However, as we projected, with raw materials expected to remain relatively flat next year compared to this year, I do not foresee price increases in the specialties. I do expect that prices in chemical intermediates might rise because we are currently at the lowest point in the market. We are facing a particularly challenging market situation in olefins, but there is an expectation for some normalization of prices. The price of propylene relative to oil is about 40% lower than usual, an unprecedented situation. This price compression is attributed to excessive capacity additions and low demand in various applications utilizing propylene. We expect a balancing effect following the end of destocking and some growth in stable markets, which is one area where I anticipate price improvements and better margins. I want to acknowledge the impressive work by our teams in maintaining high prices in this difficult market, which has significantly improved our price to variable cost ratio and mitigated some volume challenges.

Great. And as a follow-up, any update in terms of the market for pricing for the product from your Kingsport plant and circular products? How is that progressing moving forward as you move to develop the other large projects?

Pricing is performing exceptionally well. We are not facing any challenges regarding the premiums needed for the recycled content products on the specialty side, and we are having positive discussions with our customers about the premiums on the PET side that align with the economics we've shared. We are very optimistic about this situation. It's an exciting time with the methanolysis plant nearing completion and starting the operational phase. A dedicated team is ensuring that the startup process runs smoothly. In line with Frank's comment, the video serves as an excellent marketing tool for customers. It tells an impressive story as we showcase large piles of various types of garbage, which we are processing into a clear pellet. Customers are often astonished and impressed by our ability to utilize low-quality materials that cannot be reused by mechanical recyclers. Such materials typically end up in landfills or incineration, or are used in low-end applications. They are quite taken aback by our capability to convert this waste into a clear food-grade quality pellet. The narrative around effectively diverting waste from landfills and incineration—rather than just focusing on clear bottles that could have been mechanically recycled—is significantly enhancing customer engagement. Additionally, it's important to note that many of the applications we are targeting for this recycled content, especially in PET, are where mechanical recycling falls short in meeting performance specifications due to inferior quality. Our product matches the quality of virgin material derived from fossil fuels, unlike mechanical recycling, which has integrity and color issues. Therefore, we are specifically focusing on applications where mechanical recycling isn't a viable option, allowing us to secure better premiums and improve our economics.

Thank you.

Thanks. Good morning. And staying with methanolysis. So there have been many projects in the industry where capital cost estimates have been revised higher over the last year or two. And I believe you presented your return on capital objections for the two additional methanolysis plans a couple of years ago. So is it reasonable to assume CapEx probably needs to go up versus your initial expectations? And if so, how are you mitigating return on capital now?

Yes, so it's an important question and one we're very focused on. The capital headwinds that we encountered in the project here in Kingsport were really isolated to construction quality and productivity issues around pipe installation. And that was a very specific issue. It had nothing to do with the design of the plant or the scope of the plant in what we're trying to do when we got into these issues here in the last six months. And the way we're approaching the next two projects, we're taking a very different approach, using very large contractors that are very capable of controlling those costs in a much better way than what happened here. So we feel we're in a far better shape. Also, we're not trying to build a new plant, right? So this is a new first-time 100,000-ton plant that we're building. The plants that we're going to build in France and the second one in the US are basically the same plant we built here with some sort of modest improvements. So, we're not going into this without already knowing what the capital cost is for the methanol system unit. And the polymer lines are built all the time, well established to understand what those capital costs are going to be. Infrastructure is also pretty straightforward that surround the plant. So we feel good that we can come up with a high-quality estimate for the next two projects and we can manage the construction process far better than what happened in Kingsport. And so, we're still working those numbers. They're still in line with what we expected to deliver a 12% return or greater for the France and the second US plant. Remember, the first plant here is greater than 15%, even with the higher capital costs. So we feel good about sort of where we are on the capital side of this. And of course, we're pursuing these additional incentives for both projects as I discussed earlier and obviously if we get those, that's going to help manage capital risk, as well as improved returns.

Thanks, Mark. And you've pre-processed a fair amount of materials for the Kingsport plan. Any lessons so far versus your initial expectations in terms of how this front-end technology works and what the costs are?

So far the processing has gone well. I mean, there's always hiccups. It's a proprietary new process that we developed that takes a lot of steps out of the sortation compared to a mechanical recycler. So we're excited about taking that approach. Chemical recycling allows you to do that because you're not needing perfect, clear material to sell back to the market, as the big pile suggests in the video. But the process is up and running and working well at this stage. And we feel good about how that's going to work. Our overall cost when we think about sourcing material and processing it into the front of the plant is a little bit better than we expected. So we're feeling really good on the feedstock side here. Feel great about having 70% of the feedstock already in long-term contracts in France as well. So I know feedstock was a big question in the beginning of this whole process as a risk. We've actually managed that one reasonably well. Customers are doing well. Now the final step is starting up the technology, improving its economics and its effectiveness as sort of the final big milestone in front of us here over the next two months. So we're really excited to sort of check all those boxes, keep going forward with this plan, use it to help improve earnings next year in a difficult environment, and get these next two projects underway and create a lot of value for our owners.

Yes, good morning guys. If we could, let's stay on methanolysis. If we assume we're kind of at the run rate of our $450 million EBITDA from the three plants, how volatile would that $450 million be over a typical, let's say, seven-year cycle? And then talk about the volatility you may see on the pricing side and the volatility you may see on the feedstock side over that seven-year cycle?

That is a great question, Duffy, and one that's been a big focus for us. As we told you from the beginning, the approach we're taking with this plant is to be more of an industrial gas type project in how we deliver very stable margins and attractive margins when you look at the economics for these projects. So on the PET side, we're doing contracts that pass through the changes in feedstock and energy costs, delivering stable margins for us. We have no intention of getting back into the merchant PET market going forward. And if we don't get those contracts, as we've said, we won't build the plants, but we're getting the contracts and we're feeling good about it. So those margins will be stable in the PET side. On the specialty side, we have demonstrated great pricing power around our specialty products and managing the price to variable cost ratio really well and keeping those ratios stable. From a demand point of view, what I'd say is, the PET market, the packaging market is a lot more stable than some of the other more discretionary markets. So, we think that will actually add stability from these projects as well as to the company's portfolio. The other thing I'd note is, it's a regional business, right? So when you're taking packaging waste out of the environment, the brands and even more so the regulators want to solve the local packaging waste issue in Europe or the US. So they want that waste taken back into polymer and then provided back into the packaging and create a closed loop in food-grade where fossil fuel-based PWT is no longer used. So this disconnects us from China. We're not trying to solve China's waste problem in the US or Europe. We're trying to solve the European and US waste problems. And so, it becomes more of a regional business. The brands will have to be really careful about making sure they're focused on solving the local impact to protect their brand equity, the regulators are writing policy, especially in Europe, it's already written that the polymer has to be made from packaging placed on the European market. So, that regional aspect of this business has been a core reason we've been interested and excited about making these investments. So it's not perfect. You still have macroeconomic demand uncertainty, but it's going to be very stable EBITDA.

Great. Just one technical question about your acetic acid sale. Did you sell the technology for acetic to them as well, or could you, if you chose, build a plant or do something like the licensing deal you did before where you actually kept the technology?

The sale of the Texas City facility is not part of Eastman's strategic focus. As Mark has highlighted, we are concentrating on anhydride, anhydride derivatives, and cellulosics. The important takeaway here is that this is beneficial for the INEOS Acetyls business and for Eastman as we continue to advance our commitment to a circular economy.

It has no effect on our rights to use our technology or license our technology.

Great. Thank you guys.

Thank you, Duffy.