Frank Mitsch: Good morning. I did appreciate the video on methanolysis, so thanks for giving us the link there. Mark, Advanced Materials has had a difficult 2023 on the backs of a difficult 2022 where you’re now expecting 2023 to come in below $400 million of EBIT. I took a look back, the last time that happened that you were below $400 million of you was back in 2014. So I know it’s been a difficult couple of years, what sort of confidence might you have that that business can get to $500 million or better in 2024?
Mark Costa: Yes, so Frank, we feel very good about [indiscernible] what you just said, getting this business to come back considerably from where it is now. The bridge I just laid out at the corporate level is very true at the AM level and all of those elements. So, if you think about this year, just as context before we get to next year, the extremity of the demand decline was more than anything we’ve ever seen before. So we’ve seen difficult demand environments in 2009, in 2020, but those were over three quarters in 2009 and two quarters in 2020. We’re now in our fifth quarter of low demand and some applications continue destocking. So this is something we’ve never really seen before. But it is all demand related, and it’s a lot of destocking that where people got out of control in building inventory during the supply chain crisis.
And some of the markets that we’re in have very long supply chains. When you think about consumer durables or making the polymers here, having ship it all the way to China, go through multiple steps to get an appliance or TV or something made and then shipping it back to the US and Europe, you’ve got six to 10 steps. It’s a long supply chain to deplete. When there is such a significant step-down in demand that’s as bad as 2009 when you think about consumer durables warehousing for that matter. And so, the good news is, we can see some markets bottoming out and recovering really well. So, durables is down 40% in the fourth quarter of last year, it was even worse in the first quarter, came back 30% in the second quarter relative to the first and another 15% back in the third quarter.
Now, it’s going to be a little softer in the fourth quarter because of normal seasonality of activity and what customers do. But you can see that — the bottom of that market was the first quarter. And it’s certainly in better shape as the de-stocking has definitely played out we think at the end of the third quarter. We have some other markets where the destocking is also still pretty extensive, like medical and packaging. It didn’t start like ag until the second quarter of this year, and it’s finishing out through this quarter as we can see it. So there’s different timing and different levels of drop across the segment when it comes to specialty plastics, but we are pretty confident that the destocking part will be over by the end of this year.
And when you think about that $450 million of variable margin down for volume and mix, about half of that is in the AM segment. So you can start seeing how that on the destocking part comes back. That’s just on the destocking part. Then you’ve got the $75 million of EBITDA coming from the methanolysis to add back to next year on top of this year. Remember, only $50 million of that’s going to show up in AM and the other $25 million in other. And then you’ve got a lot of these stable markets that are going to have some amount of very modest growth in the sort of packaging, medical, all we’re going through this year is a decline in demand in medicals. Surgeries are steadying up. It’s just a lot of destocking, but it’s very high value and painful where you get passed it.
So we feel good about that. About $40 million of the $75 million of the asset utilization headwind from inventory management comes back as a tailwind. $35 million of FX as a headwind this year. I don’t know where currency will go next year, so that could be up or down, but it’s a significant headwind this year when you think about — looking at the total decline. So you’ve got the destocking coming off, you’ve got the markets, you have the utilization tailwind, Kingsport, you’ve got innovation, you’ve got the auto market, which we expect to continue to grow, and a lot of the innovation that’s happening in there. There’s a lot of innovation throughout the portfolio in AM that will create growth once the market stabilizes and customers are confident doing new launches.
So we feel great, and the incremental margins will be impressive because we’re going to keep the cost structure flat.
Frank Mitsch: Very helpful. If I could follow up on the asset utilization, just a clarification. In the appendix, the updated number on the headwind is $100 million on the lower asset utilization. It says first half versus second half versus the prior $75 million and you’re expecting a $75 million benefit in 2024. Shouldn’t we be expecting $100 million benefit in 2024 on asset utilization if the headwind for 2023 is higher? I mean, I wouldn’t assume, are you assuming that you’re going to run at lower asset utilization as we start 2024?
William McLain: Frank, this is Willie. So you’ve got it correct on the first half, second half. That increased from $75 million to $100 million. And sequentially, as Mark has highlighted, it was a $75 million headwind to Q2. With that momentum, we would expect it to improve quite a bit as we go from Q3 to Q4. But the full year, obviously, you’re taking the reference 2022, and that doesn’t come into effect as you look 2023 to 2024. So $75 million is a reasonable estimate. It may be a little bit higher, but right now $75 million is close enough.
Mark Costa: [Multiple Speakers] Hi, Frank. Part of it is, we built a little inventory in the first quarter, and so you’ve got to offset that to the $100 million, because that’s the first half, second half. So $75 million implies we’re running our assets in a similar manner next year and get that tailwind.
Frank Mitsch: Okay. Thanks so much.
Operator: Our next question comes from Vincent Andrews of Morgan Stanley. Vincent. Please go ahead.
Vincent Andrews: Thank you. Good morning everyone. Mark, your prepared comments talked about the potential for some state or federal incentives for the US methanolysis plant. What’s the sort of order of magnitude and what might be available and when will you know?
Mark Costa: So yes, the Inflation Reduction Act is a great program for investing, inspiring sustainable investments and we certainly see several of our projects that we’re doing available for credit. When it comes to the second methanolysis plant here in the US, the one that we’re doing with Pepsi baseload. That funding could be about $350 million of capital. It is what’s in the application. That doesn’t mean that’s what we’re going to get. That’s what we’re asking for. And so, the good news is, we’ve been through a couple of rounds now and we continue to be considered for that program. It’s a very competitive process. There’s also some tax credits that we’re pursuing as well. And we should have insight on what they choose to give all of us out of our requests in the first-quarter of next year.
It’s what we’ve been told. But you never know, it’s a government process. So who knows how the timing will work. But it’s significant. It’s a considerable help. We’re also pursuing additional incentives in Europe with our project there in France, not at that scale, but some additional incentives.
Vincent Andrews: Okay. And could you just talk about the sale of the plant assets to INEOS. Is that something that you’ve been working on for a long-time? Or is it something that just sort of came up this year? And is there anything else like that, that’s being contemplated?
Mark Costa: Thanks for the question. And obviously, we’ve had an ongoing relationship with the INEOS Acetyls. And through their acquisition of the BP assets for 10 years now, so I would say it’s just do that ongoing partnership that we’ve had at the Texas City site. As we think about longer-term in both increasing the percentage of Eastman that specialty, as well as the highest and best use, INEOS is the best owner for that. And also as we think about strategically feedstocks for our Advanced Materials segment long-term. So all-in-all, all those factors came into play and the team did a great job here and we expect to close that here in Q4. And that provides about $400 million of cash and we expect to use that to pay-down debt here in the near-term and for it to be basically immediately accretive. Right now, I would say, there is no other items like this in the pipeline. We’re always evaluating the portfolio. But nothing imminent.
