Eastman Chemical Company (NYSE:EMN) Q2 2023 Earnings Call Transcript

Eastman Chemical Company (NYSE:EMN) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good day everyone and welcome to the Second Quarter 2023 Eastman Conference Call. Today’s conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. I’ll now turn the call over to Mr. Greg Riddle of Eastman Investor Relations. Please go ahead, sir.

Greg Riddle: Thank you, Elliot, and good morning everyone and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; and William McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday after market closed, we posted our second quarter 2023 financial results news release and SEC 8-K filing, our slides and the related prepared remarks in the Investors section of our website, www.aspen.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 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-Q to be filed for second quarter 2023.

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 2023 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. Elliot, please, let’s start with our first question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Josh Spector with UBS. Your line is open.

Josh Spector: Yes, hi. Thanks for taking my question. I guess, first, I was just wondering if you could talk about the cadence of earnings here in the second half. Obviously, you’re talking about a number of inventory adjustments impacting 3Q. If you could talk towards what you’re thinking more of the steady state looks like, whether it’s 4Q or maybe beyond that, and what that implies for longer-term earnings CAGR here? Thanks.

Mark Costa: Good morning Josh and thanks for the question. So, there’s a lot embedded in that question about the back half of the year and how that indicates where we go into next year. So, first of all, I’d start with — we obviously, in April, thought demand was going to be better in the back half of the year, which was principally an assumption based on destocking really being complete by the end of the second quarter. Obviously, we and everyone else in the sector has come to a different point of view that, while demand at the primary level, I don’t think is changing that much. It’s not getting worse in our perspective, and I haven’t heard anyone else suggest that. We are expecting that there’s a lot more destocking that continues to go on in some end markets, which has really been the impact to our outlook in the back half of the year.

So, some areas, whether it’s this year or next year, for example, automotive, we have solid growth in this quarter. We expect that to continue to be solid through the back half of the year. And there’s so much pent-up demand. And when you think about 2024, I would expect it to continue to be a next year relative to this year. So that market, aviation, same story in very good shape. You have a lot of sort of stable end markets where demand has been off in that sort of 3%, 4%, 5% range. When you look at all the fast-moving consumer goods companies out there fully recognizing that they’re holding price and being very disciplined to expand their margins that way with the raw material tailwinds, and accepting that they probably wouldn’t gain much volume if they reduce price.

So, disciplined, like we’re maintaining, frankly, in our specialties. But in addition to that, they’re managing cash too. So, we saw an additional sort of 8% to 12% destocking on top of that demand in the fourth quarter, first quarter. But fortunately, as we go into the second quarter, lessening on that destocking and expect much less destocking in those kind of stable markets like packaging, personal care, water treatment. So, that feels like it’s moving in the right direction as we go to the second half and of course, that would continue also into 2024. When you look at the consumer discretionary markets — actually, I would take two other stable markets just to deal with them. So, there’s a couple that also took some sort of extreme negatives in additional destocking in Q2, which was packaging and medical in the Advanced Materials segment.

And that’s — they were carrying a bunch of safety stock from last year. Demand wasn’t improving as they expected. And so they really started destocking in the second quarter, but they also seem to have addressed their issues predominantly in the second quarter. So, that’s also expected to get a bit better as we go into the back half of the year, as that destocking reduces through the third quarter and certainly seems to have run its course in by the fourth. So, again, improvement relative to next year, especially when you think about all these markets had a certain amount of destocking that won’t repeat in 2024, that’s a tailwind. So, the two bigger markets that drive a huge amount of value for us on a profitability point of view, like automotive that had the most demand impact is sort of in the consumer discretionary area as well, like durables and building construction.