Good day, everyone, and welcome to the Third Quarter 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. Thank you, Maxine, 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 close, we posted our third quarter 2022 financial results news release and SEC 8-K filing, our slides, and the related prepared remarks in the investor section of our website on 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 our third quarter 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-K filed for full year 2021 and the Form 10-Q to be filed for third quarter 2022. Second, earnings referenced in this presentation excludes 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 third quarter 2022 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we'll now go straight into Q&A. Maxine, please let's start with our first question. Thank you. Our first question today comes from Vincent Andrews from Morgan Stanley. Please go ahead. Your line is now open. Thank you and good morning, everyone, and congratulations on the announcement with Pepsi. Very exciting news. Maybe you could just talk about the balance of the customers at the facility. I don't know if you can name any of the other ones or just sort of tell us how many they are and are they contracted similarly at this point or what's left to do there. Vincent, great to hear from you and we're really incredibly excited about the Pepsi contract and their commitment. It is a significant volume for that plant as the base load for the plant. We have very active conversations going on with several other customers, but we're not in a position at this point to sort of talk about those discussions. We do believe the Pepsi agreement, consistent with what we're attempting to achieve with the PET market, is a great endorsement and proof point about the value proposition that we can bring to solving the plastic waste crisis and create economic value for our shareholders at the same time. We're excited about working with them going forward. If I could just ask a question, get your point of view on all the destocking that's going on. You know, I know from the prepared comments, you know, there's some thought that hopefully it will end by the end of the year. You know, what exactly are you hearing from customers in that regard? How do you think we'll know that it's over other than it just being over? Like, what signposts are you looking for? It's a great question, and it's one that, as you know and everyone knows, it's a little difficult to call in the moment on what's going on in demand relative to destocking. I think you got to take it market by market. The place where we have the greatest headwind is in retail discretionary spend around the planet, especially in Europe and the US. What you had happen, I think, and has been well documented, is we all knew there was gonna be a shift from people moving back to more services, travel, leisure from sort of just buying consumer goods, you know, in the COVID situation. I don't think anyone really understood the significance of that combined with extreme inflation on how much the pivot could turn into being. People stay committed to travel, as we all know from the airlines. With this extreme inflation, affordability for everything else in their life was very constrained, and so they've really cut back on anything that's a discretionary spend. Then you had all these ships loaded with all kinds of, you know, consumer goods, you know, caught on the ocean, caught in ports, and it all showed up in the second quarter. You saw, you know, Walmart, Target, Best Buy, et cetera, have a huge problem on retail inventory to sales, you know, that continues to now. You know, fortunately, the wholesale chain supplying it doesn't have that much of an inventory, but you still have a huge amount of destocking occurring at the retail level. You can see that flowing through and impacting some of our customers like Whirlpool or Electrolux and the announcements that they have out there. You get a pretty significant decline that's both a demand and a significant destocking event, that's occurring as we are in this fourth quarter. I'd say that's the one part of the market that's a little hard to call to say, you know, when that sort of combined destocking demand situation plays itself out. When you look at the broader set of what's going on, there are other factors impacting the market. You've got Europe in stagflation, where high energy costs and high inflation is driving a drop in consumer demand, but energy costs are staying high. You know, you've got China with a no COVID policy constraining, you know, consumer behavior and a B&C industry that's been in trouble for over a year. The U.S. building construction market's not doing well either, as you can see in all the, you know, housing data that's been coming out recently, even in the third quarter GDP numbers. You know, that impacts a lot of demand across our portfolio. You know, the D&C is not off as much, especially North America. There's a lot of momentum in that market of houses still being completed and painted or and appliances being bought for it. You can see, you know, that coming off as you go into next year. You even have stable markets that you know like a P&G and other markets out there who are doing well, but they're still looking at their inventory and gonna destock high cost inventory to generate cash for the end of the year and position themselves for lower prices in the future. You've got modest destocking going on in stable markets that I think will play itself out by the end of the year. You've got Europe and China, which has been challenged for a while, so that destocking, I think, is largely playing itself out by the end of the year. You have the US that's more in a you know in the earlier phase of that destocking and change for what's going on in the marketplace. Those are sort of the way we see it around the world. You know, you've got positives, right? The automotive trends are good. You've got recovery that we're already seeing as a benefit in the third quarter and sequential improvements into the fourth quarter. You've got the EV trends where we make an exceptionally large amount of money relative to an ICE car, you know, 2.5, 3x as much value. As those are, you know, becoming more part of the mix, you know, it gives us another mix upgrade. You know, you've got consumers in a financial system that are still relatively healthy, that sort of balances out some of these trends. We think that a good amount, you know, greater than 50% of the destocking plays itself out, you know, through the end of this fourth quarter. That means as you look at next year, with the destocking, you know, being more behind us, and returning to sort of what we're thinking about as mild recession terms, you know, demand improves in a meaningful way, you know, as you get past the fourth quarter, you know, from a primary market demand point of view. On top of that, as we look at next year, you've got innovation happening across our marketplace that's gonna drive a lot of growth. You've got the lack of the outages that we had this year that, you know, hit us by about $100 million of, you know, missed volume mix, you know, that put us well below market demand this year. You know, there's a lot of upside in that available capacity and a lower planned shutdown schedule in a meaningful way next year that gives us more volume to sell. It's a lot of reasons that as we get through this quarter, put some of this destocking behind us, that volume next year will be better even in a mild recession. Sounds good. Thanks so much. Our next question comes from David Begleiter from Deutsche Bank. Your line is now open. Please go ahead. Thank you. Good morning. Mark, on the $150 of costs you've targeted for next year, how much is structural and how much is somewhat temporary? Does that include the lower shutdown cost or turnaround cost next year versus this year? Morning, David. Thanks for the question. This is Willie. As we think about the $150 million, I would look at it in two buckets. You know, roughly $100 million, we expect to be on the manufacturing front. Obviously, as we've talked about inflation being a key factor, as you think about the demand that we had in the first half of 2022, along with the outages, that's driven a lot of inefficiency. We expect that to be a large component as you think about contractors, as you think about the level of overtime. I do view that as structural as we get back to operating in a, I'll call it a more controlled demand environment, that we'll be taking a significant amount of that type of cost out of our system. There will be, I'll call it a lower amount of planned turnarounds. That'll be, I'll call it a smaller portion of that $100 million that we see in the manufacturing space. As it comes to the non-manufacturing, you know, that's about a third of the actions that we see. In many cases, what I would say is the level of consulting spend discretionary. So that's more of, I would say, variable versus structural in the current environment. We can expect to continue to invest in the growth programs, as was just highlighted with the third, you know, project gaining momentum with our circular investments. We will balance that out of 150 of structural / discretionary to ensure that we can continue those investments. Very good. Mark, just in your slide 12, looking at initial 2023 guidance, perhaps. Look, you're looking at perhaps a modest maybe 5% type EPS growth year-over-year. Is that in that ballpark? Yeah. Well, good question, Dave. We're not gonna be giving quantitative guidance about 2023 versus this year, which we still have to finish out. What I would say is we look at the tailwinds and the headwinds in a mild recessionary environment. We think we're in a good position. You know, it's obviously a very dynamic time right now, whether it's what's gonna happen in China or the Ukraine war or inflation, et cetera. You know, there's a lot of uncertainty and that certainly goes back to a trade war in 2019 and a pandemic in 2020. You know, what we know is the market is challenged, as I just said, around the short term in the recessionary environment that the manufacturing world seems to be entering. I do think a lot of the destocking, you know, will play itself out. We're really focused on what we can control. You know, I think the volume and growth side of things is in a good position with over $400 million of new business revenue closing on innovation. We've got a lot of tailwinds, whether it's, you know, the multifunctional layers growing in EVs, you know, the tremendous success we're having in our paint protection films, you know, growth we're seeing in Tetrashield and food and beverage cans or, you know, really seeing a lot of growth continuing even in this semiconductor environment for our high-purity solvents as we expand the product portfolio there and sustainable coatings items, etc. A lot of innovative growth going. I do think there's a meaningful tailwind that comes out of the lack of unplanned outages that we have this year, next year, and then, you know, less planned outages obviously helps as well. You know, that's one component. An equally important component is spread improvement, right? When you think about what we've been through in the last two years, right, you had about $1.3 billion of inflation in 2021, and we had pricing in place that caught most of it, but we still had some spread compression in the specialties in the back half of 2021. When we started this year, we had a view that we were gonna have $500 million of inflation this year. We had pricing in place to deliver much greater than $100 million of spread improvement in the specialties. We didn't plan on having another $900 million, you know, of inflation through the rest of the year, so a total of $1.4 billion when you sort of take our view of the fourth quarter here is a significant headwind. The teams have done a phenomenally good job of keeping pricing going with the strength of our value propositions in the specialties to keep pace with all of that inflation. Of course, Chemical Intermediates, you know, has done well in the first half of the year. While we kept pace, we didn't recover the spreads that we were aiming to get, you know, from what we sort of gave up in the back half of 2021. There's that opportunity that's still in front of us, and with inflation being as high as it is now, that opportunity is much greater in how raw material and distribution costs could fall and what the spread tailwind will be next year as we're gonna continue to have very strong discipline in pricing because we are committed to getting our margins back to 2019 levels before all this inflation chaos started. I think that's a pretty significant upside. I think an equally significant upside is a real change in the fibers business. As we've told you, we, you know, faced a lot of inflation and increasing operating costs in the fibers business in 2021 and 2022, and that's pushed our margins down pretty significantly. There was a recognition with our customers already this year that those costs needed to be recovered for us to be a reliable and sustainable supplier to them. You've already seen us have a lot of price increases this year, but it's only covered a portion of that inflation, as far as the recovery goes. We've already succeeded in locking in contracts with a significant portion of our customers with prices that will allow us to significantly improve our earnings relative to this year. In fact, so much so that, you know, we believe it would offset what we've said in our prepared remarks about the normalization of Chemical Intermediates. That's a significant improvement in earnings taking us back many years into where that business will sit and be a much more sustainable, more profitable, more cash-driven business. As we just discussed, you got the $150 million cost reduction. A lot of, you know, tailwinds that offset those, you know, headwinds that we have with pension costs and growth spend and currency and interest expense. Net-net, I think, in a mild recession will be greater than this year, but I'm not about to quantify how much. Very helpful. Thank you. Thank you. The next question comes from Jeffrey Zekauskas from JPMorgan Chase. Please go ahead. Your line is now open. Thanks very much. What are the financial terms of your agreement with Pepsi? How do you price the material to them, or how do they buy it from you? Thanks, Jeff. We're very excited about this commitment with Pepsi. We don't discuss the specific contract terms with any of our customers. In this case, in particular, we view our contracting approach for the circular economy as a competitive advantage. What I can tell you is the contract is aligned with our circular contracting strategy that we've discussed with investors in the past. You know, these agreements really demonstrate that molecular recycling is a you know, essential part of solving the plastic waste crisis in sort of collaboration with the mechanical recycling industry. We really view this, you know, Pepsi commitment, which is one of the most significant and most successful, you know, brands in the world, that they see the value in what we're doing both from an environmental point of view, and it also demonstrates that we have an economically viable platform when we meet these terms in this contract strategy. When you think about the principles that are behind this contract strategy for these types of contracts, you know, we will have margin stability in how the product is sold to them and it's structured relative to what goes on in the marketplace. These contracts will be long term and have, in this case, a sufficient baseload for us to commit to this third plant. You know, we can see a clear vision of the capital necessary to provide an appropriate return on investment on this. It's a really exciting situation we find ourselves in. I would say that, you know, back to Vince's question, there's a lot of companies out there who are excited. We have over 1,000 SSOs already for our first plant. We're gonna be starting up in the spring of next year on a wide range of specialty products. The brand engagement in Europe is incredibly strong, both in specialty as well as in PET. I think it's really a significant proof point, you know, when we get this contract that, you know, there has to be a pathway for hard to recycle materials back to food grade to sort of truly have a circular economy in that marketplace, you know, that we can partner with mechanical recyclers, you know, as an essential part of solving this problem, that we're gonna do this at a lower carbon footprint and make sure that we have very minimal impact on the communities that we operate in. Importantly, we need to make sure we don't, you know, move to other materials. Plastic is by far the most carbon efficient product out there for these applications. If we, you know, don't use plastic, then we're gonna have a huge impact negatively on climate if we start moving to glass, aluminum, and some of those other products. Frankly, in many applications, there just isn't an alternative material that's gonna work for the brands. For us, we think this is a big part of the circular economy, and we feel great about working with Pepsi as an anchor client. Okay. For my follow-up, in Chemical Intermediates, are you closing one of your smaller crackers permanently or what are you doing with your closure? Can you discuss what's going on with propylene spreads, in that it doesn't look like people can make money taking propane to propylene at this particular point in time? You know, how is the propane/propylene dynamic affected Eastman during the year relative to last year or now relative to previous quarters? Okay. Jeff, this is Willie. I'll answer the first part of the question as we think about our operations. As we've highlighted earlier, given the one, the amount of inflation that we've seen this year in working capital and through raw materials, we're looking at that in concert with the demand that we see, and we've highlighted the destocking that we expect have seen in you know late Q3 and we're seeing here in Q4. As we're in a planned turnaround for one of our crackers at our Longview, Texas site, we're taking that opportunity to keep it down the remainder of the year to ensure that in our olefin stream that we bring our inventories back in line and that we also move through some of the higher cost, you know, both from an energy and raw material front and get that through this year so that we're better positioned in 2023 from both an operations and supply chain and working capital standpoint. As we think about, you know, propylene and propylene margins, what I would highlight is, again, we've continued to optimize our operations. We've made the investment in the refinery grade propylene. That is continuing to play out quite well as we see the current economic environment. Also, again, our propylene derivatives have continued to perform strongly in the first half. While those margins are normalizing some in the second half as we had expected, this is still a very strong part of Chemical Intermediates and is delivering the cash for the company. Yeah. I'd also add, Jeff, that our teams on the commercial side are doing just an excellent job with pricing discipline. We don't sell propylene, right? We sell derivatives, and those prices, we were able to hold those prices flat to, you know, to Q2 sequentially through the third quarter. There will certainly be prices coming off, and some of these, you know, customer contracts are cost pass-through contracts or tied to propylene that, you know, so you'll see prices starting to come down in the fourth quarter. Our view is, you know, pricing discipline in times of sort of economic transition like this is incredibly important, versus chasing demand that's frankly not there 'cause they're destocking anyway. From an earnings and cash point of view, you know, we're managing at a trade-off between volume and price in a market where we're waiting to see where primary demand really settles, and holding onto value as long as we can. Okay. Great. Thanks so much. Our next question comes from Duffy Fischer from Goldman Sachs. Please go ahead. Your line is now open. Yes, good morning. First question, Mark. When you look at, you know, what your expected sales are for the fourth quarter and look at what your planned operating rates are, did you bring operating rates down enough that you don't think you'll build inventory? Or, you know, what will you do with your inventory throughout fourth quarter, you know, if the numbers hit the budget you have planned? Duffy, we are expecting a decline in sequential revenue and volume numbers. This is Willie. We're expecting a decline in sequential revenue and volume numbers. We're adjusting our operating rates not only for that, but we're looking to take our inventory quantities down somewhere between 5% and 10% on top of that. Obviously, we've highlighted the steps that we're taking within our olefin streams, but we're managing that across the enterprise and the portfolio. The utilization rates and the impact on our P&L from that is baked into our guidance. You know, at this point, what I see here in October from an order and demand pattern is basically in line with our expectations as we've outlined. Yeah, we made a decision that, you know, cash is an incredibly important part of any company, and certainly in our value proposition. It's obviously a very challenging year when it comes to cash with working capital and all the inflation that we're trying to manage. We were focused on generating cash in this fourth quarter and taking the actions necessary to do that, as our priority is, and positions us well for next year, in how we sort of drive forward and run our plans next year well, as well as position for lower costs, raw materials that we're gonna be purchasing that we believe we already see the trends now in the marketplace of raw materials coming off, that we'll see, you know, already flowing through in the first quarter and have positioned ourselves even better for that in January. Okay, thanks. Then the issues you've had with shipping out of the East Coast, the port issues, what's the resolution to that? You know, have you found kinda alternate routes, but maybe more expensive ones doing trucking or rail to get to other ports? As we get into the first half of next year, is that something that's gonna continue to be a headwind for you guys, or do you have solutions outside of, you know, again, hopefully the ports themselves just getting better over time? First of all, the ports themselves are getting better. With the reduction in demand in the U.S. as well as in other economies, the amount of trade occurring on a lot of what we were shipping in containers out of those ports has lowered itself. The logistic constraints are not a major factor in the fourth quarter, and we don't expect it next year. In fact, we expect to see a significant distribution cost tailwind for us next year relative to this year for two reasons. One, with demand as tight as it was and all the challenges we had in keeping customers supplied, we used a lot of different expensive modes of transportation to make sure we honored our commitments to our customers. You know, those modes, you know, were a higher cost to us, some of which we passed on in pricing, but, you know, some of which is, you know, something we're not gonna use next year and pick up a cheaper position in how we transport products, you know, from a mode point of view. Of course, distribution rates are already coming down. You can see it on major routes, you know, like the dramatic drop in container costs between China and here. We really do think this, you know, goes from a significant logistics constraint on volume limitations this year that we couldn't serve even though demand was there and very high modes and rates to a meaningful tailwind next year as we optimize our operations and our distribution to a, you know, sort of softer environment. Great. Thank you, guys. Thank you. Our next question comes from Frank Mitsch from Fermium Research. Please go ahead. Your line is now open. Hey, good morning, folks. One of the more surprising thing, I wanna come back to the fibers contracts for 2023 because that seems impressive that you're able to drive that much profit growth already signed up for next year. And also in the prepared remarks, it said that it's gonna bring the levels back to sustainable investment levels. Are you indicating that perhaps we might see capacity expansions in this business? And any other color you could give us in terms of, you know, why we're seeing such a step change for 2023 would be helpful. Yeah. To be clear, we're not intending to add tow capacity, so let's just make sure we're clear about that. When we talk about getting sustainable margin levels, it's to be a reliable supplier. When you look at the situation, we had a view of the market declining 2%-3% in tow, you know, year-over-year. It's now changed to being sort of flat to down 1%, partly because the overall market just isn't, you know, declining as much as people thought. Equally important, the heat-not-burn market is growing phenomenally fast. Companies like Philip Morris and the other brands have these very successful heat-not-burn products, and they still use quite a bit of tow. Hmm The thinking hadn't included, you know, how that would offset the tow decline in sort of the traditional products. When you put it all together, you've got a much more stable end market situation than I think what people expected. Second, this is unique to Eastman, you know, textile growth has been fantastic, and we, you know, continue to see strong interest in our product. When you think about a product that's made from half, you know, certified, you know, grown, you know, sustainably certified forest wood pulp and the other half now being recycled plastic, it's just a great value proposition on beginning of life. End of life concerns about microfibers from textiles ending up in the ocean are certified to biodegrade. You know, that's a very strong, you know, value proposition for the marketplace, and we're seeing just great brand engagement on that. You got growth in that's more than offsetting the decline in tow that we see. Our assets are tight. Then, you know, you combine those two facts with less supply being available because what we have done actually is repurposed some of our tow assets to making textiles, right? That took some capacity out of the marketplace. Other companies have, you know, optimized their capacity, whether it's in Mexico or now because of the Ukraine war in Russia. You've got, you know, less supply than existed several years ago. In that conversation, our customers really wanna make sure we're gonna be a very highly reliable supplier to them to meet their needs. For that to be the case, we need margins at a better level than where they're at right now. We're able to, you know, get price increases this year and add on pretty meaningful price increases next year to get us back to, you know, more appropriate margins for this business. Well, they say there's no business like show business. Yeah. Just one thing I wanted to mention is that the contracts also include provisions to adjust for changes in variable cost, which we didn't have in the past. That makes them a little bit more predictable too on how they're gonna perform. Got you. I also wanted to ask about, you know, in this environment, it's very helpful to have an asset footprint that skews more towards the US than Europe. You still have a lot of assets over in that part of the world. We're starting to see some other companies talk about rationalizing capacity in that part of the world, and I'm wondering, you know, what your thoughts are on the long-term viability of your assets over in Europe. First, when it comes to Eastman, about 75% of our production from a volume point of view is in the United States, right? That's a significant competitive advantage for us on an energy cost basis relative to other markets. You have to remember that 55% of revenue is outside the US. Most of what we sell in Europe and China, in particular, are our specialties. You know, we you know and how we serve our global markets are in very strong cost position. Obviously, currency is not helping that at the moment, but long term, I think that energy position is gonna be a strong competitive advantage. When it comes to Europe, our asset base in Europe is a lot smaller than it used to be after we sold the tires and adhesives business, which has significant assets and energy intensive assets in Europe. With what's left now, we have, you know, our interlayers plants, you know, and a small performance films plant, which are more electricity driven and not that energy intensive. Our most energy intensive asset is our amines facility in Belgium. The segment that's most impacted by us is AFP when it comes to high energy costs, where for that segment, about 35% of their production is based in Europe. And so they're seeing a pretty significant energy headwind. If you just look at the fourth quarter, it's probably a $20 million headwind, you know, that they're facing on a year-over-year basis, relative to sort of where they were a year ago for just that segment. None of these assets are in a position where we're concerned about them being economically shut in, you know, because the costs are so high. We feel we have a very good plan in place, especially in Belgium, to fill that, we'll get the natural gas supply that we need through the winter. On top of it, lots of teams working to make sure everything has got supply agreements in place so we don't get rationed, and we don't have a concern around the economic impact from a viability of the assets. Got you. Thank you so much. Yep. The next question comes from Matthew DeYoe from Bank of America. Please go ahead. Your line is now open. Morning, everyone. I believe you have some euro-denominated debt maturities approaching. Does it make sense to take that out with USD debt, and how are you thinking about the term loan? I guess as well, what are the implications for next year's interest expense with all this? Does this kinda shift your commitment to the buyback? Okay. You know, what I would highlight is, to your point, we've got a roughly EUR 750 million coming due in May of next year. I would say, treasury team is proactively looking at how we will manage that. You can expect us to probably put some things in place here in Q4 and finish things off in early Q1. You know, as we've seen rates move, compared to that, it's probably call it roughly a $25 million-$30 million headwind on a year-over-year basis based on the rates that we see now. As we think about the share buyback, you know, we're still committed to the $1 billion that we outlined for this year. As we think about, you know, cash flow and strategic cash available as we look into 2023 with what Mark outlined, I see operating cash flow in a normalized working capital environment and also with the ability to increase our cash earnings potentially being $300 million-$400 million higher on an operating cash flow basis. Absent that, less our dividend, that puts us at $1 billion+ of strategic cash for our organic growth strategy as well as bolt-on and share repurchases in 2023. You got to believe in 2024 that, you know, we're back to that $1.6 billion or above operating cash flow. Thanks, Willie. I guess, following the agreement with Interzero, what% of your France facility is now feedstock locked in or contracted or secured? You know, we've said the Interzero contract's worth about 20,000 tons, and we're building in two phases a 150,000-ton plant. It's a good step, but it's not a huge% of the plant. I would say we have other agreements under discussion right now that would get us, you know, close to what we need for startup. And feel very good about that, in the progress we're making. It's pretty remarkable when you think about that we're locking in contracts, you know, for when these plants start out, you know, in the 2025, 2026 timeframe, and getting these commitments. Most importantly, what I'm most excited about is the fact that these conversations with these mechanical recyclers are coming to a viewpoint that we need to collaborate together. Mechanical recycling is vital to solve the plastic waste crisis. They have a low energy footprint, and where they can take, you know, waste, you know, back mechanically into applications is great, and that's what should happen. Unfortunately, there's a huge amount of packaging waste out there, as well as textile and carpet waste that, you know, cannot be easily mechanically recycled, especially when I'm talking about going back to food grade. You know, there's real limitations in what you can do in mechanical recycling back to food grade. We've become an essential partnership to really create a circular economy in that sort of high-value packaging market, and they see that. Also, you know, there's a long-term viability question with mechanical recycling because the polymer degrades over time and really has some sort of performance quality issues after several heat cycles. We can take that degraded polymer and bring it back to life through our facility. It's a partnership that really allows mechanical recycling companies to have like a long-term future, allows plastic to have an infinite life in how it can be recycled at a much lower carbon footprint than the current process. So, you know, they see. Interzero sees that. A couple of other announcements you'll hopefully see before the end of the year. You know, there's an acknowledgement that this system requires collaboration to really, you know, bring and keep the most carbon efficient material, you know, in use in a way that doesn't impact the environment. Understood. Yeah. Thank you. Our next question comes from Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead. Your line is now open. Thanks. Good morning, everyone. Could you discuss, you know, what share of the third methanolysis facilities covered by the Pepsi agreement, is this enough for you to make FID? If so, when are you planning to break ground? We're not gonna disclose the volume. As I said before, we don't discuss sort of specific contract terms with our customers. In this case, what I can tell you is this commitment was the key milestone we needed to achieve to feel we could have confidence in the economics to move forward in starting the engineering work and the, you know, planning to construct this plant in the US. Both the contract terms, the length of the contract, and the size of the contract give us confidence to start aggressively moving forward in the construction of this third plant. That's, you know, that's where we needed to be and we're excited about this partnership. I would also note that there's a lot of other customers who are very interested in this capacity. We'll be accelerating those conversations now that we've got the sort of base load position set, to get you some additional customer announcements. Thanks, Mark. Sustainable recycling, you know, it looks like virgin plastics prices are falling in many cases and so is, you know, the feedstock for mechanical recycling. Does that change your discussions with potential suppliers of feedstock and also with potential customers for your recycled materials in any way? Basically, the current market conditions. Yeah, I don't think it's changing anything significantly. You know, there's obviously gonna be ebbs and flows with supply and demand in the packaging industry, which compared to, you know, consumer durables, is a far more steady industry. What I also like about the circular platform is it improves our revenue coming from much more stable end markets from a demand point of view, which is a nice upgrade to our portfolio. When it comes to sort of the trends in prices, especially in the economic chaos we've had of extreme inflation and then now companies hoping for, you know, cheaper prices in the future, you're gonna see a lot of, you know, short-term volatility that we don't see any of our customers getting distracted by it 'cause they're looking at how do they hit commitments in 2025 and 2030, right? That's what all these discussions are about. It's not about what is my composition of virgin versus rPET in 2022, right? That's just not how they think about it. They think about how I build a roadmap to 2025 and hitting those commitments. In the short term, if I need to save a little money, I'm gonna make trade-offs on what I'm buying today. They're not, you know, they can't back off of their commitments. In Europe, it's not a choice for the brands, right? It's a mandate in government legislation. In Europe, if you don't hit your recycling targets, you're starting to pay some pretty significant taxes. That's a real bad look for brands, you know, of not solving the recycling content and solving it by paying a tax, you know, coming up short on their targets. In Europe, you've got very, sort of structural reasons that they have to stay committed to, how they're gonna solve this problem. Mechanical recycling infrastructure is not remotely capable of providing enough, recycled material to the packaging industries. That's where our value proposition shows up. Thanks, Mark. The next question comes from Prashant Juvekar from Citi. Please go ahead. Your line is now open. Yes. Hi, good morning. Mark, I have a question, another question on inventories as it relates to cash flows. You know, your cash flow from operation is down more than 50%. You pointed out the hit from working capital being $500 million dollar hit. I guess my question is, how much of that is from your actual cost going up for raw materials, and how much of it is from level of inventories going up? You know, can you describe where inventories got to in terms of days, and where do you think that will go? That's my first question. Thank you. Thanks, PJ, for the question. Yeah. What I would highlight, as we went into the second half of the year, we had some large turnarounds, as we've highlighted here in both Q3 and Q4. We were building inventories going into the second half. You know, I would highlight at that point, it was probably roughly half raw material energy inflation and half quantity. We've brought those quantities back down through Q3, and we'll be expecting that by year-end, effectively, the entire increase is raw material and energy inflation. Bringing our DQO-DIO numbers back in line with the prior year-end. I mean, if you think about the first eight months, you know, we were trying to ship things as fast as we could make them in serving market demand, you know, really through most of August. You know, some of that was, you know, outage related and raw material availability related and interlayers that constrained our ability to supply markets. You know, demand was great. You know, it was just a logistics or a production constraint in getting it all served. The markets obviously shifted pretty dramatically in September and through this quarter, in destocking. Thank you. Appreciate your discussion of a mild recession in your prepared comments. You know, you mentioned amines, acetic anhydride, and plasticizers to kind of hold up even if olefins decline. You know, amines and plasticizers have been cyclical in the past, so why do you think they'll hold up in a mild recession here? Thank you. Yeah, sure. You know, one of the things that's been an important evolution of our portfolio in CI is the growth in functional amines. When you look at that business tied to ag, which is obviously having a good year this year and expect to have a good year next year, we are tied to, you know, ag demand. It has phenomenally attractive and very stable margins because most of almost all that business is in cost pass-through contracts. You know, that business didn't have market tightness driving spreads up in the last two years, and it's not gonna have market looseness driving spreads down because they're CPT. that's just a great business, and really quite attractive, just like the care chemical business in AFP. When it comes to acetyls, you know, you've got a business, acetic anhydride relative to other acetyls is actually very stable in its margins. Again, it didn't have a fly up in margins in 2021, 2022, and it's not gonna have a big decrease in margins when the markets soften. It's just the nature of those end markets like pharma and food applications are more stable in what happens with them on a margin basis. But margins will certainly come off a bit there, but they will be more than offset by much higher volume. We had significant constraints on volume this year at our acetyl production because we had some significant planned shutdowns. Then the outages impacted their production run rates as well. You know, without the planned shutdowns and sort of better operations, we have a significant volume upside that we're confident we can place in the marketplace to sort of have acetyls be relatively stable to this year. Then especially plasticizers, which are our sort of benzoic derivative products, again, historically very stable and reliable. When we put those three together, that's 50% of the EBITDA of the segment, right? General plasticizers, in our case, DOTP, as well as all the other olefin derivatives is the other half. When you look at that part, the most volatility usually comes from the bulk ethylene as opposed to the derivatives. You know, you can go do the math and see that the margins in the bulk ethylene are already incredibly low. We have reduced it as much as possible, as Willie said, using RGP to sort of minimize ethylene production. The margins, you know, are sort of cash costs in the back half of the year and weren't great in the second quarter. Looking at next year, that's not a sequential headwind in 2023 to 2022 in any meaningful way. So it's, you know, you're now whittled down to olefin derivatives pricing, you know, coming off. You know, when you think about, you know, that, okay, half the earnings is in these very good businesses that are very stable. You know, the bulk ethylene headwind is behind us to a large extent. You know, the amount of decline you can have in the olefin derivatives, even if it's significant, still allows us to be at that sort of normalized $300 million rate that we talked about. That's sort of how we sort of look through all that. We feel that's actually great performance in a mild economic recession for this business. In the total portfolio sense, we'll be offset by fibers, which allows the specialties to drive, you know, recovery and earnings growth. Great. Thanks for the color. Thank you. Our next question comes from Laurence Alexander from Jefferies. Please go ahead, Laurence. Your line is now open. Good morning. Just wanted to flesh out the discussion on pricing and, you know, the price initiative-driven spread expansions. Are you seeing any change in the volume elasticity of demand in response to price initiatives, particularly in Europe, where I guess this slowdown's been going on the most? Well, I think you have to get clear about what is, you know, primary demand in the marketplace, what is destocking, and then, you know, what may be driven by pricing, whether it's destroying, you know, in-market demand or losing share to competitors where you have to, you know, examine that price question. We're not seeing, you know, any sort of specific destruction in demand because of our pricing, you know, at the consumer level. Frankly, you know, when you get to the price of the product on the shelf, you know, our component of almost every customer's cost structure is really quite small. We're not, you know, really a driver of where they go on the pricing on the shelf when it comes to consumers. When it comes to, you know, share loss, we're keeping a very close eye on is our pricing driving any share loss in the specialties or the commodities for that matter. We're not seeing any of that. Now, it's a little hard to, you know, see through that when you've got destocking going on, so you never know quite, you know, is it them just pulling inventory down or shifting share? It takes a few quarters to sort of figure all that out. What we can see right now based on the end market information we have is what we're seeing in demand drop aligns with, you know, what's happening at the market and what the, you know, retailers are doing in destocking. We feel being very disciplined on price, and holding, you know, firm on that, while we wait for market clarity is the right strategy. You know, we have very strong value propositions that allowed us to increase prices to cover, you know, $1.4 billion of inflation this year. We're confident we can hold our prices, you know, relative to how raw material and distribution costs decline next year, to improve our spreads back to, you know, more appropriate levels. You know, we're feeling good about that. We just need the raw material declines we're already seeing to, you know, continue happening into next year, and also same on the distribution costs. You'll notice I'm not saying energy as a tailwind because I think that's a lot less certain, on where energy goes, and so we're not assuming a tailwind in energy next year, with all the dynamics going on around the world. Okay, thanks. A couple of years ago, like, one of the debates around the green premium was that as you aimed to bring on larger facilities, that premium would compress, and it doesn't sound like that's happening. Is that right? Or can you characterize how resilient? If anything, is the green premium increasing as the CPG companies realize how tight their supply of renewable or recycled product is gonna be? Yeah. First, I don't think we've ever thought the green premium was gonna compress over time, at least not over the next decade, you know, because the supply infrastructure needed to solve the plastic waste crisis at a lower, you know, carbon footprint, you know, so we're making both climate and waste better, is just significantly beyond, you know, what we and others can add to solve that, right? Simple microeconomics, demand's gonna be a lot greater than supply for quite some time. The value proposition of recycled content in polymer is a true specialty product for some period of time here, in what it uniquely brings to the marketplace. You know, at some point, is it possible that people add a lot of capacity? Sure. That's, you know, way out in the future, you know, for when that starts sort of exceeding demand. Thank you. Our next question comes from Kevin McCarthy from VRP. Please go ahead. Your line is now open. Yes. Good morning, everyone. Would you discuss your capital budget profile for this year and next? It looks as though you took $100 million out of the plan for this year. Are there any projects that you're rethinking in this environment, or is that more of a timing issue, whereby it would shift into 2023? Yeah. Good morning, Kevin. Thanks for the question. As you think about, you know, cash flow progression, obviously we've evaluated our portfolio of capital, and we've taken actions on both fronts. There's both timing, as we've highlighted, earlier this year. Some projects were getting pushed out, as a result of supply chain issues. Those are resulting in some of those cash flows now, you know, falling into 2023. Additionally, again, we've reduced and focused our portfolio. We're investing to ensure that, one, that the safety and we maintain our plants well. Two, that we continue to grow our core specialties. Three, as we spent time today talking about our circular platform. I'll use that to bridge into 2023 expectations. You know, what I would say is, in a mild recession scenario, you know, range of, you know, where we are currently at $600 million, or it could be as much as $100 million or $200 million higher as we make, you know, progress on all three of our projects. As Mark highlighted, the fact that we'll be completing, you know, mechanically complete here at the end of the first quarter of our Kingsport Methanolysis facility. And as we make progress on both our France project and our third project here, that will be in the U.S., that will increase the level of capital. And we're confident in the cash flow that we're gonna generate and allocating a significant portion of that strategic cash to our innovation driven growth model and the circular platform. The key to winning at times like this is staying focused on how you're gonna create value long term and making sure you're positioning yourself for the other side of an economic correction to be the winner. So we're not losing sight of that. We may adjust the timing of some projects relative to when we expect the demand necessary. Frankly, the softening economy will make construction costs cheaper. You know, so it will actually help us out in some of this, inflationary element of CapEx costs. Okay, that's helpful. Secondly, for Willie, on slide 12, you referenced a pension and OPEB headwind of $100 million. What is driving that? Is there any cash attached to it in terms of what you may have to inject or is it strictly a P&L issue? Let me first start with our pension plans are well-funded. Two, there's no near-term cash requirement that we would expect. Our large U.S. pension plans are still today roughly 100% plus funded. The key factors here are really call it the accounting. At the end of the day, discount rates and interest rates have gone up, so we'll have a gain at the end of the year in our mark-to-market that comes back in as a you know higher interest cost in 2023. Additionally, with investment performance this year, the asset base has deteriorated but ultimately that will result in lower return on assets. Bottom line is from a cash and from a funding standpoint, there are no issues. I would just attribute this to mark-to-market accounting and the volatility that we're seeing in both interest and assets here in 2022. Got it. Thank you very much. Let's make this question the last one, please. Thank you. Our final question today comes from John Roberts from Credit Suisse. Please go ahead. Your line is now open. Thank you. Two quick ones here. One is, since Interzero is burning the waste plastic you're gonna get in Europe, are you gonna pay something just over fuel value for that waste? And then secondly, in your 2023 guidance, you've got pension costs going up. I don't think I've heard of anyone actually talking about higher pension costs in 2023 yet, so maybe you could tell us how that's coming about. On the Interzero, we're not gonna disclose the price we're paying for the material, but it is, you know, a very attractive price that supports our economics. There's, you know, a whole spectrum from things that go to waste, things that go into park benches to some, you know, modestly higher downcycled applications. It's a portfolio you're managing on price to make sure the sort of average comes out. We're seeing that very much on track with the economics of, you know, these platforms delivering $450 million EBITDA across these three projects, you know, when they're all up and running. I feel good about the pricing that we're getting as well as, you know, where the feedstock price is set. On pension, I'll let- Yeah, John, I thought the last question was on the pension. Just, Yeah. It has been answered. Got it. Thank you. Go ahead, John. Yeah. Okay. This concludes our call for this morning. Thank you very much for your time and for joining us and your interest in Eastman. Have a great rest of your day. This concludes today's call. Thank you for your participation. You may now disconnect.