By: Rahul Koul
Last updated : September 27, 2021 9:19 am
Being connected to our customers and innovative products is the powerful distinguishing factor to make that happen
"The sense we are getting from customers is that the demand is delayed. However, the pandemic curve has died down and things are getting adapted more quickly than imagined from a commercial standpoint. My belief is that as we go into 2022 with focus on automotive, building and construction, the supply chain that has been depleted will get refilled," says Willie McLain, Senior Vice President and Chief Financial Officer, Eastman Chemical addressing the Credit Suisse Virtual Basic Materials Conference.
"Overall market dynamics remain strong, be it global consumables, building and constructions. The key and primary issue right now is that the supply chain and logistics have become more challenging in the near term. The key customers in the transportation sector have been impacted significantly and we have been seeing the dip in levels of semiconductor chip production with things bottoming in Q2 of 2020. We were expecting sequential improvements in Q2 and Q3 of 2021 and are seeing the premium orders that we hadn't seen previously. Overall it is having an impact on our advanced materials segment. In the near term, we have been seeing some headwinds such as inflation on prices and logistics and production of chips as well,” McLain mentioned in conversation with Pierre Lescastéreyres, Investment Banking Analyst, Credit Suisse.
“Overall we are seeing Amines and Additives & Functional Products (AFP) performing reasonably well and Chemical Intermediates margins building up a bit better. We are expecting the Q3 to be similar to Q2 or bit down depending on how the volumes close here in September. All in all, expect to continue stronger performance than we saw in August. In FY 2020-21, we had strong cash flow. We had strong demand and inventories remained well stashed as per supply chain. Our margins are holding better overall. At the end of the day, the environment continues to be very dynamic,” he added.
On the availability of raw materials, McLain said, "Previously we had challenges in advanced materials space but we have overcome many of them. In near term, we have seen a few implications, less on supply of raw materials and more on raw material inflation and logistics side. Eastman has been better possessed and as the dynamics continue to unfold and we continue to serve the demand that is very resilient."
On the strong performance of the chemical intermediate business, McLain said, "Very wide market in July and August time frame as supply continues to be stronger. That brings focus on consumer demand and as long as it is resilient, value can do the transition there on up and down of transformation and result is stronger spreads for a longer period of time."
On the role of innovation in specialty product lines, Eastman CFO commented, "Our innovation driven growth model is definitely the focus of our leadership team and we have been extending the line of innovative products in advanced materials and other categories. We have a robust cash flow and leverage that we are looking at making investments into molecular recycling. We have demonstrated it in the market with advanced materials and we have seen 2/3rd of products doing well.”
Commenting on the improvements in the cash flow, McLain added, “Ultimately, it is two-fold. One is delivering upon the growth model, including how we get back to normal and have an 8 to 12% model that we had in 2018, improving our EBITDA and operating cash flow. Second are the opportunities through multi-pronged approaches for working capital. We have multi-year plans and digital adjustments to achieve these. There are transformation programs we will continue to operate as well as digital investments. With our strong first-quarter results, we now expect free cash flow to approach US $1.1 billion in 2021. If we continue to grow, we expect to see US $4 billion in cash during FY2022.”
McLain bets big on the recycling business. He outlined: “We are committed to working together across the value chain to create real and actionable solutions towards a true circular economy. We are way ahead of market demand and will have a world class plastic-to-plastic molecular recycling plant ready at an investment of US $250 million. We are expecting our plant to be ready by the upcoming Innovation Day in December, 2021. A lot of excitement from the consumer side as they are demanding the materials and that we see as a very positive sign. We are excited about our progress and we will make solutions for our customers and governments, national and regional. There is a billion dollar worth opportunity and we see robust returns from the plant. In terms of cellulosic technology, we have the ability to bring recycled content. Globally we have seen success including in China. As a CFO, you want economic returns and we see that as robust."
"In the near term, the change is there. The consumers are ready to put money behind their belief system, whether there is reduced carbon footprint or recycling, they are willing to pay more. Our products in the market have a 25% cost higher than others but the great thing about technologies is the level of recyclability and quality. The willingness to recycle and pay for premium costs drives our business," he added.
On the company’s future strategy, McLain commented, “Every company will have to improve their baseline products as it is no longer a choice but a competitive necessity. The world continues to get smaller and we have demonstrated that we can adapt and deliver in both complex and favorable environments. We hold ourselves to high bars. Being connected to our customers and innovative products is the powerful distinguishing factor to make that happen. As the first mover to the commercial and industrial markets, we have taken actions to make our portfolio stronger and also capitalize our gains."