Good day, everyone, and welcome to the Second Quarter 2022 Eastman Chemical Conference Call. Today’s conference is being recorded. This call is broadcast live on Eastman’s website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle, Eastman Chemical Company, Investor Relations. Please go ahead, sir. Thank you, Tracy. Good morning, everyone, and thanks 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 the market closed, we posted our second quarter 2022 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 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 second quarter 2022 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 the full year 2021 and the Form 10-Q to be filed for the second quarter 2022. 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 second quarter 2022 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A. Tracy, please let’s start with our first question.

Yes, thank you. Good morning, everyone. Can you talk about the reduction in freight cost? I feel really good about how it’s going.

John, we can't hear you.

I'm sorry, I was on mute. Mark, are you still ramping up mixed waste plastic into the gasifier? And how far do you think you can take that? What are the theoretical limits?

So John, yeah, we are still ramping up that project. And thank you for reminding everyone that it's not just methanolysis, which is incredibly exciting and has a huge amount of economic potential, as well as impact on improving the environment. Our cellulosic opportunities are also quite strong in this marketplace, and that's how we go with this gas. So we have multiple options on how to ramp up the feed. As we look at the demand curve in front of us for the next three years, we believe we can ramp it up to serve all that demand growth. We're not going to talk about the technical details of this, but we're very confident that there's no constraint in our ability to grow with the market. And the market is really expanding and going incredibly well. You've got the Naia textile fibers that, even in a down textile market today, is actually seeing demand exceeding supply, and we're working on how to expand capacity. The sustainable proposition of a biopolymer where microfibers that might break off from the ocean is just very compelling. Add in recycled plastic, and it's a trifecta win on the environmental front with bio recycled and biodegradable materials. We’ve got great progress going on regarding microbeads and now to the biodegradable additives for cosmetic applications that we told you about on Innovation Day. The Evento program is also making tremendous progress in the marketplace regarding how we can replace polystyrene in food service and some other applications. So we're really excited to grow - expectations are honestly exceeding what we imagined. So we're working hard on how we're going to debottleneck capacity to keep pace with it all, on the polymer side, as well as how we take in the waste plastic. So it’s all going really well.

And then did you finish the ethylene to propylene conversion project that you were working on? It sounded like that in the release, but I thought that was still yet to come.

No, John, it’s just to come. We did the RGP project a couple of years ago that allowed us to reduce a good portion of our ethylene production by switching to propylene through our crackers as we change the mix to use RGP instead of ethane. So that's full tilt right now. You can do the math and see that ethylene prices are pretty much down to cash cost in the second quarter, as well as as we go forward in the third. So we're pushing that as much as we possibly can. But the ETP is an investment we need to make going forward. It’s a great investment; it’s just a timing question of getting it done. But it would remove the entirety of our bulk ethylene exposure from the marketplace and switch it to propylene whenever we want, allowing us flexibility to go back and forth. This means we can sell it better. In times like this, we can completely eliminate any bulk ethylene, taking a lot of volatility out of the business.

When does that actually get done then?

It takes about two years to build, John. So it's not really going to have an impact until you look out and say it's like 2024, '25.

Yeah, hi. Thanks for taking my question. I just wanted to dig into some of the sequential outlook for AM, you're forecasting up 10% sequentially. Your full year comments kind of impact 4Q could be flattish sequentially. Typically, there's a pretty big step down in 4Q and then followed by a pretty big step up into the first quarter next year. So wondering if you could walk through that 4Q thought versus 1Q, what drives 4Q flattish? And what should we expect 1Q up into next year off of that level? Thanks.

So in the back half of the year, as we look at the trend rates we've had in the first half, obviously, first quarter was disrupted by about $100 million of earnings in AUM for the streamline events. We sort of have to add that back to look at an underlying quality of the quarter. When you look at it that way, we had a very solid second quarter and the trends remained good. We made good progress starting to recover some of the spread compression that we faced last year with our pricing. We had some limitations on the markets we can serve. Automotive is obviously down, which was not what we expected from 1Q to 2Q and logistics constraints on how much of the durables demand we can serve that was well in excess of our logistics in our production capacity in the second quarter, given the limited production we had in the first quarter. So as you roll into the third quarter, you've got continued improvement in pricing and continued capture in recovery of spreads, as you move into the back half of the year versus the first half. That's a tailwind. You’ve also got pretty stable markets. It's important to keep in mind that while there is some softness in durables, a lot of the market is quite stable. About 40% of the demand in advanced materials is very stable in medical, consumer packaging, cosmetics. In advanced materials, packaging and coatings is actually stable. It’s commercial demand that is holding up fairly well. Then you've got automotive that will have some amount of recovery in the back half of the year versus the first half, a little bit less than we expected but still recovering. So you've got that as a sequential tailwind going into the second half of the year. Consumer durables, which is sort of the biggest exposure to what you're seeing from Walmart and Target and all those companies, demand is coming off, but a good portion of that demand, frankly, we couldn't meet with our production logistics limitations. So it’s not all impacting our outlook for the demand in the back half of the year. So we're not expecting a significant net hit regarding how demand drops relative to what we can produce, especially since we're trying to catch up with so many customers from the production limitations in the first quarter. Overall, the demand is a little bit less than we expected. That's why we sort of reduced our outlook for AM in the back half of the year, but not by much. So those are sort of the key trends: continue to improve spread, continue to improve volume mix on a trend basis versus the limitations we had in the second quarter.

Okay. I mean, that’s helpful. I understand asking about '23 is obviously a bit early. But I think if I consider that demand kind of stabilizes your 4Q levels maybe $170 million in EBIT. Are there one-time catch-up items in there that remove that typical $30 million, $20 million step up into the early part of next year? Or is that a normalized base that we should be growing off of?

If you look at the performance we're going to have in the back half of the year and what we guided and annualize it, it's a pretty good earnings number that you would carry into next year. You'd have continued volume mix growth. Remember, we have a lot of innovation, especially in durables, which is why our demand is holding up so well. Tritan is winning all over the place, especially with recycled content, especially as you go into next year when the methanolysis plant starts up, and that will really benefit the back half of the year, particularly in accelerating growth in durables as well as in cosmetics. We continue to talk about the Evento growth we mentioned, the foodservice products on cellulosics or wins in the eyewear market, etc. All of these are building to grow faster than underlying markets on sustainability trends in both polyester and cellulosics. You've got continued automotive growth next year in that recovery phase. The markets remain stable in medical and packaging, etc., cosmetics and other heavy-weighted markets. Demand looks really good. I'm not going to guess the outlook given the economic situation next year; no one knows whether it's going to be slow growth, mild recession, or something worse. So we’re not going to start giving any guidance on that basis, but we certainly will have a lot of vectors to grow. You'll also have continued spread recovery. As I just talked about, VAM and PVOH prices will come off from these exceptionally extreme highs due to all these supply outages. So there are a lot of reasons AM should have a good year, and you’ll have an easy comp in the first quarter versus this year.

Okay, helpful. Thank you.

Thank you, Mark, in CI, you talk about structurally improved segment earnings quality. Given that, what do you think the new normalized earnings level is in the CI going forward?

Well, David, thanks for the question. We’re still trying to work our way through the math on that. You have to sort of look at the long-term energy cost structure implications and what's going on. Clearly, right now, with what's happening due to the Ukraine war with the shift towards more green energy and the lack of progress on that front in the short term, matters like natural gas are in more demand around the world than ever really managed. There’s a shift in the cost structure on a global basis where European agents will pay a lot more for natural gas relative to the U.S., even though our prices are really high right now in the U.S.; they are exceptionally high everywhere else. That’s an advantage that can help us going into the future, but I’m not about ready to quantify what that means. But certainly better than what we talked about on Innovation Day in December when we built that guidance. It's important to remember that before we get to that topic, there are many actions we have taken to structurally improve this business. 40% of the revenue in this business is in really high-quality, good margin, higher-margin businesses than the segment average. You've got functional means, which is the biggest part of that 40%, going into AG with cost pass-through contracts. There are stable margins, a nice plasticizer business in the benzoic acid area that has good stable margins and growth-a-basket around sustainability. We’ve made investments in RGP. We shut down our Singapore plant, the biggest source of earnings volatility in olefins, considering the dynamics of the Asian market and the future ETP investment I mentioned. So a lot of different things are going on there that give us confidence. The back half of this year should hold up a little better than we expected. Three months ago, going into next year, it should also hold up better than we expected, but I’m not going to quantify anything with all the macroeconomic uncertainty.

Understood. And just lastly, on your implied Q3 guidance, you talk about solid EPS growth year-over-year. What do you think solid really means? Is it up 5%? Is it 10% year-over-year? Anything in that range?

David, as you look at what we've seen to date, if you look at the year-over-year being roughly 245 last year were 283 in Q2. You can look at, I'd call it, approaching in the middle of that range.

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

Thanks very much. In general, do you think your domestic pricing of all kinds of products has benefited from the difficulty of imports coming into the United States? And do you think that if logistics improve globally, that might make pricing tougher for your products in 2023?

So when I think about that, Jeff, I think that's mostly a question for CI more than anything else. Certainly, logistics constraints out of Asia have limited some of those products' ability to come into the U.S., contributing to market tightness that all chemical intermediate companies around the globe, especially North American ones, are benefiting from. On the specialty side, there's really no factor; we haven't seen logistics constraints of Asian competitors being a limiting factor on the specialties. So it’s really just a CI question.

Thank you, and good morning, everyone. On the Kingsport facility that's going to start up in '23, you note that you have a thousand sales opportunities, which is more than the capacity of the plant. I'm wondering how you're thinking about allocating that volume from a customer perspective demand is indeed in excess of supply. Are there ways that you can leverage your existing relationships to improve contract structures or other things in Advanced Materials? Or how are you thinking about marketing the material?

So one, it's been tremendous to see such strong engagement across so many iconic brands interested in the recycled content and how that can play a role in their sustainability goals and positioning relative to composition in the marketplace. We've said we have over 1,000 sales opportunities that are in excess of the plant's capacity. So we are in that approach of figuring out how we align with the strategic customers that provide us the best long-term growth. We have relationships, Vincent, with a lot of companies that have been loyal dedicated customers for a long time with our current products, and now they want to do recycled content. They get preferential treatment versus someone new. So we're trying to balance that out. When we look at the quality end markets that drive a lot of where we want to go, markets like hydration are on the sustainability trend: reduce, reuse, and recycle, right? The trend moving towards hydration water bottles, for example, is a great market. It will grow incredibly well in the future as people become more conscious about single-use plastic products. Looking at high-end brands like Williams Sonoma, Cuisinart, and Ninja—leaders in the marketplace—we want to align with those winners. Same thing in cosmetics; we have great relationships with all the top brands. This allows us to help them be sustainability leaders, especially for future projects and not just our current project, those brands are very focused on their products being made sustainably and being global leaders, highly engaged in not just buying from Kingsport but also from our specialty products made in France. Aligning with the winners and the leaders is how we’re approaching it.

Great, thanks. Good morning, guys. First question just on fibers. One of your competitors in acetic told last night called out what they say is an untenable situation in the toll market today, needing a bit of an overhaul to increase the value proposition. Obviously, Eastman has previously made a bit of a pivot towards textile and non-wovens. But just curious how you're thinking about the filter market today or just the overall situation with your acetate assets?

Sure. The two markets from a demand point of view have been actually quite stable. The market is not declining as fast as we expected. A lot of this is benefiting from heat-not-burn cigarettes and also use of tow. You've got traditional cigarettes declining and growing so that offsets some of that market dynamics. Our textile business is doing incredibly well. We put that in motion several years ago; to some degree, we saw this market decline in the textile market. It’s extremely attractive, presenting a compelling sustainability offer for the market. Great customer engagement helps replace any decline in tow, and we definitely are at that stage where that’s occurring. We feel good about where we are from a volume point of view. From a market perspective, we’ve increased prices meaningfully for this segment due to higher raw material costs, energy costs, and operating costs. We need to improve our pricing to improve our margins back to a reasonable level because they are currently not at that level. We need to work with our customers to recover those costs. We're looking for all opportunities to partner and have those candid conversations with our customers to find a path that makes sense and recover those margins to keep supporting this business.

Great. Perfect. Can you just remind us on the Tennessee methanolysis facility? If you do hit that mechanical completion target at the end of 1Q '23, when should we expect to see commercial production rates and see it running through your P&L then?

Yes. It will take a period, as it does for every plant, to start it up. So we complete the end of the first quarter or the second quarter; starting up will take time, and you’ll see the benefit in the second half of next year. It won't have a huge benefit on earnings as you’re ramping up, since you'll have all the costs associated with the plant. But it will start helping significantly in 2024.

Hey, guys. Nice quarter. In terms of ASP volume growth in the first half, it’s pretty impressive. Do you see a similar level in the second half?

So Mike, it’s good to hear from you. We do see volume trends continuing, probably not as strong as the first half. The first half had tremendous growth across the board for animal nutrition, especially fluids, care chemicals, even B&C in some of the restocking efforts. Growth was quite good. Automotive wasn't where we wanted it to be, as we all know. When we look at the back half of the year, we expect strong volume growth continuing in many stable markets, benefiting animal nutrition, especially fluids, as well as from aviation recovery. We also expect some recovery on the automotive OEM side, with some softness in the auto refinish side. I'm not quite sure how that’s going to net out, but B&C will certainly be a bit softer, seen even in architectural paint with our customers. Overall, the volume mix will definitely improve, and spreads will be better as we continue to recover our spreads relative to compression we faced last year. You must remember the pricing actions we took were much swifter due to our contractual contracts to keep up with raw materials. We have a delay but not nearly the same scale as Advanced Materials. All that’s progressing, but it’ll be offset by several factors including FX headwinds, which impact ASP significantly, higher growth spend, and increased shutdown scheduling in the back half compared to last year. So, all those factors will balance out some of that. There’s also a natural seasonal and sequential decline in ASP when moving from the first half to the second half with ag markets, which usually appear less busy in the back half. Great start to the year, but not as much year-over-year increase in the back half for those combined factors.

Got it. And in terms of the outlook for AM, I think you outlined a good portion of why in the prepared remarks. When you think about the segments, is the shortfall similar between Tritan and interlayers? How do we get that back? Is that earnings power that is still there that could bounce back in '23 if headwinds subside?

Yes. To step back for a second regarding the segments from an end market perspective, we’d say about 40% of revenue is stable. This includes medical, consumable packaging, and cosmetics, which will continue to grow. Segments like medical still need to rebuild to a safe supply level. Auto has some upside compared to last year and the first half. Consumer durables, which contributes about 25% of revenue, shows sensitivity, as I've discussed. So from an end market point of view, a good portion is stable or improving. Then, we offset the durables question risk via innovation. When considering the end markets, especially plastics are on track for a strong year, both initially and as we move into the back half after overcoming challenges in the first quarter. We've seen spread recovery in the back half relative to last year, which is significant. Performance films are also showing resilience in a tough market, demonstrating how we can grow dealers, particularly in the Chinese market with no COVID. The interlayers business is facing challenges; I’ve already covered that. Demand will improve in the back half, but spread challenges are significant there. You get all these positive factors, but it’s important to remember global energy costs impact margins. That’s a headwind to factor into the math as well.

Yes, good morning. Mark, regarding your Advanced Materials segment, I think there was some content in your prepared remarks suggesting less improvement in global auto production compared to prior expectations in April. What’s the outlook for global builds that you're considering for the back half? Some car companies are talking about 80 million-plus global builds. Is that consistent with your view, or are you becoming more cautious?

No, I think that’s consistent with our view. Our customers drive our demand, and paying attention to their market outlook is crucial. However, we expect some sequential improvement from where we were in the first half, albeit not to the extent we initially anticipated. I believe that number is acceptable.

Good morning, everyone. Do you have any patents or competitive advantages beyond just the first mover advantage that would protect you from an entrant in textiles over time, thinking maybe of a competitor until?

We don’t have many specific patents on the textile side. We have a significant market position advantage; we dominate the majority of the market for textile filament, a different tech than making tow fiber. The capital intensity of that business positions us well in developing and producing. But we have no patents on it. You can use the tow side of things, but that's a more competitive market. There’s a substantial advantage due to our market relationships.

And Mark, the other highlight is we produce textiles at our Kingsport, Tennessee site, which is highly integrated. We have the lowest cost position for producing flake at this site globally. The integration and power of acetyl stream and cellulosics differentiate us from our competitors.

Thanks again, everyone, for joining us today. We appreciate your interest in Eastman. And I hope that you have a great day.

This concludes today’s conference. Thank you for your participation. You may now disconnect.