Good day, everyone. And welcome to the Fourth Quarter Full Year 2020 Eastman Chemical Conference Call. Today’s conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir. Okay. Thank you, Cecelia. And good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Senior Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday after market closed, in addition to our fourth quarter and full year 2020 financial results news release and SEC 8-K filing, we posted slides and related prepared remarks in the Investors section of our website, www.eastman.com. Before we begin, I’ll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our fourth 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-Q filed for third quarter 2020 and the Form 10-K to be filed for full year 2020. Second, earnings referenced in this presentation exclude certain non-core and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items are available in the fourth quarter and full year 2020 financial results news release, which can be found on our website. With that, I’ll turn the call over to Mark.

Good morning, and thanks, Greg. Before we answer your questions, I want to take a few minutes to make some comments. We’ve had a strong recovery in the fourth quarter and robust performance for the full year, despite the challenges associated with COVID-19. I’m incredibly proud of how Eastman employees around the world responded to these challenges and stepped up to help us deliver in 2020. And here are some of the highlights. Early in the year, we took quick and decisive action to adjust our operations to keep employees safe and preserve our operational integrity. We shifted our financial forecast for prioritizing cash and liquidity, given the uncertainties, and we delivered another year of outstanding cash flow, our fourth consecutive year of cash flow greater than $1 billion. While we prioritized cash, our earnings performance was resilient, which is a testament to the tremendous investments we’ve made in our innovation portfolio and our overall business portfolio over the last decade, including enhancing our market development and commercial capabilities. Additionally, we demonstrated we have a diverse portfolio of businesses and end markets, which gives us this ability. As you know, we are committed to being a leader in the circular economy, we’ve accelerated progress, and it’s paying off with several wins across our portfolio, including Eastman being named as a Wall Street Journal Most Sustainably Managed Company of 2020. In addition, in our 2020 sustainability report, we committed to the ambitious goals of reducing our scope 1 and 2 greenhouse gas emissions by one-third by 2030 and achieving carbon neutrality by 2050. Looking forward to 2021, we entered this year with momentum from our record fourth-quarter results. And we’re seeing clear signs of recovery across many of our markets, including strong orders in January. That said, visibility remains limited due to continuing effects of COVID-19. This means that we will continue to focus on what we can control. In 2020, we meaningfully reduced capacity utilization as we aggressively managed inventory well beyond the decline in demand to maximize cash. As a result, EBIT declined by about $100 million, just related to this additional inventory actions we took. If volume is flat in ‘21 compared with ‘20, we would have about $100 million tailwind from this improved utilization as we go into this year, or about $0.60 a share. Looking at our cost structure, recall that we reduced costs by approximately $150 million in 2020 versus 2019. And we estimate about $100 million of this was temporary. We also took actions to accelerate our transformation program and we’re on track to reduce costs in 2021 to offset the return of those temporary costs. As a result, in 2021, we expect our cost structure to be about flat in comparison to 2020. On top-line growth, we expect growth from three levers. First, we anticipate the market to continue to improve relative to 2020, as we have seen in Q4 and in January. Second, we continue to make progress with our innovation-driven growth model to grow faster than underlying markets in many of our specialty products. There are a number of examples of this across our portfolio in 2020 and we expect it to continue in ‘21. Third, we project a strong improvement in mix with recovery in these high-value markets and the innovation-driven growth of our premium products. Significant portion of our headwinds in 2019 with the trade war, as well as 2020 with COVID-19 were related to mix. As growth in our specialty products accelerates in ‘21, improved mix will be a powerful driver of earnings growth. We’ve already seen this benefit in Q4 of ‘20 and expect it to accelerate through ‘21. There are also headwinds including the lack of visibility related to COVID-19 and other global macroeconomic uncertainties. In addition, we’re seeing costs for raw materials, energy, and logistics rising and have competitive pressures in a few products. When we put this together, we expect our ‘21 adjusted EPS will increase between 20% and 30% compared to 2020. This means our expected ‘21 EPS will be well above 2019, which would further demonstrate the strength of our portfolio. We anticipate a strong start to 2021 with adjusted EPS similar to the first quarter of ‘20. You’ll recall, in the first quarter of 2020, our EPS was up 15% year-over-year, a very strong performance for our industry at that time. Finally on cash, a high priority for Eastman. We expect ‘21 to be our fifth consecutive year of free cash flow above $1 billion. A moment ago, I talked about our intention to be a leader in the circular economy. And as part of that commitment, today, we’re announcing along with Tennessee Governor, Bill Lee, our plan to build one of the world’s largest methanolysis facilities here in Kingsport. Through methanolysis, this world-scale facility will convert waste plastic, polyester plastic that often ends up in landfill and waterways into durable products. Over the next few years, Eastman will invest approximately $250 million in the facility which will support Eastman’s commitment to addressing the global waste crisis and mitigating challenges created by climate change while also creating value for shareholders. Using the Company’s polyester renewal technologies, the new facility will use 110 kmt of plastic waste to produce premium, high-quality, specialty plastics made with recycled content. This will not only reduce the Company’s use of fossil fuels feedstocks but also reduce our greenhouse gas emissions by 20% to 30%. This is incredibly exciting news and we’re only just beginning. I’ll close where I began with appreciation for the men and women of Eastman that make all this happen and do with a bias for action, adaptability, and optimism for the future. I share their optimism. This is an exciting time for Eastman. Our strengths have never been clearer, and it gives me the confidence that we are well-positioned to manage in this uncertain environment and deliver long-term attractive earnings growth and sustainable value creation for our owners and all of our stakeholders. With that, I’ll turn it back to Greg.

Thank you, Mark. Cecelia, we are now ready for questions.

We will now take our first question from Vincent Andrews from Morgan Stanley.

Thank you, and good morning, everyone. Mark, I’m wondering if you could just talk a little bit about the molecular recycling plant. I can’t pronounce methanolysis. Just help us understand, it sounds like you’re saying this is going to be the world’s largest. But, what is the scalability of these in terms of how much larger could it be? Where are you in terms of customer demand in terms of filling it out? And in the script you talked a little bit about there being clear evidence of willingness to pay price premiums for renewable products? How are you going to be pricing this product? Maybe we could just start there.

Certainly, Vincent. Methanolysis is a technology that has been around for quite some time; Kodak developed it decades ago to recycle polyester X-ray material. They recognized the potential to use it for municipal waste, expanding its capabilities back then. I wanted to initiate a project in 2010, and we even had plans and engineering development at that time, but the market wasn’t ready. Now, we are excited because the market is very receptive. Issues of climate, circularity, and sustainability have become a major priority globally. The importance of these issues has only intensified since the COVID pandemic. We believe we are well-positioned to lead in this area. The technology presents a significant market opportunity across various specialty plastic sectors, including hydration, consumer goods, electronics, and ophthalmic applications. Many customers are eager to engage as they commit to enhancing their recycled content. We currently have over 100 customer trials in progress across diverse applications, indicating ample growth potential. We've already achieved success with CamelBak and Nalgene, who have incorporated our recycled content into their Tritan Renew products. Expect more announcements throughout this quarter, showing demand is strong. From a value perspective, as we demonstrated, retail products with recycled content are fetching premium prices due to sustainability. In Europe, food-grade PET is trading at a much higher premium as companies strive to meet their recycled content goals. Customers understand that achieving these types of investments requires a reasonable premium. We aim to keep our premiums manageable while ensuring they provide a decent return. Our primary objective is to drive growth in this business. Another economic advantage is our ability to quickly utilize this plant. We can grow specialty conversions gradually, as we do with other specialty products, while also filling capacity with PET for packaging where demand is robust, allowing us to increase value over time. The economics are quite favorable, offering multiple opportunities for success in existing applications through premium pricing and accelerating growth by entering new markets like electronics and automotive. Our scale and integration provide us with a significant edge in managing our feedstocks.

Thanks. And just as a follow-up, $600 million of revenue, is that just sort of assuming from this plant, or is that assuming additional capacity down the road?

You asked about the scalability and the additional plant. To clarify, the $600 million in new business from innovation applies to the entire corporation and all of our products, not just methanolysis. We view methanolysis as a standalone opportunity, encompassing both the polyester revenue and the polyester renewal and carbon-neutral technologies. We estimate this could generate between $500 million and $1 billion in revenue for the company. Naturally, this development will take years to realize. This would create a substantial platform, the largest after Tritan, and alongside this, represents our two biggest platforms. This is separate from issues of scalability, which involve building out plans to meet anticipated demand for our specialty products. We also believe we can scale this through partnerships with others globally who are interested in recycled content and are developing business models to create multiple plants dedicated to methanolysis. Constructing these plants is very scalable and economical, and having them located in different regions presents further advantages. Therefore, we see another avenue for growth beyond this, but it's still early, so I want to be cautious about making any predictions.

All right. Well, thank you very much. Sounds very exciting.

We will now take our next question from Jeff Zekauskas from JP Morgan. Please go ahead.

Thanks very much. My first question is, you talked about $100 million cost penalty from lower utilization, but wasn’t the cost penalty $200 million? Why doesn’t $200 million come back in 2021?

So, Jeff, good morning. This is Willie. First, what we would highlight is, the $100 million that we’re highlighting as a tailwind is specifically related to the $300 million of inventory reduction actions that we took in 2020. And you can clearly see the impact of that in our cash flow. The other $100 million is we think about utilization versus volume mix, and you can combine those two together. So, fundamentally the lower utilization and volume mix net together with the other $100 million.

Okay. And in your methanolysis facility, why don’t you just buy methanol? Why do you have to make methanol?

Jeff, we’re not producing methanol. I'm not sure how they named the technology that way. Essentially, you take polyester waste and use methanol along with a small amount of energy to break down that waste and revert the polyester back into its intermediates like DMT and EG, and then purify them. This is an input to the depolymerization process, not an output. This method is significantly more energy efficient than the traditional fossil fuel process. While it does require some energy and methanol, it is far less than the entire process of extracting oil and refining it into DMT and EG. We achieve a 20% to 30% improvement in carbon footprint with this technology. It’s crucial to highlight that any recycling technology we pursue must meet two core objectives: addressing the plastic waste crisis and minimizing carbon emissions. We cannot afford to let carbon contribute to environmental harm while improving our overall footprint. All technologies we consider must have a lower carbon footprint than fossil fuel processes. This applies to methanolysis as well, and our CRT technology also demonstrates a 20% to 50% improvement based on the feedstock. We are tackling both our climate impact through process innovation and the waste crisis.

So, you’re buying the methanol, is that it?

Well, we make our own methanol and buy some methanol. It’s a mixed bag, as you know, from the broad portfolio of products we make.

Okay, great. Thank you.

We will now take our next question from John Roberts from UBS. Please go ahead.

Thank you. You talked about a 5% revenue headwind in chemical intermediates in 2021 from the changes that you made at the Singapore oxos facility. That seems really big. I didn’t realize that facility maybe was as big as it was, or is it a significant shutdown or closure you’ve done there?

Yes. Thanks, John. To your point, as we’ve made the decisions to, I’ll call it, cease the operations at our Singapore site, fundamentally, it was based on the raw material positions that we have at that facility in Singapore. And roughly, it is a world-scale equivalent of an oxo facility. It’s about a fifth the size of what we have in Longview, but still significant from a volume output. The key factor, as we think about 2021 and going forward is, overall, that will give us an opportunity to, I’ll call it, continue to debottleneck our facilities in Texas where we have a much better cost position. And from a fixed cost structure standpoint, we expect to improve earnings by about $25 million on a go-forward basis.

But, this is an action we want to take for a while. It’s not a profitable position to be with our cost structure that we had in Singapore, but we had to wait until the contracts expired to be able to shut it down on the supply side. And so, while the volume is going to be down, the earnings are going to be meaningfully up around $20 million, $25 million net-net by taking this action. So, we’ve always warned you that CI has a lot of volume volatility to it because of shutdowns or just planned maintenance shutdowns or this. It’s really dangerous to look at volumes in that section, you need to just focus on the earnings.

We will now take our next question from Matthew DeYoe from Bank of America. Please go ahead.

Can you discuss the confidence in obtaining feedstock for the methanolysis plant? The U.S. waste management infrastructure generally isn't set up to transport products inland to Tennessee. What is your solution for this?

It's a great question and quite challenging. The plastic waste crisis is something that everyone recognizes needs attention, and there is a significant amount of it. However, one of the main difficulties we face with these investments is getting the waste delivered to our site, which is puzzling but very real. We have developed numerous partnerships to supply us with waste and possess unique capabilities for handling it. Our technology combines polyester and mixed plastics in a way that allows us to process a diverse range of waste. We can efficiently separate and manage mixed plastic streams that others cannot because we utilize a low-cost, readily available mix that requires minimal separation. This efficient separation integrates well into our operations, making waste more accessible and affordable, as it holds less value when not separated. This integration gives us a significant advantage, including a potential 10% reduction in capital expenditures with some of our assets. While it requires considerable effort, we have spent the last 18 months building a diverse source pipeline. Additionally, a long-term opportunity is emerging with our customers, particularly major brands in textiles and polyester markets, who are keen on establishing a take-back program. They are looking to create a true circular loop by collecting used products from their customers to send to us for recycling back into materials for their products. This represents a complete closed-loop system, though developing it will take time. Brands have been leading this push and promoting molecular recycling as the key to achieving a closed loop, and we expect to see other customers making similar moves.

It seems that much of the press release focused on the PRT aspect, but are you also planning to gasify the fiber or waste stream directly into the gasifier? Did I understand that correctly, or is it solely for PRT that you're pursuing this?

No, no, we’re commercial in both now. So, we’re doing both now. We’ve just talked a lot about the CRT, which we call the carbon renewal technology. Basically, we’re changing our technology, if you will, from gasification to reforming when you go from sort of coal to waste plastic and replacing that coal with the waste plastic with a carbon footprint that’s sort of 20% to 50% lower. So, it’s a very compelling technology. That goes into our textiles, our Naia fabrics that we’re growing quite strongly as well as into some thermoplastics in the specialty plastics business and a new growth opportunity we see in AFP around fumed insulation that would be cellulosic-based and very sustainable offering versus EPA. So, a lot of different applications in CRT going on at the same level, that’s part of that $500 million to $1 billion platform combined with the PRT. So, a lot going on.

We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.

Mark, on the ‘21 guidance, could you walk through the earnings bridge from ‘20 to ‘21? That would be helpful.

Sure. I’d like to start by highlighting the aspects we can control. Our fixed costs will remain neutral in 2021 compared to 2020. We eliminated $150 million in temporary costs last year, but many of those expenses will return, especially in operations, as we are operating our plants at full capacity to meet the increased demand seen in the fourth quarter, which is continuing to rise in January. Therefore, those costs will inevitably return. However, there are still various efficiency-related costs and structural expenses, like travel costs affected by COVID, which are unlikely to return, at least not in the first quarter, but we anticipate they may start to come back throughout the year. Overall, fixed costs will remain relatively flat. As Willie mentioned earlier, there is a $100 million utilization advantage based on 2020 volumes, even without an increase in volumes compared to last year. Altogether, this leads to an approximate contribution of $0.60 per share from the cost utilization aspect alone, not factoring in any volume growth. And then, we’ve got volume growth in three categories. The first just being market recovery as we’re seeing in the fourth quarter and January. And so, that is we’re presuming is going to continue through the rest of this year as the economy continues to recover and that COVID’s not going to have some big negative impact. The second is innovation, creating our own growth, right? So, a lot of growth that we had last year wasn’t just what markets did, but how we created our own growth. We had phenomenal success in performance films in a very down auto market for the year, yet their revenue was basically flat for the year, where they had strong growth year-over-year in the fourth quarter. And so, that’s a great example of innovation creating growth, great success in acoustics and heads-up display, creating growth in interlayers, Tritan delivering a lot of growth where specialty plastics actually grew earnings in total for 2020 over 2019. So, a lot of things going well on the innovation side and a lot of traction developing in AFP like animal nutrition. So, a lot of innovation. It’s important to remember that both of the markets that are coming back are high-value mix, like automotive and as well as the innovation having much higher margins than segment average. So there’s a huge mix upgrade impact that isn’t just about ‘19 to ‘20, but it goes all the way back to ‘18 when you think about, first, we had a trade war that really hit some high-value markets for us and impacted earnings. Then, we piled on a pandemic, and we see us recovering back to ‘19 volumes and mix and hopefully better than that. So, that all helps. There are some headwinds. Obviously, aviation is not recovering as well this year. And so, that’s still going to be probably a $30 million headwind in earnings relative to ‘19. And then, we expect raw materials to go up, and there’s some lag always in the specialties in catching up to raws. And we have the competitive pressure we’ve called out in tires and adhesives and acetyls. So a variety of different things going on there. But, when you net it all out, it’s a very attractive recovery in earnings. I do want to emphasize though that 20%, 30% range is a genuine range. There is a lot of uncertainty. So, while it’s great to have growth in January, great to have the recovery in the fourth quarter, it’s January. We’ve learned this lesson in ‘19 and ‘20 about what can happen through a year. And while we remain optimistic that these trends will continue, we really don’t know the impact of COVID and how it’s going to impact the economies yet this year. We certainly are seeing operational limitations about how demand is recovering, especially in logistics and getting products to our customers. So, that’s limiting us a bit here, certainly in the first quarter. And so there’s just those things and factors you have to keep in mind when you think about this range. And I think it’s reasonable to be a bit cautious as you start the year in this range, and we build the success through the year.

Got it. And Willie, just on the free cash flow guidance, can you walk through some of the components there? I assume we’ll see a fairly big build in working capital in 2021.

We have a straightforward overview for free cash flow. It does not reflect significant growth in working capital. To summarize, we anticipate cash earnings consistent with the 20% to 30% range previously mentioned. As business activity increases in inventory, we believe we can manage it effectively. As part of our transformational initiatives, we are investing in advanced integrated business planning processes to ensure we maintain our inventory performance and the improvements we've achieved. We are also implementing programs in accounts receivable and accounts payable to make continued progress. Therefore, our assumption is that working capital will remain neutral in 2021, even in a positive economic climate. Regarding capital expenditures, we expect them to be between $500 million and $525 million in 2021, which is at least $100 million to $125 million more than last year. We believe that we will offset this with cash earnings. Overall, we have a proven record of generating cash flows exceeding $1 billion in nearly any environment. Our long-term goal is not only to maintain this level but to grow beyond it. I'd also like to commend the Eastman team for achieving $1.1 billion in free cash flow in 2020 through collective effort and focus.

We will now take our next question from Kevin McCarthy from Vertical Research Partners.

Mark, I heard the comments regarding volume growth. You talked about market recovery and innovation, and it sounds like mix is going to be important as well. But, is there a way you can help us better understand the level of volume growth that’s embedded in your EPS guidance, looks like in the pandemic year, went down 5%? How should we think about the high end and the low end, whether it’s an absolute level or relative to GDP or another macro metric? How would you have us process that?

Kevin, from a KG point of view, I think you would think about our volume recoveries being similar to GDP and then you get some leverage from mix. So, as you look at this, you’ve got a variety of markets that are sort of still recovering relative to ‘20 that are going to have volumes up in a meaningful way, like transportation or autos to be specific, not aviation, even though aviation will be better this year, but not by much. So, you’ve got markets like that that are recovering. Textiles, we expect a very strong recovery. And so, those will continue to drive value. And those are all very high value relative to corporate average when it comes to variable margins. And then, you’ve got other markets that are not going to grow as fast because they were really strong last year, like packaging and some hygiene applications and care chemicals. We still see them probably growing as opposed going backward, but not by much, given the strength they had last year. So, you can’t sort of trade all markets the same way, obviously, as we look at all these different parts of our portfolio. But, what’s nice is the stability you get from this, right? So, these resilient markets that we were in provided a great stabilizer to the headwinds we saw in automotive last year, where our volume mix, as you noted, was only down 5%, which was quite good for our industry and quite stable because of all these different resilient end markets. And now, this year, you’re going to sort of have the reverse of that of some of these high-value markets that were impacted last year are going to do much better. And these resilient markets are not going to be a big driver of growth. So, it’s hard to give you a specific number because a lot of it that’s driving the earnings is mix versus KGs. I don’t want to get into the breakdown of that.

Second question I had related to methanolysis. My understanding is that you can use different sorts of waste streams such as old PET bottle resin and maybe polyester from carpet and so on. And so, my question is what testing have you done already regarding the issue of variability of waste streams? And does it matter? In other words, if I’m unzipping it, as you say, into ethylene glycol and DMT, is it the case that the output is entirely fungible and the variability is a nonissue, or do you have to go through customer approval processes, et cetera, as you implement the new process?

Sure. Let me break this down into two parts: operations and customer qualification. The technology of methanolysis is quite robust. While methanolysis itself isn't a new concept, Kodak discovered some challenges long ago when they switched from using consistent polyester X-ray films to municipal waste. They found it difficult to manage a diverse waste stream that could vary daily based on the types of plastic present. The advantage of this technology is that it does not compete with mechanical recycling. Mechanical recycling is generally more effective where it's applicable, as it has a low carbon footprint but is limited to very clean feedstock. Most mechanical recycling processes can primarily handle clean and clear feedstock from bottles, and even then, they face performance limitations, as the polymer degrades over time. This sets a limit on the sustainability of mechanical recycling. Therefore, molecular recycling methods like methanolysis are crucial to complement mechanical recycling by addressing the raw materials that cannot be reused mechanically and preventing them from ending up in landfills, allowing us to recycle plastic indefinitely without degradation. The key is that extensive operating experience is necessary to manage this process. The challenging part isn't the methanolysis; it's the purification that requires significant expertise and many trade secrets we've developed over the years to ensure that the intermediates produced are purified and essentially identical to those made from fossil fuels. When we produce the polymer, it matches exactly, with no profile or impurities to worry about. The advantage for customers is that they don't need to adjust their molds or processing conditions. They can incorporate recyclable content into their products because it is truly identical in quality and performance, and it will not degrade over time during recycling. This technology offers a compelling long-term solution, much more akin to aluminum.

We will now take our next question from Mike Sison from Wells Fargo. Please go ahead.

Hey guys. Nice end of the year there. One quick follow-up on the methanolysis facility. Are you going to be able to brand it, like Tritan, meaning is there going to be a sort of a name or a labeling where a customer can sort of showcase that it’s used from recycling material, and if I wanted to go to Amazon or something and search for it, it would pop up?

Yes, we’ve aimed to maintain our core product brand names while incorporating a recycled element. Tritan Renew is the official brand name, and there will be Naia Renew in textiles and a variety of other products. For cosmetic packaging, we’ll have Cristal Renew, among others. These names indicate that they contain recycled content. Nalgene and CamelBak are already marketing their products this way, so you can check those out. It’s important to have some form of identification. Each customer is unique; many switch to our product without specifying what it is. Therefore, the approach will vary depending on how customers choose to present their marketing on shelves. We don’t enforce a specific method.

Got it. And then, just in terms of Tritan overall, it does seem like the fundamental demand or growth rate for that business has gapped up over the last couple of years. Can you maybe give us a sense of what you think this business can grow over the next three to five years? And then when will you need to add some capacity to meet that growth?

Yes. So, Tritan has been a phenomenal success story over a decade now, right? It’s just a business that has continually delivered strong performance and growth in a wide range of applications. It started out with hydration, where we have these reusable water bottles replacing single-use plastics. So, one of the great things about our recycled content is it’s going into durable products predominantly. We got out of PET a long time ago. So, I’m not trying to defend the PET business. I’m actually taking single-use plastic, I’m taking carpet, I’m taking textiles, a very wide range of supply on the raw materials, and then turning them into durable products predominantly. And so, it goes into a lot of consumer durable appliances, et cetera. We’re now going into toys in a variety of different applications. So, it’s positioned in a lot of markets that already care about being BPA free and products being safe. As one of our drivers, the performance is far superior to the competing plastics and its durability and resilience and how it holds up over time. And now, we got recycled content that we can add in it. That just gives us one more level of differentiation. So, we have a long runway of very attractive growth in this business. For when we need to add more capacity, we’re still a couple of years out. You have to remember that in ‘18, we added a significant chunk of capacity in Tritan that we’re certainly making progress in filling out, but we still have a few years before we have to add more capacity.

We will now take our next question from Frank Mitsch from Fermium Research. Please go ahead.

It always paves the way. Good morning folks. You called out the biggest source of upside for the fourth quarter came from transportation, ex aerospace. And obviously, you’re continuing to see some issues on the tire additive side. So, I was wondering if you could offer a little more granularity on how that played out for you with your various products, how it’s starting out this year, and what’s your expectations as we progress through ‘21?

You’re talking about automotive, just to be clear?

Correct, correct.

Yes, automotive demand has rebounded strongly, including tire demand, which saw significant recovery in the third and fourth quarters. We've experienced a broad resurgence in that sector, as supported by numerous external reports. Our focus on luxury markets, particularly with advanced materials, has benefitted us, as that segment remained more resilient last year compared to the overall market. We're also seeing accelerated growth in areas like acoustics and heads-up displays, with our next-generation paint protection film and performance films performing exceptionally well. Our service channel strategy has allowed us to gain substantial market share in China, and we expect this growth to continue. The combination of market conditions, innovation, and our service model is propelling this growth, resulting in margins that exceed both segment and company averages. We're beginning to see a reversal of the volume and mix impacts we faced in previous years, especially noticeable in the fourth quarter, and we anticipate this trend will persist. However, it's important to note that while demand is extremely robust across the automotive supply chain, we are encountering logistics challenges and capacity limits in meeting all of that demand. Despite these challenges, we remain committed to servicing as much as we can.

Got you. Very helpful. And if I could ask about ASP, it was really interesting to read about the Retinyl Sunflowerate, and I was wondering where I could get some of that at some point. I know Greg uses it because he looks fantastic.

I certainly need to.

Where do you stand on the strategic review, considering that a third of the business is facing challenges? What do you think your ability to execute something in 2021 is?

Thanks for the question, Frank. First, I’d say that the pandemic has accelerated some of the issues that we’re facing in the one-third, particularly as we highlighted in the first half of the year in tire additives. Also, I’d say the environment has made it more challenging to, I’ll call it, complete some of the alternatives that we’re considering for the businesses. But we’re committed to addressing the performance. We’ve announced that we’re shutting down one of the tire additives facilities. And you can expect us to continue to look at the footprint of tire additives, adhesives and also the contract structures within those businesses. And considering the types of actions that make sense, it could also include joint ventures and divestitures that we’ve highlighted in addition to just transforming within the Eastman portfolio. We continue to work on reducing the cost without sacrificing also some of the innovation. We continue to make progress in the transition to, I’ll call it, the Crystex Cure Pro next generation. And we’re also very active here on all the options as we start 2021, and we’ll update you when we make progress on that.

We will now take our next question from Bob Koort from Goldman Sachs. Please go ahead.

Mark, I was hoping you could answer a question I get and fumble when my clients ask me, and that is, what does the trends in propylene and refinery grade propylene mean to your business from a profit or advantage or disadvantage standpoint relative to your competition?

So, Bob, demand is strong across several end markets. You may be referring to the recent surge in propylene, which has increased by about $0.12. We are pleased to see propylene prices rise due to demand and some production outages. Refineries are operating at lower rates, and it's uncertain how long this situation will continue. Additionally, some feedstock prices have gone up. While spreads have returned to more normal levels, they haven't fully reached the levels we saw in 2018. As mentioned before, we don’t focus on olefin forecasts. However, the spreads we've observed with our transition to refinery grade propylene and polymer grade propylene indicate that those margins are currently very strong. The sharp price fluctuations can be challenging for our chemical intermediates business, but they are adapting swiftly to these market changes. We anticipate better margins in olefins and derivatives compared to 2020.

So, Willie, is the cliff notes then that if the raw material inflation is demand-based, then you’re okay with that because it allows you to pass it through and more easily?

Yes, that’s correct, Bob.

Got it. Mark, I’m sure it’s refreshing to discuss next-generation technology instead of olefins. Is there any way to ring-fence it and then consider putting it into a SPAC at a sales multiple that could enhance your earnings multiples?

We can consider changing our name to GameStop. Just kidding, Bob. What we are really doing is significantly transforming the portfolio of this company to genuinely focus more on ESG initiatives. For the past decade, we have been launching various sustainable products that are far better for the environment across our portfolio. Now, we are also emphasizing the circular economy and exploring how we can scale this up through partnerships. We have the opportunity to fundamentally shift our identity and significantly reduce our carbon footprint, aiming for a 30% reduction by 2030 and further goals for 2050. This is a major repositioning of the company. The unique and powerful aspect of our contribution to the circular economy lies in our integration in Tennessee. We have often emphasized scale and integration as our competitive advantage, which many see as cost-related. However, I view it as a means to foster innovation and growth. Our complex infrastructure will be vital for setting us apart and accomplishing things that very few others can achieve with such economic efficiency. While we can conduct methanolysis globally, our approach here offers distinct advantages compared to a standalone plant. Both options are appealing, but our method is exceptionally attractive, even beyond the 15% ROIC. Instead of isolating this in a SPAC, consider investing in Eastman as a strong environmental option.

Touché. Thank you.

Our next question is from Aleksey Yefremov from KeyBanc. Please go ahead.

Thank you. Good morning, everyone. Mark, if you’re investing about $250 million of capital in this methanolysis project, your ROIC is about 15%, so let’s say, 20% for the sake of the argument. So, does this mean this project could contribute somewhere north of $50 million of after-tax cash flow? Is this a fair math?

No. Alex, this is Willie. And yes, your math is correct at the 20% level. So, to your point, we’re focused on...

Yes. I would emphasize the ROIC in this one is unique compared to normal specialty investments because we can load the plant so fast. So the payback period is a lot faster for us in this one compared to normal where you’re filling out a Tritan plan over time. Because we can baseload it with PET because we do still have some PET assets left that are dual-purpose with our specialty plastics. And so, that gives us a lot of leverage in how we gain returns on the economics.

So, 20% is not necessarily the limit here, is…

Well, we don’t want to get into details. But, let’s just leave it at that it’s a very attractive investment.

And just as a follow-up, you’re talking about using 250 million pounds of plastic waste by 2025, 500 million pounds by 2030. Should we think about this as a lower limit for growth that you’re thinking about this business, or is it most likely scenario, or is this the upper limit? How high can it go within the next four years to nine years? And just a second part to this question, you were talking about $500 million to $1 billion in sales. Does this correspond to these two numbers, 250 million and 500 million?

Yes, these aspects are related. The type of waste plastic we aim to process relates directly to our first methanolysis plant and the plans for the CRT, which drives our revenue projections of $500 million to $1 billion. Collaborating with companies globally for additional projects could further enhance these figures. Regarding the fill-out rate, it’s somewhat difficult to specify. We are highly confident in our ability to sell products from the plant, offering a combination of specialties and packaging. However, the speed at which we can transition to specialty products is promising given the strong customer engagement we’re experiencing right now. We are enthusiastic about our progress, but there is still considerable work ahead. Importantly, we are currently implementing a higher-cost method to utilize our existing assets for producing recycled content. This is evident through our partnerships with brands like CamelBak and Nalgene. Though the alternate process we are utilizing is costlier and has limited capacity, it helps us establish market momentum that will allow us to scale effectively once methanolysis is operational, which will reduce our costs and significantly increase our capacity. Additionally, the CRT is already being repurposed, presenting a low-capital expenditure method for transitioning to plastic reforming. We are continuing to scale up, although our progress has been hindered by setbacks in the textiles market, so we need to make up for lost time now.

We will now take our next question from P.J. Juvekar from Citi. Please go ahead.

It’s Eric Petrie on for P.J. You noted the methanolysis plant has capacity of 150,000 to 200,000 tons of polymer per year. I’m assuming most of that will go into Tritan. So, at the fill out point, how much of your Tritan will be renewed versus traditional produce-based?

First of all, it’s not all Tritan. So, Tritan, I think, will be one of the big success stories, but it’s not limited to that. So, we have a lot of copolyesters that go into cosmetic packaging, for example, that has a significant amount of value for that space who are very forward-leaning on the sustainability front, who are very interested in adopting recycled content. So, it’s across that. There’s even some shrink packaging that we may do. And so, there’s a wide range of products in markets, but it will be a good portion of the Tritan mix, but we’re not going to call out a percentage right now.

Okay. And then, secondly, how did volumes for your specialty products grow in fourth quarter? And what was the comp for full year ‘20? Typically, those end markets grow 2 times underlying.

Yes. The process of measuring growth during a COVID crisis can be a bit complex. However, we have observed significant growth and success in the Advanced Materials division, particularly driven by specialty products that are contributing to volume and mix improvements. It’s important to differentiate between the two-thirds and one-third segments within AFP. The two-thirds segment is more stable, with margins considerably exceeding the segment average. Despite facing a $30 million headwind in aviation this year, we anticipate that earnings for this two-thirds segment will return to and potentially exceed 2019 levels. Additionally, the coatings business is experiencing strong growth during the market recovery, along with care chemicals and water treatment sectors showing robust performance. Our heat transfer fluid business is also performing well. Overall, many of our businesses are thriving. This positive trend in earnings and growth has been consistent since 2018, showcasing the stability and favorable margins of that segment. However, we are taking measures to address challenges identified in the tires and adhesives area. Overall, our portfolio remains resilient in terms of volume.

We will now take a question from Arun Viswanathan from RBC Capital.

Congratulations on all the progress. I’m just curious, Mark, you guys laid out an 8% to 12% EPS growth rate in the past. I know that ‘21, obviously, is going to be much above that because of the recovery. But, when you look long term and you add in the methanolysis gains, do you see a path to returning to that level structurally longer term or maybe even eclipsing that?

Well, right now, we’re still focused on recovery and getting back to ‘18 levels, which I do think is a pathway we can see after we get through this year. I think we’re already on a strong track with what we’ve guided for this year. When you think about post recovery, let’s say, and I’m not going to try and predict when that is with COVID, we very much would expect to get back to that growth math that we described on at Innovation Day of that 8% to 12%. Obviously, circular economy helps that and drives growth. Obviously, we’ve had things that haven’t worked out as well as we had hoped like, tires and adhesive. So you got to sort of do all that net math, which we’re not doing at this stage. But we definitely see the set of activities, the great things that are happening in many parts of the portfolio, a few things that didn’t work out as we had hoped, allows us to still get back to ‘18 and grow from there with that math.

And then, could you just remind us on the capital allocation side, when you expect to kind of maybe pivot more towards buybacks, if at all?

Yes. So, as we think about capital allocation for ‘21, first and foremost, obviously, we grew our dividend for the 11th year in a row and expect to allocate about $375 million there. Also, we’ve got some debt coming due in Q4, and we would expect currently to pay that debt down, so, $300 million of debt reduction. And then also looking through with the remaining cash from a strategic standpoint, we would expect to allocate roughly $350 million between bolt-ons and share repurchases. Obviously, we’re going to be, I’ll call it, cautious offsetting dilution here in the front half, and we’ll see how the economy continues to pick up.

And just to sort of wrap things up, one last thing I wanted to say was, I have a deep appreciation to my employees and our leaders throughout the world. The success we had in getting through ‘20 in a very stable manner compared to many in the industry and to emerge and grow like we intend to do this year is a testament to all the investments we’ve made in our capabilities. I mean, we’ve made a lot of investment in commercial capabilities, a lot of investments in improving our operational cost structure. We’ve obviously dramatically changed our portfolio and improved its quality and depth of innovation and ability to create its own growth compared to the last recession we faced in 2009-2010. And we’re seeing the payoff of that in the stability we delivered last year and the strong free cash flow and actually quite good earnings, especially if you back out the $100 million of additional inventory actions, and feel great about how we’re positioned for this year. And so none of that would have happened without the dedication and effort even in the extreme situation of how we had to work in COVID to deliver this. So, thank you to all of my employees.

And with that, we’re going to say thank you very much for joining us this morning. And if you have questions, you can reach us through the day. Everybody, have a great day.

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.