Good day, everyone, and welcome to the Fourth Quarter and Full Year 2022 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, 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, we posted our fourth quarter and full year 2022 financial results news release and SEC 8-K filing, our slides and our related prepared remarks in the Investors section of our website, eastman.com. Before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our fourth quarter and full year 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-Q filed for third quarter 2022 and the Form 10-K to be filed for full year 2022. 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 2022 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we'll go straight into Q&A. Emily, please let's start with our first question.

We will now go to our first question from Josh Spector of UBS.

I guess first one to ask, can you walk through your step-up in your implied guidance from first quarter through the rest of the year? I guess mostly interested to hear how much you see this within your control versus subject to macro conditions changing?

Sure, Josh, and welcome. We expected that question. I think it's an extremely important one we spent a lot of time on. First, let's just recognize we're in an extremely dynamic time in this world where it is difficult to predict some of the macro. You've got China in a weak situation but likely recover, seen one article saying there's $2.2 trillion of cash out there with Chinese consumers to be deployed and how that impacts both demand and energy. Ukrainian War, you've got inflation at four-year highs and what the Fed is going to do with it. So there is a lot of uncertainty, and the fourth quarter was a little bit challenging. As we look at Q1, many of those challenges continue, whether it's the destocking in durables and Building & Construction that still needs to work itself out, auto not yet recovering, and the stable market is virtually getting past destocking, but not growing yet. We will certainly see some raw material benefits in the first quarter, but not much in the way flow-through works, and seasonally energy is high. So the first quarter has a number of challenges, not to mention pension and variable comp. So as we look at the step up into the second quarter and through the rest of the year, there's really three key elements. To your point, the one that's most directly in our control is taking out $200 million of cost net of inflation. Not much of that is really helping us in the first quarter. There are some of the unmet manufacturing activities that we're executing on, but even that is being implemented through this quarter and the operational improvements flowing the inventory, and those benefits won't flow out until they start moving into the second quarter. So the vast majority of that $200 million gets spread across the three quarters. So that's a big step up Q1 to Q2. The second one is how will spreads improve. Now we've had tremendous success in being disciplined and successful in managing our pricing with just great commercial excellence across all parts of the company. It's pretty extraordinary when you think about the amount of inflation that we faced. Last year was about $1.3 billion of inflation where at the beginning of the year, we didn't really expect that much inflation if you go back to our January call of last year. And if you look at it on a two-year basis, it's $2.4 billion of inflation if you even go back to 2019 to 2022, $2 billion of inflation. So a significant amount of inflation, and we've caught up with most of that across that multiyear timeframe. We certainly kept up with it through last year. So as you go to each segment, the story is a little bit different. Advanced Materials is probably the most important one to start with because it has a pretty significant tail in spread. When you think about it, they had one of the most challenging raw material and energy environments across our segments with vinyl acetate monomer and polyvinyl alcohol up 45% relative to 2021, paraxylene up 40%; energy up 70%. Now they kept up with that inflation with 13% increases in price, and they did improve spreads. And if you go back to where we were at the beginning of last year, we had the intention of recovering spread compression in 2021 of about $100 million. Now we didn't get that, but we did keep up with inflation. And we're starting now into this year at a much higher altitude with the prices that we've achieved in keeping up with this inflation. So as we look at this year, we see that this segment is going to have a pretty substantial tailwind in raw material and energy. And we're not trying to be too optimistic about this. If we just use where raw materials have already come down in vinyl acetate monomer, polyvinyl alcohol, and paraxylene for the first quarter of this year and think about the energy off of the natural gas forward curve for the year, that's actually quite a bit more spread tailwind than what we would have thought last year of that $100 million because of the higher altitude. So that's part of it. And again, that shows up as a step up as you move into the second quarter. There's a bit of it that flows through in the first quarter, but most of that is in the second quarter through the fourth. With Fibers, a much shorter cleaner story, which is you had a lot of challenges in inflation here as well, especially in energy and the market. The customers have moved to being worried about security and supply. So you've been very successful in increasing prices last year as well as contractually securing much higher prices this year to make sure that margins are back to sustainable levels to support our customers. And that's a $275 million outlook to earnings this year, which is a significant step-up, in fact, enough to offset the spread normalization in chemical intermediates that we expect this year. And then Amy & Performance will have modest spread improvement as well, but not as much because they managed spread quite well last year, so they have less upside this year. So you put it all together, that's a lot of spread improvement and a lot of it flows in sequentially into the second quarter. So that's a big step up. The third segment is volume and mix, and this is more of a mix of what happens with the economy versus what's in our control. Destocking at some point is going to end. We're assuming right now that it predominantly ends by the end of this quarter for durables and Building & Construction. And so you get a step up of demand going from destocking levels, which are pretty severe to something less than that. In the stable markets, we can see moving past that some amount of growth from those markets. Importantly, innovation is something in our control, and we've had a lot of success last year despite our challenges in the economy and securing a lot of new business wins that are going to help this year. And again, that doesn't really happen during destocking. So you have to wait to get that past you to start seeing some of that benefit. And then, of course, there's China recovery. But we're being very conservative in not assuming much of that in our sort of outlook that we've provided until we see more proof of it. So the bottom line is there's a lot of step-up across these three factors. Many of them are in our control. But as you look at the guidance we gave you for the year, given the outlook for the first quarter, I think it's appropriate to sort of look at the lower half of that guidance for how we're going to perform until we get past this quarter and have more insight on all these factors.

Our next question today comes from David Begleiter with Deutsche Bank.

Mark, just on Fibers, can you talk to the sustainability of this higher level of earnings going forward?

Hi, David. Thank you for the question. It's one of the bright spots of the year and one we're excited to talk about. Fibers has obviously been on a tough journey since 2014 when the market structure loosened up for a variety of factors. But the situation has evolved and changed over time. First is on the demand side. We historically thought about demand declining in the 2% to 3% range. But what we've seen over the last few years is it's only declining around 1%. And partly, that's driven by the strength of the heat-not-burn segment of the marketplace that is growing at 15% a year, offsetting some of the other decline on the cigarette side. China has also stabilized to being pretty much flat to slightly up in demand over the last several years. So you've got stabilization of demand, the heat-not-burn market growing. And the heat-not-burn devices require quite a bit more tow per smoking experience than a cigarette. So that's also helping. If you look at in the last decade, we've only been down about 10% of demand as you sort of put all these factors together. And we uniquely at Eastman also have the benefit of the textile growth providing stability and margins to our business. On the supply side, there's also a lot that's changed in the last decade. So you can see about 15% of capacity has been shut down or repurposed. That's assets that have been retired, the impacts that Russia has had on capacity in their country as well as us repurposing some of our assets towards the textiles growth. And the move to the slim cigarettes, especially in China, as well as two free cigarettes has actually had a significant impact on the effective capacity. It's much more difficult to make those products, so you lose a lot of capacity, at least 10%, maybe 15% of capacity is lost with that. So the industry has gone, when you put those factors together, to being pretty high in capacity utilization, where the conversations and then the focus with our customers is how we are a reliable, secure supplier for their needs. You have to remember the value of tow and the final price of the cigarette is a very small percent. So making sure they have it to sell their product at very high margins is incredibly important to them. And that's not the focus. So that's allowed us to get quite a bit of price up last year, so already good momentum, seeing some of that benefit already in the fourth quarter of last year that indicated the trajectory we're on for this year. So we give you factors as sustainable and improving the earnings quite a bit. So I would say this year is going to be at least $275 million when we put all those factors together. The other thing that it does is it gives us a much more solid base for our overall cellulose extreme and very strong cash flow to support the investments we're making in the circular economy, not just the polyester side, but we have a huge number of opportunities on the cellulosic side, with our recycling capabilities to take plastic waste into that product also being biodegradable is allowing us to realize wild growth in our Naia textiles, we told you a lot about. So you're going to hear a lot more this year around Aventa food services that have a huge market opportunity to replace polystyrene and the microbe. So the cellulose extreme is shifting to being pretty attractive and sort of when we put it all together, a growth business.

And just on cash flow. You mentioned increased to $1.4 billion this year due to a number of actions you're taking. Can you just sort of on patty taking and specifically working capital release this year?

Yes, David, this is Willie. I would highlight to your point, basically, in 2022, I'll call it, the inflationary pressures consumed another roughly $300 million in working capital. As we look at 2023, we see, call it, an absence of that inflationary pressure as well as we optimize the inventory for the new demand levels. We think there's at least $300 million on that front that we'll benefit from on a year-over-year basis. Also, as you think about cash earnings, I would say you need to look at higher cash earnings year-over-year as we normalize for the pension and also as you normalize for the variable comp coming back to normal. Those two items should put us at $1.4 billion or above, and higher taxes will bring us back down to the $1.4 billion level. So that's a high-level bridge for you.

Our next question today comes from Aleksey Yefremov with KeyBanc Capital Markets.

The price of virgin plastics has been very volatile lately. So has the interest in recycled content that you're negotiating changed at all given lower virgin plastic prices and perhaps weaker demand?

We haven't seen any significant change in consumer interest regarding recycled content. Brands have established ambitious goals for 2025 and 2030, and the pressure to meet these goals continues to grow, particularly concerning plastic waste. Consumers are increasingly aware of this issue, driven by various environmental NGOs and political bodies in both Europe and the U.S. that are focusing on sustainability and the impact of plastic waste. In Europe, there are comprehensive policies aimed at reducing plastic waste and increasing recycling, which include a requirement for 30% recycled content in packaging by 2025, along with the imposition of taxes on products that do not meet this requirement. Thus, there are strong economic incentives in Europe pushing brands toward these commitments. In the U.S., NGOs and social media also exert considerable pressure on brands, and several states, including California, have enacted legislation similar to that in Europe, driving change. The need for brands to be sustainable rather than face taxes makes adherence to these commitments a more appealing choice. However, there's a challenge with the mechanical recycling industry, which currently lacks the capability to provide the needed recycled content back into food-grade materials by the 2025 deadline. Much of what is recycled is being used in other applications like textiles. Consequently, the quality needed for food-grade materials cannot be met with the current mechanical recycling processes. Our capabilities are in high demand, and brand engagement is robust. We are seeing notable success in our specialty initiatives, particularly with the ongoing opportunities around our first facility in Kingsport. On the PET front, exemplified by the recent Pepsi contract, we believe we play a crucial role in addressing this crisis. I should also mention that the short-term dip in demand isn't linked to packaging; it's primarily due to reduced demand from the carpet and textile sectors that previously utilized clear bottles as feedstock. This drop in demand is a result of trends in the durables and building construction sector rather than packaging.

And just a follow-up on Advanced Materials, Mark. Do you need raw materials to come down from where they are today to get to your targets of being meaningfully up versus 2021? Or are you assuming sort of current spot raw material prices pretty well for the rest of the year?

Yes. On the spread assumption that we've got and how Advanced Materials improves, we're assuming that we don't have another inflation crisis like we did last year, right? So vinyl acetate monomer and polyvinyl alcohol prices were extraordinarily high because half of the VAM producers in the U.S. were unable to operate for five months. So we had prices for some periods of the spring and the summer that were double because of that extreme market tightness. And we had to buy a lot of very high-priced material from the spot market out of Asia to continue to supply our customers. So getting rid of all that market tightness, which is where sort of VAM and PVOH prices have now gone to some degree, I think there's still more coming down, but we're just using where we are today for this quarter and how we project spread improvement versus last year. Same with paraxylene. We're not assuming a dramatic improvement relative to where paraxylene is now. You could look at 6 million tons of paraxylene capacity coming online this quarter in China, and paraxylene prices could get lower, but that would be upside. We're not banking on that in our outlook. We are assuming energy costs get lower; as I said, we're using the forward curve on natural gas for that. But that's what's in the sort of outlook we're giving you for this base case. Could things be higher? Sure. But that would require a pretty significant move up in oil from the sort of $80, $90 range we're in. And I think we feel good about this base case given sort of the world that we're in and the macroeconomic challenges that we face right now.

Our next question comes from Michael Leithead with Barclays.

First question, just on the circular plastic build-out, a bit of inflation so far, and you still need to break ground on the second and third facility. So can you just talk about what you're doing today to help make sure we don't get further CapEx creep year over, say, the next year or so?

Sure. So there's a lot that we've been doing to manage a difficult capital construction environment last year for the Kingsport plant and have done a great job in keeping those costs under control. A little frustrated by the challenges in getting craft labor to get the plant sort of completed here, but the cost control is working well. And we're confident we'll get this plant up and running early summer. When it comes to the next two projects, there are a couple of things we're doing. One is some of the commentary we provided in our prepared remarks about how we're building these plants. So we had a design for building these plants where we were always going to start out with 100 KMT of capacity, but designing them upfront to expand to be 50% bigger when you add it on the second phase. We've switched to taking a more standardized approach to sort of say, look, we're going to build identically what we're building here in Kingsport in France and in the second U.S. project with Pepsi. So a very standardized approach to leverage all the engineering, procurement, construction approach to sort of build a replica of what we're doing here in a very efficient manner. So that's one way we're going to help to keep the capital cost down. Now to be clear, we're still spending capital at the site to make sure the infrastructure is in place for what we will do is double the capacity at each of these sites over time after we get the first site, first modules up, if you will. So we're actually sort of expanding what we think we can deliver between now and 2030, doubling it versus going 50%, but we're taking a more standardized approach. And this also allows us to take a lot of insights we have around how to improve the technology on energy efficiency and feedstock robustness into that second phase in this more modular approach. So there's a variety of benefits. The other thing we have really factored into our capital estimates yet is a slowing macroeconomic environment should create some deflation in the construction industry. We're already seeing it in the price of steel and pipes and things like that. So materials are going to get cheaper. I don't think the cost per labor hour is going to go down. But I do think we're going to have more availability of resources, higher quality resources. So productivity will improve, and materials and equipment will probably come off in price. So that will help also keep control on the CapEx numbers.

Great. And then second, just on Fibers and the new contract there. If I remember, most of your tow business was moved to long-term contracts a few years ago. So is this new pricing just reflective of a portion of your current business that we'll see further resets over the next two years? Or is this a big reset for almost all of your business here today into 2023?

It's a significant reset for the majority of our business. Approximately two-thirds of our business operates under contracts, with many being multiyear and some annual. Even the portions not under contract have solid agreements regarding annual volume. The timing of when these contracts began to be renewed aligns with last year into this year, which provided us the chance to negotiate and raise prices. This is why these changes are occurring now, rather than a year ago when the market was already tightening, but we lacked the contractual flexibility to implement these adjustments until now.

Our next question today comes from Vincent Andrews with Morgan Stanley.

Mark, could you talk a little bit more about, I guess, two things. One, I was struck by the consumer durables comment in Advanced Materials where your volume was down 40%. That just seems like an enormous number. So could you just talk a little bit more about how that's actually impacting Advanced Materials business and what the sort of cadence of improvement is it's going to be? And then also, could you just sort of detail a little bit your assumptions about the auto business for 2023? I think I read that you've got expectations for sequential decline from 4Q to 1Q and some modest growth overall in 2023. But is there anything changing about the customer mix of your products in terms of the cars they're building and the tech that's in them or anything like that, just given it seems like the automakers are starting to focus on different things in a more recessionary environment.

Sure. So both very relevant important questions for us. The consumer durable business is incredibly important markets where we sell our Tritan at very high margins and have had tremendous growth over the last decade. What I can tell you, and we've been doing a very deep dive on what's going on in the fourth quarter, as you would expect, it's entirely market-driven. When you look at some of what's going on in the specific parts of the market we're in, which is small appliances, housewares, electronics, that part of the durables world, it's just been declining really for quite a long time, right? So the underlying market started declining in the second quarter of last year modestly. And then as people started switching to travel and leisure versus buying a lot of durable goods, you saw that in the announcements from Walmart and Target, if you go back to May. And what we didn't really fully appreciate is just how much overstocking the retail sector was doing in ordering from everyone who could supply them because they were so short of material and then suddenly it all showed up and they had a lot more inventory to get to get out. And with inflation being so high, the consumer durable sector is the first thing people stop buying. And you can see that in the semiconductor data; you can see that in the electronics where they're dramatically down. So when we look at what's going on in the end market, you can see a lot of evidence at the primary demand level of demand being off, but not nearly as much as us, right? So the retail sales data will show our direct end markets might be off 10%, 15%. And we're off 40%. So the rest of that is, by definition, destocking. And that's because of these retail inventory channels that are so overstuffed, and it just took a while to get that momentum to try and pull down production through the entire chain. So it's challenging. And it's continuing into the first quarter, and we expect it to be equally challenging this quarter as the fourth. But at some point, it's going to end. And from what we can see so far, we think they will get this under control mostly by the end of this first quarter, and then you've got a big step up in demand when the destocking is over to sort of lower demand than what is normal but still a lot better than 40% down, and that's part of the step-up in earnings for Advanced Materials as you move into the second quarter. On the auto side, demand, we're being, I think, conservative probably a little bit more conservative than what the consultants would say about demand being slightly down in the first quarter and not improving much for the year. So if we're wrong about that and production improves more, that's a lot of upside because those are very high-value markets that we serve in our earnings. But the shift in the market, to get at your question, Vince, is really important. That shift is very favorable to us. So we now got about 10% of our sales going into at very high margins. You have to remember that EV is about 3.5 times more value for us than an ICE car. There's a lot more glass in an EV car and a lot more functionality. They're putting in it from acoustics to solar rejection, to heads-up display, et cetera. So the value captured there is tremendous on a mix lift basis. So the EV trend, and we are aligned with the top players on this with our products, is a significant opportunity. I'd also say the heads-up display in general, not just in EVs, but all cars have a lot of growth momentum. It was a big mix uplift last year and even though down market, and we think that trend is going to continue and accelerate into this year as a result of the semiconductors. There's a lot in the HUD. There's a lot of times if you were trying to buy a car last year, they would let you order the HUD because of semiconductor limitations; that's going to resolve. And so we see the HUD market picking up. I'd also note that, that's in large. The paint protection business and the performance films business is doing fantastic, very strong growth, very high margins. So we got a lot of mix uplift relative to the underlying market in auto that helped us offset some of the challenges last year and certainly will be a significant lever versus last year into this year.

Our next question comes from Jeff Zekauskas with JPMorgan.

Of the $200 million in cost savings, how does it split between SG&A and cost of goods sold?

Thank you for the question, Jeff. I want to emphasize that we have two main components to consider here. We anticipate approximately $125 million in savings from our operations, which includes manufacturing and supply chain. Additionally, we expect around $75 million from non-operational areas, which primarily involve selling, general, and administrative expenses. To elaborate on the $125 million, our confidence stems from expecting more efficient operations as we adjust to lower demand levels, which will positively affect our supply chains and improve upon our planned and unplanned schedules from last year. Our experience during the COVID period has shown that we can utilize a flexible cost structure by leveraging overtime and contractors, and we are initiating actions at the end of this year and into Q1 to align that cost structure with current demand levels. We are committed to operating as efficiently as possible while evaluating the demand trends that Mark has pointed out. In terms of supply chain and network optimization, we anticipate savings between $30 million and $50 million, as we aim to reduce reliance on air freight and less efficient transportation methods compared to last year. Moreover, as indicated in our prepared materials, we expect to see about $25 million in lower maintenance costs year-over-year. We are also reassessing our asset footprint, which may result in some restructuring charges as we move forward. Regarding non-operational costs, we have already begun to cut discretionary spending starting in Q1, with external expenses and workforce reductions each contributing about half of the overall cost impact compared to last year.

Okay. And so these are net reductions. So does it mean that SG&A should go down $75 million all-in in 2023, exclusive of the $110 million lift in pension expense? And can you explain what the event was that caused the $110 million lift in pension expense?

Okay. So let me break that into a couple of parts for you, Jeff. So on the pension, I'll hit that first. That will not impact SG&A or manufacturing. It's set forth on our income statement within the EBIT. There are two drivers as you think about pension, and they're equal. So the pension and interest costs, we had lower discount rates. You can think about 200 basis points on the interest cost in 2022. That increased over 500 basis points, so a 300 basis point change on the interest cost. Our assets are lower year-over-year as you think about the market basically being down about 20% versus our assumed return of about 6%. That's about $50 million each is what I would roughly say there. On the SG&A question, our variable comp will be normalizing. So that will be a headwind on a year-over-year basis that we expect to be substantially offset by the $75 million.

So Jeff, one way to think about sort of the waterfall across the businesses and the cost actions is, the cost reduction actions are sort of equal to offsetting both the pension costs and the return to variable comp and inflation, right? We put all that sort of together. So sort of the fixed cost structure, if you will, is flat. The Fibers improvement offsets the normalization in Chemical Intermediates. So you have to have a point of view that the two specialty businesses are able to deliver earnings growth over the annualized FX headwind for this year. That's another way to sort of think about how we get to sort of flat EPS, including pension is those specialty businesses have to offset basically inflation this year and growth relative to last year. We've given you a waterfall on sort of where that growth comes from.

Is the pension expense cash or noncash?

It is noncash. So there's no impact on our cash flow.

Yes. That's why we held the guidance where we did just talk about growing earnings of the segments.

Our next question today comes from Frank Mitsch with Fermium Research.

Willie, I'll reach out to you later to discuss how Fermium can assist with your pension plan asset returns. Mark, in your prepared comments, you mentioned that the cracker will remain down through the first quarter. Could you explain some of the factors influencing the outlook for Chemical Intermediates and when we might expect the cracker to be operational again in the second quarter?

Yes, our expectation is the cracker starts to come back up in Q2. Any way you can do the math on sort of cracking spreads right now last year. Remember, our crackers are a bit different where they're highly oriented towards propane versus ethane. And we're trying to make as much propylene as we can and as little ethylene as we can with the investments we've made in switching into RGP, which we're doing as much as we can because the ethylene market is very economically challenged for basically cash costs on bulk ethylene. But as the propylene markets are starting to improve, you can sort of see that through January. The spreads, the crackers are recovering as we go through this quarter and that feeds into our expectation that, that is likely to continue or hold and we bring the cracker back up. Demand right now continues to be challenged. So we don't really need as much of the output which is why it's easy to sort of make this decision in the moment for both the demand and the cracker from my point of view. But we expect demand to get better in the second quarter as well as the spreads to continue to sort of stabilize at these better margins. So that's sort of how we're looking at it at this stage. You have to remember that propylene prices are well below any sort of historical norm to oil. They're very depressed. If you go run that analysis, it's pretty extraordinary. So we're really just trying to get back to a more normal relationship to the price of oil on propylene.

Terrific. And then if I can ask about the second methanolysis unit in the U.S. You'd indicated in the remarks that you've made progress on permitting, but you haven't selected a location as of yet. Can you just talk about how that process plays out? I mean I don't doubt that communities would welcome a methanolysis unit in our locations, but can you talk about a little more color there?

We are very excited about our partnership with Pepsi, which underpins this facility and gives us the confidence to accelerate this project. We are exploring several locations, including existing sites we own in Texas where we can optimize costs with brownfield and existing infrastructure. Additionally, we are considering other brownfield sites in different states that could be appealing and assessing the capital efficiency, feedstock advantages, and incentives offered by various states to encourage investment in the circular economy and tackle environmental challenges. Engagement from the states has been very positive, and they are eager to get involved in this green initiative. We have not made a final decision yet, but I anticipate we will have that in place within the first half of this year, allowing us to proceed swiftly with the permitting and site development. Our new standardized approach to building these plants enables us to begin engineering even before selecting the site. We are already advancing the engineering and design process, while the infrastructure specifics will be determined based on the site we ultimately choose.

The next question comes from Kevin McCarthy with Vertical Research Partners.

A couple of questions on your capital deployment. So in the prepared remarks last night, Mark, I think you mentioned your methanolysis investments in the aggregate would cost $2.25 billion, which is up about 10% relative to your prior projections. Can you talk about how that flows through? Is it going to be ratable over the next five years or some other shape? And then related to that, are your returns still the same? In other words, are you able to perhaps extract a larger premium to offset the higher project costs? And I guess more broadly for Willie, do you think CapEx will run $700 million to $800 million over the next several years? Or again, is there a different shape to that as you execute on these investments?

Kevin, thanks for the question. Yes, I would highlight here in 2022, we already invested approximately $300 million as we think about our circular investments that we highlighted in the prepared comments. So as you think about approaching $2 billion over the next three to four years. In 2022, '23, we're increasing our CapEx budget to $700 million to $800 million. That includes a step-up on a year-over-year basis. And yes, as you think about a normal, I'll call it, a large capital curve, it will definitely be over $800 million through that time horizon and probably will peak around $1 billion to $1.2 billion.

Okay. And then Mark...

As I think about broader capital allocation...

Sorry, go ahead. You're talking about the assurance; we didn't answer your question.

Yes, I was just going to follow up on that. I think in the past, you talked about 12% plus.

Yes. To clarify regarding returns, the details we shared in today's prepared remarks about the facility design align with the economics we presented during the 2021 innovation phase. The first phase has always involved processing 110,000 tons of waste. The projected $450 million EBITDA remains unchanged, and our confidence is increasing as we finalize contracts and secure feedstock, both in terms of availability and costs, which support these economics. Although capital costs have risen slightly more than we previously indicated—about a 10% increase—these adjustments do not impact the returns. We stated that our returns exceed 12% for the second and third projects, and are above 15% for the first project. We also mentioned our ability to accommodate some of these challenges, which are expected in such capital construction endeavors, and we strive to maintain strong economic plans to ensure returns.

Our next question comes from Matthew DeYoe with Bank of America Merrill Lynch.

One, I have missed this, but if we're looking at the Kingsport methanolysis unit, can we just walk through the progression from cost to profit how much commissioning costs in 2023 numbers? What do we think for how that moves to profit in 2024 and getting that full run rate earnings on that facility?

Yes. So I would highlight as you think about the start-up, we're talking about roughly $35 million, including, I'll call it, the depreciation as it starts up in the back half of the year. So as we think about the first project, you should be getting to a more normalized run rate of growth in 2024. And by the end of '25, we would expect to be close to the full run rate of the plants, which we've highlighted could approach roughly $150 million per project.

All right. On that end, would that mean that 2024 is just neutral? Or would you see EBITDA? And then I guess just a question, you don't really talk much about buyback for next year. And I know CapEx is going up, but it still seems like maybe you have $200 million, $250 million of after dividend cash flow. Do we assume that goes to buyback or I mean your leverage is fine. Can you do in excess of that?

Yes. So definitely, we expect 2024 to be accretive from our Kingsport circular methanolysis projects. So we're confident in the progress. You'll see revenue here in the back half of '23. That turns into earnings and growth in '24 and approaching those run rates as we expect these plants given, I'll call it, the market excitement that's around that in the 1,000 leads that we're already working on. As you think about...

Capital.

On the capital front regarding share buybacks, our priorities for capital allocation remain unchanged. We increased the dividend in the fourth quarter of 2023. Additionally, as we consider $700 million to $800 million in capital expenditures, we are focusing on bolt-on acquisitions instead of share repurchases. We will always maximize our cash flow to provide returns to shareholders, and we have the capacity to effectively utilize the cash.

We always have this debate around best uses of cash in there on a principal basis. When we look at the circular platform, the capital we're deploying there has substantially better returns and valuation potential for the company than buying back stock today, and we think that's the appropriate way to deploy the capital versus buybacks on that front.

Sure. But that's not contemplated in the earnings guidance, right? Or is it?

What?

Any accretion from like a deal or a buyback or anything like that? That would be a huge upside.

Sure. Well, just to highlight, obviously, we executed $1 billion of share buybacks in 2022, both from our operating cash flow and the divestiture proceeds. So we will have, I'll call it, EPS accretion as a result of the full year benefit from that. Right now, that's primarily offset by higher interest expense.

Our next question comes from Mike Sison with Wells Fargo.

Mark, just one question. You spent a lot of time over the last several years transforming the portfolio to more specialty assets. And when you think about the performance in the second half, kind of the start of the first quarter, what can you point out to folks that demonstrate that maybe the performance has the special characteristics or maybe it's more the bounce back in the second half? And clearly, your multiple is where it should be, if it's the case. So just curious what your thoughts on that.

Sure. So first of all, we think we've made tremendous progress in improving our portfolio over the years. We've obviously divested a lot of commodity businesses, acquired some great specialty businesses. In the past, if you go back to that sort of 2011, '12 time frame as well through the acquisitions to '14 and the divestitures more recently and optimized the portfolio. So I think we have a very good track record and portfolio discipline. I think last year, as you look at it, it was a uniquely challenging year for two reasons that you have to sort of consider in judging a history and a future of this portfolio. Obviously, the fourth quarter turns out was the entirety of the earnings decline from a volume mix point of view. So we were actually flat in volume and mix leading up to the fourth quarter, and the entirety of the volume/mix decline was driven there. And because of some of the very unique operational challenges we had last year, those limited our ability to deliver growth, especially in Advanced Materials. So those two factors sort of constrained what was on track at the beginning of January before the Ukraine War, rapid inflation, everything else was going to be a really impressive year of earnings growth. So I wouldn't sort of overwork on trying to interpret too much into 2022. Our challenge and our proof point will be if we deliver this performance that we've just sort of suggested in our outlook discussion today, in this kind of challenging economic environment. That's a really strong endorsement about the quality and strength of the portfolio to manage through these challenges. There's no question, we create a lot of value in markets that have economic sensitivity, whether it's Building & Construction or durables or auto. Auto, all last year was at recession levels. 80% below 2019 is not a good year for auto demand. And we managed to actually still do reasonably well in that business on the volume mix side. So I think we feel really good about the quality of the portfolio from a volume/mix point of view and its ability to deliver innovation and growth through all kinds of platforms, not just big circular platform we've been talking about, but cellulosics has probably $200 million upside when we go forward over the next three, four years. And then the interlayers business, as I discussed earlier, has a tremendous amount of growth. PPF is great. Coating, adhesives has a lot of sustainable introductions to the marketplace, semiconductor leverage we have in high-purity solvency. So growth innovation is very much there as the specialty business should have to deliver good results. Margin stability actually is on the spread side quite good. When you look at the portfolio, it combines to deliver steady spreads at the favorable margin level. And we've demonstrated very good commercial discipline. So what you really got last year is a manufacturing recession in one quarter and a huge currency headwind for the year. And then some limitations on how much growth we're going to have with some one-off operational issues. So I don't think there's any lack of differentiation in this portfolio or quality of that. And I think as we get through this year and start delivering pretty significant growth next year, assuming we put this recession behind us, is going to be very attractive for owners.

The next question comes from John Roberts with Crédit Suisse.

You had an ethylene/propylene flex project for Longview. Has that been delayed? And if you had that in place, would you have still shut down the cracker?

We are not currently building that project. We are finalizing the licensing and initial engineering work to proceed as soon as it's appropriate. We have numerous requests for capital across our portfolio, related to the valuation discussion I mentioned earlier. It's not just the circular segment that has many capital opportunities with attractive returns. Our entire specialty portfolio has similar opportunities. Although we face current economic challenges, we still see growth prospects across our specialty portfolio, which will take priority for capital over the ethylene and propylene investment. We will definitely undertake that investment at the right moment, but we need to carefully manage our overall capital expenditure budget. To address your question, if the ethylene to propylene project were operational, we would not have shut down the cracker. Keep in mind it was taken down for maintenance, and we simply did not restart it after completing the planned maintenance. We would have certainly scheduled maintenance in Q4, but we would currently be transitioning to ethylene to propylene.

Our next question comes from Laurence Alexander with Jefferies.

I have two quick questions. First, regarding the renewables capacity, will the inventory build be reflected in your profit and loss statement, or will it be accounted for separately? Also, could you provide an estimate of the magnitude? Secondly, about the feedback from customers in the end markets, your presentation suggests that the primary theme is an industrial recession caused by destocking for recalibration, while the underlying demand appears to be stable except in the construction sectors. How confident are your customers in that assessment? Additionally, when do you anticipate they might need to recalibrate, and how much notice do you think you would receive if that were necessary?

Sure. On the Kingsport methanolysis project, obviously, we've built out the supply chain. We already have the key raw materials and lease cycle materials as part of our inventory here at year-end as we're preparing for a startup next year. So you can think about there's no significant impact of transitioning from fossil fuel feedstocks to recycled content as we go from 2022 to 2023 as we think about our projects, second U.S. project and the project in France. Again, we could have different operating models in the regions that those are not significant working capital builds.

Regarding your question about end market exposure, it can be categorized into three segments. The segment most affected by the current manufacturing recession is durables and building construction, with a 40% decline in durables and a decrease in building construction in the fourth quarter. These markets are experiencing substantial impacts, and the destocking observed in retail data is significant compared to the ongoing weak demand in these end markets. Destocking is expected to occur eventually, though it’s difficult to predict the timing precisely; we've shared our assumptions for you to incorporate into your models as you see fit. In terms of the automotive sector, demand has already been at recession levels throughout last year. This segment, which is a major profit driver for both the industry and Eastman, likely has limited downside and potential for upside as we progress through this year, despite the economic challenges consumers face regarding discretionary spending. We anticipate stability and modest improvements in this area. Additionally, it's important to note that we are connected to the luxury market since our products are high-value, which has shown resilience last year and is expected to continue performing better even with the rising interest rates impacting the economy. The third segment, which constitutes about half of our revenue, includes what we refer to as stable markets such as medical, consumables, agriculture, food, feed, and water treatment. Although we experienced some destocking in these stable markets during the fourth quarter as companies aimed to reduce high-cost inventory and generate cash, the impact was minimal. The stability in these markets means there isn't much destocking possible, helping to stabilize overall revenue as we move into the upcoming quarters.

Let's make the next question the last one, please.

Of course. Our final question today comes from the line of P.J. Juvekar with Citi.

So Mark, regarding methanolysis, you mentioned that your capital expenditures have increased by 10%, but you don't anticipate a significant change in the expected returns. Are you passing this increased cost on to your customers? Also, considering that plastics have cyclical trends, are your customers prepared to accept the cyclicality and volatility in order for you to maintain steady margins?

Yes. From a spread perspective, our approach to the PET market involves a circular contracting model that aims to maintain consistent spreads between feedstock and energy costs and material prices. Therefore, we anticipate solid stability in our spreads. The model resembles that of the Airgas company. However, demand is still influenced by end-market conditions. There will always be some variability in volume, but since we are focusing on packaging and consumables, this annual volume fluctuation tends to be quite stable. I am not particularly worried about volume in that area. Regarding the specialty aspect of our circular platform, we are not altering the structure of end-market demand or pricing strategies; rather, we are introducing recycled content as an additional differentiator for Tritan and our other copolyesters in the cosmetics sector and beyond. While we will remain sensitive to demand changes within this circular framework, we expect to capture higher margins compared to our current realizations in these products and to grow total volume rapidly. Our competitive advantage in the marketplace stems from high-value growth that boosts our product mix against cost leverage, which holds true in favorable times and leads to accelerated growth. However, we also encounter downturns, like the challenges in the last fourth quarter and the first quarter of this year, where changes in mix become a headwind. Looking ahead, as we move through these challenging periods, not only for the circular platform but also for overall market recovery, there is significant potential for an improved mix as we enter the latter part of this year and into 2024, particularly as we experienced coming out of 2020.

Mark, the Airgas or the industrial gas model hasn't really worked in plastics. What gives you confidence that this would work this time? Is it because this is such a specialty product and the consumers want it or the customers want it that you can have that kind of contract structure?

Yes. So as I said, in specialty, it's just our current model. But when it comes to the PET, that's where the industrial gas model concept applies. And yes, it's a unique offering, right? We're the only large-scale company on the planet, especially in North America and Europe, who's offering recycled content from hard recycled plastics. And when you get to the food grade industry, mechanical can't remotely meet their needs. And someone has to plug that gap if they're going to hit their targets, and we are way ahead of our competition in being able to provide that service. And that's exactly what an Airgas company does to provide a service to convert a product into a highly needed input. And that's sort of where we're at today, and that's our confidence as we go forward into these three projects. And that's why we continue to maintain a discipline of not building these facilities unless we get these kinds of contracts because I'm not getting back into, as you said, P.J., the traditional plastics business with high yield margin volatility; we just won't do that.

Okay. Thanks again for joining us today. We really appreciate it. I hope you have a great day.

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