Good day, everyone, and welcome to the Fourth Quarter Full Year 2021 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. Thank you, Tracy. And hello, everybody, 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, we posted our fourth quarter and full year 2021 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors section of our website, www.eastman.com. Before we begin, I'll cover 2 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 and full year 2021 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 2021 and the Form 10-K to be filed for full year 2021. Second, earnings referenced in this presentation exclude certain noncore and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures, including a description of the excluded and adjusted items, are available in the fourth quarter and full year 2021 financial results news release. As we posted the slides and the accompanying prepared remarks on our website last night, we will now go straight into Q&A. Tracy, please, let's start with our first question.

Mark, just on Advanced Materials, very nice guidance for 2022. Can you talk about how much lines that you have to that $700 million EBIT being performed this year between price increases and innovation?

Sure, David, and it's good to hear from you. And we are really excited about Advanced Materials and its ability to deliver substantial earnings growth, as you just mentioned. And I think to talk about it, it's best to start with the context of last year because it really feeds into why we're so confident about this year. Last year, both at the company level and in particular, at the Advanced Materials level, primary demand was incredibly strong at the consumer level, strong in transportation, B&C, durables, a variety of markets, textiles, etc. The constraint in serving it, especially in Advanced Materials, was an outbound logistics and operational concern. Because the demand came back in such a strong way, we ran into supply chain outbound logistics constraints in the industry. We at Eastman had operational constraints as well. You've got all this primary demand. Then you've got the innovation driving the growth to be well above end markets, especially in durables and transportation. And you've got these operational constraints that were in three buckets. There were planned shutdowns and in particular, in Advanced Materials, we had a pull forward, the line conversion of Tritan, because that demand was so strong, we were unable to serve it with the existing capacity. So we had that line conversion that took a bunch of capacity off-line during the second quarter of last year. And then we had a long shutdown in the fourth quarter to expand capacity and improve reliability. Bringing that set of facilities back online in December took a lot longer than we expected. So operationally constrained demand through last year. So when you look at this year, from a volume mix point of view, we expect to have a lot more capacity. We're in a better logistics position to serve all that demand. Innovation will continue to deliver strong growth on top of that, which allows us to have a very large driver on that front. In addition to that, of course, with the market being so constrained and tight last year, we had extraordinary inflation across the company and in Advanced Materials in particular. It really accelerated through the back half of last year. There was a period of time, as always, where it takes prices to catch up to raw materials. Now on that front, we did a great job of getting all of our prices back up in specialty plastics as well as new contracts and interlayers to recover the distribution energy and raw material headwind that we had incurred. As we look forward, those prices are sufficient to cover raw material and energy costs being similar to fourth quarter and an increasing logistics headwind this year. You’ve got at least $100 million of spread tailwind that is fairly well defined by the prices we have in place now. So you put those together, that’s very strong growth. But then there’s still a cost tailwind as well for this segment. When you have all those operational shutdowns like we did last year, it’s not just the higher maintenance costs, the lost volume opportunities, it also led to very high air freight expenses. At the company level, airfreight was probably $65 million last year relative to a normal $10 million, and a lot of that was in Advanced Materials. Our supply chains are in much better shape where we're not going to incur that air freight this year; we already have good plans to materially reduce it back to a more normal level. Not all the way there, but good progress. So you've got cost tailwinds, to some degree, offset by gross spend. But when you put it all together, it adds up to a very impressive earnings outlook for Advanced Materials. You’ll see that immediately in the first quarter with strong sequential improvement as that volume and mix improves without the operational constraints of that fourth quarter, which was over $25 million there. Spread expansions are going to occur by those prices that are already in place as we talked about, and costs will be a bit better. We feel great about the segment. It's really a testament to the innovation; it's not just about markets. We're growing well above our markets.

Very good. And just one thing, lastly on Fibers, Mark, you referenced strong growth in textile products. Can you help talk about the growth of those products in '21 as well as your earnings profitability and what you foresee for 2022 in textile products?

Yes. Textiles is a great story. As you know, we've been investing in building out a new set of markets with an improved Naia textile fiber. We have been able to add sustainability to this value proposition with not just the biopolymer content we've had forever, but now the acetyl component, the other 40% being derived from waste plastic. So you've got a product that is sustainable and sustainably growing from wood pulp made from waste plastic and is certified biodegradable as microfibers if they get into the ocean through the washing machine, etc. That value proposition, especially for luxury brands and the women's wear market, where sustainability is a very important factor, is driving tremendous growth in that market combined with market recovery from 2020. You saw very good revenue in the Fibers segment that was driven by this. Revenue volume mix was relatively stable in tow, and the revenue growth is driven by the great success we are having in this space. It’s exciting because we see that continuing. The growth we are seeing in women's wear is also starting to get into athleisure and is creating a lot of opportunities to grow. This is like Tritan, where we are moving quickly to convert more tow lines to making Naia textile fibers to keep up with the growth that we see this year and the years to come. It’s an exciting story, and this business, by the way, on the textile side did a nice job of keeping prices to keep up with raw materials. The spread compression that happened in this segment was really on the tow side.

Mark, maybe you could just talk to us a bit more about the recycling plant announcement in France. I am interested in two areas: the milestones that you need to check off and your comfort that you're going to check those boxes, and maybe over what period of time you think you'll be able to do it.

Thanks, Vince. We’re really excited to get this second project announced. Obviously, we’re incredibly excited about the first project we’re building that will be online at the end of this year, proving out this technology at much larger commercial scale and enabling very attractive specialty growth here in the short term. But as we look at the French project and getting a position in Europe to serve and enable the circular economy is just an exciting opportunity. We looked all over Europe, and France was a unique opportunity that we’re very excited about. The French government was very committed to being a leader on plastic waste and climate, as you might imagine, and really trying to develop a circular economy. They were aggressive on how they're going to improve their recycling infrastructure to support this plant. They were helpful in making sure we found the right set of incentives, the right understanding, and very available green feedstock for the recycling feedstock, as well as green energy and steam. A lot of factors came together to make France a very attractive location. Europe as a market is very attractive, because especially in France, those brand leaders, particularly in the cosmetic luxury space, are very forward-leaning on sustainability on plastic waste and dealing with climate. So strong engagement. They wanted to have a plant in their backyard. Another good choice in France. That allows us to have a strong competitive position and be a solution provider in this space. Market demand is very strong. As you saw, there are a number of LOIs in place. One of the milestones that has to be completed, Vincent, is just completing those agreements to lock in both the specialty offtake of this plant as well as the PET offtake. And I’ll come to textiles in a moment. But this plant is going to be a mix. So the first plant is going to be primarily specialties. This plant will be a mix of continuing to have our specialty capability there around our copolyesters as well as making PET for packaging. We’ve got to complete those agreements. Engagement is very strong, and we’re making sure that’s done. The second thing, of course, is sourcing feedstock. We’re making great progress with several suppliers in the feedstock. One of the attractive aspects of France is there's over 600,000 tons of polyester waste a year, and so we’re tapping into that as well as into other countries across Europe. We’re confident we’re going to get the feedstock, but we have to make sure you’ve completed that sourcing. The site selection is the last part. We have three very attractive sites identified. They all have very attractive green energy supply. We’re working through what is the best one with the right logistics for both inbound and outbound, as you’re moving a lot of material here. I’m very confident. All three sites are attractive. We just need to decide which one. We feel good about the track we’re on. It’s just completing the work that we have going. And then on textiles, it will be part of it. It’s not our primary focus at the moment because we've had so much engagement in the packaging and specialty side. We’ve been primarily working with customers on that front. We’re starting engagement on textiles. Right after packaging in plastic waste, the two biggest contributors to incineration and landfill are textile waste. This is going to create significant and meaningful circular economy. That’s why we're having success in our Naia cellulosic fibers; it's for the same reason, but we expect textiles to be a part of this project. I’m not yet sure what percent, so I don’t want to get into that at this point. But no doubt, it's a source of feedstock and it's a source of offtake.

In your script, you talked about elevated spreads in your Chemical Intermediates business that you thought in the second half might be more narrow. Which are the spreads that are elevated now that might narrow later in the year?

Sure, Jeff. So obviously, spreads on the olefin side are the area where we've had the most expansion through last year. There was a belief that markets would normalize as supply and demand come into more balance. We thought that would happen in the fourth quarter, and it's held up better than expected as you can see in our results. We expect, frankly, those spreads to continue to hold up as we go into the first quarter, and our forecast is based on moderation starting in the second quarter and becoming more normal in the back half of the year which is just a forecast. As we all know right now, Jeff, no one really knows exactly how that spread normalization is going to occur. It’s important to remember that there are other factors in this segment that create a lot of value. We've got very good volume mix upgrade, especially mix upgrade, and the growth we have in ag functional means and especially plasticizers. Acetyls will actually be up in earnings in a meaningful way this year versus last year because last year we had a very large shutdown in our acetyl complex. We’re going to have a lot more volume to sell this year. Acetic anhydride, due to contractual reasons, didn’t improve that much last year and it’s catching up to the better market conditions this year. We’re going to have better margins in acetic anhydride, which is the larger part of our business. You must remember that acetic acid is a small co-product for us, and we’re not that levered to what's going on in that market. You've got a lot of positives going on, not to mention substantial cost tailwind for this segment when you think about the high shutdown schedule I mentioned in Advanced Materials and how that applies across the company. A good portion of that high shutdown — unusually high shutdown schedule last year was in Chemical Intermediates. We delayed a bunch of maintenance turnarounds from 2020 into '21 for safety reasons and keeping people from getting COVID. We also had some unplanned outages like Uri and a few other outages in Chemical Intermediates in the fourth quarter that were a headwind that will all become tailwinds. You've got cost tailwinds, operational cost savings improvements, and then you've got these other businesses growing that net against whatever the normalization of Chemical Intermediates is on the olefin spreads. So we definitely are focusing and designing these plants with a focus on maintaining steady spreads as much as possible to provide a reliable source of EBITDA for the company and margin stability. That’s our focus. Now there are two models in how you do that. The first model is a certain percentage of this plant will continue to be specialties, like what we're doing in Kingsport. There’s a tremendous amount of demand in cosmetics, in electronics and some very unique high-value packaging items that are specialty products we sell every day now. We base those prices on value, and we have good differentiated positions in the marketplace to maintain prices relative to raw material costs. A good portion of the volume will be making PET for packaging, and that will be the circular contracting model we talked about at Innovation Day. Those will be take-or-pay long-term contracts that are based on the value we provide in delivering mechanical recycling content to the marketplace. Remember that current food-grade rPET has been trading at a 40% to 50% premium to virgin PET today and for the last couple of years in the European market. These will be cost pass-through contracts, so we’re not going to be taking risks on what the feedstock costs are, which makes a lot of sense for the customers because if the feedstock costs for us go up, the food-grade mechanical recycling costs are going to go up even more. This is a hedge for them against the risk of buying mechanical recycled content relative to what the cost pass-through contract would provide, which will be relatively more stable. Those are the kind of contracts we have. Stable margins are derived from both parts of the plant. The exact mix of what is going to be specialty versus PET and textiles is still being determined by us because we’re seeing a lot more specialty demand than we originally expected. That’s good, those are higher margins. We’re working on how to balance all of that out. But whatever we build is going to be flexible. The lines that make PET will have the ability to flex and make our specialty copolyesters in the future, allowing us to mix upgrade these facilities over time if that opportunity presents itself.

Mark, you were in the PET business before, then you got out. What is your confidence level in achieving this 12% ROC that you were talking about in this French plant?

Sure. Our absolute focus has been on this question because I have no intention of getting back into the merchant PET business that had wide swings in profitability. I ran the business for quite some time a number of years ago and am not going back there. We have been very clear with investors as well as customers that the approach we’re taking here is different. The PET part of this business is going to be in long-term offtake contracts with cost pass-through structures where we’re not taking spread risk on what the price versus feedstock cost is. To be clear, we are not going to build the plant unless we get it that way; we're not going to slide back into that volatile business that is the normal PET business. And the specialties, we have a very long demonstrated track record for a few decades now, especially the last decade of delivering very strong volume growth, but also very steady spreads over time. Obviously, there are expansions and contractions with movements in deflation or inflation of raw materials, but we have very differentiated positions. This plant will give us an even more differentiated position relative to competitors because we are going to have recycled content in our products in a plant based in Europe, giving a much better circular economy benefit for anyone who wants to buy from this plant. The circular economy is a very regional concept. So when we build plants in Europe or in the U.S., it's a significant advantage relative to Asian competitors in how we can provide within-region solutions.

Great. And congrats on that plant. My next question is quickly on inventory levels. And it looks like inventory must be low, given that you are airfreighting raw materials here. What are the inventory levels at your customers when you look down the chain or look across your portfolio? Is it quite low?

Yes. So inventories are at historic lows for us, and as far as we can tell, historic lows for them, too. I should have put that in my stream in David's question around Advanced Materials. That's another driver of volume growth on top of good market pent-up demand and the logistics constraints being freed up and our innovation driving growth. There is this need to rebuild inventories all the way down the chain, pretty much across every market. I would say the only exception I can think of across all of our markets is where the cigarette customers are about normal inventories. But automotive obviously has a huge amount of pent-up demand and need to rebuild inventory. Building construction, same thing. Durables, where we’ve seen a lot of growth, there's still a lot of inventory rebuild in that stream. And the list goes on.

You signaled plans to deploy $1.4 billion of capital in 2022. Could you help us understand the mix of repurchases versus M&A, and also the timing of that deployment, recognizing that you're set to close the adhesives deal?

Yes. Thanks, Kevin. This is Willie for the question. We actually put a lot of the proceeds and the free cash flow to work at the end of 2021. We repurchased roughly $1 billion of shares, of which $700 million was during Q4, mostly in November and December. As we think about having $1.4 billion next year, it's a combination of the proceeds from our adhesives divestiture, which we anticipate will close at the end of Q1, as well as the additional cash flow we will have from operations in addition to increased organic spending. So $1.4 billion, we expect to start deploying that in Q2. You can think about probably greater than $1 billion on share repurchases, with the additional optionality as we think about the remaining $400 million as we get into the back half of the year and see how things develop with our portfolio of bolt-on projects.

Great. That’s helpful. And then maybe, Mark, as a follow-up, what are you looking to do with the bolt-on M&A pipeline strategically?

Yes. So we are looking at bolt-on M&A. I would say that we are exceptionally busy with our top specialty innovation growth programs across the company and ensuring we deliver on that while building out the circular platform. We’ve now got the project in Kingsport, the announcement in France. We’re still working on that third project in the U.S. and making progress. So that is a huge amount of EBITDA in play for long-term growth from an organic point of view on the specialty side, accelerated by all this circular opportunity. Bolt-on M&A is a priority, but it's after those two topics. We do see opportunities in Advanced Materials and AFP. Our priorities remain the same around finding ways to open up new markets with compounding capabilities in a few targeted areas, especially specialty plastics. The renewable content of Tritan is opening up new market opportunities in opaque spaces and other performance dimensions. There are a lot of opportunities we want to exploit and grow. We’re interested in growing our Performance Films business and have a great track record of continuing bolt-ons there, which should continue. Whether it’s performance, personal care, or coating additives, there are many opportunities that leverage our strong positions in technology platforms and market positions. So it’s those four areas, alongside animal nutrition. The markets are pretty overheated, and we’re going to always remain disciplined in our capital deployment to ensure we provide an attractive return for investors. We’ll just have to see if that gets done. If it doesn't happen, as Willie said, the extra $400 million this year above the $1 billion will turn into share repurchases.

A quick one on AFP. You're looking for 10% growth versus last year. Any commentary? You have 4 businesses in the segment now. Will they all sort of grow in that line, some above, some below?

Yes. First, we’re really excited about the new focused AFP. It is attractive growth when you look at what we're guiding to for a recast of $450 million EBIT last year for the AFP business, excluding tires and adhesives. That is strong growth. It’s really the same story, just not as extreme as the Advanced Material story earlier. We’ve got very good volume mix growth in coatings, personal care, water treatment, animal nutrition, and specialty fluids. All of those elements were drivers of growth last year and are expected to continue to be drivers of growth this year. This is also a place where we had an unusually high shutdown schedule last year, especially for the care solutions business. You’ve got the freed-up capacity to enable more volume growth on top of market growth as we go into this year. Then you've got restocking because none of these customers have inventory, as I mentioned earlier, so there’s that restocking benefit. There’s also innovative growth that is continuing to gain traction and starting to build like what we have in Advanced Materials across coatings and care solutions. That’s all contributing. You’ve got spread improvement. This business increased prices a lot faster last year because many of their positions are in cost pass-through contracts that track quickly with raw materials. So we didn’t have as much of a spread headwind in this business last year as we did in Advanced Materials. Therefore, this year, we’re not going to have as much of a tailwind, but we’re still going to have that meaningful tailwind. Of course, the overall net cost structure is considerably lower this year for the company, and AFP will pick up part of that. It gets netted off by gross spend. So, we’re well positioned to deliver growth. It’s across all segments: coatings, residential. Construction is incredibly tight. Automotive has plenty of room for recovery this year. We’ve got some great growth in semiconductors in the coatings business. Animal nutrition is going to have a solid year, and personal care is a stable business with more capacity to sell this year. Yes. First of all, we said greater than $100 million. We have some room for error with the more recent inflation to deliver that $100 million. Second, we have good pricing power and a strong demand environment. We just spent considerable time talking about how primary demand and our direct customer demand is well in excess of what can be provided. They need to rebuild inventory on top of that. So we feel confident in that environment. We have pricing power. If we see raw material inflation go up, we’ll increase prices further from where we are today. The team has done an excellent job when you think about the raw material inflation that didn’t really accelerate until the end of August. That was actually very good excellence when you consider the extremity of this inflation to be in a strong position for the first quarter. To be clear, what our assumption is on a full year basis this year is that raw materials and energy are going to be a headwind relative to last year. We're assuming that those prices remain elevated around the fourth quarter. We also expect distribution costs to be a headwind this year as the supply chain tensions are not resolving anytime soon. The prices we have in place get you that greater than $100 million tailwind. So I think we’re in a good position. If oil keeps going up, we’ll raise prices.

Are there any constraints on growing the green textile fiber business? Can we assume that for many years, you can convert capacity from cig tow? Are there constraints on putting more waste plastic into the gasifier to grow the acetyls component of that?

Yes. There are no limitations to our ability to grow the Naia textiles business long term. We have tow assets available to be converted. The tow market continues to have a 2% to 3% decline, releasing additional capacity. It’s just time and capital expenditures to convert those lines to make the Naia fibers. We’ve had some interesting breakthroughs on the process innovation side to improve our ability to do that efficiently. We can definitely convert capacity to grow with the market. When we look at recycled content for Naia textiles, the engineered thermoplastics, and specialty plastics, we have plans in place with reasonable capital to improve the capability of the front end of the gasification complex to process whatever plastic waste we need to support all that growth. No, we will have it everywhere. The scale will depend on the market and the opportunities that we’re pursuing. Whatever plastic you get, even if it's all polyester, there’s all kinds of stuff — rocks, aluminum, other polymers — when it shows up at the plant gate. You don’t want to put that in the plant. We have to have this processing on the front to ensure what you’re putting in is as pure polyester as possible. This processing is another competitive advantage for Eastman, giving us confidence that we can lead in this space.

One of the key drivers for growth in '22 is the $75 million tailwind from planned shutdowns and operational disruptions year-over-year. If I'm reading that correctly, it’s a $5 million net benefit, and you’re talking about $75 million. Is that just the unplanned outages from ’21 that you're not counting on for ’22?

I’ll let Willie answer your question. The Macron visit was great. I put myself in lockdown for the two weeks leading up to it so I didn't get Omicron and couldn’t go. It was impressive to see him spend time with me, making sure we succeed. But to the cost question, I’ll let Willie take it.

Thanks, Frank, for the question. There are several tailwinds on the cost front for ‘22. Greater than $75 million compared to last year from an unusually high planned shutdown schedule. The schedule should be about $50 million relative to that on a year-over-year basis. Additionally, we faced some unexpected challenges like Winter Storm Uri. We had to defer several shutdowns in '21 because of COVID and accelerated shutdowns to improve reliability. It’s not just the higher maintenance costs but the impact of lost capacity, which gives us growth potential from pent-up demand and the need to rebuild inventories. There’s an $85 million tailwind on variable compensation that goes back to normal in 2022. We continue our operations transformations, and believe that will be another $50 million to $75 million. Entering 2022, inflation is going to be much higher than traditional; we think that number is probably $100 million to $125 million. So as you look at this, the net tailwind is greater than $100 million and likely offsets any scenarios on the normalization of margins.

Just the level of urgency at customers about restocking, do you see it as more of a 2022 couple of quarters event? Or do you see it as a more drawn-out tailwind that spills into 2023?

I think that the world is going to struggle to keep up with demand. It’s hard to see that anytime soon. Customers or Eastman for that matter are going to get inventories back to where they should be. I think this could drag out through the year and into next year, especially if the economy is reasonably good. We’re equally excited about our cellulosics. That’s a stream that has been core to who Eastman is for almost 100 years. It’s amazing to see how sustainability has changed the mindset around these products. Sustainability had been an important factor only in the last three years. We’ve got a tremendous growth opportunity across that spectrum of businesses that drive growth in Advanced Materials, AFP, and fibers. As I said earlier, we’re confident in the technology. We’ve been operating it for some time, processing plastic waste well. There are reasonable ways to expand capacity and grow with all of these markets. The margins in our cellulosics are among the highest in the company. As we grow this stream, we’ll see nice mix upgrades and asset utilization benefits. It’s all good. I couldn’t be on this call talking about all of this if it wasn’t for the employees we have around the world. They’ve faced phenomenal challenges in the chaos we’ve encountered. Supporting all that in every function across the company, they’ve kept our customers supplied around the world every day. I just want to thank them because they’re the real heroes.

This concludes today's call. Thank you for your participation. You may now disconnect.