Good day, everyone, and welcome to the Eastman Chemical First Quarter 2020 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical, Investor Relations. Please go ahead, sir.

Okay. Thanks, Molly, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McClain, Senior Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. In case you missed it, yesterday after market close, in addition to our first quarter 2020 financial results news release and SEC 8-K filing, we posted slides and related prepared comments in the Investors section of our website. This is new for us, and I hope it's helpful to you. Now before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in the company's first quarter 2020 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 2019 and the Form 10-Q to be filed for the first quarter 2020. Second, earnings referenced in this presentation exclude certain non-core and unusual items and used in adjusted effective tax rate using the forecasted tax rate for the full year. 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 first quarter financial results news release, which can be found on our website. With that, I'll turn the call over to Mark.

Thanks, Greg. Before we turn it over to your questions, I want to take a few minutes to make some comments. We all recognize that our world is facing unprecedented challenges right now. COVID-19 isn't like anything we've ever seen before. For those affected by the pandemic, I want to recognize how difficult this must be for what you're experiencing. So many are helping too in this difficult time, in the healthcare community, our first responders, and government and local communities. And to them, I want to express my gratitude for helping keep us safe. As importantly, I want to thank the men and women of Eastman. It's been said that characters are revealed through adversity and the Eastman team has demonstrated its character and risen to every challenge we've faced. We've come together in tremendous ways to keep everyone safe, all while keeping our operations going. I particularly want to thank our operators, our mechanics, our electricians and their families who've kept our plants running and getting our products out to our customers every day. And to the many Eastman employees who are working from home or on site. Thank you for continuing to support our customers and keeping business going. So to you, my colleagues at Eastman, thank you for your courage, your ingenuity, and your dedication. You're truly making an incredible difference in a material way. Turning to Q1. We had a strong first quarter in earnings and even more impressive free cash flow generation. This quarter demonstrates what Eastman can do when we have a day of sunlight between the trade war starting to moderate and COVID starting to escalate. Given all the uncertainty related to COVID-19, it's extremely difficult to predict financial results for 2020. So we are withdrawing our guidance. We did see some impact in the first quarter as we attribute a $20 million to $30 million EBIT decline to the impact of the pandemic. Our diverse end markets mitigated some of this. While we saw a substantial impact in transportation and textiles, we also saw stability in a number of our other markets. As we look forward, we expect to see increasing challenges in transportation, textiles, and energy markets. We also see a number of markets providing stability, such as consumables, medical, personal care, and agriculture. There are markets where we expect a mixed impact, such as building construction, consumer durables, and industrial chemicals. None of us can know what will actually happen with how we attempt to restart these economies across the globe. We can take some insight and hope from the recovery we're seeing in China. We are far from having insight into how North America and Europe will restart. We were able to continue to lead from a position of strength because of our innovation-driven growth model and our operational discipline. The benefits, especially in this uncertain time, have never been clearer. We have a long track record of transforming our portfolio towards specialties. Within this portfolio, we have built an outstanding innovation capability as well as a decisive operational execution capability. Eastman has industry-leading cash flow, which we have taken aggressive actions to sustain in this current environment with a strong balance sheet and significant sources of liquidity. In addition, we have a proven track record in our specialty businesses of driving growth above end markets with our innovation-driven growth model. That said, in this incredibly uncertain time, we are focused on the actions we can control and are exceptionally well positioned to weather this environment. We are realizing stability from our diverse end markets and leveraging our strong customer engagement. We're taking significant cost actions, adjusting our operations to the current demand environment, significantly reducing discretionary spend and deferring some turnaround of assets. We're expecting strong free cash flow this year with working capital expected to be a source of greater than $250 million beyond previous expectations. We reduced our expectations of capital expenditures by approximately $100 million to a range of $325 million to $375 million. Finally, we will maintain our disciplined approach to capital allocation, with a focus on our strong dividend and a significant debt repayment program, which we now expect to be substantially greater than $400 million for the year. All in, we've made great progress strengthening the company, and you can see the evidence in the first quarter earnings and cash flow. With that, Willie and I are happy to take your questions. Operator, we're now ready for the first question.

Thank you. Our first question will come from Vincent Andrews of Morgan Stanley. Please go ahead. Your line is open.

Thank you and good morning, everyone. I didn't see your prepared remarks, but I'm happy you're doing them, and I look forward to reading them in the future. I did just skim them. But with that said, Mark, I'm wondering if you can just talk a little bit. I saw in the slides, you talked about April being down 15% versus March, and it sounds like March was worse than the other two months of the first quarter. But maybe you could just contextualize April? How much it's down versus the overall first quarter?

Sure. So as we said in the slide, we really try to provide some perspective across the markets and sort of grouped them into three categories, Vincent. And it's good to hear you and you sound healthy as well. There are - about 40% of our markets are quite stable and doing quite well, being relatively flat sequentially. In those markets, you've got things like personal care, consumables, which is a range of things from packaging adhesives to packaging polyesters, etc. The medical pharma parts are good, ag, and nutrition. And all those markets are going to hold up relatively well in this. Then you've got somewhat challenged markets that are like building construction, consumer durables, electronics, industrial chemicals, where they're actually still also sequentially declining, as you can see in April, but we expect those to continue to sort of do relatively okay to the more impacted ones in transportation, textiles, and energy. So there really are three things. That diversity of end markets, especially that 40% that gives us a stability in the world is incredibly helpful in this time. And we would expect that to sort of continue through the quarter. What we call mixed impact are a little bit harder to call. I think there's some of that, that's holding up well, like consumer durables, a lot of our innovation and Tritan and things like that are allowing us to create our own growth. So we're seeing stability from not just markets but innovation in some of those applications. Architectural coatings are holding up really well as well as our architectural interlayers. But it's reasonable to expect some of that going to moderate as existing projects might be completed, etc. But through Q2, I think it's going to be okay. The question is what happens longer-term to some new starts in housing. The real challenge, of course, is in transportation, which I think is extremely well documented, where you've got auto plants, tire plants shut down all over the world, fortunately, China coming back. But we track every tire plant, every auto OEM, every window plant down to the model and are mapping all that out. As you know, they're all shut down now. The question is when are they going to start back up? And we see that recovery and that sequential improvement in China already, but obviously, U.S. and Europe are still a question mark. So we've been conservative. We've assumed that the auto OEM market's going to be down from an OEM production point of view, be down 50% for the quarter, which is on the sort of more pessimistic end of the range of the consultants out there. That's really to inform our production and inventory strategy as opposed to trying to say we can predict earnings at this point given the uncertainty. Overall, I'd say April's a good indicator of the quarter. I think we could expect it to be a bit more challenging in May as the supply chain line catches up to us with a lot of these plants being shut down. Then we presume that, along with the consultants, that things will start back up to some degree. And you'll see some of that benefit in June. Does that answer your question?

Yes. So just to recap, it sounds like you're saying being down 15% in April, sequentially, it's probably about right. It'll be a little worse in May, and may be a little bit better in June. But if we think sequentially between 2Q and 1Q, we could think about your volumes being down. I'm just going to say 15% to 20%. Is that fair?

I mean, I think that's a range to start with. I just really want to emphasize for everyone, no one knows what's going to happen here, right? I mean, there's just a phenomenal amount of uncertainty when we don't even know how the U.S. and Europe are going to restart yet. There are a lot of questions that we have to answer that go with that. So we can get people back to work in a lot of companies, but it's really a question of what consumers are going to do. Are they going to go back to restaurants? Back to their more normal life activities? Travel? Shop in retail stores? Buy cars? We don't know how the consumer's going to behave coming out of this, which will then dictate when auto plants start up, when tire plants start up. Housing is going to play out when it comes to - they've got great DIY and projects that they're finishing in construction, but how many new starts are going to happen? So there's a lot of crystal ball gazing. I think April is informative, and it's one third of the quarter. What we're going to do is be conservative, really focus on cash generation, manage what we can control. We will give you updates through the quarter as we get more insight.

Thank you. Our next question comes from Jeff Zekauskas, JPMorgan. Please go ahead. Your line is open.

Thanks very much. How did you make so much money in Chemical Intermediates on a sequential basis? I think you were up over $8 million, maybe it was $20 and $20-ish million in the fourth quarter. Can you talk about the dynamics? What are you doing right there?

Well, we have a great commercial team there that does things right every day and how it optimizes every market to place products at the best price possible and optimize our big engines that support our specialty businesses. You've got to remember, Chemical Intermediates role is clearing the excess capacity that isn't going into the specialties. My hats off to that team in doing that. It's a dynamic time. We did have a very strong sequential improvement from Q4 to Q1. It was really driven by four factors. The first was strong volume growth. We saw strong improvement in ag, alkylamines, in - that market had been pretty depressed. There's a lot of destocking going on in the fourth quarter last year. The ag market came back to life. Those are high margin products for this segment. That was quite helpful. We also saw strong demand in a lot of other markets, acetyls, plasticizers and a few others. So volume was the biggest driver of all the levers that improved it. The second was a lack of shutdowns. We had a huge shutdown going on in the third and fourth quarter last year. A lot of that expense was in the fourth quarter. So we didn't have that. That was a $20 million benefit in itself from Q4 to Q1. The third was an improvement in spreads. Our spreads got back to being about where they were in Q1 2019. That was a bit of an improvement from Q4. Some of it was cracking spreads got better in January and February. Unfortunately, they started to compress a bit in March, but we got the benefit of that. The last part was the licensing. We had a sort of robust multiyear licensing program that we were driving in our fourth quarter call in January, and we got the first installment on one of those licenses in the first quarter. I'd say that was a smaller part of the story, but progress. There's more of that to come this year when we complete that license. As we've said, we have a portfolio of licenses we're looking at doing as we go into the next couple of years. So it was just great success, Jeff, on sort of every line of the income statement and the assets ran well, utilization was good.

How representative are those operating earnings for the remainder of the year? Or what are the headwinds or tailwinds that you foresee? And when you talked about April being down sequentially by 15% for the company as a whole, how much was April down year-over-year?

April, compared to last year, was similar to the previous quarter. Unfortunately, the CI store won't perform as well as it did in Q1, and we are facing some challenges as we enter Q2. One major factor is volume; while some areas remain strong, the COVID-19 impact is causing a slowdown in many markets. Our chemical needs are tied to end markets that are experiencing these challenges, leading to demand pressure across multiple sectors. Currently, due to the oil situation, we are not able to export as much to Asia after fulfilling North American and European markets, which limits our capacity. The Asian markets have not fully recovered, and margins are low. This results in restricted export volume in the current circumstances. Unfortunately, volume will be a headwind. Additionally, as you know, cracking spreads are becoming more difficult as we enter this quarter, which will also create some challenges. As we reduce operations due to a decline in the specialty business, we expect to see lower asset utilization at our major facilities in Longview and Kingsport. The higher cost per unit, combined with lower rates, will impact both CI and specialty. With all these factors considered, we anticipate a significant decline as we move into Q2. Overall, while oil affects the corporate level in a neutral to positive way, it will still impact CI.

Thank you very much.

Our next question comes from Frank Mitsch from Fermium Research. Please go ahead.

Good morning, Greg, yes, the prepared remarks were helpful. On the cost reduction front, you had outlined that you were going to save $20 million to $40 million this year and $100 million over a 3-year period. That's been accelerated to $150 million this year. Can you talk about the buckets that fall into? How are you going to get at - how are you going to build up to that $150 million cost savings in 2020?

Yes. Thanks, Frank. This is Willie, and I'll lead on that question. As you think about - Mark's already highlighted how we're changing our operational footprint and becoming focused on cash here in late Q1 and planning to run that way for the rest of the year. That enables us to reduce the level of contractors on-site. It also results in changing the scope of some of the maintenance, etc. Another key lens to that is discretionary spend. We've stopped travel, reduced consultants and third-party services as you think through that. Those are the key factors. We did get some of that benefit in Q1. It was a small amount. We expect that to increase in Q2 to be about a third of the $150 million. That third in Q2 will probably only partially offset the impact of our idling plants and reducing operation rates, and then the remainder would be in the second half of the year.

As I think - Willie, as I think about what you just said, it sounds like a lot of that is more transitory. At some point, you are going to have contractors back on-site. You are going to travel, etc. So should we be thinking about this $150 million as kind of a 2020 reduction versus your previous plan? And then that will dissipate in 2021 and beyond?

So Frank, for the second half of the year, we are going to be focused on improving the long-term structural cost of the company. We highlighted that on our year-end conference call with a $20 million to $40 million. We're looking to accelerate that and transform the operational as well as our functional footprint for the long term. But you're correct. In the near term, we had pivoted the actions on the temporary front and made what has normally been fixed cost variable. Some of that will come back. You have to remember, we have strong variable margins in our specialty product lines across Advanced Materials and AFP, and they will more than obviously offset that with those spreads.

Frank, just to add, we recognize that a good portion will come back. It's important to keep in mind if demand really doesn't come back much, we can extend these savings. For longer than what we've currently assumed to ride through even a more difficult time. On the flip side, I think we're learning a lot about how we can operate and be efficient in this work-from-home environment. There are different operating modes, so we're embedding that into our thinking about how to improve our long-term cost structure. We're certainly escalating and accelerating what we intended to do on that $100 million-plus program to get more of that as we go into the back half of this year as well as next year. So there are a lot of actions we're taking to sustain through this second phase of activity, our cost. The key thing I want to emphasize, though, is none of what we're doing is cutting our innovation programs. We are optimizing for this environment. We're very focused on cash, but we are also focused on making sure that we have a long-term strategy in place as we come out of this to have strengths to create our own growth when the markets actually come back to life. Through innovation and continue to have that kind of engagement with customers. We're still actually getting a lot of engagement with customers today. On innovation, even in this sort of virtual environment, we had a number of wins. We've even recycled Tritan content - product that we launched. We've already got three wins on that. Nalgene, Camelbak and a couple of other big brands have adopted. We're getting wins on our recycled cellulosics as we speak, two of the largest ophthalmic manufacturers have seen the power of a half bio content, half recycled content product for their offerings, continue to get wins in Tetrashield for can packaging and food where we've got just great chemical resistance and toughness and non-intent BPA. The good news is innovation is still live. We're still focusing on keeping those programs going, but we are very aggressively going after every other bit of cost.

Very interesting. Thanks so much.

Our next question comes from Alex Yefremov of Keybank. Please go ahead.

Thank you. Good morning, everyone. I would join everyone supporting the prepared remarks. Question on free cash flow. You have about $400 million in dividends. You said substantially more than $400 million in debt repayments, maybe another $50 million in buybacks. So can we say that kind of the floor for your free cash flow is about $850 million and it's really substantially more than $850 million this year?

Yes, let me answer that question. We expected it. I want to start a little bit just back on the market comment. Obviously, demand is unpredictable. That's why we pulled earnings guidance. We are in the position to sort of understand what happened in April, but not know what's coming for the rest of the year. We have to make some assumptions, and we are modeling scenarios like everyone else is doing different kinds of recovery out of the second quarter. We do believe the second quarter will be the toughest quarter with the complete shutdown of these global economies, and the indication as we see it now that people will start trying to come back to life through this quarter. I want to emphasize this diversity in markets is a huge help for us to maintain stability. The 40% that's very stable and even 35% that's sort of mixed is providing a lot of stability to offset the challenges that we have in the transportation and textile side. There's a lot of uncertainty there. We do see price stability. Great price stability in the first quarter, and we expect price stability to continue into the second quarter in the specialties. We are getting some benefits there from raw materials and would expect that to continue through the year. As I said, low oil is sort of a neutral to positive event for the overall portfolio. So that's all we know about the markets. In that great uncertainty, what we have to do is focus on what we can control. What we can control more so is a lot of our cash generation outside of cash earnings. We're doing everything we can to stay close to our customers, make sure we don't lose share, and keep our innovation going when the markets recover. We've acted quickly to idle all of our plants or campaign them or do fuel utilization. We moved very quickly in March when we saw this was going to get worse outside of China with the COVID spread. We ramped back raw material purchases and everything else in the plant so that we could take advantage of what demand does exist to pull inventory down, and we're doing a great job of that. So working capital $250 million, we think will be released. With all the cost actions really described, $150 million on the cost side and about 40% of that will flow into the second quarter number on that $150 million and reducing CapEx $100 million. So lots of levers that we're pulling. When we look at that and run our scenarios, obviously, the dividend is our priority. We're going to pay that. It's a great strong dividend. It's been increasing for over a decade. On the delevering, we think we can do substantially more. And what that means to us, even in a very slow economic recovery, we believe we can do greater than $1 billion of free cash flow. Obviously, if the recovery is better than that, there's upside. When we say substantial, it's substantial that we're going to make a lot of progress in our delevering. People should not use that to reverse-engineer earnings. It's what we're trying to do on cash flow and the levers that we can pull. We can pull even harder in inventory if we need to, we can pull harder on costs if we need to. It's a cash-centric strategy that we're operating right now.

Understood. Mark, very helpful. Just to follow-up on your margins, it's understandable that your volumes will affect your margins. In terms of the spread between price and raw materials, by the end of the year, should we expect that spread to be at a healthier level than, let's say, the back half of 2019 or even the first quarter? Related to that, if you could update us on your view on the methanol contract headwind this year?

Sure. I'll take the first part of that question, and I'll let Willie answer the contract question. So spreads in the specialties, we do expect to improve our spreads in Advanced Materials with the raw material tailwinds that we have there. With the two-thirds of AFP as we sort of separate that out for you, we expect spreads to improve with good price stability relative to the raw material declines. In all those areas, I think we see that Fibers have very steady spreads for the year. All that is, I think, a place where we can get some additional cash and earnings benefit. The third of AFP, I'd say, the tire adhesives, it's going to be more stable spreads, but at the challenged levels we had in the back half of last year. We don't see it getting a lot worse this year relative to the second half of 2019, but we don't expect it to get a lot better given the sort of competitive dynamics in that spot. In Chemical Intermediates, as I said, we've got some challenges there on spreads. Something important to note about this oil topic is our crackers and the spreads there are a little bit different than other companies'. It's not nearly as challenged at this point as it was in the past. From 2010 to 2016, we had a huge tailwind when oil went up and we had stranded gas in the U.S. that let ethane and propylene also be stranded and really cheap. Our crackers are propylene-centric because that's what we make specialties from. That's why they exist. We're much more propane-based in our crackers. We made the RGP investment to further reduce the amount of ethylene we produce, replacing some of the NGL feeds with RGP. That changed the dynamic. Now we're 70% to 75% propane, 20% to 25% ethane, the remainder 5% to 10% is RGP. Propane isn't stranded anymore, right? It was stranded up through about 2016, but they added so much export capacity to export propane. Now it's reconnected to the oil market. Propane-propylene spreads are a lot more connected than ethylene to ethane. The volatility will still be a challenge, but it's not nearly the challenge that we would have faced back in 2015 and 2016. We have some spread. It's more about competitive intensity than it is about cracking spread that's going to pressure some of these margins in this competitive environment. Overall, we have good shape on spread to be a bit better this year than last year.

Okay. Mark, on the methanol front, just to follow-up quickly, we made the transition, as we highlighted in January. We had marked that contract to market. I would actually say it's actually a slight tailwind on earnings and a modest headwind on cash overall. We're exposed to coal-based methanol as well as natural gas and market. We're well positioned on the methanol front.

Thank you. We will take our next question from David Begleiter of Deutsche Bank. Please go ahead. Your line is open.

Good morning. Mark, just looking at Q2, thinking about how should we think about decremental margins in the specialty businesses given the asset utilization headwinds you've called out here?

I'm going to let Willie take that one.

Yes. Thanks, David. On the decremental margin front, we've highlighted the fact that we've idled plants, we're lowering capacity utilization. A lot of that is focused on our transportation, textiles, and energy end markets, and that's predominantly in Advanced Materials and Additives & Functional Products. As you think about AM, we've previously talked about how the margins have shown through as the specialty and premium products have grown. That's because of the fixed cost leverage as they've been able to grow. You can expect a little bit of the reverse here in Q2 as we focus on maximizing cash generation and reducing costs in this environment. However, you should expect on the recovery that as the demand recovers for these businesses that then it would bounce back. A little bit of contrast between AM and AFP is the fact that Advanced Materials has idled more plants, whereas Additives & Functional Products has slowed those down. Additionally, given the specialty nature and the linkage across the streams, there is more fixed cost to and capital involved in those specialty product lines that result in the decremental margins and fixed costs being worse. When those variable margins come back, the reverse is true, and we would expect to see that in the second half of the year.

Got it. And Mark, just on this - I'm sorry.

Go ahead.

Yes, just on the strategic alternatives process, that third of ASP that you highlighted back in October, any update or progress you made on that initiative?

Yes, David, let me go first, and Mark can follow-on. We had several interested parties pre COVID environment, but it's difficult to get a transaction done now. Obviously, we need to focus on the earnings impact of this event. We are also focused on restructuring these businesses right now and continuing to evaluate our manufacturing footprint in these businesses, and we'll have decisions soon on those. Additionally, we're taking costs out such that on the other side of the COVID environment, we can focus on other strategic actions that we can take with these businesses.

It's not exactly a surprise that we'd be sort of challenged from a process point of view. The thing I want to add beyond just the restructuring activities, and we intend to be aggressive there and hopefully make some decisions here soon about our asset footprint, the innovation is actually very attractive to potential interested parties and is going quite well. Our new Crystex that is far superior to the competitors in the marketplace is getting a lot of adoption more than we thought. That's one plant running well right now in this tire environment. We’ve had to increase rates there because of the demand for it. It's good to see that the innovation still is attracting attention and adoption, and it's at a better price. Same is true in tire resins. We've been launching and trying to validate a new set of differentiated tire resins. We've virtually, once again, had progress innovation-wise in verifying and validating that with a couple of big MNCs seeing the value and wanting to move forward to those programs. Even over in adhesives, our new UltraPure, sort of odor-free, VOC-free resin is getting a lot of adoption right now even in the context. The innovation's important. It's all part of restructuring the business and improving it while we have it as well as making it more valuable to other people. So we just have to get through this short-term environment.

Our next question comes from PJ Juvekar of Citi. Please go ahead. Your line is open.

Good morning, Mark, it's Eric Petrie on for PJ. How much did your premium products and Advanced Materials grow in the first quarter? Or were there destocking actions by auto OEMs for interlayers as well as head-up displays?

It's somewhat of a mixed situation between the automotive sector and the rest of the business. Two-thirds of the revenue from Advanced Materials performed strongly, driven by robust engagement and volume growth across various applications, particularly in the more stable areas we highlighted. Packaging within consumables showed impressive results, and we saw solid, stable performance in the medical sector. It's significant to note that the automotive segment, which constitutes one-third of our revenue, is critical to our earnings. The second largest market, consumer durables, performed well due to the continued growth of Tritan. The medical sector remains the third largest, with stability and profitability. The fourth is the consumables market, which is stable, and the fifth is architectural, which is also holding up relatively well. This overall performance has contributed to the increase and stability in earnings. The automotive sector, which represents a high-margin area for our company, saw good demand in January and February. However, demand decreased significantly in March due to the escalation of COVID-19. This resulted in a $15 million to $20 million EBIT headwind, primarily linked to transportation issues in March. Overall, most sectors are maintaining their performance well, except for transportation. Prices remained stable, and raw material costs were beneficial for the quarter. Asset utilization was generally good in the first quarter, but we expect to see its impact more clearly in the second quarter.

Helpful. And then secondly, some paints and coatings companies are guiding volumes down for the second quarter by one third. Are you expecting similar declines?

In automotive coatings, we would expect to see a pretty dramatic decline, as you saw. We're assuming OEM production is going to be down 50% sequentially. So automotive coatings are going to track that and be quite a large headwind. On the other side, architectural coatings seem to be holding up a lot better based on what we're seeing and what I heard the coating customers that we have say earlier this week. I think that number you're quoting is a bit of a blended number. We have two markets that have very different tracks between architecture and OEM - auto OEM.

Yes, good morning. Within your AFP segment and AM segments, can you walk through the products where your competitors would base their chemicals off of oil? So even if they have lesser quality, maybe with this lower oil environment they will push harder on the price?

Sure. In Advanced Materials, oil drives a lot of the raw material costs for pretty much the entire segment outside of the cellulosic products, Duffy. In that area, you have that potential. So far, we've seen great price stability. Paraxylene was a tailwind all last year. Prices have been holding up relatively well. Starting to give some back. To be clear, as we've said in many calls in the past, you don't hold on to all of it, right? You've got to treat your customers with respect and share some of the raw material value, and we're going to do that. Still, net, I think it's going to hold up quite well from what we can see. Things like Tritan, where we're the only competitor in the world, we've got a lot of control over pricing. On the auto-related markets, interlayers are annual contracts. Those prices got established last year. They don't have a lot of movement to them when it comes to raw materials within the year. In performance films, it's also very price-stable. They're a consumer product, and our prices are pretty stable there. The value we present in performance films is not remotely connected to raw materials. Overall, I'd say that segment is going to have some prices coming down a bit this year with raws, but hold up really well. In AFP, if you go to the two-thirds of AFP that we called out. Coatings, specialty fluids, Care Chemicals, crop, etc., that's going to have pretty good price stability. It's had good price stability through last year and expect it to continue to have really good price stability this year. There are some cost pass-through contracts in Care Chemicals and coatings that we'll pass on some of those raws, but the spreads will be stable, which is in the end, all we want from a long-term point of view. You will see some increased price competitive behavior in adhesives and tires in the one-third, but that's also sort of stabilized. They got very competitive by the back end of last year. I don't think spreads are going to compress a lot more from that to this year. Overall, I'd say we're in pretty good shape Duffy, to either neutral or improving, even in this environment. That portfolio, Fibers, is totally different, as you know, where those prices at 1% down will be that for the year. In CI, I think I've already addressed. In terms of transportation demand, we are primarily referring to autos, tires, and aviation. All three sectors are facing significant challenges, with tires and aviation being more affected than auto manufacturing. While external data is available, currently, no one is flying. The increase in air travel is anticipated to recover at a slower pace than car purchases. Initially, the potential upside could be that fewer people are inclined to use mass transit right now, which may lead to higher car sales as individuals opt for personal vehicles instead. We are not including that possibility in our forecasts, but it could represent an opportunity. The demand for tires is down, not only on the original equipment manufacturer side but also in the replacement tire market due to decreased driving activity. Overall, this segment is experiencing a decline of about 40%.

Good morning, everyone. I'm pleased to hear you're doing well. It's surprising to think it was only a couple of months ago that we were at an event, but I wanted to revisit Frank's earlier question. You mentioned that for the second half of the year, you expect to see more of the structural savings. Could you elaborate on the timing of those ongoing savings as we progress through 2021 and into 2022? Are you still aiming for approximately $100 million in structural cost reductions, or has that figure increased? Will any future announcements regarding asset optimization be factored into those numbers? Is that potential for extra benefit?

The $150 million, obviously, a lot of it is connected to demand. That temporary cost relief will come back because it's going to come back with revenue that has very high variable margin to pay for it. The structural side is what we said. We have a lot of work going on, an extensive, comprehensive program on an operational transformation project to look at every element of how we operate from supply chain, manufacturing, inventory management, etc., to take out significant costs, that analysis. The work going on is discovering more opportunity than we expected, and we'll give you more insight on that as we refine it. We're excited about that, and that will allow us to escalate and increase that $100 million as our long-term goal to get more of it into the back half of this year that would annualize into a real helpful benefit for next year. It does include asset rationalizations. We're going to address our Singapore plant, which has material benefit. With the tire situation, we will look at optimizing our tire footprint, asset footprint, and we'll make some decisions around that. It is a combination of better maintenance, better network optimization, better supply chain management, more efficient operations as well as asset rationalizations, pulling every lever we got. We're going to look at SGA too and figure out how we take our business operating model that is really working phenomenally well. We built and developed that over the last couple of years in improving how we operate, make commercial and operating decisions today, see if we can optimize it for those efficiencies.

That's helpful. If I can find one more in. You mentioned you're the only producer of Tritan, which is frankly the case, but the product does compete against polycarbonate and SAN. The other two, I would imagine, are seeing some pretty significant price deflation. Does the value proposition of Tritan change at all here? Does that possibly limit growth on the back end as we move out of this?

Tritan wins in the marketplace for two historical reasons, and now it has a third. Historically, we launched it into specific applications where we had better product performance compared to polycarbonate. Then, of course, BPA became an issue. We picked up a lot of share and a lot of stability in our pricing because we have BPA free, and polycarbonate's not. That helped a lot and allowed us not to compete against polycarbonate anymore in our applications. SAN is out there, but it's brittle and breaks if you drop it; it doesn't have the toughness at all compared to what we do. It's a real downgrade if you want to go that product. Now people are starting to worry about styrene, especially in Europe. We're getting a lot of conversations from brands wanting styrene-free solutions. That's also helping us. The third thing we've added that is going to be significant for the entire portfolio in specialty plastics is recycled content, whether it's Tritan or other core copolyesters. We can now add recycled content through chemical recycling, putting recycled content into products without a compromise in performance. It's identical product, but it has recycled content. We're already getting wins. Nalgene, Camelbak, and a couple of other big brands are adopting it. We're getting wins on our recycled cellulosics. Two of the largest ophthalmic manufacturers are seeing the power of a half bio content and half recycled content product for their offerings, continue to get wins in Tetrashield for can packaging and food where we've got great chemical resistance and toughness. The good news is innovation is still alive.

Is there a market price premium? Are you catching that price premium on recycled content? Are you finding that people are willing to pay up for it?

We're not going to discuss that right now. That's a customer by customer basis. There is a value to this that I’m confident that our spreads will be equal to or better than our current spreads.

Thank you. Our next question comes from Kevin McCarthy of Vertical Research Partners. Please go ahead.

Yes, good morning. A couple of questions on chemical intermediates. Mark, I was wondering if you could expand a bit on your licensing activities. Last quarter, you had discussed some ethylene glycol market opportunities in-licensing. Was that the source of the revenue in the first quarter? How much of a benefit did you have? What does it look like for the balance of the year relative to the magnitude of the first quarter contribution?

I'll let Willie take this one.

As you think about what we said in January, we said we would get licensing revenue of roughly $25 million to $50 million over a three-year period. This first installment is a modest amount that we see on this. We would expect potentially more in the second half of the year as we hit additional milestones. You can think about it as being a little bit less than the $25 million on the low end.

Okay. With regard to volume in chemical intermediates, Mark, I think you called out four different factors there. One of them was strong volumes in ag. I was curious about your volumes in oxo alcohol. Did you see any sort of boost from isopropanol into sanitizers or COVID-related demand there? Or is that too small to matter in your mix?

I would call it a too small matter. There are certainly some boosts in the propanol area. We see demand holding up relatively well in some of these stable markets. In CI, where their products are going into those stable markets are benefiting from it. But I wouldn't call it a significant offset. The real benefits we're seeing on the positive side of the COVID-19 crisis is more in parts of specialty plastics. We're going into face shields and the barriers in grocery stores. You're seeing strong growth in some of that. Medical is doing relatively well. Pharma, etc. so there are places where we certainly see some benefits in that stable section of what we called out on that market map.

Appreciate the color. Be well.

Thank you.

Our next question comes from Matthew Blair of Tudor Hold. Please go ahead.

Good morning. I'm glad to hear everyone is safe. We think of Eastman as having a lot of connections to propylene, both on the commodity side as well as specialty side of your business. Given that refineries are a key source of propylene, could you talk about what impact, if any, you would expect lower global refinery run rates would have on Eastman here?

We expect the reduced rates on the refineries to help maintain a better PGP price. It's difficult to figure that out yet here in the second quarter. We do see PGP holding up relatively well compared to ethylene by a significant amount. That spread, therefore, to propane is holding up reasonably well. That's helping. I don't think it's going to cause a spike up in propylene at this point given where overall macroeconomic demand is.

I was hoping you could talk a little bit more about the dynamics in tires. Previously, you've highlighted your exposure to areas like commercial in replacement rather than OEM. Based on the March data, it looks like replacement is holding in better than OEM. I just want to clarify, is that reversing as you head into Q2 where these replacement tire markets are softening more than OEM?

I think the expectation of our tire customers is that they're both softening. Everything is soft, right? Our tracking shows about 90% of the tire plants shut down in April in the U.S. and Europe. Fortunately, they're starting to come back to life in China, but everything has just collectively gone off. There's a combination of destocking their channel, like we're all doing to focus on cash generation as well as uncertainty in demand. People will run with what they've got, especially in this period of shelter in place. We expect less replacement tires needed in the short term.

Appreciate it. Thanks.

Our next question comes from Mike Sison of Wells Fargo. Please go ahead.

Morning, guys. You all sound well and healthy. Mark, it's been a while since volume has been a tailwind, but hopefully, over time, things get better. Where do you think profitability or margins can get to if volumes return, maybe in a more normalized environment whenever we can get back to that?

If we look all the way back to 2018, before the trade war started and that got followed on by COVID-19, those margins we had back then were, I think, quite attractive and representative of where we were as a company and where we should be going forward. I don't see any reason that we won't have attractive margins in the two-thirds part of AFP and we're obviously stabilizing fibers. There's obviously uncertainty in CI and the one-third part of AFP. I think we can get back to 2018 and the performance we had back then.

As a quick follow-up, I think you mentioned you felt oil prices where they are would be neutral. I was thinking about chemical MB, which is a much smaller part of your portfolio. Your specialty business is much larger. Why wouldn't oil be more of a beneficiary given the lower prices and raw materials for your other businesses?

It is, and you're right. CI was 14% of our earnings in 2019. Not a significant part of our story. You've got two combined effects on CI at the moment because the oil price is so low, right? You've got the competitive dynamics, spread compression as well as reduced volume, which is not normal for that segment. Normally, they can clear all their volume. Because the price of oil is lower, it’s more difficult to access export markets. The combined effect is a little bit more extreme. It's a net positive when you look across the whole portfolio and the benefits in the specialties relative to the impact it has. Remember, not all cracking, right? The ACO amines business is stable. Almost all our business is cost pass-through contracts. Demand is going well in ag markets. Peak acid is small for us. The prices are stable because we primarily operate in North America. Those margins are fairly stable because that's the only asset we have.

Great. Thank you.

If you take the next question, the last one please.

Our last question today will come from John Roberts of UBS. Please go ahead. Your line is open.

Thanks. I'm glad to hear you all are well. That was an interesting observation Mark on cars, given no one's expecting any upside there. But my question is you've been transitioning some of the Fibers capacity to apparel, which is obviously going to be weak here for quite a while. Do you have the flexibility to shift back towards a cigarette tow if smoking activity actually stays pretty strong here over the next few quarters?

We don't have to shift back, John. The capacity we have in place to serve the tow market is sufficient. It's still stable, right? The market is still declining in that 2% to 3% range. We don't see growth changing in any meaningful way associated with the pandemic. The capacity is completely sufficient to serve that market. It's important that we have enough capacity to serve our customers there because security supply is extremely important to our cigarette customers. The capacity is repurposed towards textiles, and we're going to materially reduce rates to align with demand. We will have some asset utilization headwinds in the second quarter associated with that. We still see a lot of ways to grow and create our own growth. We need to get past the shelter-in-place mode. When people come out of that, I expect some will buy cars again, and some will buy clothing again. Our value proposition has really been strengthened by adding recycled content to our bio content. Now we're offering a northern Indiana fiber half bio from a certified sustainable source, and the other half is recycled content, taking plastic out of the ocean and the environment. That's a compelling value proposition for this market; they want it. The third benefit we have is, even when it breaks into a microfiber through machine washing, it’s certified biodegradable. We've got a trifecta of an offer in this space that allows us to create growth as long as there's some amount of demand.

Okay. Thanks, everyone, for joining us this morning. An audio replay of this call will be available on our website a little bit later this morning. I hope everybody has a great day.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.