Eastman Chemical Company (NYSE:EMN) Q4 2022 Earnings Call Transcript

Page 1 of 16

Eastman Chemical Company (NYSE:EMN) Q4 2022 Earnings Call Transcript January 27, 2023

Eastman Chemical Company misses on earnings expectations. Reported EPS is $0.89 EPS, expectations were $1.26.

Operator: 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.

Manufacturing, Industrial, Industry

Photo by Robin Sommer on Unsplash

Greg Riddle: Thank you, Emily, and good morning, 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.

See also 12 Cheap Blue Chip Stocks To Buy and 12 Best S&P 500 Dividend Stocks To Buy.

Q&A Session

Follow Eastman Chemical Co (NYSE:EMN)

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

Joshua Spector : 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?

Mark Costa : Sure, Josh, and welcome. The — 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 B&C 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. And 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 ’22 $2 billion of inflation. So a significant amount of inflation, and we’ve caught up with most of that and 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. So Advanced Materials is probably the most important one to start with because it has a pretty significant tail when in spread. When you think about it, they had one of the most challenging raw material and energy environments across our segments with VAM and PVOH up 45% relative to ’21 PX, up 40%; energy up 70%. Now they kept up with that inflation with 13% increases in price, but 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 ’21 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.

Page 1 of 16