Good day everyone and welcome to the Fourth Quarter Full Year 2023 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website. We will now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead.

Thank you, Alex and good morning everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday after market closed, we posted our fourth quarter and full year 2023 financial results news release and SEC 8-K filing, our slides and the related prepared remarks in the Investor Relations section of our website. Before we begin, I'll cover two items. First, during this presentation, you will hear 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 2023 financial results news release during this call, in the preceding slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2022 and the Form 10-K to be filed for full year 2023. 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 the description of the excluded and adjusted items are available in the fourth quarter and full year 2023 financial results news release. I'd like to now turn the call over to Mark for some remarks.

Before I jump into the Q&A, I do want to take the opportunity to recognize the team that's been working on the methanolysis plant. There's a huge team out there that's been working tremendously since our last call in October to commission and start up this facility and get us to the point where we're introducing feedstock. And that's a remarkable accomplishment when you look over this time frame. They've worked incredibly hard through the holidays, made a lot of personal sacrifice, and they've got us to this stage. It’s a real testament to their dedication and belief in the company and the excitement that every owner of this company has around building the circular economy. It's also a great example of the power of our Tennessee site. Its scale and integration has really enabled this start-up process to go this quickly and well. Because we have such a vast set of resources and capabilities, it literally allowed us to swing a lot of those people from different parts of the plant into this start-up process and make a significant difference. I just wanted to express my thanks to all of the people who've been involved in this process. It's been a tremendous program and they really did make a lot of sacrifices, and we deeply appreciate it. With that, we'll open it up to Q&A.

Our first question for today comes from Josh Spector of UBS.

I wanted to follow up on the methanol facility, specifically the methanolysis facility. You're close to producing an on-spec product, but could you discuss the milestones you aim to achieve this year? When will you determine if the yields meet expectations? Do you anticipate reaching full operational capacity and aligning the cost structure so that EBITDA meets your long-term expectations?

It's a question we are very focused on. And we are very excited to be at the stage we're at right now. As we said in our comments, we're at the point where we've been starting up the facility, completed all the commissioning, and are introducing feedstock which will start to be processed. The front end of the plant takes a little bit of time to do that, to get the system properly charged, and then it starts going through the plant. So we feel that we're in good shape to be on spec soon with material recognizing revenue and starting that process to serve our customers who are very eager to get product from us. When I say 'soon,' I mean sort of days or weeks from where we sit right now. We feel like we're on track to start up the plant and serve customer demand relative to that $75 million. Now as you talk about the plant side of this, you don’t go from the plants producing on-spec material to full ramp-up rates overnight. It takes a few months to optimize the operations and ensure everything is working properly as you scale it up. We will be doing that and ramping up production. The way this plant works and how we can get the recycled content out, we should start generating revenue relatively soon. Right now, we are still in that pre-production phase, and expenses are a bit higher than when you are pulling the operating resources back to a steady state. The demand side, I'd say, is actually quite good. What's different about most plants in this situation is we didn't start selling recycled content when the plant starts; we began over a year ago. We have a technology called glycolysis; it's a bridging technology where we can use our existing assets. You can use clean, clear bottles which are what's needed with glycolysis to make recycled content. So, long term, it's not a great strategy because it's very costly to buy those clean bottles and it's not efficient in utilizing existing assets. But what it did allow us to do is supply recycled content polymer to a number of brands. In fact, the brands that you can see on that slide in the presentation we provided have been selling our recycled content from that technology into the marketplace. So we're not trying to ramp them up; they're already ready to go in the market and are very eager to get material from us to accelerate volume build into this year. That really helps us know that we can get the price premiums we want to support our economics as well as have a number of customers who are going to buy the moment we have product coming out of the plant. There are a bunch of other brands we've been working on that we just didn't have the capacity to serve last year that are also very interested in the product, and we will be qualifying them and ramping them up. The ramp-up will start to help Q2 relative to Q1 but make a big difference in the second half relative to the first half where you see this incremental EBITDA. The last point I would mention is on the cost side; normally, when you build a big specialty plant, there are huge operating cost headwinds as you start up, and we certainly have operating costs for this plant. But they are offset by the pre-production expense of last year and the higher costs of the glycolysis process I just mentioned. The costs are relatively neutral which helps the revenue flow pretty fast to EBITDA through a year-over-year steady cost structure.

And maybe just quickly, so as you go through all that, you made some comments that you wouldn't FID the next plant until this plant is done. Is that just on-spec product? Or is there at some point, production yield or another metric you're looking at to say we're good; the design is fine, we're going to move ahead with that project? Because you seem pretty bullish about getting the customer commitments for that second plant soon, so I wonder what's the limiting factor there.

Yes. There are a couple of limiting factors. One, obviously, is we want to see the Kingsport plant technology up and running. We want to see that the yields and efficiencies are what we expect them to be, and the plant is operating well. That will give us insights and knowledge to feel comfortable about the quality of this plant. It's important to keep in mind that to minimize capital risk and construction risk, we're going to leverage and build the same plant in France for the second plant. There are improvements we'll learn through this process, but it will be the same scale and design, leveraging all the learning we've gone through in this plant to do a better job constructing the second and third plants. The customer contracts are the second component of that decision-making, and the incentives for the project are the third part. We feel good about all of those, and we think, again, in the same kind of time frame in the next several months, we should be in a position to have FID. When construction starts is a little bit different than declaring FID. We're still completing engineering and permitting on the environmental side that is ongoing as we speak. We're not talking about starting actual construction until probably late summer with the path we're on right now. This gives us all that time to ensure we believe in how the plant operates before we start construction on the second and third plants.

Our next question comes from David Begleiter from Deutsche Bank.

Mark, some of your customers and peers this earnings season have noted some modest stabilization, improvement in certain markets, underlying demand. Are you seeing any of that in any of your geographies or key markets?

Certainly, David. What I'd say is we are seeing stabilization, absolutely. Our guidance is built on the assumption that primary demand this year is going to be similar to last year in the discretionary markets. In stable markets like personal care, water treatment, consumer packaging, et cetera, we would expect modest growth from last year. To be clear, last year's demand was low. We're not predicting a meaningful improvement from those low levels throughout last year. In automotive, we actually grew last year and think it'll be more flattish this year. That's where we are in primary demand. The key driver for a significant volume increase this year versus last year is the lack of destocking which drove earnings down by about $450 million last year. We said in October that we should assume about a third of that was destocking; it's probably a bit more than that but to play it safe, we'll call it a third. That's about $150 million of a lack of demand headwind from last year relative to this year, which is like an easy comp. We can see evidence of that in the fourth quarter and certainly into the first quarter. For example, the durables business, which was most impacted from a demand drop last year, had volumes in the second half of last year that were 40% higher than in the first half. We're still not where we want to be from a market demand point of view, but destocking is over. We're seeing the same in many stable markets. Destocking occurred in personal care, water treatment, and similar sectors in the first half. By the back half of the year, we’re seeing some modest market growth already. So for the overall year, compared to '22, demand was relatively flat in some of those markets.

And just briefly on AFP. You mentioned some negative price cost in 2024. Where are you expecting to see the pricing pressure in AFP?

So first of all, the spread management last year was great in AFP. We have a lot of business on price and cost pass-through contracts that give us stable margins. That was helpful in 2022 as raw materials increased – our prices kept track. As prices came off last year, raw material prices decreased, the price contracts followed, but there's a lag. So we had an improving spread last year for AFP. If you look at spreads this year relative to last year, there will be some headwind due to how these cost pass-through contracts work.

Our next question comes from Frank Mitsch of Fermium Research.

And if I could follow up in general on pricing. As you indicated in terms of the cost pass-through contracts, 2022 was a very good year. And as we're ending 2023 here, pricing has been taking a bit of a hit. How are you thinking overall about Eastman's pricing ability in 2024 for the overall enterprise?

So first of all, I think it's important to have a little history around pricing; it's a pretty impressive story. If you think about 2020 to '22, our company faced $2.4 billion of inflation. We had cost pass-through trying to keep up, but there was a lag that created compression and prices catching up to those increases. Overall, we've done an excellent job of getting prices to catch up to inflation by the end of 2022 but it created a compression headwind in specialties. This is how we entered 2023, at a pretty high elevation with that inflation. The accomplishments in 2022 were commendable, with our teams demonstrating commercial excellence and the real strength of our value proposition holding prices outside of cost pass-through contracts in the specialties. We also improved pricing in Fibers dramatically. Despite the $450 million in volume headwind and $50 million of currency in 2023, we managed price effectively in a difficult economic environment. About $300 million of that is in Fibers based on industry conditions as well as a good portion in Advanced Materials where we had extraordinarily high raw materials in 2022, enabling us to recover margins as raw material prices decreased. Overall, we expect 2024 pricing will see modest reductions reflecting how the raw material and energy environment has improved, but spreads in Advanced Materials and AFP will be similar to last year. We don't expect a tailwind from those, but we believe we'll hold on to margins.

Got it. All right. And then perhaps if you could – I took a look year-over-year, Europe actually declined less than the United States. Is that just a function of Europe entering the year in a worse position? Or is there anything that you can talk about in terms of perhaps any sort of green shoots or what have you in that part of the world?

Part of the reason North America is down as much as it was, is that all of Chemical Intermediates sits in North America predominantly. The revenue decline in Chemical Intermediates has been almost exclusively in this country. The rest of the portfolio is more globally diverse, and we saw demand drop off evenly across the globe, along with destocking. China has its challenges, as do Europe and the U.S., with the U.S. probably a bit stronger economically than the other two. But from a green shoots perspective, I wouldn’t be ready to declare market recovery in the consumer discretionary world; so, cars, building construction, consumer durables, electronics. There may be some improvement, but it's too early to make that declaration. The stable markets are definitely growing. Medical is likely to grow 4% to 5%. There’s still destocking in the first quarter, but the underlying market will grow 5%. Agriculture is growing, personal care and water treatment as well. A lot of the packaging sector is seeing consumer brands pivoting from focus on price to recovering volume; we will benefit from that as well. This situation accounts for about half our revenue, where modest growth exists in these stable markets.

Maybe just first on Advanced Materials. Can you help us understand the $450 million guide there and maybe the degree of upside beyond that? I think you get $50 million from Kingsport, and you're guiding to $100 million for the first quarter. Given the severity of the demand decline, utilization headwinds, destocking in 2023, is there a path to $500 million or more, even in a modestly positive demand environment from here?

Given the challenges in Advanced Materials with rough demand in Q4 of '22 and throughout all of '23, we're beginning to earn our way in our recovery and working to improve beyond $450 million. The key tailwinds driving Advanced Materials recovery are volume and mix. At the corporate level, this story is largely an AM story; 2/3 of the $150 million of a lack of destocking resides in the outlook for this segment. The durables market has already shown significant recovery, and medical has great underlying growth. It's just been impacted by a lot of caution in the supply chain crises, that's still working its way out in the first quarter, but we can see it'll be less in the second quarter and we will see growth in the back half of the year. Markets have already done significant destocking or stabilizing with a lack of destocking aiding in this progress. In addition, we have a return to seasonality; the second and third quarters are typically stronger, and we expect that trend to continue. The orders in January, February, March show progression getting better. The ramp-up from the methanolysis plant will also contribute $50 million of EBITDA that you mentioned in Advanced Materials. The other $25 million benefit comes from corporate, which is where last year's pre-production expenses have been recorded. Finally, the automotive market, although it’s going to be flat, has us growing above that market through strong presence in HUD and premium products. Although EV growth may be slower than anticipated, it’s still growing significantly faster than ICE cars, where we supply high-value products with added functionality. We expect price and cost relationships in AM to be somewhat neutral to last year, which will not provide a tailwind but shouldn’t be a significant headwind either. Volume recovery is where we will see improvement, allowing us to exceed $450 million.

As we think about the year-over-year increase and our depreciation expense, a substantial portion of that will go to the Advanced Materials segment.

That's very helpful. And maybe just a follow-up on EVs, how much outperformance relative to the market did you see from EV and premium volume mix impact? Given that we've seen some of that headline deceleration in EVs and looming consumer weakness, do you see potential that mix improvement will decelerate into 2024?

Certainly, I think the year-over-year improvement rate in '24 to '23 will be less than what it was in '23. There's still plenty of applications we're winning. There may be a primary demand issue slowing down, but we are establishing presence in various EV accounts. Thus, even if we expect the overall flat market, growth from premium products will be a supportive factor for us. The overall production market is moderating. This consistency in premium product growth helps our situation.

Mark, could you talk a little bit about plants 2 and 3? There were some comments in the prepared remarks about methanolysis and the teams working to ensure they stay ahead of inflation. How are you feeling about the CapEx estimates for those plants?

You're absolutely right, it's an inflationary environment. If you look back to Investor Day in December 2021, the capital estimates we had for both Kingsport and these projects have increased, which is true across every chemical industry project I’ve seen. We are managing the inflation. A lot of what we saw happen in Kingsport went beyond just normal inflation. For instance, we faced significant productivity issues with a contractor not having skilled labor and suffered from many severe weather events along the way. Despite the challenges, we've learned a lot from this first methanolysis project, where we're implementing our learnings in building the France and second U.S. projects more efficiently. While inflation has occurred, some materials have seen a deflationary trend, which may help offset or slow down future inflation. We believe that capital efficiency will improve as we build the same plant. All scopes will be locked up before we break ground, and this will bolster our ability to control CapEx estimates compared to Kingsport. We are working with strong firms, Technip and Fluor, for these projects. We feel confident in managing capital costs. Ultimately, we expect higher costs, but we are aiming for proper customer contracts and incentives. Overall, the Kingsport project remains at a 15% return on capital despite cost increases, and the new projects are still projected to have returns above 12%. Even with inflation, we maintain confidence in these projects starting this year, as long as we secure customer commitments, incentives, and finalize capital numbers.

Our next question comes from Mike Leithead from Barclays.

First question, I wanted to circle back on the EPS outlook. I think the last number of years, the first quarter has roughly accounted for 25% of what Eastman's full year EPS turns out to be. This year, Q1 is maybe 18% or so of the full year guide. So can you talk through why this year's Q1 is a bit different? Is it mainly the lingering destocking that gets you a bit better into Q2?

As Mark outlined, we expect the traditional curve; we're growing earnings through Q1. Traditionally, Q2 and Q3 are the best quarters. There's a combination of factors at play — the usual seasonal patterns and specific items impacting us in '23 that are turning to tailwinds in '24. Those are key items.

There's a couple of unique elements in Q1 besides the seasonal pattern; unusual low orders from Fibers customers account for a portion. They aren't facing volume risk on the contract; they're just not buying as much in Q1 as they will in Q2 and Q3. The timing of fluid fills is also slower in Q1 but we have more in Q2. So, beyond the normal circumstances, a little destocking persists in agriculture and medical, which will weigh in on Q1.

That's helpful. And then just briefly on methanolysis plants, 2 and 3 again. If everything goes as planned, breaking ground by late this year, is it fair to say that these plants, commercially, would be running something like mid-2026 as a starting point?

Based on the current schedule, we’re aiming for 2027 rather than 2026 for the start of these projects. We’re incorporating efficiency and timing strategies to build these plants more effectively, but we’re also managing multiple projects simultaneously. It takes time to complete everything; however, the market is eager for our product with significant targets by 2030, so we remain committed to meeting those goals while ensuring these plants’ effectiveness. We want to ensure we've learned everything we can from Kingsport before breaking ground.

Our next question comes from Jeff Zekauskas of JPMorgan.

I think in the Advanced Materials discussion, there was some noting of weak fourth quarter's amount. Asian auto production is always very strong in the fourth quarter, especially EV production. Is it the case that your EV exposure in Advanced Materials is more with domestic companies in Europe rather than with Chinese companies?

In the fourth quarter, there were many factors in play for Advanced Materials. Our relationships with both Chinese and Western EV makers are strong. For the auto industry, performance films are important; we focus on EVs and ICE cars together, plus paint protection film. The issues in the quarter did not solely come from OEM manufacturers. Overall, auto demand was better, and we are growing above the market this year.

I believe that the original plan for the methanolysis project was to spend $250 million for the project itself in Kingsport, with an additional $175 million for Tritan. Did you partially build the Tritan plant, or was nothing constructed? As for the estimates for plants 2 and 3, I understand that it was initially projected to be $600 million to $800 million. What are those estimates now?

The last update on all programs indicated that the three methanolysis facilities would require approximately $2.25 billion. Mark has also highlighted that inflation since 2021 has greatly impacted that number. Every project over this time frame has incurred increases. We've managed the higher CapEx within our budgets outlined for the last couple of years. I referenced earlier that we had around $30 million of increased depreciation expense going from 2023 to 2024, with much of that tied to the Kingsport methanolysis facility.

We’ve partially constructed the Tritan facility but paused that work. We will restart it as we align it with our outlook on Tritan demand, which is improving this quarter. When we determine Tritan demand in this next quarter, we will resume construction to ensure we don't miss serving the market.

Our next question comes from John Roberts of Mizuho.

Are the Sig Tow contracts working as expected in 2024? Do you think you’ll reach a point where the decline in Sig Tow volume is offset by the new products in Fibers to maintain flat to up volume overall?

Great question. I'm optimistic about our cellulosic stream these days; we've navigated a rough patch for a while. Our tow business is currently stable, and we're back to profit levels that allow us to reliably serve customers. They value our supply reliability. We have 100% of our contracts this year for volume and price, providing earnings stability. We foresee improvement over last year. We have about 90% of our contracts in place for '25 and close to 70% for '26. We’re positive about the Fibers business; the growth from our products will support our overall volumes and enhance profitability. Aventa, which allows us to replace polystyrene with a biodegradable cellulosic material, presents a significant growth opportunity.

Our next question comes from Mike Sison of Wells Fargo.

Nice outlook for '24 so far. Just curious, Mark, your volumes were down mid-single digits in the fourth. It's been quite some time since we've seen volume growth. When do you think AFP and AM will turn the quarter? What type of volume growth is needed to hit the midpoint of your guide?

Yes, we will see a shift in Q2 and the second half of this year. The situation is murky in Q1 due to some unique factors I've mentioned – timing of fills and customer purchasing behaviors. Destocking is almost finished—it’s been an extended cycle unlike any other, extending beyond typical patterns in history—but we're ready to connect our production volumes back to markets, enabling a strong recovery this year.

This is Willie speaking. As we consider year-over-year increases and depreciation expenses, a substantial portion will be in the Advanced Materials segment.

Are you likely to stagger construction of methanolysis number 2 and number 3? Or do you think you're in a strong enough capital position and confidence in this business to build the two simultaneously?

We would expect to stagger these, Aleksey. There won’t be a significant interval, but we will definitely stagger with the France project breaking ground in late summer. Following that, we would look to start our second U.S. project shortly thereafter.

Do you have significant customers on the fence right now, expressing that they would like to see the Kingsport plant start-up? If it goes well, will that lead to more customers willing to sign up for the other two?

Yes, we believe so. This industry has limited examples of successful environmentally friendly technology solutions, impacting customers’ willingness to commit until they see proof of availability at reasonable prices. We have been selling recycled content successfully, confirming our price expectations with several contracts, so we feel optimistic. However, predictably weak market conditions limit customer launches, requiring careful forecasting for the $75 million of incremental EBITDA projected for this year. This assumes upside potential as well, depending on how markets unfold.

Our next question comes from Kevin McCarthy of Vertical Research Partners.

Mark, if the methanolysis start-up and ramp go smoothly such that you earn $75 million in EBITDA as you've indicated, what could that earnings level become in 2025?

As we've discussed, roughly $50 million of EBITDA will arise in the Advanced Materials segment, primarily in the second half. We anticipate exiting 2025 at a level greater than a $75 million EBITDA run rate. We expect to reach roughly a $150 million run rate, aided by ongoing brand connections and launches.

Perfect. I appreciate that. And secondly, I want to come back to the Fibers discussion. You've got substantial contracts through 2026. When we talk about a lot of the output being under contract, does that mean the volume is committed? Can you speak to the degree of visibility into both pricing and cost?

The commitments for '25 and '26 cover both volume and price. There are ranges; they have minimum and maximum volumes. Most of these pricing formulas adjust based on changes in energy and raw materials, allowing for price changes depending on market conditions. Thus, these margins see adjustments if costs rise or fall.

Our next question comes from Laurence Alexander of Jefferies.

Can you discuss how the policy landscape is shifting in terms of the potential incentives you may receive for the second and third plants compared to your initial expectations?

On the incentives side, the EU and its individual governments have prescribed methods that dictate how they offer incentives. We're engaged in securing the higher end of what's allowed within these frameworks, and improvements are expected due to inflation impacting CapEx costs. In the U.S., we have an application with the Inflation Reduction Act, but we've yet to receive confirmation on potential rewards. We've requested substantial funding to support our environmental investments aimed at maintaining carbon neutrality. There are two critical demands from customers: a strong desire for 100% recycled content and a push toward carbon neutrality. Both of the prospective plants are designed to meet those demands, which introduces significant appeal around our environmental technology solutions.

To what extent have you pulled forward productivity that might impact your ability to achieve incremental productivity gains over the next few years?

We faced extraordinary inflation in '21 and '22, losing productivity to COVID and remote work challenges. Last year, we aggressively pursued $200 million in productivity to recover from it. This year, we're only getting enough productivity to offset inflation, around $100 million, which is much more typical for us. We will require productivity to offset inflation annually to invest in growth while delivering earnings and cash back to shareholders. We expect continued productivity, but rather than a significant spike, it will align more closely with typical offsets to inflation. The recovery of volume in specialties will be critical for our success.

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

Our final question for today comes from Salvator Tiano from Bank of America.

I just want to ask about the M&A landscape. What are you seeing here? Now that it looks like things are improving, are you incentivized to look for specific targets?

We have shown that we are disciplined with our portfolio overall. As we prioritize bolt-on opportunities, we're focusing on Additives & Functional Products and Advanced Materials segments. Our key focus now is to execute our organic growth program. However, as business recovers and the rate environment evolves, there may be better deal space emerging.

Thank you, everybody, for joining us. I hope you have a great day.

Thank you for joining today's call. You may now disconnect your lines.