Earnings call: Eastman reports modest growth amid economic challenges

Eastman (EMN), a global specialty materials company, held its third quarter 2024 earnings call on October 25, 2024, with CEO Mark Costa and CFO Willie McLain discussing the company's financial results and future projections. Despite a manufacturing recession and ongoing economic difficulties, Eastman anticipates modest growth in 2025, supported by innovation and an expected recovery in discretionary markets such as automotive, housing, and consumer durables.

The company has also detailed strategies to enhance its cost structure and improve operational efficiency, particularly with its Kingsport methanolysis facility and the upcoming Texas plant, which is set to benefit from significant government funding and tax incentives.

Key Takeaways

• Eastman anticipates modest growth in 2025, despite a manufacturing recession since mid-2022.
• Discretionary markets are recovering, with expected improvements in affordability due to lower interest rates.
• Over $75 million in cost savings are targeted through operational optimizations and energy efficiency initiatives.
• The Kingsport methanolysis facility is expected to significantly improve EBITDA.
• Strategic capacity management is repurposing tow and flight capacity to boost textile growth and food packaging opportunities.
• A market decline of 1% to 2% is anticipated next year, with traditional cigarettes dropping 2% to 3%, partially offset by heat-not-burn products.
• The Texas plant will benefit from DOE funding and state tax breaks, aiming for a 90% reduction in carbon emissions and an expected 12% return.
• A 4% increase in volume mix was reported in Q3, driven by strong performance in coatings and heat transfer fluids.
• The chemical recycling segment is projected to generate $20 million to $30 million in EBITDA, down from an original estimate of $75 million.
• Issues with feedstock preparation led to increased downtime in August, with improvements following in September.
• The methanolysis project in France is facing delays due to changes in EU policy.
• Inventory build strategies are in place, preparing for future growth despite current weaker demand.

Company Outlook

• CEO Mark Costa projected modest overall growth for Eastman in 2025, driven by innovation.
• The company plans to enhance its cost structure, aiming for significant cost savings.
• Eastman is focusing on strategic capacity management to boost growth in specific sectors.
• The company anticipates a slight market decline next year, with a focus on managing customer inventory levels.

Bearish Highlights

• Ongoing economic challenges and a manufacturing recession since mid-2022 are impacting growth.
• Discretionary markets are still recovering from low demand.
• The chemical recycling segment's EBITDA projection has been lowered due to operational challenges.

Bullish Highlights

• Pent-up demand and anticipated improvements in affordability are expected to boost revenue.
• The Kingsport methanolysis facility and the new Texas plant are projected to significantly improve EBITDA.
• The Texas plant is expected to feature a broader scope, including a new polymer line and infrastructure.

Misses

• The chemical recycling segment's EBITDA is down from an original estimate of $75 million to $20 million to $30 million.
• The methanolysis project in France is progressing slowly, facing delays due to EU policy changes.

Q&A Highlights

• Executives discussed the company's growth outlook amid macroeconomic uncertainties, including the upcoming election and instability in the Middle East.
• There is cautious behavior from brands and retailers, particularly in Q4, but decent growth is anticipated.
• Eastman's capital expenditures for 2025 are expected to be around $800 million, influenced by the startup of the Longview, Texas facility.

Eastman remains focused on navigating through economic headwinds while positioning itself for future growth. The company's strategies in operational efficiency and capacity management, alongside government support for its Texas plant, underpin its efforts to maintain a robust financial outlook and deliver value to its stakeholders.

InvestingPro Insights

Eastman Chemical Company (NYSE:EMN) is demonstrating resilience in the face of economic challenges, as evidenced by both its recent earnings call and key financial metrics. According to InvestingPro data, Eastman boasts a market capitalization of $11.82 billion, reflecting its significant presence in the specialty materials sector.

Despite the manufacturing recession mentioned in the earnings call, Eastman's financial health appears robust. The company's P/E ratio of 13.53 suggests that it may be undervalued relative to its earnings, which aligns with the company's anticipation of modest growth in 2025. This valuation becomes even more intriguing when considering an InvestingPro Tip that Eastman is "Trading at a low P/E ratio relative to near-term earnings growth."

Furthermore, Eastman's commitment to shareholder value is evident. An InvestingPro Tip highlights that "Management has been aggressively buying back shares," which often signals confidence in the company's future prospects. This is complemented by another InvestingPro Tip noting that Eastman "Has raised its dividend for 14 consecutive years," underlining a strong track record of returning value to shareholders. The current dividend yield stands at 3.08%, which may be attractive to income-focused investors.

The company's focus on cost savings and operational efficiency, as discussed in the earnings call, is reflected in its solid financials. With a gross profit of $2,079 million and an operating income margin of 11.84% over the last twelve months, Eastman appears well-positioned to weather economic uncertainties and potentially capitalize on the anticipated recovery in discretionary markets.

Investors seeking more comprehensive insights can access additional tips on InvestingPro, which offers a total of 8 tips for Eastman Chemical Company, providing a deeper understanding of the company's financial position and market performance.

Full transcript - Eastman Chemical (EMN) Q3 2024:

Operator: Good day, everyone, and welcome to the Third Quarter 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. [Operator Instructions] We will now turn the call over to Mr. Greg Riddle at Eastman, Investor Relations. Please go ahead, sir.

Greg Riddle: Okay. Thank you, Harry, and good morning, everyone, and thanks very much for joining us. On the call 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 closed we posted our third quarter 2024 financial results news release and SEC 8-K filing, our slides and the related prepared remarks in the Investor Relations section of our website, 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 future expectations are, or will be detailed in our third 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 third quarter 2024. Second, earnings referenced in this presentation excludes 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 2024 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A. Harry, please let's start with our first question.

Operator: Thank you. Our first question will be from the line of David Begleiter with Deutsche Bank. Please go ahead. Your line is now open.

David Begleiter: Thank you. Good morning. Mark, on your 2025 outlook, you mentioned modest underlying growth, but then you will have above-market growth driven by your innovation. So a little more detail, what can that mean for overall top -- volume growth for Eastman in 2025.

Mark Costa: Thanks, David. It's a good question. We're obviously spending a lot of time focusing first on getting through this year and delivering earnings, but obviously, we're all now looking towards next year as well. The story for Eastman has always been over the last several years the sort of volume and mix story is our biggest driver of some of the challenges we faced as well as the opportunity that's now in front of us. Eastman is clearly leveraged to an economic recovery and we can accelerate it with our innovation. When you think about just the last couple of years, we've had incredibly high inflation, interest rates as everyone knows, and we've been in a manufacturing recession that really started in the summer of 2022. But we've had almost 2.5 years now of no improvement in end-market demand, especially in the discretionary markets. And when you think about the area under that curve of low demand, if you will, there's a lot of pent-up demand that has not been served even when you consider some of the overstimulation in 2021. So the macro is clearly uncertain right now. We all know that. What we do know, I think at this point is that the customer inventory destocking is over and we're recorrect -- we sort of reconnected to primary demand. We can also say that in the sort of what we call our stable markets, things like personal care, aviation, water treatment, Ag. Those markets have all been sort of steadily growing at modest rates this year, and we expect that to continue into next year. So that I think will continue in this year, that's about 60% of our revenue. The discretionary markets, which are auto, housing, consumer durables, that's where we see demand has not really improved very much. And this year, that's about 40% of our revenue. Normal would be closer to 50%. So a lot of upside here as we sort of return to normal. The lower interest rates are for sure going to help improve the affordability of cars, affordability of homes. When you think about the U.S. home market right now, we're at 1995 levels, 30% below 2019, and Europe and China is also challenged. So when interest rates start to become more affordable, which we expect will happen through next year at some point, you're going to see that starting to improve and that will certainly drive upside for us. Same is true in auto, where you'll see lower interest rates helping affordability and same thing, demand has not been very good for quite some time. On the consumer durable front, same thing, well below 2019 levels this year. From an end-market point-of-view, a lot of pent-up demand since the summer of 2022. Recovery in housing will certainly help influence purchases, less inflation pressure on everyday life will open up the opportunity for people to start replacing and upgrading consumer durable products are now starting to get pretty old. So we see modest growth across all these markets. I don't want to oversell it. But what we expect and are going to plan for is a modest growth here along with the stable market. So clearly, that's going to help drive revenue increase. And then you get to our programs to create our own growth. You've got the Kingsport methanolysis facility. Obviously, in three weeks we'll give you a lot more detail about how we think that EBITDA will improve, but it will be a substantial improvement both on the revenue side as well as on a cost tailwind relative to this year. You've got a -- the auto film business, the auto interlayer business always creating their own growth, especially interlayers is doing quite well with their product portfolio right now. We've got a whole range of cellulosic products starting to deliver some innovation growth. Naia continue to grow. We already have commercial orders and event in food applications and expect that to accelerate in a variety of other programs, which we'll also tell you about at the Deep Dive Day coming up. And then there's a variety of smaller but helpful innovation programs around semiconductors and coatings in the AFP segment. So overall, I'd say revenue is going to improve in a modest way from a market point of view, accelerated by innovation, giving us some good growth. And just to finish off the bridge, we do expect price to raw material costs to be relatively stable as we go into next year. On the specialty side, we think we'll have a spread tailwind at olefins, and then on cost structure, we are going to take a set of actions to drive costs lower than just offsetting inflation. So you'll have a tailwind there. And then there'll be two sort of modest headwinds. We expect energy and natural gas prices to go up and so there's always a lag in catching up to them as well as some -- a bit lower volume in fibers as the markets adjust down and some inventory management. So when you put it all together, I think volume mix is going to be a big driver. And it's a combination of market and innovation, on top of a structure that is favorable on cost and when you're netted together, I think that translates into pretty substantial improvement in EPS over this year.

David Begleiter: Very good. Mark, just on that cost issue, where are you taking out costs that are driving the cost savings above productivity and how material could that be in 2025?

William McLain: So, David, what I would highlight is, we're focused on improving the cost structure because we have continued to be in a challenging environment. Also, as we look beyond, I'll call it just the normal productivity, our success in innovation has driven some level of complexity in our operations and we're optimizing that from a product and an operations standpoint so that we can maximize gross margin realization. Additionally, as you think about, we just announced here in the quarter, there are targeted opportunities to optimize our global asset base with the shutdown of our interlayers resin operations line at our Massachusetts facility. And then as we continue to decarbonize, we think driving energy efficiency in the face of some of the higher energy costs that Mark just talked about is another pathway that can lead us to driving, I'll call it, cost-savings above and beyond our normal level of inflation, and we've talked about that being approximately $75 million in the past. So we'll be above that, and we'll finalize those plans and tell you more about that on our January call.

David Begleiter: Thank you.

Operator: Our next question will be from the line of Patrick Cunningham with Citigroup. Please go ahead, your line is now open.

Patrick Cunningham: Hi, good morning. With the slightly lower methanolysis guide here, I think you cited continued consumer weakness. How should we think about some of these challenges weighing on incremental EBITDA into next year?

Mark Costa: So when you think about companies and brands trying to drive growth, they always want to use innovation to drive growth. That's always the best way to win in the marketplace. But when the economies are incredibly weak and you're under a lot of pressure on inflation, the rate at which they're trying to launch new products versus just manage their cost structure is weighted towards managing the cost structure. So we're seeing that through this year. As the markets stabilize, which I believe they have done and interest rates also help improve affordability of a number of different things for the consumer, you're going to see some recovery and stability in demand in that, companies will start switching more to how do I use product differentiation on the shelf to sort of drive growth. So while certainly the product launches are a bit slower this year and clearly in a normal seasonal decline in the fourth quarter, you're not going to have a lot of product launches. We expect and see customers staying highly engaged and thinking about what they want to do as they go through 2025. So we think we're in the right place for that to recover and get better, but it's certainly not as strong as what we would have guessed in the beginning of this year relative to where we are today.

Patrick Cunningham: Very helpful. And then it sounds like there is some softness on the fibers business into next year. Have any of the recent capacity announcements in tow started to weigh on some of your contract conversations? And is there any intention of repurposing any of those assets for the business near-term?

Mark Costa: Yes. Good question. So first of all, we expect fibers to stay stable over the next three years. We do see a bit of capacity coming online in China, which is primarily aimed at serving demand in China and a few countries that we don't serve. So in that sense, there is that dynamic. The industry has had a lot of history around managing capacity to be aligned with serving the market. Eastman has been repurposing both our tow and flight capacity, as you mentioned, to support our [indiscernible] textile growth. And now we have the event of food packaging, which we'll tell you more about in three weeks, which is really exciting. It's a huge volume market and a great opportunity and margins a bit above company average. So we have opportunities to continue to run our assets full that aren't directly dependent on tow and we'll continue to drive that strategy, which I think is unique to us in this market space. The other competitors have rationalized some capacity. They have other high cost assets, so we'll have to just see what they choose to do. But in the next few years, we're not really worried about that. We think that the customers are still very much focused on security and supply and reliability supply. If they ever get shorted on product to serve the market, it's at a huge cost of them. The cost of our tow as a percentage of the price of a cigarette is extremely small. So you have to be very careful about missing out on sales if you get short on supply. So in that sense, I think we're in good shape. When we talked about the decline next year, that's really just about market decline, which we think is 1% to 2%. That's traditional cigarettes declining 2% to 3%, being offset by the heat not burns netting out to that kind of a number. And we do see a bit of inventory management going on with customers in the fourth quarter here and expect that some of that will continue into next year. So we're putting a little bit of targeted inventory management at a few customers into sort of -- into what's going on this quarter, as well as what we might expect next year. They've been holding a lot of security of supply, back to my point, and I think they're trying to look at how to optimize some of that inventory for cash purposes. So that's how we look at it. So we'd expect the utilization rate to stay strong over the next three years.

Patrick Cunningham: Great. Thank you so much.

Operator: The next question today will be from the line of Duffy Fisher with Goldman Sachs. Please go ahead, your line is open.

Duffy Fischer: Yes. Good morning, guys. First question is just around the Texas plant that FIDed. So I guess main question would be, what's going to be different about that? Lessons learned from Kingsport, how is this footprint going to be different, the capital cost, the timeline to build, how will that be different than what you did in Kingsport?

Mark Costa: Well, certainly the Texas plant will incorporate all the learnings we've had on the Kingsport project, both in how to construct it more effectively as well as how they've started up better than what we've gone through this year and run it reliably. So there's all types of improvements and insights we've had that we're factoring into this and certainly feel very confident that we with a better construction approach and a great large partner that we have, we will be able to construct the project into the methanolysis part of this project at a much lower cost than what we spent on in Kingsport. So that I think is pretty clear and well-engineered and we feel confident about it. The project is different though, in that it has a lot more scope to it than just building a methanolysis plant because while we're leveraging a brownfield site in our Longview, Texas site, we are still having to build another -- a new polymer line that goes with this. We'll have infrastructure around this facility that already existed in Kingsport that we need to create the tanks, pipe bridges, etc., that go with supporting this overall plant. So you've got more infrastructure involved. And we have an investment that's being supported by the DOE of a much lower decarbonization plant. So the use of a thermal battery and solar to sort of drive it is a -- another capital cost that is different than where we are today. It does get us down in our carbon emissions by 90%. So it's a very compelling project from a carbon emission, not just a waste management recycling point of view. And so worthwhile investment. The good news is unlike Kingsport, we have support from the federal government. So we've got $375 million of funding coming in from the DOE, another $70 million of tax breaks coming in from the state of Texas. And we've got all of that factoring in to help manage some of the inflation we're facing as well as supporting this decarbonization aspect of the project. So overall, it's a bigger capital program being supported by these incentives, and still has an attractive return around 12% as we aimed at achieving from the beginning of this platform.

Duffy Fischer: Great. Thanks. And then just if you could, volume mix was strong in both AM and AFP. Could you break out how much of that was volume, how much of that was mix in each of those segments?

Greg Riddle: Duffy, this is Greg. We do not have a breakout of volume versus mix, but in both of those cases, mix is a contributor as it always has been for Eastman. So I don't have a breakout for you today, but certainly mix was a contributor.

Mark Costa: What I would say though, Duffy, is if you think about leveraged economic recovery, the discretionary markets, which are more challenged, obviously than the stable markets, those are our highest margin markets. So as you think about the recovery in homes, cars and consumer durables, that's a large mix lift going forward into next year and the years to come as we drive a lot of innovation in that space.

Duffy Fischer: Great. Thank you, guys.

Operator: Our next question will be from the line of Frank Mitsch with Fermium Research. Please go ahead, your line is open.

Frank Mitsch: Good morning, and congrats on the World Series, M. Riddle. Mark, you mentioned on the fiber side that you're looking at applications, I believe you said in food packaging, that sounds new to me. Can you expand upon that, please?

Mark Costa: Sure. Aventa, it's not sitting in fibers at the moment, just to be clear, it's actually sitting in corporate other, but it's a new innovation program that we're launching in foodservice. Basically, our cellulose acetate, which is what we do use to make the tow fibers or eyewear and additives for coatings, etc. That core cellulosic platform that we have, one feature about it that we didn't talk a lot about until the last three years is it's also very biodegradable. And you can tune the rate of the biodegradability of it as well depending on how you make that polymer. So a huge opportunity in foodservice is there's a lot of packaging that cannot be recycled and ends up in landfill. For example, those expanded polystyrene foam trays that your chicken and pork and beef sit on in the grocery store or the clam shells or straws for that matter. And what we figured out is we're making an excellent straw that's already going national here with one large company and that is completely home and industrial compostable. We also figured out how to foam it, so we can actually replace polystyrene as a drop-in replacement to the current equipment. And all of those foam trace can now be made out of our Aventa sized assay product and is completely biodegradable and even the microplastics that might originate from it will not persist in the environment that's been certified in Europe. So it's a great platform, huge amount of volume, margins are good and it's another exciting way to sort of keep asset utilization high and start turning the cellulose extreme into net growth across the company, and we'll tell you more about that when we get to the Deep Dive. So the Deep Dive is going to focus on polystyrene in and the methanolysis facility, but we are also going to spend time on all these different cellulosic products that are launching right now that we're really excited about.

Frank Mitsch: That sounds -- looking forward to that. And the company reported 4% higher sequential volume mix in 3Q. Can you talk about where you're seeing that in terms of end-markets and geographies, that would be great?

Mark Costa: Yes. So very happy to see the improvement on the volume mix. AFP had a strong performance. Some of that was heat transfer fluids into some different projects and that was sort of around the world. Those are more LNG-oriented projects, not specifically tied to China. And then we also had some improvement in coatings. Again, shipments around the world in some of our high-value coating additives that were the biggest drivers of that improvement. And in AM, we were about flat inside that. We had great performance in the interlayer business driving some of that volume mix improvement. I would say that the performance film business was sort of in-line with the market and the specialty plastic side of things were relatively stable. And then on CI, we just sold more volume as we had more volume to sell as we came out of some of those -- that planned shutdown constraint on volume in Q2. And that was mostly North America.

Frank Mitsch: Great. Thanks so much.

Operator: Our next question will be from the line of Vincent Andrews with Morgan Stanley. Please go ahead, your line is open.

Vincent Andrews: Thank you, and good morning, everyone. Mark, just wondering if on the chemical recycling, if you can just give us some dimensions around -- you now looking for $20 million to $30 million this year of EBITDA, and I think that the original number was around $75 million. So that walk from $75 million to $20 million to $30 million, how much of it was from just sort of ramping the plant and having some teething issues that you're ultimately going to get the other side of versus how much of it was just that the consumer offtake is maybe not as robust because of the macro? Maybe we could start there.

Mark Costa: Yes. So the walk as you described it between sort of the lower uptime that we had in the startup process of the plant versus sort of the ramp-up of sales we expect, I'd say two thirds of it is around the costs and one-third around the volume. And Just to address the cost side of it, when you look at the year, we're obviously a bit optimistic around how quickly the plant would start up. And so we've sort of learned from that. I mean, the construction environment was obviously very challenging, as you all know, that led to also a lot of construction quality issues and vendor equipment issues. And we lost about four months through the spring into May, just dealing with all those sort of mechanical integrity issues around the construction of the plant. And then once we got to the feedstock-ish ramp-up and running at higher rates with that, we knew we were going to have complicated challenges in feedstock. We're using waste as feedstock. And we have always been using hard to recycle material from the very beginning. So we've always been using challenging material. And the great news about that material is the process chemistry has worked incredibly well from the beginning. So as the plant runs, it's making on-spec material that's going into food grade product with high clarity. It's just really exciting to see that process chemistry works it well and produce such a high quality product. But as we told you in the second quarter call, we did run into some feedstock preparation issues impacting how the first part of the plant runs. And that was sort of causing us uptime problems in how the feedstock sort of went into the plant. And we had a plan to fix it. It just took us longer to fix some of those issues and make the improvements necessary. So we had a lot more downtime through August than we had planned on. The good news is, we got into September with those implement -- improvements in place and ran well through the -- through September with much higher uptime. And so we feel good about how we entered our planned shutdown. And we had a planned shutdown for this facility that's aligned with the shutdown of all our polymer lines for the specialty plastics business. And so in that, we also made a few additional improvements that were needed to be down to do, and so we feel good about that. We're at startup of the plant, and in the final steps of that sort of start-up process, and looking forward to sort of running as we lead up to the Deep Dive day on the 21st of November. So those cost issues, which is predominantly a downtime related issue of how the plant was running due to these sort of issues on the front end caused the cost to come to be higher as it flows in inventory and flows out of inventory. And then I already addressed the volume question in a prior question, which is when the economy is really weak, the rate at which people are launching new products is slower. But we're still seeing very high engagement from customers. We haven't lost -- actually, I think we've only lost one customer now to think about it. When it comes to sort of wanting to move forward, it's just the pace at which you're moving forward has moderated.

Vincent Andrews: Okay. And then just on the on the Texas plant, can you let us know the mechanics of how that DOE grant works in terms of, is it like a project finance where you draw it down and then you have to pay it back over time? And I assume the $70 million from the state of Texas requires pre-tax income from that plant to get the -- to get the credit or are you able to use any income from Texas in the meantime?

William McLain: Vincent, on the DOE grant, you can think about -- we've gotten the first phase approved and we're going to be receiving the cash as we make progress on the investment and on the project overall. So the $375 million will match the capital outlay over the time horizon and we'll just talk more specifically at the Deep Dive around the capital level. You are correct on the state of Texas, it is on the, -- I'll call it the income, but the income will be initiated as we build the project.

Vincent Andrews: Thanks very much.

Operator: The next question is from the line of Michael Leithead with Barclays. Please go ahead, your line is now open.

Michael Leithead: Great. Thank you. Good morning, guys. What's the latest status update on the France methanolysis project?

Mark Costa: So the France project, as we've discussed in the first and second quarter is on a slower path of development. We've made phenomenally good progress on many dimensions of the project. So we've -- as we've discussed before, got over 70% of feedstock sourced. We have a great progress on permitting. In fact, have a permit. We've made great progress on the incentives and have those secured. We're almost complete on the engineering work. And so all of that's on track. The one thing we have not succeeded in getting is the customer contracts for the packaging side of this project. And that's really been a delay due to the policy in the EU. So as I mentioned before, at the last moment in the spring of this year, they made a change to the policy. The policy was always written to drive high recycling rates, high recyclability of products within the union and aiming to try and get that recycling of local waste out of the environment and not being incinerated, which is the primary thing that they do with waste in Europe, which also violates their CO2 policies of getting climate down. But they came up with some WTO concerns and said that imports needed to be allowed into the mix of what counts as recycled content. Obviously, imports replacing local demand for recycling doesn't make a lot of sense if you're trying to get waste and reduce incineration. In fact, what will happen with all this imported materials, it will end-up being incinerated and increase carbon footprint for the -- for the union. So while there's a trade issue that needs to be sorted out, it doesn't really make any sense for recycling policy. And so I think that -- and there's a number of efforts going on to try and address this issue. But with that uncertainty or the ability to use waste from other countries and that's caused a sort of slowdown in the customer discussions as they're trying to think through their sourcing strategy. So we don't yet have those customer contracts. And to be very clear, as we have been from the beginning with our principles about the contracting model for packaging, we don't have commitments from customers that give us a long-term commitment with stable margins and the pricing structure at the appropriate levels, we're not going to sort of proceed forward at this project. So until we get these issues resolved to the customers as they look at what they want their sourcing strategy to be, we'll have to sort of hold on this project, but it's somewhat ready. So if we get the contracts, we can move forward. The government -- French government is extremely supportive in doing everything they can to help us on this. And we'll tell you more about this also at the Deep Dive in a couple of weeks.

Michael Leithead: Great. Looking forward to it. And then on the Kingsport methanolysis unit, I think in the last question you talked about very good uptime in September after getting through some of those teasing issues. What's been the steady-state utilization rate from this facility when the site has been running well during those periods?

Mark Costa: Yes. So I'm going to hold off on answering that question because we have a lot of exciting stuff to show you around the plant and it running and we have been running it at reasonably good rates. We've told you in the past, we've been able to run that 65%, 70% range. And I'd say that's consistent. The issue isn't been being able to run at good rates. The issue is just downtime to deal with some of these feedstock preparation issues. And so -- and we've rate tested every part of the plant at a very high rate. So we'll tell you a lot more about that and a lot more detail around sort of how we're going and you can see the plant yourself.

Michael Leithead: Great. Thank you.

Operator: Our next question will be from the line of Josh Spector with UBS. Please go ahead, your line is now open.

Josh Spector: Hey, good morning. Wondering if I could try again on PRT and just specifically 2025. I understand you want to save some things for a few weeks from now, but you guys have been pretty clear about kind of the bridge of earnings from that this year into next year. So can we at least frame how we're thinking about the contribution to 2025 at this point?

Mark Costa: Sure. So, one, I'm not taking the bait, so I'm not going to give you a number, but we will be sharing our thoughts with you in three -- in three weeks when we have more time to actually provide the proper context. But the -- there will be two drivers of the economics as you go from 2024 to 2025. The very low uptime we've had in the first eight months of this project this year obviously will be much better next year, right? So we have a pretty high cost of per unit going into the inventory this year that's a headwind in the economics this year. So as you start ramping up, that cost per unit goes down pretty dramatically from where we are right now. And so you're going to have a pretty meaningful cost tailwind relative to this year in running the plant. The second is that's just pure operating leverage and utilization difference. And then the second part, of course, is ramping up on the revenue side and we'll spend -- and spend some more time, but both will be meaningful contributors to how you get to a better EBITDA next year versus this year, and it will be a key contributor to growth over this year even in a challenged economic environment.

Josh Spector: All right. Thanks. Had to try. On free cash flow I do want to ask [Speech Overlap] thanks. Some interesting commentary on inventory build or strategic inventory build being a driver for the $100 million reduction. Can you just talk about that? That seems to contrast a little bit with some of the weaker slower demand commentary. So where do you see that opportunity and why?

William McLain: So there's a couple of items I would highlight. One is in the polyester space and the other is in the cellulosic space, which both Mark has touched on. So we have made selective choices in those specialty product lines. One was to manage shutdowns with -- here in September and October. So we'll get some of that back in fourth quarter. But as we think about 2025 and being prepared for growth. In our polyester space, you've heard us talk about the flexibility of our polyesters and we have a Tritan facility coming online in late fall of next year. So what we're looking at doing is exhibiting that flexibility here in the early part of 2025 by switching those polyester lines back to co-polyesters as well as PET production. And we're building the inventory to enable us to do that now so that we can make those transitions and leverage the assets that we have on that front. We also saw, we continue to have capital discipline on our capex and we've reduced that to $625 million for this year. Well, on the cellulosic side, we are leveraging that to build inventory for products like Aventa, and -- so that we have those market adoption rates, etc., as we make plans to debottleneck those assets and leveraging the inventory versus the capital here in the front end. So well-positioned to provide growth and to be capital efficient as well between capex and working capital.

Josh Spector: Great. Thank you.

Operator: The next question is from the line of Jeff Zekauskas with JPMorgan. Please go ahead, your line is open.

Jeff Zekauskas: Thanks very much. What's the EBIT drag from the methanolysis plant in 202?

William McLain: So, Jeff, obviously, as we've dropped down the EBITDA expectations, the incremental EBIT on a year-over-year basis is neutral. So there's no incremental EBIT on a year-over-year basis. And as we've talked about previously, the cost of the pre-production, etc., was fully reflected in our other segment in 2023.

Jeff Zekauskas: And for my follow-up, is the price of the methanolysis product very different from your non-methanolysis co-polyesters or how does it compare to Tritan? And what seemed to be the primary applications? Who is -- who's buying it and why? And is it a wide variety of customers or is it very concentrated? Can you give us a sense of who wants the product and why?

Mark Costa: Sure. So first of all, the premiums we're getting for renewed content, the recycled content and the products is a premium on any of the existing products, whether it's Tritan or co-polyester or PET, there's a premium above all of those different products, obviously. The amount of premium varies based on the pricing of the underlying product and the value that it's creating and the application it's going into. But there is a good return on that. It's also driving a lot of new market growth. So to answer your question, the applications we're going into are a wide spectrum of applications. This is a very fragmented market today that we serve in the specialty business and it will be fragmented, spread across a variety of markets. So it can range anywhere from cycle content going into reusable water bottles with now gene and camel back in those kind of applications that are very obvious where you'd want to have a recycled bottle going into making a reusable water bottle. You've got all the applications in the appliance world, whether it's blenders or cuisine arts and things like those kind of products that want to have a better sustainability footprint. You've got new applications that it's opened up to us, like the housings for drills. We've told you the story around Black and Decker in the past. You've got large appliances also looking at these opportunities. A lot of that is Tritan. You've got a lot of cosmetic packaging, which have very aggressive sustainability goals that are converting over to recycled content, where they're trying to get to 100% recycled content and a lot of that cosmetic packaging. And that's a lot of our co-polyesters. You've got packaging -- consumer packaging opportunities. It's really across the spectrum of end-markets where we see the opportunity to create new growth and win applications that we didn't currently have, which is very profitable when it's opening up an entirely new market to valuing up markets that we're currently in. So we'll share a lot more about that with you also in three weeks, but it's a broad spectrum.

Jeff Zekauskas: Okay. Thank you very much.

Operator: The next question will be from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead, your line is open.

Aleksey Yefremov: Thanks. Good morning. Mark, could you maybe provide some detail around advanced Materials, key product categories, auto films, interlayers, Tritan, etc.? What's been happening with demand and margins in Q3 and heading into Q4?

Mark Costa: Sure. So first of all, I mean, all the end-markets excluding autos, which is a bit of a different story, but all the other end-markets obviously went through a pretty steep destocking cycle in the -- in the end of 2022 through 2023. So what we saw in 2024 was most of that being completely over and a lot of volume improvement was just that lack of destocking. And then you've got some modest growth occurring in markets across the space. So in the automotive side of things, the automotive underlying market is clearly one that's getting a lot of attention right now. It's been a bit weak. So I'd say our view is consistent with the other views out there where the overall underlying market is probably down 2% roughly. In that, our business has had high single-digit volume mix growth. So significantly outperforming the business. So it's been exciting to see that happen, and a lot of drivers behind that. But there's just a lot of design trends helping us on two dimensions and why we're doing well and not just EVs, which were highly levered to, but also in ICE cars. We're just getting more territory per car, right, whether it's an ICE car or an EV, side windows are now being laminated. It's actually moving at a pace of almost four to 5 times the rate of builds and how they're adopting side windows that usually include acoustic management as well. You've got larger sunroofs, significantly larger on an EV, but even on ICE cars they're bigger. And with the EVs, when you put it all together, in particular, you're three times a square meters of an ICE car. But even the ICE cars are trending in a very favorable way for using more laminate glass, and the products have a lot more value in them. So they've heads up display that's been growing double-digits. They have solar rejection, color matching, especially on the sunroofs, etc. So a lot of trends helping us grow better this year than the underlying market in a pretty meaningful way. And those trends will continue into next year. And if you combine it with modest growth in the underlying auto market, that's a good story. On performance films, that's an accessory aftermarket, if you will. So it's the window films and paint protection films. It's not growing as fast this year in this economically challenged environment as people manage their pricing. It's still growing, still growing a little bit better than underlying markets, but not the same story as Interlayer. So that's on the performance film side, which is holding in reasonably well for the market that we're in. And then on the specialty plastics side, I think that a lot of the volume growth this year is a lack of destocking, a little bit of modest growth in some of the stable markets that they're in, and that's sort of where we sit. So again, it's all about innovation, it's all about little stability and underlying market growth that helps accelerate that innovation and adoption with the brands as they look to create growth in a more stable environment. So combines to help growth in next year.

Aleksey Yefremov: Thanks, Mark. And your coding customers have been pretty vocal about how they feel regarding negotiating position with payer suppliers. How do you think about preserving your margins in the coatings business in 2025?

Mark Costa: Look, I think that every customer including us is negotiating as hard as we can to get the best prices possible for what we're buying in a weakened economic environment, you're obviously going to do that. In the end, if you got a specialty business, you have differentiated value in the products that you supply to your customers and you can maintain price discipline, which I think we've demonstrated extremely well. So in an increasing environment like 2021 and the beginning of 2022, you saw us very successfully raise prices in that environment to stay up with hyperinflation in our raw materials. And you've seen since then us maintaining very good discipline on pricing for the value of our products. There's always a little bit of sharing that you do with raw material declines and that happens. We've always been clear about that. There's a bit of a lag on the way up and there's a bit of a lag on the way down. But we're confident that we can maintain stability in our price raw material costs, which we've done this year and we'll continue to manage that way as we go into next year. I'd say the only exception of that is a bit of energy increase on our side. So if the natural gas prices go up a lot like the forward curve implies relative to this year, there'll be a bit of a lag in our pricing and how it goes up relative to those costs. And that will be a bit of a headwind. But we intend to manage the pricing and value of our products as we always have.

Aleksey Yefremov: Thanks, Mark.

Operator: The next question will be from the line of Mike Sison with Wells Fargo. Please go ahead, your line is open.

Mike Sison: Hey, good morning, guys. Nice quarter. Mark, you've been running volume mix here mid-single digits for the last couple of quarters. It looks like you'll probably hit that for the full-year, in as you described not a great environment. So if things don't improve in 2025, a lot of companies have said the first-half could be similar to the second-half 2024. Is that a good base case because a lot of the new products and innovation that you've done heading into 2025? And if demand does get better, let's hope, would you be better than that?

Mark Costa: So I think that sort of again depends on the markets. There's no sort of uniform answer to that, Mike. In the stable markets, I think we've been seeing some steady modest growth this year and that continues through next year if that's not back-half loaded. So whether it's personal care, aviation, medical destocking, by the way, is mostly over. So we'll get back to having growth in medical. Packaging (NYSE:PKG), consumer packaging actually was a bit down this year, as you can see from all those companies that are in that space and we do believe that will sort of swing from a low-base to some positive growth next year. So I think those are all going to happen through the year. The ones you're really talking about that are back-half loaded are more interest rate sensitive markets like housing and auto, where it's a little unclear exactly when interest rates get to a point that encourages people to start selling their existing homes or how affordability works on autos between interest rates and just the pricing that the car companies are choosing to pursue. They've increased prices a lot over the last three years. So how they sort of manage that pricing is that I expect it will start to come off a little bit. So those kind of markets are probably going to be a little bit more back-end loaded than front-end loaded. Consumer durables probably in between those two stories and the rate at which it grows. So I don't think we're waiting for the back-end -- the back-half to be strong. I think we'll have decent growth, but it's really early to say right now. There's a lot of uncertainty in the macro economy. You got an election coming up, you have instability in the Middle East. Without a doubt, we see it in the fourth quarter, brands and retailers are being cautious right now. And they're uncertain about where the economy is headed and so they're being a little bit careful, which is understandable in the context. And so I think we need to get to January past the election and some of these other sort of uncertainties right now and see how the economy looks and we'll obviously provide you a good update in the fourth quarter call.

Mike Sison: Got it. And then one quick follow-up on the methanolysis demand for 2025. Do you have a baseload of sort of orders heading into 2025? And is there any impact from the election on that? Do you think if one way goes the other could either kick-start demand or maybe keep demand a little bit tepid?

Mark Costa: Well I'm definitely not taking the election bait, but --

Mike Sison: Off at the side.

Mike Sison: Yes. I think that there's a lot of uncertainty that in an election that holds people up and you could debate the pros and cons of what Trump or Harris would do. So I think we just need to wait five days and see what happens. But when I think that -- when you talk about these uncertainties, I think that they're not going to have a direct impact on what we do right now in any significant way. I think the markets are stable. I don't think the policy changes that could be made right now would have a significant impact one-way or another.

Mike Sison: Thank you.

Operator: Our next question will be from the line of Kevin McCarthy with VRP. Please go ahead, your line is open.

Kevin McCarthy: Yes, thank you, and good morning. Mark, your additives and functional products business wound up doing quite a bit better than you would have thought three months ago. And so can you talk through what drove that? It sounded like heat transfer fluids was part of the equation there. Cognizant (NASDAQ:CTSH), I believe anyway, you were expanding capacity in that product line in Alabama. Is that done? And did it help your business? Or is it unrelated and really you garnered the upside from other factors. Maybe you could just help with the forward trajectory there as well?

Mark Costa: So, as the functional products has done well because it's just an excellent execution on every dimension of running the business. I wouldn't aside into any one thing. Without a doubt, foods came in a little bit better than we expected. But when you add it up for the year and even for Q3, it was great execution in getting volume in coatings. It was great execution in growing the care chemicals business. It was great execution in minimizing the decline in Ag, that normally happens as you go from Q2 to Q3 was not quite as much as we expected. So it was lots of little wins that added up to delivering excellent performance. It's great commercial excellence in managing pricing back to the question a moment ago and defending the value of our products across our portfolio and improving and maintaining spread. So I would give credit to the whole team on how they're just delivering really good performance in a soft environment.

Kevin McCarthy: Okay. And then as a follow-up, perhaps for Willie, can you comment on your capital expenditures for 2025 relative to the diminished level of $625 million this year? And how does -- how does the ramp in Texas factor into next year's budget?

William McLain: Thanks for the question. Just as a reminder, I'll call it, baseload maintenance capital is about $350 million. This year, we're going to come in around the $625 million. We're still setting our capital plan on the velocity as we look at, I'll call it the startup of the Longview, Texas facility. But you can expect it to potentially be around where we started this year, which was around that $800 million mark. But we'll talk more about the Deep Dive and you'll hear in three weeks as well as on the Q4 call as we finalize plans.

Kevin McCarthy: Great. Thank you very much.

Operator: The next question will be from the line of John Roberts with Mizuho. Please go ahead, your line is open.

John Roberts: Thank you. Is the methanolysis unit running at full rates today?

Mark Costa: No, John. I mentioned earlier, we're still in the start-up. So it was a month long planned shutdown. We shut down all of our polymer lines for an annual planned maintenance every year in this time frame. And this plant shut-down in alignment with it. Otherwise, we would have nowhere to go with the monomers coming out of the plant. So it's not yet started up, but we're in the final days of start-up right now.

John Roberts: Okay. And then I think you mentioned that Aventa is in corporate and other. When does it move to the -- it will move to the Advanced Materials segment or will it move to fibers because it's cellulosic? And when do you make that move?

Mark Costa: CFO is looking at me to answer that question because we're still debating it. We're -- we're excited about getting it ramping up. We haven't made a final decision about where it's going to land inside the company. So we'll let you know once we decide. We'll probably have a point of view on that by the time we get to January.

John Roberts: But do you have a timeframe when it moves to out of corporate?

Mark Costa: I think it will move next year. We just haven't decided which segment yet. There's good logic for both segments as you just mentioned. So we're just working through the final decision.

John Roberts: Great. Thank you.

Operator: The next question will be from the line of Laurence Alexander with Jefferies. Please go ahead, your line is open.

Laurence Alexander: So good morning. I have two questions. First, on your comment about biodegradable microplastics as a side effect or a consequence of your new products. Where are you seeing demand pull, if anywhere related to that as a concern? And then secondly, we spoke quite a bit over the last couple of years about the amount of innovation around the automobile that helps you grow faster than the market. Can you just walk through where you're seeing a similar a similar demand plus driver in either construction or appliances, durable good -- those types of durable goods, just to get a sense for what your operating leverage might be on a cyclical recovery, like how much faster you might grow relative to what the multiplier effect might be?

Mark Costa: So I'm sorry, you just broke up a little bit on the first question. What was the first part of your question again?

Laurence Alexander: So around the microplastics comment you made, it was a very quick comment, but just if you can unpack it, where you're seeing it actually be relevant to demand pull?

Mark Costa: Yes. So when it comes to plastic waste, people don't want to go to landfill, they don't want to be incinerated and they certainly don't want to go into the environment. And a lot of things, a lot of consumer packaging like most PET packaging is very recyclable and should be captured and recycled in some combination mechanical as well as what we're doing in chemical recycling. So that's great, but there are applications where you just can't do that. So a meat tray that's got a bunch of bloods that sort of into it is not something that's getting recycled and a lot of other food waste containers. And so it just ends up in landfill, and there needs to be a solution. And so the whole point here is we don't want staying in landfill and we certainly don't want it breaking down to small parts and becoming microplastics. So, and the good news about our cellulosic is they -- in any form or fashion they will not persist in the environment as a microplastic that's been sort of certified in Europe by their sort of regulatory process and testing as well as compostable. So we have a great solution. It's primarily driven by, I don't want waste in my environment and there are policies in several states that are banning polystyrene in food packaging where they have to go to something else. And this is by far the best solution on the marketplace as far as we can tell. So it's all sort of all connected back to that plastic waste thing and in these specific applications. On your second question in regards to do we have underlying trends driving above-market growth? Certainly in the specialty plastics business, that's been true for well two decades, but certainly in the last decade. So Tritan has grown because it's a better product in many applications than polycarbonate functionally, but also because it's VPA free. And so you've got lots of growth happening across specialty plastics where we're growing because we have a better performing product or safer product happening. In coatings, we have the same opportunities. Tetrashield, which is a -- the coating version of Tritan, you've got growth happening in those markets and underlying growth to be VPA-free, PFAS free. So we have a lot of different places where markets are being accelerated.

Greg Riddle: Thank you. Let's make the next question and the last one, please.

Operator: Yes, of course. The next question is from the line of Salvator Tiano with Bank of America. Please go ahead.

Salvator Tiano: Yes, thank you very much. Firstly, I want to ask a little bit on the Longview FID. So I know you had a major customer there before, but you were still waiting for a bunch of other things, including potentially more customers. So I guess, what changed that you decided to approve the plant at this point. Did you get any more any more customer commitments, for example?

Mark Costa: So the decision to move forward on the Texas project, one, we already have a very large customer, Pepsi that baseloads a plant, which we don't yet have for the French project as a contrast. And so we feel very good about that side of it. This plant is going to be designed to include flexibility for serving specialties. So the combination of Pepsi and the confidence we have around serving some of the specialty markets makes us feel good about that. And we got the DOE funding, as we talked about earlier that obviously supports the economics and the engineering work is pointing at a capital cost that has an attractive return. But that engineering work, by the way is still underway and needs to be completed. But everything came together in the sense that we had clarity about this and that clarity and commitment is important for continuing to sort of sign up new customers at this stage as well as get some of the incentive work done.

Salvator Tiano: Perfect. And just wanted to clarify a little bit. This year you also had a big earnings benefit from higher operating leverage from operating at higher rates. How should we think about that next year? Is it going to be an improvement or have you reached the normal run rate at this point?

William McLain: Yes. So we have seen the benefit that we highlighted earlier this year with the operating leverage across the company and specifically in Advanced Materials. We will have further operating leverage in 2025, as Mark has highlighted as with the Kingsport methanolysis, as we have, I'll call it, stable operations and have the uptime behind us. So look to have further leverage in 2025, and we'll give an update on guidance on our Q4 call.

Salvator Tiano: Thank you very much.

Greg Riddle: Thanks again everyone for joining us today. We appreciate your time and your interest in Eastman. I hope you have a great day and a great weekend, and I just want to end with let's go Dodgers. Thank you very much.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.

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