Good day. And welcome to the Eastman Chemical Third Quarter 2020 Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's 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, Maria and good morning, everyone and thanks 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, in addition to our third quarter 2020 financial news release and SEC 8-K filing, we posted slides and related prepared remarks in the Investor section of our website, www.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 the Company's third quarter 2020 financial results news release during this call, in the slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for second quarter 2020 and the Form 10-Q to be filed for third quarter 2020.

Second, earnings referenced in this presentation exclude certain non-core and unusual items and use an adjusted effective tax rate using the forecasted tax rate for the full year.

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 third quarter financial results news release. With that, I'll turn the call over to Mark..

Thanks, Greg. Before we answer your questions, I want to take a few minutes to make some comments. We’ve had a strong recovery in the third quarter and solid performance through the first nine months of 2020, despite the challenges associated with COVID-19.

Our employees around the world have done a great job of taking the actions necessary to keep their coworkers and themselves safe and healthy. We remain steadfast in this effort, especially as we see a resurgence of COVID-19, and continue to be committed to build a more inclusive teams so everyone can fully contribute at work.

As we think about the impact of the pandemic on our business, we are leading from a position of strength with our innovation-driven growth model, which continues to be at the heart of how we win.

As we moved through the third quarter, demand across our businesses improved, particularly for markets most impacted by COVID-19, especially auto, building, construction, consumer durables and some other markets.

Our earnings were strong, with almost a 60% improvement from the second quarter, driven by innovation and market development, and the outstanding work of Eastman employees as they navigate these challenging and unprecedented environment.

Additionally, we made progress on our plans to generate $25 million to $50 million of licensing technology earnings over the next few years, with $14 million of earnings in the third quarter. End-markets are recovering as the third quarter reflected a strong improvement.

We saw a 10% sequential recovery in volume and mix from Q2 that got us back to within 5% of last year, which was limited by our planned maintenance shutdowns in CI. On a nine-month basis, our volume and mix is down 6%, which is well above underlying markets.

This resilient performance is due to our robust and diverse end market positions and the strength of our innovations. We realized a strong improvement in our most impacted and mixed impacted markets. In our resilient end markets, the benefit we enjoyed in the first part of the year moderated as expected.

That said, volume in our resilient markets is approximately flat year-over-year through the first nine months. We see continue momentum in October, and into November, based on what we know today, we project that volume and mix for Eastman will approach fourth quarter levels of ’19.

A testament to the resiliency of our portfolio and the great work of Eastman team has done to mitigate the impacts of COVID-19. All that said, we are focused on what we can control.

Across the portfolio, we continue to create our own growth through our innovation-driven growth model, whether its in Performance Films, Specialty Plastics or architectural coatings among others, we are performing better than our recovering end markets. Prepared remarks I shared with you, how we’re leading the way in innovation market development.

I'm excited about the early strong customer engagement with a new potentially revolutionary product in architectural space, which has the potential to become one of Eastman's top three growth platforms.

We've expanded our paint protection portfolio by launching a black PPF, expanding our position from clear products to opaque, a market with tremendous growth. In a world where sustainability is driving consumer behaviour, we've had a number of wins across our sustainable product offering that leverage our innovative molecular recycling technologies.

Assuming economic conditions remain as they currently are, we expect our fourth quarter adjusted EBIT will be similar to the fourth quarter of 2019 adjusted EPS of $1.42. If the volume and mix strength in October continues through the remainder of the quarter, our EPS could be above the prior year.

Obviously, there's uncertainty of the impact of COVID resurgence, but we expect to provide an update in Q4 December [ph] Finally, on cash, which we’ve made a priority given the uncertainty, we’ve done a great job managing working capital, and, in particular, inventory.

As a result, our free cash flow for the first nine months is the highlight of our company’s history, and we are on track for a fourth consecutive year of greater than $1 billion of free cash flow.

All this gives me confidence we continue to be well positioned to manage in this uncertain environment, and deliver long- term attractive earnings growth and sustainable value creation for our owners and for all our stakeholders. With that, I'll turn it over to Greg..

Thanks, Mark. Maria, we are now ready for questions..

Thank you. [Operator Instructions] Our first question today will come from Jeff Zekauskas of JPMorgan. Please go ahead. Your line is now open..

Thanks very much. In your script, you say that the impact of lower capacity utilization was $60 million in the third quarter versus $140 million in the second quarter. And then I think you also said that you thought your volumes in the fourth quarter year-over-year wouldn't be so different than what they were last year.

And you also said that earnings would be flat relative to last year.

But if you have a $60 million penalty in the third quarter and that seems to go away in the fourth, should you just earn a lot more in the fourth quarter?.

So, Jeff, this is, Willie. So let me start with the response. So, as you've highlighted in Q3, we had a headwind on a year-over-year basis of roughly $60 million. And what I would highlight, in Q3 we actually sequentially reduced our inventories about 5%, while volume was increasing 10%.

As we think about where we sit at this point in time, we see volume levels being similar and approaching last years level, while we expect our quarter [ph] to slightly have higher capacity utilization.

So as we think about the year-over-year performance in Q4 and or sequentially, we should have a slight tailwind, but it's not a full $60 million impact, because you'll have to recall that volume was down quite substantially on a year-over-year basis, whereas it will be coming back.

So you have to take the volume component of that, that partially offsets the $60 million..

And so look, the cost actions we took - Jeff, and good morning, Jeff, as well as improving utilization certainly is going to help the quarter. We said volumes are going to approach you know, ‘19 levels not get all the way back there. So we're seeing great recovery in the auto markets and BMC [ph] et cetera.

And - but you also have some markets that are off, like aviation, some specific coating additives in China, they're still in the process of recovering. And so we have a few markets off netting out some of the recovering markets, and the ones that are off are very high mix value.

So you know, strong recovery, great momentum as we go into ‘21, but not quite all the way back on the sort of volume mix side. And you've got a bit of spread pressure as well as you go into the Q4 number.

With the improvement and increase in raw materials, energy costs, we've got some price contracts that lag and how you catch up to that, not a problem over time, just you know, in a quarter, you could call that lag and some of their competitive pressures entire. So we net it all together. We definitely see a way to get back to ‘19 levels in earnings.

And, potentially better if the strength holds up that obviously with COVID you know, lockdowns in Europe, et cetera, we're going have to see how that plays out..

Okay. And you said, you have a goal of $25 million to $50 million in licensing revenue - in licensing revenues. And through the first nine months, I think you reported $18 million. So does that mean there's $7 million to go on the bottom end? Or is this 25 to 50? Some kind of annual number..

Jeff, just to refer back to our January call, the $25 million to $50 million was between ‘20 and ‘22. So what I would say is this is great progress by the team, we're delivering on that front.

And what you should expect is we're probably have the confidence that we're at least in the middle of the range, and over the next couple of years, we can deliver on top of that..

Yeah, it's a great multi-year program, Jeff. We have a lot of incredibly valuable technology, some of which very much is on strategy for we're growing our specialties and some of which we've developed over time, that doesn't really fit with where we want to go.

So this is an energy technology that allows you to successfully convert through gasification - coal gasification into making a high quality energy product, which the current technology in China does not do. So we've seen strong engagement, and this is the first license to sort of do this.

Obviously, there are other companies who are very interested in being in the energy business in China. So we expect to get you know, more of these licenses in the future building on this first one.

And then there's other normal licensing activity we have, some of our other technologies that are a little bit you know, lower in value per license, but this is a great example. It's a little chunky when it shows up, but is you know, one we would expect to repeat again and again in the in the coming years..

Okay. Thanks very much..

Thank you. Our next question will come from Bob Koort from Goldman Sachs. Please go ahead..

Thank you very much. Mark, you talk about, you know, the October conditions prevail for the quarter.

So does that mean better than typical from a seasonality standpoint, when I would presume November, December are usually weaker months or does it just mean typical seasonality from that October level? Trying to sort of gauge what you've baked in, in terms of what may or may not be a typical this fourth quarter?.

Yeah, this is in the a-typical category, Bob. So normally we have a really strong third quarter and second quarter, and then things, you know, trail off into the fourth quarter as people - you know, we as well as our customers sort of destock, you know, for cash reasons.

And the primary demand in some markets like BMC and other things, you know, slow down, that's normal. On a primary demand basis, some things will still slow down, like building construction, to some degree, but even that is showing some more strength than normal because of all the delays that occurred in the summer.

So, primary demand seems a little bit stronger, but the more significant driver of why we're going to have much better performance than a normal seasonal pattern is a number of our customers we're like us, aggressively destocked inventory through the summer, I think we can all acknowledge and see the demand came back in the third quarter better than we expected.

So people are really tight on inventory, the automotive companies are really tight. BMC is obviously very tight, relative to the way demands come back. And that's true in consumer durables, and a bunch of other markets.

And so what you see is people trying to build back to normal inventory levels, I don't think they're trying to build to something excessive, they're just trying to get back to stable, you know, natural inventory levels to support the now - the better demand, and then we probably expected in the second quarter. So that's all sort of good news.

But normally, you've got this destocking going on, instead, you've got this sort of restocking back to normal levels that we can see. So that's going to give us a lot more stability, especially true in a - we're seeing this both in the auto side, as well as some of the durables, but also true everywhere else.

I mean, we're running utilization flat out in CI, a number product were running flat out to support this demand and building action in the quarter.

Did that answer your question Bob?.

Yeah, absolutely. I mean, obviously typically the fourth quarter destock ramifications can be pretty negative. But it sounds like just the reverse this year. If you look to next year, your cash flow has been very impressive. As you contemplate having to rebuild that working capital in your own franchise for next year.

Have you sort of reconciled with that might be kind of drag on cash flow that could be for next year?.

Bob, this is Willie. Let me highlight, we have factored, I'll call it end a [ph] increased business activity.

But I'd also highlight to you that we've made significant progress this year on, I'll call it structurally changing the levels and we're making investments in our integrated business planning on an enhanced level, such that we, you know, ultimately have a pathway to preserve the gains this year and mitigate any headwinds on inventory with business activity.

Additionally, I would highlight that we will continue to leverage our accounts receivable and accounts payable programs. So as I sit here today, I see a pathway to a fifth consecutive year to greater than a $1 billion in free cash flow..

Some of it is a natural [indiscernible] where you've got earnings improving and inventory, you know, to some degree will come up and lesser than the past because investments really maybe those sort of naturally hedge each other, right. So the EBITDA grows, you know, the inventory comes, the value of EBITDA is greater than the cost of the inventory.

And that sort of balances each other out. CapEx will be a little bit higher, too. As we start ramping up some of our circular investments, but we've modeled this a lot and netted it out. We think it's going to be roughly in a sort of similar to this year..

Thanks for the help..

Thank you. Our next question will come from Matthew DeYoe of Bank of America. Please go ahead..

Hi, yes. So Performance Films seemed to have somewhat of a blowout quarters.

Why are we seeing so much demand for Window Tinting? Is this expected to continue? Or is there some sort of pent-up demand trend that wouldn't necessarily be obvious kind of on the back of all the lockdowns?.

Yeah, well, let's start with - Performance Films had a blowout a couple of years and a blowout first nine months of the year. So you know, they're - on the first nine months their volume mix is only down 5%, in a market that's down 20%. And they're up year-over-year in the third quarter. So they're having a great year. And it's a combination of things.

One, the Window Film business is very solid and always growing. Two, our Paint Protection Films are growing tremendously fast at very high values.

As that marketplace, you know, has just taken off and we've talked to you about that over the years and now we're even expanding from just clear into black or opaque products as we go into next year, which is going to give us a whole – a new addressable market. So a lot of growth potential there.

But it's not just that, the bigger part, frankly, is an excellent channel strategy and a service model.

We have an incredible team out there, especially in the key markets, we serve like North America, China, and the rest of Asia, that has instituted a far superior model and how we support both the aftermarket dealers, but also building these auto dealership programs where they can now sell these products as a value up with the car, which they're always looking for, in where sort of train, develop, support them in doing that, you know, at the auto dealerships.

And we have huge relationships with the top two auto chains here in the US, as well as the big auto chains in China. So it's a combination of multiple things that’s getting as to win great products, great new markets growing, but an excellent service model that gives us durability.

And now we're going to add on also a whole new digital tool that dramatically improves the install ability of the product with the installers. And that's very attractive and launching as we speak..

That’s helpful. And I was interested, to pick your brain a little bit more on the new market for the heat transfer fluids. I mean, I think that's one of the higher margin businesses in ANS or AFP. And clearly expectations are pretty soft from the aero side.

So can you talk maybe about growth there and the margin profile associated with that growth?.

Sure. So if you go back, you know, 5, 10 years ago and say what was the businesses, primarily heat transfer fluids for chemical plants like polyester plants, et cetera. That was really the predominant source, very attractive business, lots of growth and China consuming it. But the market, end markets has dramatically diversified.

The first big new market was solar. So you have to use – when you heat up these panels, these reflective panels out in the desert, you got to get the heat transferred to the turbine engine, and our fluid does that. So solar has been a huge driver of growth for us over the few - last few years. And a new market, it's really taken off for us as LNG.

So they also consume and use these products in those facilities. And that's added on a whole another dimension.

So while some of the traditional chemical markets are slowing down a bit, obviously, with different capital cycles, we are seeing these other markets deliver growth and enable us to have a lot more stability as well going forward to this business..

Got it. Thank you..

Thank you. Our next question will come from P.J. Juvekar from Citigroup. Please go ahead..

Yes, good morning. In CI, you mentioned that you're running flat out, you know, what are propane to propylene spreads? And also, you're using more refinery propylene, how did all that play out in the quarter? And then just in CI, you also have a smaller Ag business.

How did that do? I guess last year, you had some tough comps, I guess this year should have some more stability in that Ag business? Thank you..

Good morning, P.J. You know, just first on the spreads. Obviously, as we think about the integrated spreads to our derivatives, with raw materials increasing here during the quarter, our pricing lag, so there was, I'll call it some compression within the olefins.

Obviously, on our RGB investment, we're still very positive on how that is provided a return and paid off and given us a little more stability. But again, I thought the key thing is, it's like compression.

And we also had highlight - had some plan turnarounds like at our Singapore facility, that will give us some opportunity for a little bit higher volumes than we had in Q3, as we come out of those plan turnaround..

And in Ag. You know, seasonally Ag always declines for us in the third quarter P.J., you know, there's a lot of built to get the products to the customers, the farmers. And by the third quarter, you know, find takeover. So, you know, that always turns off for us.

But this year was also more of a headwind than normal, because one of our largest customers there had a very long shutdown in the quarter. And so that has a real mixed impact.

It's not just a volume impact on CI, because the means business is very high value attractive business in CI, and so you feel both on the volume and mix, some of it normal, some of that was unique to this compared quarter..

Great. And you know in your prepared comments you talked about molecular recycling. Clearly there is something that the world needs today, you talked about the happening in Tryen [ph] and Naia yarn fiber.

Can you talk about what are the inputs to this molecular recycling? You know, and what’s the product quality? And, you know, when does it become economical? Thank you..

Sure. So we're incredibly excited about the circular economy. You know, over a decade ago, we've been focused on sustainability and how that is a critical driver of change and innovation in our industry.

We saw that all the way back to Tritan, when we're launching that in 2009, around health and wellness, natural resource efficiency, feeding a world, all those trends are in core [ph] you've heard us talk about all of them, and essential renovation that we require, every new product development program to be connected to something sustainable, if it's going to be durable.

That's been true for the last decade. The circular economy is a whole new dimension of growth for the company, we're really excited about it. The reality is plastic waste is a crisis. It's just also ridiculous waste that much carbon in the environment, we should be capturing and keeping the environment and reusing it. A lot goes into making that happen.

And we can play a critical role in that. Obviously a lot of infrastructure outside of our scope to get it to us. But we need to prove that it can be reprocess, reused, effectively. In mechanical recycling, which is why it's done today. Its very energy efficient. So wherever you can do it, you should do it.

Problem is it requires extremely clean feedstock and has limitations on its quality, as well as how many times you can reuse it mechanically. So while important, very limited to solving the total plastic problem. So molecular recycling is required. It's not an option, it's required to actually solve the plastic waste problem.

And we're excited because we have two technologies that are commercial now, that are going to prove that it's both commercial and scalable and economic returns for our shareholders to do so. And so those technologies, the first is what you're mentioning around cellulosic, so we have the ability to do reforming with our gasifier.

So instead of gas mined coal, we can reform waste plastic, and return that into feedstock for making our cellulosic plastics. That includes our Naia yarns, as well as the thermoplastics we sell, and especially plastics.

And it's a huge opportunity, we already were picking up a lot of momentum from sustainability on these products because you know, in the yarn 60% is bio content you know, FSC certified sustainably grown forests. That alone was driving a lot of growth for us.

I mean, if you look at women's wear this year for us, our volume is flat last - relative to last year where the markets down 30%. So we're seeing tremendous success there in that part of the market.

And that also will go into thermoplastics, so you know, are the largest player by fire are [indiscernible], sunglasses, eyewear, for the high end plastic that goes in those frames, Marchon were the key leaders in that markets, already launched with us using our recycled content to have that offer.

So we see a lot of opportunities to grow the cellulosic plastics, even opportunities in electronics, toys, even single use plastics is an opportunity in a market that we see. So on that side tremendous opportunity.

A lot of growth that allows us to grow in existing applications, allows us to grow new applications, like electronics where we're not today and opaque application and it comes at a higher margin. And the polyester technology is the same thing P.J.

We've got our - tried our [ph] new product already getting orders from two iconic brands like Camelback, and Nalgene. We have a number of customers working with us in cosmetics in atomics as well durables, more hydration customers, as well as single use plastics. So we look across those two markets.

As of now we already have 100 customers doing trawling with us across all these different markets and opportunities around these two technologies to grow the volumes, as well as get a better premium. And we know we can get the better premium. We're getting it now.

And if you look at a better broader market about how important this is, food-grade PET recycled in Europe, and its going at a substantial premium to serve Virgin PET. So markets are willing to pay and support the investment necessary to solve this problem. So a great return on investment for everyone. So we're really excited about this.

We think it's a great way to you know, defend our existing business, grow our businesses, and solve a real challenge in the world that we need to resolve..

Great, thank you..

Thank you. Our next question will come from Alex Yefremov of Keybank. Please go ahead..

Thank you. Good morning, everyone.

Mark, just to continue on the subject, have you made any progress in your decision making on methanol analysis project, are you aiming closer to investment or defining the economics for that business?.

Yeah. So methanol analysis is key to our strategy, as CI. It is a meaningful advancement to build one of those plants. And, you know, we're close to refining and finalizing the details of exactly when we're going to build it. We're committed, you know, to making this investment. We believe it's the right thing to do. The economics are very attractive.

For all the reasons I just mentioned, in the January call, in the fourth quarter call we’ll provide you more details, as we're just finishing up, you know, the final analysis of timing and capital scope, et cetera..

And just to follow up on that, Mark, is it fair to say that, regardless of what decision you make was that methanol analysis project, you're kind of free cash flow parameters that you outline for next year are still there $1 billion plus was potentially methanol analysis CapEx?.

Yeah, that include. When we were talking about free cash - the free cash flow earlier, that includes the capital for methanol analysis. That's the reason CapEx, you know, we'd go up, you know, next year. We've already built a lot, especially capacity.

So we believe we'll have tremendous growth, already seeing great recovery work and get back to almost ‘19 levels. And in the fourth quarter of this year, you got to remember back in ‘18, we built a lot of plants, right, a lot of different specialty plants to support growth in Tritan, and a number of other products, Ketones, et cetera.

And so we're well-positioned in our cost structure to support growth. You know, the one exception is the circular economy, which is relatively new. And we are completing in this year, an expansion of our performance films capacity to support its tremendous growth. So I think we're in good position on that.

It's really a test in our ability to do all that, is a testament to our team's operational excellence. We've made a lot of investments in the business operating model and how we operate our company, and the systems on how we're managing production. And we're continuing to make more investments on this to be much more efficient in our working capital.

So we can you know, transfer that improvement into growth capital..

Thank you..

Our next question comes from David Begleiter from Deutsche Bank. Please go ahead..

Thank you. Good morning. Mark, just cost savings, I believe about $100 million of these 150 are somewhere temporary in term cost savings.

How should we think about how they flow back into the cost base in 2021?.

Good morning, David. I am going to let Willie take that one..

Sure. Good morning, David. Thanks. You know, as we think about the 150 million of actions that we're taking this year, and we've highlighted two thirds of those are discretionary. We're trying to match those, as you think about with the level of business activity.

I would highlight that we do expect over the long-term that some of that discretionary spend would become structural as well as we think about the leveraging of technologies and how we do business.

But fundamentally, as we think about 2021, we have cost actions, that includes site shutdowns, as well as labor cost actions that are going to approach $100 million. And we're taking actions on those this year.

So as you think about 2021, we will not only generate cost savings that offset any of the discretionary that's flowing back, we actually expect through digitization, the integrated business planning, and other network optimizations to actually give us capacity to invest in growth and capabilities.

And it's with that confidence, that we're going to deliver $150 million net, about $225 million gross as we go into 2021. And much of those actions are already in play. And we're making strong progress this year. So that those structural actions are in place as we start 2021.

As we think about 2022, we expect that to grow to a total of $200 million net and beyond..

Very helpful. And Mark, just on the one third of S&P [ph] that has performed poorly over the years and now you spend it in a sense the - and the actions during the pandemic.

But as you head into ’21, first half - have you been able to improve these businesses through further cost actions - thinking a different about the role this one third of business going forward in the eastern portfolio? Thank you..

Thanks, David. So, look, we've always been a disciplined portfolio manager.

It was a while ago when we had our significant portfolio transformation, but we've sold off a lot of underperforming businesses in our history, and we've had very successful acquisitions of great specialty businesses to give the portfolio the strength, not just in the stability of revenue that you're seeing this year, you know, and let's not forget, we started with the trade war and COVID.

Over the last two years, we've shown I think, good resilience in the top line with this portfolio, but also tremendous cash flow with the value of the acquisitions. So I think we're good at being disciplined.

And as we said, we saw two businesses, you know, tires, adhesives, that were developing instability, that was inconsistent with our strategy, especially as part of AFP, and needed to address that.

I think we've made great progress on managing the cost structures, especially in tires, where we're going to take out a couple plants and improve its cost structure in a meaningful way. As well as - and that allows us to level up our new plant, at a much lower cost plant as well in tires.

And then innovation is also going really well in both businesses. But you know, the reality is, the tires business is really challenged, and the competitive dynamics.

The ADT tariffs that got put in place shoving China tires back into China, then the broader trade war with China kicked off by Trump just created, you know, huge drop in demand, while competitive capacity is coming online.

And that just created, you know, a food fight at the tire company level, as you can see, and at our level, with our competitors in this business. So, you know, that's - the volume recovery has been great in the back half of this year. And the earnings, the back half of tires will be much better than the first half.

But it's still a competitive environment and a headwind relative to ‘19. And so that's when - we're going to do everything we can to improve the business, innovation is giving us the ability to sustain premiums above our competitors, in a meaningful way.

But it's a business where, you know, we're going to continue looking for either JV or divestiture options. And hopefully, we'll get to stability at some point here with COVID and be able to sort of pursue that. But we're committed to dealing with the portfolio.

Adhesives is actually holding up relatively well in 2020, relative to ’19, volumes actually up about 5%, price is stable to the back half of ’19, managing costs are like everywhere else.

That business is stable, innovations getting a lot of great traction, our IPOs are really winning in the marketplace with superior environmental footprint, as well as better superior ability and allows you to lose less resin. So great growth there. Great growth, we've talked to you a number of times about our low VOC resins that we've launched.

So it's stabilizing, but we're also still looking for opportunities to improve its performance if we can, through partnership and how we continue to improve that business. So we're still working, it's not going as fast as we liked at the beginning of the year with COVID..

Thank you very much..

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead..

Thank you. Mark, maybe you could just touch on what you're seeing in building and construction. You know, in the prepared remarks, you talked about benefiting from the DIY market. So, you know, how big is that for you versus sort of, you know, regular construction.

And as we think about going into next year, I know you have some innovation, I see the Optifilm in the deck, but as we go into next year, if DIY sort of softens a little bit, how's that going to impact the portfolio? Or do you have other things that will come back to offset that?.

So good morning, Vince.

How you doing?.

Good, thank you..

So, in our coatings business, roughly half of our coatings business is BMC. And half is transportation roughly. And on the auto side, remember, again, half OEM, half refinished. But on the BMC side, we are more weighted towards residential and commercial, which positions us well for benefiting from the DIY demand build up.

So we certainly are seeing the benefit. You know, are sort of – adhesives are doing architectural paint, did quite well, consistent with what you've heard from the architectural coating companies in the third quarter. So we're tracking with that fairly well.

And a huge part of the revenue, total revenue of AFP, but it is helpful, combined with the stability we're getting in care chemicals, the great performance we've had in heat transfer fluids that's offset the headwinds, or some of the headwinds, I should say, and aviation fluids.

Innovation is helping too, as we talked about in the growth story run off to film. So it's market recovery, it's good positions with the winners in the marketplace that we always focus on.

And a great example of the sort of resiliency of our portfolio and how it provides stability where - you know, while some things might be challenged, other parts do well, and that sort of balances out nicely..

Okay. And just on advanced materials, you know, obviously, the volume performance all year, and obviously, what's been a challenging year, has been very strong. And it seems like a lot of its innovation-driven. But as we think about going into next year, presumably the innovation, you know, continues to compound.

But are there parts of that portfolio that have struggled this year that we will actually see some recovery in next year? Or is it just going to kind of be steady as she goes?.

[indiscernible] doing really well. I wouldn't call it struggling, but obviously demand and transportation in town this year. So you know, we certainly took an impact in advanced materials, especially in the second quarter, when our customers shut their plants down and we shut our plants down accordingly in Interlayers.

So we took a hit there, obviously even performance films while did well was still down year-over-year, and faced some challenges there. But overall, I'd say the portfolio is doing great.

I mean, it's got innovation, driving growth across all three main elements of it, especially plastics has been incredibly steady through this year where things like some durables we're off in the in the second quarter, but we had tremendous sort of COVID-driven strength and, you know, shrink for packaging that goes into grocery stores.

Our sneeze guards, you know, the polymers that we make is great - has great chemical resistance for cleaning. So it's very popular for all these sneeze guards you are seeing in stores or restaurants, et cetera. It's a growth and that offsetting some of the weakness and good price stability relative to raw materials, you know, delivering good success.

And you've seen the snapback already, right. The earnings in the third quarter are better than the first quarter of last year. So we've had great snapback, volumes almost getting back to last year's level, with the rebound in automotive and the great performance in performance films I talked about earlier.

So I think this business is really on track to deliver a great result this year, but build on it with continued great results next year. You know, even in Interlayers, which we didn't talk much about, we've launched a number of new products. We've enjoyed a lot of success with our acoustics and head-up display premium products.

We've told you, we've been working on next gen for all those and we've had great wins on all three fronts. We've had a next gen acoustic product with superior sound dampening, just gets selected by one of the leading sort of EV OEMs out there on tour in their iconic models.

You know, noise is a huge issue in EVs because you've lost the sound of the combustion engine. So sound dampening in a variety of places in the car is critical and we - and the biggest place where you get sound coming into a car is actually the window. So we play a critical role in addressing some of those issues.

We've had a multifunctional product, we've been working on. That is much more difficult for competitors to do, that combine solar rejection, acoustic and HUD all in one. And it's been just adopted by a leading Japanese OEM and we've had great success also on our next gen HUD.

It's in, you know, trials right now with a leading German OEM that's going to be part of their augmented reality HUD that they're building and that market will continue to grow. So a lot of success there. Tritan’s doing great.

And they've got the circular economy piling on top of this, as I mentioned earlier, delivering a lot of growth on many different fronts. And the portfolio is diverse and gave it stability. So we feel good about that..

Great. Thanks so much..

Yeah..

Our next question will come from Frank Mitsch of Fermium Research. Please go ahead..

Good morning, folks. Hey, Mark, you know, just to follow up on, you know, kind of the auto side, you just talked about acoustics and head-up displays, et cetera. But I guess, you know, part of the reason why you're outperforming the auto OEM builds is due to paint protection that got some nice airplay in your remarks.

Can you talk about the growth prospects there? I guess, you know, in the sec - market segmentation there, because I guess, you know, my thought was that that was more geared towards kind of hiring a vehicle.

So that might suggest that you're in the early innings of being able to roll out that product, as you move, you know, to more mainstream on base.

Can you spend a moment or two describing the growth prospects there?.

Yeah, it's tremendous growth opportunities. Frank, it's a segment that's been growing. And it got growth opportunities, both geographically, as well as within the category. So you're right, it started out with very high end, hypercars, and, expensive cars, where people want to protect them.

It's already starting to move into that normal luxury market, in the mature market even, especially in China. It's amazing, you know, the number of people who are interested in sort of protecting their car, which for them is a very significant investment. And, and so there's a lot of growth in addressable market in front of us and this on the markets.

And while it's growing really well, in China, in North America, we're in very early stages of this growing in Europe. So that's a whole another region of growth for us on top of growing the category. So we believe the sort of very strong double-digit growth rates will continue for quite some time..

So we should be dialing in greater than auto OEM growth for EMA and for the near future, near midterm future?.

Absolutely, in advance which shows that's true and automotive and coatings, you know, I say we're tracking more with the market..

Okay, great. Great. And then a question for Willie, you talked about $600 million plus in debt, net debt paid down in ‘20, implying 250 or so here in the fourth quarter.

How should we start thinking about ‘21 in terms of the prior to uses of cash and expectations on debt pay down in ‘21?.

Yes, Frank. Good morning. On the capital allocation front, our priorities have not changed. We've increased our dividend for 10 consecutive years. And that's an important mechanism for us returning cash to stockholders. Also, to your point, we're committed to our investment grade credit rating.

And, you know, 2021 will really depend on the pace of economic and economic recovery. But we will continue to stay focused on getting our debt-to-EBIT ratio closer to that 2.5 times, if you’re at the end of Q3, our net debt is about three times our leverage, and also, we're committed to offsetting the dilution right now.

And, you know, obviously, the pace EBIDA growth will be, you know, as we think about allocating beyond that, in 2021..

Got you. Thank you..

Our next question will come from Kevin McCarthy of Vertical Research Partners. Please go ahead..

Yes, good morning. Mark, you've done a tremendous amount on the innovation front in recent years. And I would like to hear more about Optifilm, as you highlighted in the prepared remarks.

But more broadly, you know, I'm tempted to ask, is there a way to quantify the benefit that you anticipate from new products, either on a top down basis across the portfolio, or perhaps bottom up? You know, thinking about what the top two or three contributors could be in coming years?.

So good morning, Kevin. We do - we gave you a metric on new business revenue from innovation. So we - you know, there's lots of new business revenue, which is winning market share and things like that. But we isolate out what comes from innovation platforms. And we had a target of you know, this year getting to $500 million.

We were well on track at $40 million last year, even in the trade war. And we continue to have great engagement, even virtually, with customers. We've told you about all kinds of wins we're having in this year, across our product portfolio. And so we feel good about it, but it's not going to be at the level that we aim for.

So we'll always give that to you. And we know that new business innovation, you know, will build and I think we can get back to that level, you know, that target next year in 2021. So I feel good about the growth that we can sort of put together there. And it really fits with where we’re I think we're headed for delivering a very attractive 2021.

So, you know, Willie told you, we've got fixed costs basically flat, we've told you that we have $100 million tailwind in asset utilization next year, relative to this year, volumes were just flat in ‘21 versus ‘20, right, because we took all these aggressive inventory management actions this year to go beyond demand to, you know, generate cash, and we're quite happy we did that.

And that inverts, you know, becomes $100 million tailwind of flat volumes. And then it's innovation from new business that we're just talking about here. The market recovery, that you might, you know, have at some level, depending on how COVID everything plays out, all create incremental growth above that.

And because of the inventory actions we've taken this year, the innovations and, you know, the growth that we're getting there as above average margins for the company, because the inventory management we've done, you know, we don't have any fixed costs headwinds.

And the incremental margins for growth next year are probably going to be 60%, 50 to 60%. So very attractive margins, so that growth you know, flows the bottom line and we put up out together $0.60 just for flat volume on utilization, and flat cost and then growth - and that goes back to ‘19 levels..

Okay, that's helpful. And secondly, Mark, I want to ask about interlayer films, you talked about the acoustic films and heads-up displays.

Do you feel as though you're gaining market share in that business? Or is it more a situation where you know, volumes could be exceeding auto sales as a function of restocking? Or perhaps both of those things? How would you characterize the market dynamics in any interlayer films?.

Interlayer is a great business. It's more directly tied to OEM production obviously, so that production goes up and down, so our volume.

We still benefited and did better than in early market this year Kevin with acoustic and heads-up display, but not to the same extent as performance films, because performance films is expanding, its overall market that it serves.

And so it's doing well, the HUD and acoustic doing well, this next gen set of products I just mentioned are going to give us additional tailwind as we go into next year. So we feel that it will continue on a volume mix basis, it will do.

The mix is incredibly important to keep in mind about this, the entire company, especially in AM, so when you're selling a-protection films or window films or acoustic, heads-up display, that's way above segment average margins and AM, including Tritan in the circular economy parts we’re selling same thing.

So all those growing, isn't just volume, it's a mix upgrade..

Okay, thank you very much..

Our next question will come from Mike Sison of Wells Fargo. Please go ahead. Your line is now open..

Hey, guys, nice quarter. Just curious, and I think I've done the math, right? Looks like sales would be up sequentially, right, fourth quarter versus third quarter. And I apologize, I missed this. But why is EBIT - your guidance imply EBIT is down, right.

So if anything I am missing, I would have thought maybe you'd have flow through-up on a EBIT basis?.

So, good morning, Mike. So thanks for the question.

So on the volume mix, we expect it to be approaching Q4 levels of prior year, as we think about, raw materials continuing to be somewhat increasing, we would expect it to continue to potentially have some quite slight spread compression, as we think about our chemical intermediates and some of the ASC one third, potentially tires.

So as we think about the balance of that, also we'll have a little less of the cost actions benefit. So I'll remind you in Q3, we had roughly $50 million, Q4 we'll have roughly $40 million, as the activity continues to increase. So you know, all in, you know, that's a sequential view, as well as some of the key inputs on a year-over-year.

So, as we think about it being similar to prior year is where we come out as we look through that..

There's always some normal. I mean, while we don't have normal seasonality of the drop space or things I said earlier, we still demand to be a little bit less, you know, in products with some seasonality. So tremendous strength to get back to last year's levels and earnings.

So I think that's a great accomplishment, as we look at it, but a little bit less than third quarter..

Right, no I agree.

And then in terms of - if demand level stay sort of around the third quarter level, or second half level, and then given some of the cost saving you have CI for ‘21, where do you think your run rate level of earnings is tracking? And I know, it's maybe too early to give specific guidance, but, you know, are you above ‘19? Or you're closer to ‘18? Just maybe just give me a sense of where earnings should maybe lay out if things stay at these levels?.

Yeah, so I was trying to get at the - around the growth question a moment ago, you know, assume fixed costs flat, assume a tailwind of $0.60 cents a share and asset utilization of flat volumes.

So then you build on that with volume growth, mix improvement, as I was just talking about the power of mix is incredible such as volume, that that was a headwind this year, it was mixed as a big driver, is the markets that were impacted by COVID, were our highest value markets.

So, you're seeing the value them coming back in the third quarter, you'll see that you know, more progress in the fourth quarter. But next year, you'd expect to get all the way back there on mix. And then the asset leverage of that fixed cost, you know, with sort of that 50% to 60% incremental margins.

I think when you put all that together, there's still some spread headwinds you're going to have with pricing catching up to res, because we assume res will be increasing next year with an improving economy.

So you have a little bit of that as a headwind and some competitive pressure in tires and asset deals offsetting some of that growth and success. So put it all together, we think we can get back to around 2019 levels, could be a bit better, but there's a lot of moving parts on that.

We got to see, you know, how we get through this COVID crisis, which obviously is going to have some amount of impact. And there's the selection, there's China trade tensions, et cetera. So there is a lot of things to factor in and refine that outlook, which will give you in January..

Got it. Thank you..

Our next question will come from John Roberts from UBS. Please go ahead..

Thank you.

You have all these great ESG initiatives? How does this big Tow business fit into that mosaic? And do you have to carve that out at some point? Or can it coexist as you ramp up the other ESG initiatives?.

So obviously, we've considered carving Tow out of the portfolio a number of times, especially back in 2015. Unfortunately can't be carved out John, it's so integrated into the Kingsport site. And so interdependent with all the cellulosic growth we have in AFP, and AM and shared assets and recycle use can't separate it, it would be a disaster.

So you have to grow out of it. And that's what we're doing, right. So our strategy is, you know, through, you know, ultimately, if you go long term enough, replace all the Tow with textiles and other applications with that growth and obviously, that's going to take some time.

But our strategy and the answer to that question, when it comes up is, we have to maintain the economic integrity of the company to invest in growth and support our success.

So, Tow is part of that, but we're going to work as hard as we possibly can to grow in textiles was also as attractive margins, and grow that business as the Tow business declines over time.

So that's sort of the answer to the question, and it's also a way to leverage a lot of excess Tow capacity that we have right now that has great incremental margins and will grow textile against you know, zero..

Okay.

And then secondly, back to the performance films, the Interlayer business is almost all OEM, can the paint protection in the opaque films go OEM as well?. And maybe just give us a little bit of parameters, if Interlayer profitability is or content is one x for car, the opaque films go on the side windows and rear windows.

So that's got to be much bigger than one x and then the paint protection goes on a much larger surface area and so that's got to be even higher than the darkening films, kind of give us what are the one x and then the Interlayers and what are the opaque films and the paint protection film?.

Yeah. So john, I don’t have a quick easy answer to that question. What I can't tell you that, sort of refine a little bit about what the paint protection film is. So paint protection film comes in two versions.

One is the full wrap of the car, but a lot of people just wrapped the vulnerable - put the film on just the vulnerable parts of the car, the front, the side, the door handles, et cetera. So it comes in two different versions on how much you sell per car when you do PPF. And it is certainly additive.

When you think about our presence on a car, because the interlayers is doing one thing and acoustics and HUD, the films on the windows are, as you've noted, so it's not just tinting, it's actually solar rejection is the big value proposition.

So we sell a lot more in hot locations than cool locations, because the films are much more advanced today than they were 20 years ago. And the big value proposition isn't just the tinting, it actually rejects a tremendous amount of solar heat that actually gives you better fuel efficiency since you use less air conditioning.

And so that's, you know, additive. And then you've got the PPF. But we don't break it down on a sort of ratio basis like that. It's something we probably should do, and we'll take a look at that. But what we do know is we're getting a lot of more presence on each car sold. And the dealers, as you mentioned, are really getting interested in it, right.

It used to be very much an aftermarket business NPF. And a lot of our growth is now in collaboration with these programs we're doing with the auto dealers, where they sell it as a upsell in the car, sometimes it's pre-installed on luxury cars, so you don't have a choice about it, when you're buying it.

A lot of it is after - sort of an upsell at the point of sale. So a lot of different ways to grow..

Thank you..

Our next question comes from Matthew Blair of Tudor Pickering Holt & Co. Please go ahead..

Hey, good morning, everyone. I want to circle back to tire additives. The Michelin data showed pretty rapid improvement in replacement tire demand through Q3, I think that both North America and China up 9% year-over-year in September. So I just want to see, you know, does that match with what you have? I know your tire market is much more commercial.

But any comments there?.

We've seen the same rapid recovering demand in tires and the third quarter has been quite good and consistent with what you're talking about..

Sounds good.

And then, you know, all these forest fires have caused a pretty big wood shortage, lumber shortage, is that having any impact on I guess either fibers or any other parts of your business?.

No, where those fires are occurring are not where we would be getting our wood. We only get wood pulp from sustainably grown forests. They're grown purposely to be regenerated and taken care of it in very different locations and where these fires are occurring in East Coast, Brazil, different locations than the West Coast..

Got it. Thanks..

Yeah..

If we could make the next question, the last one, please..

Our last question today will come from Arun Viswanathan of RBC Capital Markets. Please go ahead..

Great, thanks. Good morning. Thanks for taking my question. Just two quick ones. So first off, could you just remind us sequentially what was the benefit from lower idle facility charges? I guess Q2 to Q3.

And then secondly, if you could just address maybe the benefits to Eastman from a potential infrastructure bill, if there's maybe a percent of your portfolio that's weighted there. And you know, how potentially Eastman would be positively impacted by that? Thanks..

Sure, Arun. So if I answer the question, so I'll answer it two ways.

One, which is you saw our decremental margins go down roughly 60% from Q1 to Q2, and our incremental is be about 60%, I would say over 90% of our period costs associated with our facilities basically went away in the quarter on a sequential basis, as our plants came back and became fully operational throughout the quarter..

And then on the infrastructure question, it will benefit us, we're not really focused on in a large infrastructure projects and the kind of materials we make, we tend to go more into consumer durables, cars, building construction, but more commercial than bridges. And, and so it depends on the nature of what the infrastructure is.

What's great about that is it just creates broader economic growth, which were highly leveraged. So, while it may not be participating directly in some of the infrastructure projects, we are having - you know, certainly tied to macroeconomic demand and people have more pickup trucks going to work in construction, which is good for us, et cetera.

So, we'll certainly benefit like everyone does from the improving economy, driven by it..

Thanks..

Thanks, again, everyone for joining us this morning. We appreciate you dialing in and I look forward to talking with you again soon. Have a great day..

This will conclude today's conference call. Thank you all for your participation. You may now disconnect..