Eastman Chemical (EMN) Q2 2024 earnings call transcript

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 of Eastman Investor Relations. Please go ahead, sir. Gregory Riddle - Eastman Chemical Co - Vice President, Investor Relations and Corporate Communications Okay.

Thank you, Chiach. Good morning, everyone. And thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; Jake LaRoe, Manager, Investor Relations; and a new member of our IR team, Emily Edwards. Yesterday after market close, we posted our second quarter 2024 financial results news release and SEC 8-K filing, our slides, and the related prepared remarks in the Investors section of our website eastman. com. Before we begin, I'll cover three 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 second quarter 2024 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 2023 and the Form 10-Q to be filed for second quarter of 2024. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call Second, earnings referenced in this presentation exclude certain noncore and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the second quarter 2024 financial results news release. And one more item. After we posted our materials last night, I became aware that there is a conflict on the date we chose Tuesday, November 19, for our circular economy deep dive here in Kingsport, Tennessee. We are currently working through alternatives, and we'll let when we've decided on a path forward.

With that, we are now ready for questions. Chiach, please starting with our first question.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Sure. And good morning, everyone. About to talk about where we are with methanolysis plant. I mean, give a little context of the journey we've been on and then answer that specific feedstock question. We're very excited to be operational with the world's largest chemical recycling facility, and we've made tremendous project -- progress on this project and really showing what the world -- and what's possible in the world when it comes to recycled content and dealing with this challenge that we face. We are very excited that we're making on-spec plastic from the output of this facility. We've actually produced on-spec food-grade Tritan with 75% rDMT, and that's the most difficult product we have to make with the highest standards on clarity, a wide range of performance specs, and we're making these products with no materials or concern getting through the purification process.

So very safe product from garbage, and that's an incredible accomplishment and a great job by our team and operating this plant and overcoming a series of challenges. We have had a lot of successes. As I said, we're making on-spec product now. We are doing all of this with hard-to-recycle waste, mechanical recyclers can't take back to food grade and send to landfill. We validate all of the unit ops and they can run at very high rates. We've had, as I mentioned, sustained rates in our prepared remarks of around 70% when you're running all the units together. And there's been one small mechanical thing limiting us getting to 100%, and we just recently made the change this week actually in fixing that one mechanical issue and are ramping up to full rates.

We have made a lot of progress on improving the mechanical reliability issues that we were facing in the startup of the process that we shared with you in the first quarter call. So when we took a variety of corrective actions on the early failures around instrumentation, valves, routine equipment, especially pumps that has been effective and we've seen much higher reliability across the plant. So as you said, the next step, as we're now moving to higher rates and a broader set of hard-to-recycle feedstock, we encountered some plugging issues. So to be clear from the beginning of this process, we've been using hard-to-recycle material that can't be made back into food-grade bottles mechanically, true to our strategy of dealing with this waste that doesn't have an alternative life, but we've been broadening that spectrum of different types of HTR recently, and we encountered some plugging issues in the front of the plants.

REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call I want to be clear that this is not about chemical impurities. It's not about process chemistry. It took us a few weeks to really understand what was going on, but we realized that it was in the feedstock preparation and some of the fitness for use aspects of a few sources of material. Fortunately, the issues were relatively straightforward to address once we understood them, which just involves optimizing, the feedstock form that we're using and dealing with some of the non-polymer waste that was in a few select sources of feedstock.

So we've now implemented all those changes. We're ramping up, as I said, with the change also run at full rates and are confident all these changes will be effective and it will be running very hard with the facility as we go through Q3 and Q4. The thing I would note is this has been a journey. This is incredibly complex plan to take garbage and turn it into it clear on-spec polymer that doesn't have any materials or concern that can exist in that waste feedstock. So we've made a lot of investments in purification and how to manage all these different feedstocks. And we've learned a lot over the last five months, six months of startup that I think is a huge competitive advantage for us.

And frankly, there's a lot of strategic intellectual property we are gathering through this process. As I look back on it, I just can't reinforce enough the power and success of our team and enabling us to have this success. I can't even imagine trying to build these kinds of technologies and plants without the depth of technical expertise and the scale we have to throw at these challenges. So a great shout-out to the team in overcoming these things. We're feeling very good about how we're moving forward and excited to serve customers as we ramp up volumes in the back half of the year.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yeah, good question. So when you look at where we are with the Tritan market, a lot of that goes in consumer durables as everyone I think in the industry has called out that market has been weak and continues to be weak, but we did see a significant amount of return in volume with the end of destocking. So huge amount of the hit that we took in '23 was associated with destocking that volumes come back and the very high margins that go with it are certainly very helpful this year and will be going forward. We also continue to have a lot of wins just on the traditional value proposition of Tritan.

So when you look at the compelling attributes of its heat resistance, it's chemical resistance, it's clarity; it's being a safe product that's BPA free. We've always had a lot of volume wins and applications that has driven tremendous growth in this product area for over a decade and that the engine is back in gear this year. We're winning on those value propositions, a variety of places on top of the end of destocking that's giving us good momentum. And then on top of that, we're now layering on recycled content and for a lot of brands that's really important. We have a lot of customers that have been with us for a long time that are using this recycled content claim as a way to enhance their product offering or drive new volume growth like P&G, Nalgene, Camelbak, LVMH, L'Oréal, Estee Lauder et cetera.

You've seen the icons chart of all the customers we've had for using in one form or another. And then we've -- what's really exciting is also opening up new markets for us to serve as that wouldn't have originally been available for our value proposition. This is not a cheap polymer so you really have to have a compelling value proposition. And now you have people like Black & Decker doing a trial run. As we told you about in tools and seeing that go very well with recycled content and expanding to a broader product line or deSter, which is the leading supplier of housewares for foodservice type products for airlines and foodservice and them go into this product with the recycled content claims.

REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call So lots of volume engagement. Customers are paying the premiums that we expect to make a return on this investment that we've made here in Kingsport. And so as we looked at the volume build this year and as we go into next year, we see the need for this additional capacity. So we don't short the market, right?

So we're moving to get that product at that line -- online in the third quarter of next year as a way to keep on growing our business. So we feel good about it. Certainly, it's a tough economic time, but when the market recovers, that will just be additional volume we have to serve so we feel like this is the right time.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer We're actually in the process of ramping back up to higher rates. We -- that small mechanical change we made in the middle of the plant that was limiting rates. We just implemented and we're ramping up towards those higher rates right now so not there yet.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So in the -- I'm not going to repeat all the answer I just gave you, but we have a lot of customers, obviously out there in the durable space as well as packaging, cosmetics that are very interested and committed to using Tritan. They were buying it last year at certain premiums, are continuing to buy this year and we're accessing new markets so the demand out there is real. The issue we face that I think everyone in the industry faces right now is that it's a really tough economic environment. We have some version of stagflation, right? We have inflation still impacting consumers and demand being quite weak and many discretionary markets and durables is very connected to B&C.

So when you see all that challenge, that's very real. And its duration, it's not just demand is weak, it's been weak for over two years now. And so that weighs on companies and their economics. So while they're very committed, we haven't seen anyone cancel a program. They're also focused on managing their cost structure like everyone is right now. And so the rate at which they're ramping of volume on some of the programs that we've won with these customers is going a bit slower than we thought. To be clear, that's a modest part of the overall adjustment we made in the $75 million of EBITDA incremental to last year, down to $50 million. More than two-thirds of that adjustment is the cost conversation we just had about run rates in the second quarter as we work through some different issues.

But there is a modest adjustment we've made in our expectations around volume ramp. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call I don't think it has any impact on next year. When we look at the number of wins we're having in different applications in the fact that at least it's -- the end market is now stable and destocking is behind us.

Companies are now looking for ways to grow and create their own growth, just like we are trying to create our own growth with better value propositions to the marketplace. The brands are now switching to thinking about how do they do that as well. And so I think those collaborations will be there. So we still feel like we're on track to go from our incremental $50 million of EBITDA this year to a run rate of $150 million of EBITDA by the end of next year. Otherwise, we wouldn't be starting the -- completing the Tritan line if we didn't see that volume coming.

William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Frank, good morning and thank you. As we think about the guidance, obviously, we focused on keeping the midpoint at the guide of what we had to start the year. Also, at the segment level, you saw some modest improvements in the AFP midpoint as well as the pinpoint the decline in AM as Mark's already highlighted around our view of the benefits of methanolysis and the ramp there. So as we think about it, we're driving strong growth year over year 20%. Narrowing the range we think was appropriate at this point in time. As we started the year, there's no significant primary demand increasing in the second year.

We're doing well with driving our own growth. And we think, again, as we enter the second half, we're doing it from a strong position, and it's the factors of the $0.15 beat in Q2 being offset by reduction in our methanolysis expectations.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yes so when you think about the variables on that, Frank, the biggest factor is demand. That's true for the impacts we had last year through having a good results in '21, '22. And so it's a macroeconomic question around just where does demand trend. I think we went out at the beginning of the year with a very neutral approach about end markets being similar to last year from an end market point of view, but benefiting from destocking. It seems to be playing out as we expected at this stage. so if the economy gets better, that will be upside. If the economy gets worse, obviously, there'll be some risk within the range that we've given you but I think that's the main factor.

I mean, we feel good about our price management and feel confident in our commercial excellence to maintain our share price cost relationships across our specialties. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call Obviously, there's certain amount of spread and predictability in olefins and acetyl where you could get some volatility that's in the CI sector. Cost structure, we are very much on track and manage our costs.

So the element that's material is really about the economy. We feel good about how we're creating a lot of our own growth this year with all the application wins that we've had in the traditional specialty model plus the growth we expect in the circular platform.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer That's correct. We're assuming to be clear in consumer discretionary markets whether it's autos, B&C, durables. We're assuming that there's no improvement in the end-market demand relative to last year. And that's been true how we've built our forecast every quarter. The stable markets, we do have a little bit of modest growth, 2%, 3% in there that we've already seen in the first half of the year and we expect that to continue in the second half year of the year. Those markets are like ag in its normal cycle and pattern, personal care, water treatment, those more special -- stable market, which is about half of our revenue.

Half of our revenue has modest growth and half of our revenue has no end market growth but we have completely confirmed that the theory of a lack of destocking adds a lot of volume back is very true, right? We told you that we had a $450 million hit in variable margin last year from '22 to '23 when volume and mix declined. And part of our guidance, as we said about $150 million of that, call it, a third would come back as a lack of destocking. And we very much have seen that in the first half and see that in the order books in 3Q. So that's logic is playing out and that's where we've built our midpoint of our guide.

William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Yeah, Jeff. Happy to clarify. So as we think about the second half versus first half higher planned shutdowns, Q3 is primarily in our acetyl cellulosics stream which is about half and then in Q3 and then in Q4 would be our polymer turnaround. And again, that represents about half. Yes, the transaction has closed last year also, so that impact is not in our guidance. That's a headwind as we think about in our chemical intermediates business. The combination of I'll call it the Texas City divestiture as well as the key customer shutdown that we've highlighted. It was roughly $30 million headwind on a year-over-year basis.

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N - Q2 2024 Eastman Chemical Co Earnings Call Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So that's on the cost side and the divestiture side, Jeff. On the market side, there's two dynamics going on. One is the acetyl margins are lower this year and continue to be challenged from a market point of view. And then the second part is as we divested the acetyl business, we had to shift our business model a bit and how we're taking our acid product to market. And so there's just some readjustments in logistics costs and how we manage our acetyl output out of Kingsport when we no longer have that plant down in Texas and how we are working in the market.

So those two things are some hits to the economics. The spread will obviously come back one day. And the -- a lot of these onetime logistics costs and reconfiguring supply chains to serve customers will also be a bit of a modest tailwind for next year or two as we line them out. So those are the combined factors that's going on in that acetyl business. I would note that we are predominately acetic acid -- I'm sorry, acetic anhydride in our production. So that's the market you should be paying more attention to for us relative to the acetic acid market than some other companies producing to. And we feel good about how that market will be a tailwind next year relative to this year.

William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Okay, Jeff, on your question of other, obviously, as we talked about from '22 to '23, one of the major resets and that was with regards to pension and that being roughly a $100 million headwind. So I would highlight that as one of the accounting outcomes of higher interest rates. Also, as we've increased in the back half of '23, the preproduction and the startup costs regarding our methanolysis and circular platforms. You saw that increase, and that's more connected to across the project timing in our progression through those. As you saw here in Q2, you saw roughly almost $30 million reduction in the expenditures in other.

And that is with our Kingsport methanolysis plant coming online and going from preproduction into producing inventory. So as I think about it over time, obviously, the factors matter and as we see interest rates decline, that could be a tailwind into the future. So I wouldn't say $200 million is the run rate. It's just with the current, I'll call it, macro situation as well as us progressing successfully projects through the pipeline. And now you'll see those results in advanced materials. And that's also how you will see some of our cellulosic products as well as we continue to invest there. Those will then turn into the businesses in the future, but I would say $200 million or less in the current macro environment.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer And so in addition to just the preproduction expenses and efforts around the first plant, look into the engineering expense and project development expense around France project and Texas project. Those costs are in that segment. So that's been driving it. And we'd also note the pension costs are non-cash. So it's a headwind, but it's not a cash headwind.

N - Q2 2024 Eastman Chemical Co Earnings Call William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Jeff, I would highlight as we think about acetyls in whole I think it's the $30 million plus the increased logistics costs that Mark has highlighted. We're not going to be more specific on that at this point.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yeah, great questions. So we're not going to get into our specific operating strategy, but we certainly intend to run above 70%. This is a new plant, new technology and as we just discussed, a new set of feedstocks that vary significantly from one source to another, right? That's the significant difference in the circular economy versus the linear economy that's making products out of very consistent feedstock when you think about fossil feedstocks every day. So we have been using a wide range of different sources of hard-to-recycle material. Some are better quality than others. When I talked about the 70%, that was running representative feedstock in what we think of -- what we call HTR, hard-to-recycle material.

The limitations in run rate through really the first half of the year have been more mechanically related or these feedstock processing related issues about what we're putting in the plant that were easily addressed. But when the plant, is it having some mechanical issues that we had to resolve, it runs really stably, right? We had this one issue about, once again, how to move some of the product from the middle of the plant to the back of the plant mechanically that took several improvements to address the last final improvement we implemented this week. And that should get us into the 90%-plus-range and how we can run the plant. But it's -- there are going to be times it's down for another issue that pops up, and we have a planned shutdown for some normal maintenance.

But we feel like the forecast that we've built has us running much better in the back half than the first half well in excess of customer demand. So we're confident we can serve customers with the ramp up in the volumes with the actions that we've taken.

N - Q2 2024 Eastman Chemical Co Earnings Call Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yeah, it's a mix of both. So we certainly have new loyal customers who have been buying Tritan for a long time that see a lot of value in the recycled content value proposition. But there's also -- we've been actually surprised by the number of application wins we're having with new customers and new end markets. So if you ask me from where our plan was in January to where we are today, we're actually growing volume in new wins and new customers more than I thought and the upgrade of recycled content of some existing volumes is a bit slower for the economic reasons I mentioned.

So we feel good about how we're broadening our customer base and our actual market base and where we can sell as we go into next year.

William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Good morning, David. Yeah, I would say that this year is a normal level of maintenance. Obviously, we go through each of our streams. We talked about the polymers turnaround, the acetyls, and then -- and next year we will also have olefins turnaround in addition to that with our crackers. But at an overall expense level, I would say this year is normal. There could be a little bit of favorability on a year-over-year basis.

Additionally, in the fourth quarter (multiple speakers) David, I would say, as we have the polymer shutdown here in Q4, we've got the additional-- Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So David, as you think about methanolysis, the cost this year from a maintenance point of view is extraordinarily high, right, as we're starting up the plant. So I'd say in the normal assets, maintenance will be similar to next year to this year. But when it comes to methanolysis, we'll have a tailwind next year because we don't have all the extraordinary pre-production expenses, all the maintenance and fixing all the things in the plant as we're starting it up.

So that'll be a tailwind. I mean, that's all embedded in our incremental EBITDA conversation when we talk about circular, but for sure that part's going to be a tailwind next year. The rest I'd call it neutral.

N - Q2 2024 Eastman Chemical Co Earnings Call William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President David, on the $50 million of incremental EBITDA, what I would say is in Q1 we saw -- we missed our guidance by about $10 million. So the $10 million of the decline was in other, and then $15 million, the remainder was in advanced materials.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yeah, when it comes to the next two projects, first we feel great about the Texas project. We're really proud to have Pepsi as such a large contracted and committed partner with that project. And that combined with the DOE grant helping offset capital inflation makes us feel great about that project. And we really think that project is going to be a great example of scalability of this platform where we can solve a plastic waste problem, use green technologies on the energy side to get the carbon footprint down up to 90%. And so we're really helping customers with Scope 3 as well as on their mission as well as solving this plastic waste problem.

The French project, as we said before in the first quarter call, is moving along a bit slower than we originally expected. It's predominantly due to these customer contract conversations that we've had being slower than what we had expected originally. And then, of course, we're still working on the capital inflation on that project too and trying to lower the capital costs. We do have incentives in Europe too, but not quite at the same size as the IRA. So it's really about those customer contract discussions and it's similar to the conversation we just had. All the brands are very committed to recycling content goal, right? And dealing with the plastic waste crisis, as well as we are a significant contributor helping them lower their Scope 3 carbon emissions in Europe.

That's equally, if not, more important win in most conversations with brands when you come down to -- continue to have very high recyclability goals, which by the way means the product is recyclable but you can't actually keep that status for your product unless it's actually recycled. So they also have to deliver high recycled content goals in order to deliver that value. So that's -- I don't think changed. They're not on track to hit their targets for 2025, partly because the economic situation has them moving a little bit slower, just like I explained with specialty customers where they're trying to manage costs in a difficult environment, partly because mechanical recycling isn't available to solve the problems.

There isn't enough capacity to get to the targets that they have, especially in Europe, which starts for beverage bottles at 25% next year. And there's a lot of products and packages that they make that's not a clear water bottle and those opaque, colored, trays, etc different forms of PET. You can't -- in many of those, you cannot actually use mechanical recycling to actually make those products. So they've got a challenge on how they're going to actually get recycled content into some of those products. So all that context is still very much intact and the conversations are still going on with all the customers. But you've got a market -- the PET market's at the bottom of the cycle right now, prices are incredibly low, economic times are tough, and so the regulations are a little unclear in Europe right now on what counts as recycled content and how that's going to work, that's causing the conversation to go slowly.

But we fortunately don't see anyone dropping their engagement with us. It's just become slower in getting the contracts done.

N - Q2 2024 Eastman Chemical Co Earnings Call William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Yes, Mike. As Mark just highlighted, we're still working towards milestones on our circular projects, both in Longview and France. And France specifically, that's pushing the timelines out. So as we think about the CapEx required to achieve the growth, we've got the Kingsport project behind us here in first quarter of the year as we transitioned. Also, as we highlighted, we're starting some of our other growth projects back up as we see the end of destocking and look forward with our innovation wins. So as we balance both of those out $650 million to $700 million, we think, is appropriate to achieve what we need to this year.

And obviously, with that, we're not going to let cash sit on our balance sheet, and we increased our expectations for share repurchases for the full year to $300 million.

How you think about the growth rate there? And is it fair to assume that, that business is on average a bit higher margin than the overall segment there? Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So the interlayers business is having a good year and delivering meaningful earnings growth relative to last year in a flat to slightly down auto market. So it's a great testament to our innovation strategy and delivering results as well as operational excellence in running our plants well. So the earlier business is about a third of the revenue of the segment. And it's predominantly focused on auto, but it also has B&C in it, which is flat to last year.

But on the auto side, we're seeing a lot of earnings growth as we're creating our own growth. We're very much leveraged to two end markets, the luxury end market and the EV market is still growing better than the overall average auto build. So we're getting leverage out of that by being in the right market segments. And then within that, we're selling more and more premium products. As we highlighted in the prepared remarks, we've had a great story around HUD and multiple generations of that product that we've been offering to the marketplace in the future we're building for it. So that's being adopted for better security and safety driving reasons in the car. And so that has a lot of market upside.

Also, when you get to the EVs, as we said, there's about 3 times as much square meters of interlayer of laminated glass in an EV relative to an ICE car. And they're buying very high-performance products. They want to have a very technology-forward car in most EVs, especially in the luxury in the market where we're focused. And so, they want HUD. They've got solar control that they need to have. And so, all of that is driving high value at times a lot more square meters. And even though EVs are not growing as much as I think many people expected, still growing better than the ICE market and giving us leverage. So you've had, for example, HUD, 20% up year over year in volume at very high margins.

And we've had solar control up about 12% year over year. So these markets are growing fast in a market that's challenged. It's a great story.

So we actually feel great about the process chemistry. We just need to line out the mechanical operation of the plant, which is -- this is a very big plant. It's got a lot of complexity to it. And we probably should have expected more of this and we built our guide as we work through these challenges in this construction environment.

And then just on the base business, two end markets you called out as doing better. One, coatings and the other one, ag. So on ag, where are you now on a run rate relative to when it started to fall off? Are you still well below that normalized level? And then on coatings, what are you seeing there in volumes because your customers still seem to be putting up pretty weak numbers but your volumes seem to be stronger than that? Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yes. I don't know if our volumes are a lot stronger than that. I mean you've got to remember there's two components. There's this end-market demand discussion that we're all having.

And I think we see the end-market demand situation similar to our customers on coatings, but you got to remember, there was a lot of destocking that those coatings customers did with us, right? And they completed that destocking. And so we benefited from that volume recovery in coatings, just like durables and everything else. So when you look at that, we're probably up high-single digits in volume in B&C, but I would attribute most of that to just a lack of destocking relative to last year. The ag side of things, what I'd say is, there was a huge amount of destocking as was well documented by all the ag companies that certainly had an impact on us through last year.

They resolved most of that destocking as we went through the first quarter. And by the time we were in the second quarter, I'd say we were that normal demand conditions, reconnected to demand, I think, is the phrase with destocking behind us, and REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call we're having a normal ag season this year so far. There puts and takes to that but the products that we make, it's I would call it a normal ag season, so Q2 was good, Q3 will be softer.

We do not expect much inventory building in Q4 from our customers. I think they're still being a bit cautious on how to manage the inventory. So we expect we'll see a big build of ag demand for us in the first quarter of next year, which will be a nice tailwind for the next year versus this year.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer When it comes to French project, I mean, Vince, I really hope we have clear insight by the end of the year about where that project is headed. I wouldn't say it's necessarily a formal go/no-go decision, but we'll have good insight as we go through the fall with customer contract discussions and finish the engineering work. The reality is, we have a lot of portfolio options in how we manage these three plants and what products we put into each of them and what pace we build them. So we're very excited about the first plant. We're very excited about getting Texas built. Texas will have the capability to make specialty products as well as PET.

So you've got flex in how do you serve and support specialty growth and PET growth from the Texas project as we didn't go into the French project. But hopefully, have the sorted out. We still think that that $450 million of EBITDA across these three projects is very much intact as a long-term value creation target across these projects. And depending on how you go forward, you can still get a lot of that value by shifting where you make the specialties in the first few projects. So there's a lot of robustness in this plan, but we're very committed to wanting to build all three of these projects. But to be very clear, we're sticking to our model, which is on the PET side.

If we don't get these long-term take-or-pay contracts as we did get with Pepsi, we will not build the French project. So we're being very clear to the customers that we need to get these contract commitments in place to produce product that they very much need if they want to get to high recycling content targets in Europe. There is no way you can do it with mechanical alone; can't be done. So if they want to stay committed to their goals, they're going to have to support these investments.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer I'm glad you didn't ask me who's going to win the election in November because I wouldn't answer (multiple speakers) but I actually think tariffs are an issue, no matter which person we have as a President of this country. The China government has a very explicit and public policy of exporting their excess capacity to the world, and that's going to have an impact on markets. They're basically exporting unemployment to the world. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv.

'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call And for us, fortunately, we're not that exposed to those exports from China. We do have some exposure when it comes to the CI business, has some exposure. But really, most of the exports from China are going to impact Europe and Latin America. We don't have that many sales. Over 70% of our sales are in North America with CI. So our exposure there is somewhat limited. And AFP has a little bit of exposure. So from a direct import point of view and step one, which is where we are now, our exposure on the Chinese side is not that great, which is a good thing.

The bad thing is, there's going to be reactions that you're already seeing in Europe and the US, putting tariffs in place for products are being exported at exceptional the cost out of China. And then that will be response in China. So we do expect that there's some degree of tariff tension coming our way. This is not a new issue for us. China is about 10% of our revenue. About half of that is -- goes into China and then we are exported back out of China, typically, think of appliances, electronics and things like that durables. And that's mostly specialty plastics doing a round trip through China being made into something. The other half, our products locally consumed like some performance films and laminates for cars, windows or a few coatings specialties out of AFP.

We do have a playbook on how to manage through that that we developed in the 2018, 2019 timeframe. That playbook was relatively effective. And so we're just updating it and being prepared if that scenario plays out.

Gregory Riddle - Eastman Chemical Co - Vice President, Investor Relations and Corporate Communications We're ready for the next question.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So 80% of our revenue is tow. And obviously, that market has changed pretty substantially over the last two years as the utilization rates have become very high and customers have been focused on security supply. So we expect that market to continue to be stable. As we've mentioned, we have 100% of the business contracted this year, 90% next year, and 70% in '26. So we feel pretty good about the contracts in place. There are obviously our provisions for natural market decline in the volume in those contracts because it is still the modestly declining industry when it comes to tow. And it does have pricing structures in there to adjust for changes substantial changes in raw material costs so we're providing stability to both our customers as well as to us.

So that part of the market, I think we feel pretty good about. When it comes to the textile business, it's been great. We've seen tremendous growth in the textile market. This is also another very challenged end market. If you go look at the fashion industry, it's not exactly growing. But yet our volumes have grown materially relative to that underlying market. The Naia fabric is just a great story. It's got half biocontent and now with replacing coal with waste plastic, we can make the other half of acetic anhydride to make the tow from wood pulp with waste plastic. So you got a very strong beginning of life story. And then this is going to become increasingly important is the microfibers that break off of clothing in the washing machine that end up in the ocean as microplastics, if it's a synthetic garment; ours will fully biodegrade.

So we have plenty of certifications and studies that prove that our fibers will just naturally degrade at the same pace as cotton and have no life in the environment. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call So that's exceptionally important and that's going to become a bigger and bigger value proposition because textiles is by far the number one source of microplastics in the ocean or water waste.

And having a product that biodegrades, I think, is going to increasingly have a significant value proposition on that end-of-life proposition, not just the beginning of life. So we feel great about that business and expect it to continue to grow.

Gregory Riddle - Eastman Chemical Co - Vice President, Investor Relations and Corporate Communications Let's move to the next question please.

Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer Yeah, Aventa is going really well. We've had a great successful launch with Sealed Air in the marketplace. And we're now in a large grocery store that's doing a lot of trials where the product performance in the counter, if you will, is going really well. For those who are not as familiar with Aventa, we can replace polystyrene, expanded polystyrene, whether it's trays or clamshells. In this case, trays for protein like your chicken and pork and everything else that goes in the grocery store. We replaced all that as a drop-in replacement to the existing polystyrene equipment with our cellulosic polymer, and it will get to the same low density as polystyrene and it is fully certified to biodegrade in home or industrial composting.

And even if it ends up in landfill, it can biodegrade pretty much similar to paper. So it's a great story of end of life. It's got the same beginning of life story I just told you from Naia and how we can make it. But this compostability where all these different food service products can just be thrown away with food and biodegrade is exceptionally important. There's a number of states that are now banning it, polystyrene from being used, other states or companies willing just to have a natural -- natural position. It also makes by the way a phenomenally good straw, which is also compostable in rolling out in some major food chains right now as we speak.

So the program is going well. The volume is ramping up. We have meaningful commercial sales this year and expect step-up next year as we prove out this value proposition in these early trials. To answer your question about size, it can definitely be bigger than the Naia business. There's a significant amount of volume potential in this space as you can imagine and the margins of this product are better than the company average. So as it grows, it's an upgrade for corporate earnings. It's an alternative market because it's made from the same exact cellulose acetate flake that we make tow out of or Naia out of and this uses the same polymer. So you've got flexibility to optimize value across tow, Naia, and Aventa off the same fixed asset base.

And when we look at it all together, we think that the growth curve of this will allow us and support us in expanding our acetate flake business over time. REFINITIV STREETEVENTS | www. refinitiv. com | Contact Us ©2024 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 26, 2024 / 12:00PM, EMN. N - Q2 2024 Eastman Chemical Co Earnings Call We look forward to telling you a lot more about this in the circular day that Greg's scheduling. Because it's -- we'll cover the whole cellulose experience as well as the polyester circular stream as we hope we better understand that when we break it down here at Kingsport.

We're very much looking forward to getting all of you down here in Kingsport to see all these different products and assets in action.

Can you speak to the forward volume trajectory in advanced materials? You posted 12% there. But if I look at the two year stack, it's still down. So do you see additional runway to grow at double-digit pace in the third quarter, for example? Maybe you could talk through what you're baking into the guide there. Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So our guide is basically a similar -- from an earnings point of view, a similar quarter in Q3 to Q2. And we've got the methanolysis coming online, as we said, where the volume is now ramping up into 3Q and in 4Q. So you'll see that pick up on the advanced materials side.

We'll continue to have innovation driving growth above underlying markets in the automotive sector, paving win applications across the portfolio on our innovation like we do every year in our past in the more traditional sense, if you will. So we see all that volume helping us as we go into the back half of the year. You will obviously see some normal seasonality drop in demand in the fourth quarter. We expect that to be not as much as you would normally see net because of the ramp-up in methanolysis and everything else. So the fourth quarter will be better than typical because of methanolysis and some of these other end market ramp-up of innovation sales. So I think that all that will come together to help.

There's also spread tailwind that helps in the back half of the year when you look at some of the trends in energy costs that are still the lower energy cost at the beginning of the year still flowing through inventory and PX is a bit lower now than where it was in the first half of the year. So those are all tailwinds. Then the headwind is about $25 million higher shutdown costs in the back half of the year, but that's mostly in Q4 than the first half, right? That nets off some of that volume growth.

Gregory Riddle - Eastman Chemical Co - Vice President, Investor Relations and Corporate Communications Let's make the next question, the last one please.

N - Q2 2024 Eastman Chemical Co Earnings Call Mark J. Costa - Eastman Chemical BV - Chairman of the Board, Chief Executive Officer So the first question, I'm going to answer. And the second question, I'm just not sure I understood the question. So the first question on heat transfer fluids, timing is everything in that business, and it's very hard to predict by quarter. So we've had a great year last year, $30 million lower this year. A lot of that $30 million will come back next year, specifically in the LNG space that are very high-value fills for us. But I would just think about it on an annual basis, it's very difficult to predict exactly when fills occur quarter-by-quarter.

On the second question, I apologize, but -- William Mclain - Eastman Chemical Co - Chief Financial Officer, Senior Vice President Yeah. So Laurence, I think you're talking about our growth, our increase in spend and our capabilities as well as continued investments in growth. And as you think about what Mark just outlined on Aventa and the increased expenditures there that I referenced in our other segment, that's where -- again, this year, we're increasing those. We expect to see the ramp-up of revenue that Mark just referenced in the cellulosics and including the Aventa product line. So we're making the investments also to be efficient with the working capital et cetera and expect returns on those as we go into 2025.

Gregory Riddle - Eastman Chemical Co - Vice President, Investor Relations and Corporate Communications Thanks, everyone, for joining us. We appreciate you being on this call with us. As Mark mentioned, we look forward to also having you in Kingsport later this year as we do a deep dive on our circular economy platform. Everybody, have a great day.