Eastman Chemical Company (EMN) — Q4 2024 Earnings Call Transcript

Good day, everyone, and welcome to the Fourth Quarter and Full-Year 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir. Thank you, Harry, and good morning, everyone. I appreciate you joining us. With me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe and Emily Alexander from the Investor Relations team. Yesterday, after market close, we released our fourth quarter and full-year 2024 financial results and filed the SEC Form 8-K, along with our slides and prepared remarks, which can be found in the Investors section of our website, eastman.com. Before we begin, I want to address two points. First, during this presentation, you'll hear forward-looking statements regarding our plans and expectations. Actual events or results may differ significantly. Details about factors influencing our future expectations can be found in our fourth quarter and full-year 2024 financial results release, during this call, in the slides, and in our SEC filings, including the Form 10-K for full-year 2023 and the upcoming Form 10-K for full-year 2024. Second, the earnings discussed today exclude certain non-core and unusual items. Reconciliations to the nearest comparable GAAP financial measures and other relevant disclosures, including descriptions of the excluded and adjusted items, are available in our financial results release. Since we've already posted the slides and remarks on our website, we will now go directly to the Q&A. Harry, please start with our first question.

Hey guys, this is James Cannon on for Josh. Thanks for taking my question. I just wanted to jump in on the AM guidance. I think between the overall segment and what you're assuming for the Kingsport contribution, it seems like you're assuming a decline in the base business and I just was wondering if you could unpack some of the moving pieces there.

Yes, sure. So first of all, AM has had great success in recovering earnings from a challenging environment in 2023 through 2024, and it really is an impressive recovery of the actual core business in Advanced Materials in 2024 as we fell short on our circular earnings goals in that year. So the macroeconomy is certainly challenging right now, as we all know. And the lack of destocking certainly helped last year. As we move into this year, we have a more stable flat market without that tailwind. So we have to create all of our own growth this year, which we're doing. When you look at the growth that we're going to deliver in the circular platform, it is pretty substantial with that $75 million to $100 million guide for the company, with $50 million of it being in Advanced Materials. When you look at the innovation that we're creating that drove growth last year and will continue to drive growth this year through innovation in our core business in a very flat market, I think is again a testament to the power of our strategy and the value of this segment. But there are headwinds in the core business that mitigate some of that volume growth. We've got increasing natural gas prices across the company, and a good portion of that shows up into Advanced Materials. You've got currency as a headwind, and a good portion of that shows up in Advanced Materials. That's a good portion of the $50 million in natural gas and the $30 million in currency, which offsets some of that volume and mix growth and levels out the core earnings. But we still expect the segment overall to have very strong performance. I think it's really well-positioned when you think about the strength of that stability in the core, building with innovation on top of it, and then how that then leverages into more growth in 2026. I would also say that cost management is going to help the segment as well. So it's a combination of things that flatten out the earnings growth in the core due to these new headwinds. But I don't think there's anything to be concerned about long-term.

Okay, got it. And then could you just frame for us what the Kingsport contribution looked like in 4Q, and maybe what you're assuming in 1Q?

Yes. So as we look at how we ended the year, we came in modestly below the low end of the range that we gave for 2024. We continue to work through the higher costs associated with reduced uptime from earlier in the year. But in the fourth quarter, we demonstrated continual operational improvement and we've run well since we saw each of you in November, working at 85% DMT yield since our fall turnaround, and uptime continues to improve. We continue setting new production levels since that last shutdown, and we're well-positioned for strong operating leverage in 2025 from both higher production and reduced operational spending.

I would add that all the success in this plant is a tremendous testament to the teams, the operators, the engineers, everyone who surrounded and built this plant and got it up and running. It's an extraordinary amount of effort that this team has invested to get such a complicated plant to do something extraordinary to take basically garbage and turn it into high-quality virgin polymer. It is a real proof point for how Eastman can build extraordinarily advantaged technologies and build a long-term competitive advantage that I think will be very difficult for anyone to replicate. And the only reason that happens is all the people who've done such great work.

Great, thank you.

Thank you. Good morning. Mark, a couple of questions related to the new administration. First, on the Texas project, any concerns or thoughts on the DOE funding going forward, and could that be at risk here?

Sure, David. Thanks for the question. Obviously, we're paying very close attention to the new administration. First, our projects are under contract with the DOE, and we've already received our first funds from the program, so we feel like we're on a good track there. To back up for a moment, I want to recognize and say, I really appreciate President Trump's focus on growing US manufacturing. I think it's incredibly important. A lot of us forget that you don't really have an economy without an industrial base, and that includes vertical integration to key raw materials. That's not just for economic reasons, but also for our national security reason. If we reflect on where we are today in America, we're at risk of losing American competitiveness that we've built over the last eight years. While US consumption has gone up considerably over the last two decades, US manufacturing has declined. The idea of driving and supporting US manufacturing, I think, is an extremely important priority. When you think about our circular economy project, I think it fits perfectly with his agenda and what he's trying to accomplish for three different reasons. First, a circular investment is about building infrastructure in America, reshoring jobs, and building supply chain resiliency. When you think about the products that come off of this facility for food packaging, medical, and a variety of other vital consumer durables, we need that type of resiliency in this country, and we're onshoring jobs from Asia to Texas. We're also going to create a lot of jobs downstream as people leverage into reshoring manufacturing and supplying raw materials to them. Importantly, upstream for us. This investment will create jobs and revenue for recycling infrastructure that feeds into this facility and others that need to be built in this country, creating sustainable growth not just in Texas, but across the country. The second factor is it actually creates energy independence. Plastic waste is essentially oil sitting above ground in landfill. We're using it as feedstock for the world-scale advantage process, and we have an advantaged cost position if oil is above $60. So it's value-creating in a meaningful way. The third factor, of course, is the circular economy will create a long-term US competitive advantage because it is defined by taking local plastic waste as feedstock. Imports shouldn't count as recycled content because that's solving someone else's waste problem, not ours. No one likes plastic waste, regardless of political affiliation. Even Trump signed a Save Our Seas Act in his first term, showing that marine debris and impacts to the environment are crucial to him. So I think that fits his agenda well. We're very excited to be doing this. I think Eastman fits his agenda well as a large US manufacturer.

No, very good. And just on a similar point, you are a large US exporter. What are your thoughts and concerns over the potential as Trump raises tariffs, potentially retaliatory tariffs on US exports?

Yeah. So just building on I guess the last answer, David, I do think that trade is an important topic. Back to that US manufacturing point I just made. I think strategic trade actions, along with addressing overwhelming regulations, having pro-growth tax policy, workforce development, etc., are critical to driving and growing US manufacturing, which will certainly benefit Eastman in the long term and many other companies. When I look back at the last time there was a sort of trade event in 2019, Eastman managed that pretty well from a direct impact. The only impact we had was a slowdown in the short term for economic activity, and we felt that. Reflecting back on that timeframe, we didn't really face much Chinese competition in North America, so it didn't have a lot of relevance for us to see the trade benefits. But obviously, a lot of US manufacturing did, and that helped stabilize the economy in some other areas. Today is different. The economy in manufacturing is incredibly weak globally. The rate at which people can get aggressive in focusing on stabilizing and growing their economy will be limited, given those weaker positions. Given everything I just said, it's not clear to me how much more negative impact tariffs can have on top of the manufacturing recession we're already in. While it sounds dramatic with all the different countries being discussed regarding potential tariff actions, that is certainly a wider factor than in 2019. So we will see. There's no way for me to estimate the impacts at this stage. We will need to see specific actions to really have an informed viewpoint. I will say that our forecast does not include any significant impact from trade actions.

Thank you.

Hey guys, nice end to the year. I had a question on AFP. The adjusted EBIT came in a lot stronger in the fourth quarter versus the third quarter relative to your guidance. You talked about a couple of things in the transcript. But can you give us a little bit of color on why that segment did so well sequentially when normally it takes a little bit of a debt?

Yes. So first, AFP had a great year as well as a great quarter. Frankly, the whole company had a great year. We're really excited about the earnings we delivered and the strength of cash flow we generated. AFP is a strong contributor to both earnings and cash flow. When it came to how it came in better than expected, it was on both fronts. The volume mix came in a bit better than we expected. We expected a certain amount of destocking, and we came in a little bit better than our original thought on that side. Raw material flow-through was also better across a number of products, and that combination helped. We even received some more fills in HDF than we expected as part of that. So all those came together in a way that made the outcome better. That's the story for AM and the company. In a market that didn't give us a lot of tailwinds outside of a lack of destocking, the 23% earnings growth was about pulling every lever, defending every bit of volume we had with customers, finding innovation everywhere we could, and managing costs very well. This was a tough year delivered by small actions taken by everyone across the company.

Got it. And then just a quick one on fibers. It looks like this will be the third year in a row of really good margins, pricing. The guidance looks pretty good in that 400-plus level. When you think about that business going forward, how sustainable do you think these pricing levels are? You saw some destocking here. I think there's some new capacity coming on as well. And just given that it's been such a big improvement from 2021 levels.

Fibers has certainly improved significantly back to where it was in the 2013, 2014 timeframe. So it's not like these are new levels. In the short term, what I'd say is that, based on everything our customers are telling us, actions are causing earnings to normalize. Inventory management is the key driver of the volume being adjusted. Remember that toe is 2% of the price of a cigarette, and the cigarette margins for our customers are greater than 60% in gross margin. They really don't want to miss sales; security supply is phenomenally important when markets are tight. They built a lot of safety stock as a result of the 2021, 2022 timeframe to ensure they never shorten a customer. We still expect prices to be higher. Demand isn't changing significantly, though—we expect a modest 1% to 2% decline overall. Cigarettes are declining faster, but that's offset by high growth in the heat-not-burn products. We have greater than 80% of our customers under volume commitments. The current dynamic is much more stable than the past, and we feel good about where we're at, with a diverse portfolio of ways to grow.

Great. Thank you.

Thanks. Good morning, everyone. Reading about your Rapid Brewer last night was quite a blessing. I wanted to ask you a question about Advanced Materials outlook this year. You're discussing that there's higher costs in the first half that could pinch your margins, and then you'll be raising your prices as a lag. Should we think of that dynamic as your first half earnings in Advanced Materials are somewhat under the run-rate at which they'll be exiting the year?

Yes. So look, there's a lot of dynamics going on and it's a little more complicated this year than most. In the first quarter, you've got roughly $25 million of costs moving into Advanced Materials. Obviously, that's a headwind. It's impressive that we're delivering the earnings in our forecast for Q1, offsetting that with volume mix growth while maintaining good price discipline and starting cost reduction actions for the year. You'll see some of that benefit, but it will definitely build through the year. Natural gas energy costs will put pressure on the segment, with a good portion of those costs inflating in inventory before flowing out with increasing energy costs. The segment overall is well-positioned to deliver attractive results for the year, but there are many moving parts as you look first-half to back half.

Thanks, Mark. I also wanted to follow up on the filter tow. In the past, you used to go through your annual contract negotiations right about now. So I wanted to ask you if you gained any visibility in your portfolio of contracts here beyond 2026 in terms of prices, margins, volumes, etc.

We switched from an annual contracting process to a multi-year process with a number of customers, especially the big ones. We have about 80% of the volume contracted in 2026. We probably have about 60% contracted in 2027. This multi-year contracting provides volume stability and price stability to this business. We also have to acknowledge that our customers need to manage inventory and ensure it is at the right level to demand.

Thanks, Mark.

Thank you, and good morning, everyone. It sounds like the methanolysis plant is running well still, which is great. So maybe you could talk a little bit about the volume sales side of the equation. I think last year, the sales were a little bit below what you expected, and I think some of it had to do with not being able to run the plant as well as you wanted to early in the year. Could you talk about how you're seeing the order book at this point in the year from that perspective, and also address some of the backing off from consumer brands on their recycled plastic targets?

That's a great question, Vince. First, the macroeconomic conditions we're in right now are not helpful. Demand is weak combined with inflation. Our customers are trying to manage what they're buying, and consumer attitudes towards brands are affected. This has slowed the pace at which some brands are converting to ramp up their orders. However, we have a solid funnel developed and believe we're on track across different markets we serve. The durable side already has over 100 customers committed to renew and are paying premiums for those products. There’s no lack of interest in the product, but the pace is moderated. On the consumer packaging side, we're converting a line to make recycled PET by summer, and we believe that will be successful. As for whether people are decreasing their commitment to recycled content, I don't see any significant changes from brands in needing to address plastic waste; consumers dislike plastic waste. Many state regulations are driving change, and the focus on sustainability remains strong.

If I could just follow up separately. The prepared remarks talked about there being some volume in the fourth quarter that was related to customers preparing around tariffs and things like that. But it doesn't look like that's coming out of your first quarter or having a negative impact on your guidance. Was that particularly material in any of the segments? And, is it not coming back in Q1 simply a function of customers not having a lot of inventories?

Yes, thanks for the question. Yes, definitely agree. It was a modest impact on our volume mix beat in Q4. We're entering the year with order books that are strong, fully supporting year-over-year growth we see in Q1. We're expecting volume mix growth as well as price cost in the specialties in Q1 along with the absence of the startup cost, which will more than offset the fibers inventory destocking. We have good visibility.

Hi guys, good morning. It's Aziza on for Frank. My first question was on the $50 million of net cost reduction for 2025. Can you elaborate on the regions or segments where the majority of that is expected to occur?

Thanks, Aziza. Yes, we are focused on improving our cost structure to compete in the challenging environment. Our comprehensive plan to improve operating cost goes beyond our usual focus on offsetting inflation. Success in innovation has driven complexity in our operations, and we're optimizing our products and operations to maximize gross margin realization. This will be meaningful yield improvements, optimizing our contracts and usage. There are also significant purchasing opportunities in this weak manufacturing environment, and we have opportunities to optimize our global asset base. This will be across all four operating segments, and that $50 million will be key.

Thank you. In your conversations with your auto customers, what are their expectations in terms of a recovery on auto builds in the US and Europe?

On the auto sector, I think our expectations are pretty in line with what I've heard where automotive demand in 2025 versus 2024 is probably slightly down globally. Europe might be up a bit given how low it already is; North American being more flat; China possibly lower. Our business has been very successful in creating its own growth, delivering high single-digit growth in a market that is slightly down, largely through mix improvement. Our addressable market is growing, and we're seeing more territory growth. This isn't limited to EVs—it includes ICE cars as well. We're seeing a lot of value per product growing, so we've got levered volume growth as well as mix upgrades providing us opportunities.

Thank you.

Thanks very much. I think your forecast for operating cash flow in 2025 is $1.3 billion, which is flat with 2024. Why isn't operating cash flow growing?

Good morning, Jeff. Thanks for the question. The largest driver for operating cash improvement this year is EBITDA growth, which is largely being offset due to higher cash taxes. Our baseline expectation for the cash conversion cycle for working capital will stay flat, around 85 days. The entire global team is focused on delivering cash and cash flow, and then as the environment unfolds, deliver as much upside as possible.

And secondly, historically, chemical intermediates tended to move in operating income with advanced materials and AFP. In other words, you'd make a lot in chemical intermediates and then you'd see that reflected in advanced materials and AFP. However, in 2024, chemical intermediates went down while the other two businesses went up. Should we expect those income levels to be correlated, or has something changed about Eastman?

Hey, Jeff, good to hear from you. Actually, it's the opposite. They tend to move in opposite directions. If you look back at 2021 and 2022 when inflation was tight, you saw a blowout in commodity margins, including us, where those earnings went up dramatically. While we were benefiting from strong volume growth, a lot of that was offset as prices chased increasing raw material prices. There's a bit of a natural hedge between how the CI segment operates versus the specialties. Our portfolio diversity balances out some of the volatility.

Great. Thanks so much.

Hi, good morning. This is Eric Zang on for Patrick. In AM, the prepared remarks mentioned a higher RM cost base with a 4Q LIFO inventory benefit in CI; the 1Q 2025 guides for higher raw material and energy costs. Which raw materials do you anticipate to be inflationary in 1Q?

As we transition between years, we've had higher NGLs—propane, and natural gas are the key items. In Q4, we benefited from a decline that was a little better than we expected.

Got it. Thank you. In AFP, the prepared comments mentioned new business wins and cost reductions that mitigated the projected $30 million headwind. Could you provide more insight on the strategy and execution?

On the growth side, the great thing about the AFP business is it serves stable markets, and we expect that stability to continue. The volume growth this year will be moderated as we don't have destocking, but those drivers will remain. On top of that, we have innovation driving our growth, with high-purity solvents experiencing growth in semiconductors and progress in LNG applications, which will help provide stability. We've also done a great job managing commercial excellence and pricing, benefiting from spread expansion last year, allowing us to sustain some of that strength this year.

Thank you.

Good morning. I wanted to go back a little bit to Kingsport methanolysis; you did mention that most of the improvement in AM earnings will come in the second half. How much of that is happening now with customers that may need volume in the second half, and what are your operating rates now as of January?

There's a lot of detail provided in the deep dive that you can reference for this question. Much of what I said back then remains the same today. A good portion of demand is coming from existing business and the 100-plus customers I mentioned are continuing to grow and launch products this year. We are closing new business as we do every year. A lot of orders show up pretty quickly where the products are already established. Roughly half of the demand is building on existing business versus what we are still closing.

Thank you. I wanted to address capital allocation. Out of the $700 million to $800 million in CapEx, how much is devoted to long view expansion? You've mentioned a decrease in buybacks despite generating more money—what’s the plan there?

A reminder, our base CapEx is around that $350 million mark, keeping our plants running reliably. As we think about growth programs, yes, our commitments in Texas will ramp up this year, but several other growth projects like Triton expansions will be included. The Longview, Texas site will be the largest growth project this year in the $700 million to $800 million range, net of expected DOE grant receipts. Regarding capital allocation, we've increased our dividend for the 15th year and went to the high end of share repurchases in 2024. We’re not going to let cash sit idle. We’ll leverage our financial flexibility to maximize value for shareholders.

Okay, perfect. The DOE grant included in CapEx—how much is that?

We're not going to specify the amount, but I will highlight that we received $10 million in 2024.

Great. Thank you. In fibers, it seems you had a fairly profitable product you’re now not selling in 2025. Can you provide more context?

We can't discuss specifics about the customer’s products, but it was a good high-value product that was discontinued due to a design change in the offering to the marketplace. This illustrates multiple drivers of how we're normalizing; destocking, product changes, energy headwinds, and currency, all play a role.

Great. That's helpful. Also, has the broader regulatory and funding uncertainty created any pause or delay in customer conversations about recycled products?

We haven't seen any impact at this stage. We are seeing the impact of weak economic conditions causing companies to be careful with spending, but there's no indication from customers that addressing plastic waste is less important.

Congrats on the results here. What are you hearing from customers as far as circular efforts go? Are there diminished interests?

I've addressed that in previous answers; we see moderated engagement but not a decline in interest. As for chemical intermediates, we see competitive pressures but more volume due to reliability investments made last year. These factors provide moderate stability and support the outlook.

Thank you.

I think the next question is our last, please.

Is the solar heat transfer fluid, the thermal fluid opportunity now dead? We've had several delays on projects, and I would guess the current administration is not helpful to that business?

Hey, John, how are you? I didn't see the solar question coming. We don't do much in the solar business anymore. We’ve made great progress diversifying our applications based on heat transfer fluid and have shifted significantly into energy, especially LNG. However, projects are getting delayed, and we won’t see much tailwind this year compared to last year. We do have multiple LNG fills won that will build earnings growth as we go forward.

Thanks again, everyone, for joining us. We appreciate your interest in Eastman, and I hope everybody has a great weekend. Thanks again.