Good day, everyone, and welcome to the second quarter 2023 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle of Eastman, Investor Relations. Please go ahead, sir. Thank you, Elliot, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; William McLain, Executive Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday, after market close, we posted our second quarter 2023 financial results news release and SEC 8-K filing, our slides and the 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 our second quarter 2023 financial results news release. During this call, in the proceeding slides and prepared remarks, in our filings with the Securities and Exchange Commission, including the Form 10-K, filed for full year 2022, and the Form 10-Q to be filed for second quarter of 2023. Second, earnings referenced in this presentation exclude 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 second quarter 2023 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A. Elliot, please, let's start with our first question. Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When prepared to ask your question, please ensure your device is unmuted locally. Our first question today comes from Josh Spector with UBS. Your line is open. Yeah, hi. Thanks for taking my question. I guess first I was just wondering if you could talk about the cadence of earnings here in the second half. Obviously, you're talking about a number of inventory adjustments impacting 3Q, but if you could talk towards what you're thinking more of the steady state looks like, whether it's 4Q or maybe beyond that, and what that implies for, for longer term earnings taker here? Thanks. Good morning, Josh, and thanks for the question. There's a lot embedded in that question about the back half of the year and how that indicates where we go into next year. First of all, I'd start with, you know, we obviously in April thought demand was going to be better in the back half of the year, which was principally an assumption based on destocking, you know, really being complete by the end of the second quarter. Obviously, we and everyone else in the sector has come to a different point of view that while demand at the primary level, I don't think is changing that much. It's not getting worse, in our perspective, and I haven't heard anyone else suggest that. We are expecting that there's a lot more destocking that continues to go on in some end markets, which has really been the impact to our outlook in the back half of the year. Some areas, whether it's this year or next year, for example, automotive, we have, you know, solid growth. In this quarter, we expect that to continue to be solid to the back half of the year. There's so much pent-up demand, and when you think about 2024, you know, I would expect it to continue to be a tailwind next year relative to this year. That market, aviation, same story, in very good shape. You have a lot of, you know, sort of stable end markets, where demand's been off in that sort of 3%-5% range. You know, when you look at all the, you know, fast-moving consumer goods companies out there, fully recognizing that they're holding price, being very disciplined to expand their margins that way with raw material tailwinds, and accepting that they probably wouldn't gain much volume if they'd reduced price. You know, discipline like we're maintaining, frankly, in our specialties. In addition to that, they're managing cash, too. We saw, you know, an additional sort of 8%-12% destocking on top of that demand in the fourth quarter, first quarter. Fortunately, as we go into the second quarter, lessening on that destocking and expect much less destocking in those kind of stable markets, like packaging, personal care, water treatment. That feels, you know, like it's moving in the right direction as we go to the second half. Of course, that would continue also into 2024. When you look at, you know, the consumer discretionary markets. Actually, I'm going to take two other stable markets just to deal with them. There's a couple that also took some sort of extreme negatives in the, you know, in additional destocking in Q2, which was packaging and medical in the advanced materials segment. That's, you know, they were carrying a bunch of safety stock from last year. Demand wasn't improving as they expected. You know, you know, they really started destocking in the second quarter. They also seem to have addressed their issues predominantly in the second quarter. That's also expected to get a bit better as we go into the back half of the year, you know, as that destocking reduces through the third quarter and, and certainly seems to run its course by the fourth. Again, improvement relative to next year, especially when you think about, you know, all these markets had a certain amount of destocking, that won't repeat in 2024. That's a tailwind. The two bigger markets that drive a huge amount of value for us on a profitability point of view, like automotive, that have the most demand impact is sort of in the, you know, consumer discretionary area as well, like durables, and building construction. When you look at the durable market, that's the one that's gone through the most extensive destocking and, you know, of any market. It really goes all the way back to last May of last year, the retailers sort of got 2x the amount of inventory they needed because they were buying everything they could think of because of supply chain crisis. Then they started destocking, you know, over 14 months ago. That bullet finally hit us in the fourth quarter of last year, you know, really knocked us down about 40% when the underlying market was only down 10%-15%. A lot of destocking got even worse, 10% worse into the first quarter. Then, fortunately, we saw that destocking start to abate in the second quarter. It got 22% better in the second quarter versus the first quarter. We saw momentum there. You just don't see in the results because of the medical and packaging destocking that occurred. That destocking will continue to lessen as we go in the back half of the year and be another tailwind as you go into it. Of course, building construction, I'd say, is one that's been doing some destocking this year. Demand's down, we expect that to be sort of flat to the first half because that market still has more action taken. There's also maybe some more hope with first home builds. There's a, there's a spectrum of things going on, when you look at it, but it's, you know, each of them sort of add up to less destocking, but it's not as much as we had hoped for, you know, in April. That's really the predominance of how our volume forecast came down, which is the entirety of our earnings reduction. You know, when you combine that with the need to take inventory actions for this lower demand outlook to make sure we hit the $1.4 billion of cash. All those then feed into a year, next year, that's going to look better, right? You know, when you don't have all this destocking going on, which we're assuming for 2024, you have, you know, some normal seasonality coming back into the demand outlook, you know, for next year, that's gonna help improve things. You've got the recovery of all this volume in our most, you know, in sort of down markets or our highest value markets, right? It's been a huge mixed hit to us this year, and as we've shown in past recessions, you know, when the mix comes back, and if, and even if there's a little bit of restocking, the high value of these markets, you know, drops to the bottom line pretty significantly, especially with the cost we've taken out of our fixed cost structure. It all comes together, which is building momentum in the second half to having a much better year in 2024. Okay, thanks. If I could just ask very quickly then. Your volumes were down 15% in the first half. What's your baked in assumption on the second half, all those things put together? You're saying, what is our specific volume forecast, you know, that we've got as a, as a combined company, you know, for the second half relative to the first half? Is that what your question is? Yeah. Are you assuming down 15% for the majority, down 10%, down, down 5? I'm just trying to get a kinda quantum of what you're considering. As we, as we look at it, I think it's, all together, you know, the volumes in the back half of the year are gonna be a bit less than the first half of the year, but I don't think we're gonna provide a quantitative number to it. You know, it's, it's basically just a little bit down, when you put it all together. The real headwinds in the back half of the year is the y ou know, from a sequential point of view, first half, second half, the entirety of our earnings decline is the inventory management, right? You know, that $75 million, sort of, you know, of, of additional headwind, you know, sort of aligns with sort of where our earnings outlook has now moved. Volumes are relatively stable when you put all the ups and downs, right? You know, some down in AFP, some up in AM, stability in, in fibers and CI, you know, is sort of a flat volume number from a sequential point of view. Josh, I would also say the mix should be more favorable, as Mark has outlined, with our durables markets, recovering in the back half. If I could just add one more point, which is third quarter, year-over-year, the volume mix decline would be less than what you've seen in the first half, but still meaningful. When you get to the fourth quarter, again, on a year-over-year basis, the comp is a little bit different, and so you get to a point where that decline in volume mix is even less still than it was in the first half of the year. Okay, understood. Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open. Thank you, and good morning. In advanced materials and, and, and in AFP, when you talk to your customers about what's going on volumetrically, you know, what are they indicating in terms of, you know, the desire on a go-forward basis, where they want to have inventories and, and where things might get back to? I guess what I'm trying to understand is whether what's going on right now is just sort of a structural reset in terms of how they're gonna manage their own business, versus something that maybe is just temporary, that snaps back. It's just, it's been going on for a long time, so it's starting to feel like, you know, and whether it's interest rates or, or whatever else has happened, it's just starting to feel like, you know, the entire supply chain is doing, is doing a reset. I, I'm just curious what your customers are telling you in regards to their sort of medium to long-term, intentions in terms of holding inventory. That's a great question, Vincent, and I mean, I'll, I'll try and keep it simple since my last answer was rather long. You know, it's very different by end market, on what's going on, on the stability of underlying demand and then what they're trying to do in destocking, right? A lot of these stable markets, you know, it's more fine-tuning, right? They, you know, they everyone built safety stocks last year, you know, through 2021 and 2022, and they're, they're trying to generate cash and adjust those inventory levels to different perspectives on end markets. If you're in the personal care world, in medical world, you know, these, these markets are stable at the end. They may be down a little bit, but they're very stable. You know, destocking is clearly the, the entirety of what's going on there, in, in many of those sort of end markets. You know, when you get to some of these other markets, you know, where the supply chain is incredibly long, like durables, you know, we're, we're making things that go to China, that get made into products, that come back to Europe or the U.S. You know, really understanding just how much inventory is out there through that entire chain is, is, you know, difficult for everyone in these markets. Exactly where end market demand is on these more discretionary markets, I think is a little bit more difficult to judge. But what I'd say we've seen, you know, is a couple of cycles, right? There's loggy stocking in the fourth quarter. Demand was really low in January, got a bit better through March. Then there was a realization that, you know, the banking crisis, people got nervous about what was going on in the broader economy. So they, you know, they went into a really low level of demand in April, which was probably the low point for the year. Then, you know, started to, you know, do a little bit less destocking, you know, or a lot less destocking in durables, you know, through the, through the second quarter. As we get into the back half of this year, I think what happened with customers in the, in the June time frame is everyone assuming the back half was gonna be a bit better in our downstream customers across, you know, most markets, especially maybe the more sensitive ones, that, you know, things would stabilize, destocking, you know, after 14 months, to your point, you know, would have played its course, or, you know, back in June, after 12 months. They realized, you know, they all had that built in their plans. They sort of said, "That's not gonna happen." You know, demand is gonna be flat, which is all, all of our collective assumption now. Everyone's in destocking mode to that assumption relative to things getting better, you know. It's not because the markets are getting worse, Vincent. It's just, you know, they'd assumed things would get a little bit better, they're not, and they're sort of correcting for that. It's important that it's a lack of expected growth, as opposed to, I think things are getting worse. I don't see anyone saying things are getting worse at the, at the, you know, primary demand levels. Does that make sense? Okay. Yep. Thanks so much. Our next question comes from Frank Mitsch with Fermium Research. Your line is open. Hey, good morning. You know, with much of the discussion regarding inventory management and so forth, I'm just curious, you know, obviously, the Q hasn't come out yet, so we don't know where the second quarter inventory levels are, but can you give us an idea where they are relative to the $1.94 that was in the first quarter? What are your expectations as to when you go through these actions, how much further down will you be drawing your own inventories? Morning, Frank, it's Willie. Yes. As we think about inventory levels, I'll call it from Q1 to Q2, inventories are about flat. As we think about the, the level of the supply chains, and the demands, then that Mark has just outlined, we have about $300 million that we would expect inventory to decline in, in the back half of the year. That's also essential to getting us to, to generating roughly $100 million from working capital on a full year basis. I'm confident that our business teams and supply chain, that we have a plan in place that we've already activated to execute and deliver that cash flow. Terrific. Thank you. Y ou know, Mark, I was wondering if you could talk to the raw material benefits that you're seeing in your specialty businesses. You know, any way you can provide some order of magnitude in terms of, you know, what sort of benefits are you seeing and, and, and what your outlook is there? Thank you. Yeah. I think in, in advanced materials, we're certainly seeing some pretty meaningful raw material benefits, Frank. If you remember last year, we had a tremendous spike upward in [ZAM] and PVOH prices that created a pretty significant headwind for the, you know, interlayers part of that business. Those prices have now, you know, collapsed and dropped, you know, price pretty significantly versus last year, and that's, you know, translated into a tailwind for us to recover our margins there. PX has not been as much of a tailwind. Those prices have been holding up, relative to last year. There's been a bunch of outages in that industry, new plants having trouble starting up, alternative fuel value, all those, you know, typical explanations with PX. Not as much of a tailwind there, but we're still, you know, well over $100 million of spread tailwind in that segment for the year. And I think, you know, that is obviously helping with some of the demand challenges and building us into a very good margin position as we go into next year when mix comes back and how that flows through those margins will flow through to the bottom line in our fixed cost leverage. In AFP, again, we've got, you know, good raw material tailwinds in, in that business as well. The spread improvement is not as significant because we really have a lot of cost pass-through contracts, especially in the means business. We, you know, we had very stable margins last year. That means they're also gonna be stable this year by the nature of those contracts. Those spreads, you know, are also coming in, you know, relatively good when you think about, you know, ammonia, methanol, and some of the olefin-related, you know, propane, ethane type products going out especially. Overall, spreads are better there as well as, you know, on a full year basis, helping this year and will, of course, build momentum as volume comes back with better margin as we go into next year. Gotcha. Thanks so much. We now turn to Aleksey Yefremov with KeyBanc. Your line is open. Thanks, and good morning, everyone. You, you discussed slower conversions of MOUs to definitive agreements in France. Can you just elaborate on that? Is it just in France, or is it related to your second plant in the U.S. as well? And is this really related to demand uncertainty or price volatility in the plastics markets? What's happening there? You broke up a little bit, Aleksey. I just want to make sure I understood the question. You're asking what's happening with the pace of contracting in France, you know, given the current market conditions? Was that the question? Yes, it was. Apologies. You're talking about MOU conversions to definitive agreements. Yep. Got it. Could you just elaborate on what's going on there? Yeah, sure. Well, first of all, you know, the commitment and desire to get recycled content and products remains very strong. When you look at the specialty businesses we're, we're in right now from our Kingsport plant, the demand, commitment, which is global, not just in North America, but across the world for products and durables, cosmetics, packaging, for recycled content, remains very strong. We've got 70% of our potential output, you know, where customers are very committed, as you saw in the prepared remarks. When it comes to these PET or textile contracts, you know, that are the long-term, sort of, take or pay kind of structures, for those markets, like the Pepsi contract, we are having great engagement and good discussions with a number of companies about those contracts. Like Pepsi, it takes a long time to negotiate these. They're very complicated, contracts. The current market conditions, I would say, are sort of slowing those discussions down a little bit. If you're looking at the PET market, whether it's VPET or rPET, those market prices have, you know, come off in a pretty significant way, which is purely just the story of everything else in the current macro, right? Demand is off in beverages. People are downscaling to sort of cheaper water bottles that have less material. A lot of that rPET also goes into carpet and textiles, where demand is down 20%, 30%. That's just a temporary thing. The key thing to keep in mind in these contracts is, you know, we are targeting applications within these brands where mechanical recycling doesn't really work. If they want to have recycled content in those applications, they're going to have to, you know, use chemical recycling because the performance requirements in a variety of different technical aspects, you know, the mechanical is just not going to actually work. I'm not going to get into the details of that because I think that's a competitive advantage for us, given our deep polyester expertise relative to other companies out there. That's definitely a key part of, you know, how we're going to win. The second part is the degradation of polymer is already becoming clear in some markets that, you, you can't mechanically get to 100% recycled content. While regulatory requirements may be only 25% in 2025, a lot of brands have set targets for some key applications to be 100% recycled content. To maintain quality, you know, they're not going to be able to do that with mechanical. We feel very confident that these contracts will get resolved, and we're going to get them in place. You know, the engagement's high, and the regulatory requirements, especially in Europe, are going to require, you know, people to have recycled content. You look at the market situation there, right now, only about 12.5% of PET is sort of recycled. Mechanical industry does not have the ability to double that capacity between now and 2025, when that number needs to be 25% recycled content, or you can't put the, you know, packages on the shelf. You know, we feel like we're in a good position and, and, working really productively with our customers, and we're aiming to have those contracts done by end of year. Thanks, Mark. Our next question comes from Mike Sison with Wells Fargo. Your line is open. Hey, good morning, guys. you know, I was thinking about Advanced Materials a little bit. It feels like this year, obviously, maybe hopefully trough adjusted EBIT. You know, the sustainable day you had a couple of years ago, you had pointed to adjusted EBIT for the segment, you know, maybe closer to $700 million. Do you still think that that's the longer-term upside, and, and how do you bridge sort of the gap between the two to sort of get there from, from these levels? Sure, Mike, and, yes, we still think that's the, you know, destination for this business. Obviously, you know, it's been a pretty volatile time over the last few years, you know, from the pandemic to a supply chain crisis to a recession. And as I said in, in, a bit earlier, the extremity of what's happened in this switch from a COVID life to an experiences life, and the impact of inflation, interest costs, and how people can afford to, you know, spend on goods when they're just trying to afford everyday life and maximize their experiences at very high prices when it comes to hotels and everything else, you know, it's created a short-term constraint in how people can, you know, afford goods. you know, consumer durables, as an example, you know, is, you know, one of the places that is most discretionary, especially after they bought a lot during COVID. Demands are way below anything normal in consumer durables, and then you've got this huge amount of destocking on top of it on a very high-value, mixed product. As that market stabilizes, you'll see some recovery coming in the back half of the year, especially if you back out the inventory, you know, inventory utilization headwinds, and we'll build good momentum, you know, into next year from an underlying market point of view. Then you add on top of that, recycled content, allowing us to add, you know, additional incremental value, you know, and substantial new volume, from, you know, those applications. You know, as we said, just getting started to $75 million adder to next year in EPS for the Advanced Materials segment. That, that obviously, you know, is gonna be, you know, significantly helpful. The fixed cost leverage in this business, as we've demonstrated in the last 10 years, is significant, right? This world's always, you know, grown double digits for us, when the underlying markets are typically growing 3%, 'cause we win so many applications because of better value proposition, just because of product performance and product safety. And now you're adding on recycled content to further accelerate that curve. The problem is, is in a, in a market like this, there are not a lot of new product launches, right? But we're continue to win new business. Even now, that's gonna help volume in the back half of the year on top of just waiting for less de-stocking. We've won a lot of applications, but they'll really ramp up next year when things stabilize and they start launching new products. All that sort of brings in better value from that side. Then, of course, the last couple of years, you know, the inflation's been really high. We've been trying to keep up with it, but, you know, now we're finally recovering our margins in this space. You've got, you know, better margins, on top of this vol- volume recovery to sort of lever you to, you know, better earnings. As you go through 2024, 2025, driving towards that $700 is very much what we expect to do. Got it. Just a quick follow-up for just kinda overall volume growth in 2024, right? Which I know is a long way from here. When you, when you look at your customers' inventories, do you think they will need to restock? If that's the case, when do you think a restocking event would occur? If not, is it possible you just sort of plug along low single-digit or some volume growth in 2024 to 2026, and maybe they don't need to replenish? Well, first of all, I think, you know, what happened from April to now, the whole industry, from us all the way down to retailers, have gone to groupthink that it's gonna be bad for the rest of the year, right? You know, everyone's acting under that assumption and pulling inventory down, managing in that context. There's a limit, you know, to, you know, how much destocking can occur. At some point, warehouses go empty, right? In some of these markets, especially like durables, you know, it's been, emptied out for a long time, or automotives, there's a huge amount of pent-up demand 'cause, you know, we're talking about demand being better this year, but it's from a really bad level last year, right? There's still plenty of pent-up demand there, and there's gonna be plenty of, plenty of pent-up demand in building construction, you know, with the dynamics of what's going on this year, constraining both demand and production of homes. You know, there's a lot of upside across, you know, the, the whole corporation when you think about it from both the demand point of view. You got to remember, these destocking levels are huge, right? Destocking is two or three times more than the underlying demand, and if that goes away, you know, that's all volume recovery at some point, even if the underlying market demand doesn't improve. Then to your question around inventory, you know, I think it's, you know, with the actions that we're taking and everyone else is taking, you can see people driving inventories from very low levels. It's more likely than not that they're gonna go below what they, you know, in a improving, you know, demand environment. There'll be some amount of restocking. Now, our back half, just to be clear, has no restocking assumed in it, in the guide that we gave you. You know, if that happens, that's upside. If, you know, but if you look at 2024 and say, you know, destocking is, you know, got to run its course eventually, so that you don't have that as a headwind for next year, and then some, just a little bit of restocking just to get to levels to serve that demand, I think, you know, you can get a much better picture of volume next year than this year. Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open. Thank you. Good morning. Mark, thanks for the update on Kingsport. On the project, do you have any forecast for estimated losses this year as you ramp up? Do you have an updated cost of the Kingsport project? Thank you. Thanks, David. first, I'll just highlight that the, you know, the operating costs are gonna be approximately neutral on a year-over-year basis. If you think about the pre-production that we're incurring this year, as well as the start-up expenses, and also, as we're using our bridge technology with glycolysis to seed the market, that's at a higher cost to bridge. On a year-over-year basis, the way I think about this is, revenue growth is actually accretive to EBITDA. as we outlined within, you know, our guidance on the $75 million of EBITDA on a year-over-year basis, you know, roughly $50 million of that will be in, in advanced materials and, the absence of the pre-production and start-up costs in our corporate other. As I see it, you know, that's roughly where we're getting, you know, the $75 million. Also, if I think about our CapEx this year, we started the year at, you know, roughly $700 million-$800 million for the project. We took that up to $800 million. You can think about the combination of that and how we're managing our overall CapEx as the increases into the project this year for the Kingsport project. I apologize. I meant to ask, what was the updated capital cost for the project itself, not total company CapEx? Yeah, I don't think at this time we're given the, the capital costs for the Kingsport project. We're not gonna, we're not gonna provide that at this time, David. Understood. just Mark, just on, on fibers and tow, do, do the contracts next year have, price increases embedded in them? They don't have price increases embedded in them, you know, for next year versus this year. David, if that's your question, obviously, prices have gone up considerably from last year. The idea of these contracts is to prove our margins and profitability to a level where, where we can continue to reinvest in this business to be a reliable supplier to our customers. We've achieved that type of pricing with our customers in these contracts. We've also put formulas in them to adjust for changes in energy costs to give stability for us and for our customers, you know, which we have not had in the past. We feel great about what we've achieved in, in, in improving our, our sort of ability to support our customers and, and our current profitability. These contracts, you know, are now in place, where about, 75% is, is fully contracted now, you know, through the next 24, and many of those are multi-year contracts. You know, hopefully, by, the end of the year, we'll have, you know, that number up to 90%. You know, great improvement in this business, from its, you know, performance last year, and we're very focused on stabilizing it, you know, on the tow side, to provide, you know, very attractive cash flow, to support our growth investments a-across the company. I would also note the textile business continues to do great on top of that. We're even in a 20% down market that we have this year in textiles, you know, we're growing that business. We're winning a lot of market share versus other materials because the value proposition of Naia is, you know, very compelling. It's a great beginning of life story, you know, being based on bio content and recycled plastic. Importantly, and a bigger issue going forward now is microplastics, which are the fibers breaking up and getting into the ocean, and our fibers are fully certified to biodegrade when they do end up in, in, in the environment. That's a very significant positive as the world's becoming more concerned about that as well. It's just a great business. Thank you very much. Our next question comes from John Roberts with Credit Suisse. Your line is open. Thank you. On the second U.S. PET project, are you going more slowly on that? We're not going more slowly, you know, in any significant way, John. I mean, right now, what we're doing is really focusing. We haven't, you know, we haven't made a site announcement, so you could ask that question, too. Because we're really, you know, looking at the incentives across several states. We've got three sites that are all very attractive, and the engineering work is continuing, you know, for whichever site we pick. We're just trying to get those incentives, you know, in place. You know, we feel great about our, our partnership with Pepsi as a significant baseload customer in that project. We are sort of, you know, moving forward with that project, you know, to, to make sure we can serve their needs, and, you know, put that together with the French project and Kingsport to get that $450 million EBITDA of value for our owners, which is a, you know, great return on the, on the capital required, required across those three projects. On the fibers business, assuming raw materials are sequentially stable, is all of the earnings stepped down in the third quarter? Just remind us of the frequency of the reset on the price versus cost. The contracts are quarterly, so a little bit of the step down, you know, from Q2 to Q3 is just, you know, the prices adjusting for a lower energy environment. Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open. Yes, good morning. Mark, with regard to advanced materials, do you have a sense today as to whether your third quarter earnings are likely to be flat, up, or down sequentially versus the $99 million that you posted in the second quarter? The reason I ask is, you know, reading the prepared remarks last night, it looks like you have a $40 million inventory-related hit in the third quarter, but you also say the second half should be better than the first half. It seems like there's some countervailing trends there. any, any comments on the seasonal cadence would, would be helpful. Kevin, I think we highlighted earlier that most of the $40 million headwind on the utilization rate will be in Q3. As a result, I would expect it to be similar to slightly down sequentially in advanced materials. Slightly down versus to Q2, Willie? Correct. Yeah, then, of course, there'll be the lack of that sequentially from Q3 to Q4, you know, where that improving in volume and spread will, you know, pop back up. So you can't think of normal seasonality around the back half of the year, really, for, for either AM or AFP, because most of the inventory reduction actions are happening in Q3 much more so than Q4. But the volume, momentum, and margin improvement, you know, is continuing through 3Q and into 4Q, not just because of our inventory actions, but because our customers are doing the same thing, right? They're also taking inventory down more in Q3 and, and oddly, less in Q4, when you think about it, you know, the sort of odd year we're living in right now. Yeah, it, it is odd, isn't it? Thank you for that. That, that's very helpful. Secondly, I want to ask about AFP. I think you referenced a heat transfer fluid project that caused $15 million to be pulled into the second quarter. Can you just elaborate on what you're doing there and, you know, how that is translating to, you know, to a meaningful earnings swing? Yeah, sure. You know, the, the fluids business is, is a bit sort of chunky in how volume shows up, right? Because you have these very large projects and, you know, at some point they complete the project, and at the end of the, the completion, they need to charge that plant with heat transfer fluid to then start up the, the plant. In this case, this was an extremely large LNG project, that had been under construction for several years, and their completion actually happened a little bit sooner than they expected and moved forward with wanting to charge that system. We shipped that volume. We thought it was going to be in the third quarter, it turned out to be in the second quarter. You know, this overall business is, is a great business and something I'd say that we've really accomplished a lot in this business, is diversifying our market exposure to different end markets. Historically, it's been very driven by the polyester industry, and a few other sort of, you know, chemical facilities that use a lot of heat transfer fluid. We've seen a huge growth in LNG, as you as you know well, with the geo-geopolitical dynamics going on right now with Ukraine and Europe. There's a lot of heat transfer fluid in those plants, too. We're diversifying, you know, out of China into other applications, like this project that creates a lot of value for this business. They're very high-value projects, so, you know, when they, when they do show up, they, you know, drop a lot of earnings, you know, to the bottom line. It just happened to be in Q2, which then means as you sequentially go from Q2 to Q3, you get a $30 million swing in earnings. Okay, perfect. Thank you so much. Our next question comes from Matthew DeYoe with Bank of America. Your line is open. Morning, everyone. To talk a little bit about Naia and Textiles, what's the opportunity for EBIT if we think about next year and growth? I mean, I'm just thinking, given the margin recovery in cigarette filter tow, does it even make sense to rotate tonnage from filters to fibers? Is Naia still growing into your excess capacity, or are you now transitioning filter capacity to textiles? First of all, Naia is a great business. The margins are very good. Obviously, recent improvements in tow margins are better. But the reality is, the while we're, we're really excited about the improvement in the, in the tow business, it is, you know, a stable business that's still going to decline in volume about, you know, 1% a year. It's not a, a growth business. We continue to be very focused on serving our customers. The, you know, these heat-not-burn products are certainly growing at, at 15%, and need more filter tow, but that's just offsetting some underlying natural decline of, of cigarettes to get you to that sort of net 1% decline. You know, we're not conflicted capacity-wise, between this and growing our Naia business. We are getting to the point where we are going to start using up the available capacity, and we're looking at capacity expansion options to continue to support the growth, right? Our goal here with cellulosic is not to optimize the stream, is to turn it into a growth stream, right? Our goal here is to win in a variety of applications. Like polyester being a very high growth, you know, stream for environmental reasons and providing sustainable products, you know, our strategy as we laid out Innovation Day, is to get $200 million of EBITDA growth out of this stream on top of the tow business, right? When we talked to you in 2021, you know, we weren't including improvements in tow, right? Tow was a new base. We're still aiming to grow $200 million EBITDA on top of that new base. That's a very significant change from where we were in 2021. We've got growth in Naia, which we're really excited about, as I explained the value proposition a moment ago. We have great growth prospects and some early wins in Aventa. This is our foamed cellulosic that can replace polystyrene in packaging. Clearly, polystyrene is being banned in many places for packaging, whether it's, you know, food packaging, in sort of protein trays for meat or the clamshells, et cetera. We validated that our Aventa product will biodegrade both in, not just industrial, but in residential composting, which is sort of the equivalent of landfill. It really is a true end-of-life solution. You know, customers are super interested in that. Huge market, lots of volume growth opportunity there. You got microbeads, which is a super high-value opportunity in cosmetics. We've got success in recycled content, the Ophthalmics business, with how we're recycling the eyewear back into the product. There's a lot of growth going on across the cellulosic stream, you know, we're going to be looking at incremental capacity expansion to support all these growth opportunities as we move forward. Fortunately, we have a very large installed asset base, it's not like building methanolysis plants. We can really leverage the capability we have here, there'll still be capacitor routing for Naia and all these other products between flake and fiber. Matt, are you good? Our next question comes from Patrick Cunningham with Citigroup. Your line is open. Hi, good morning. Thanks for taking my questions. I know you have no expectations for any sort of restocking embedded in the full year guide, but you know, which end markets do you think are potentially best set up for restocking, whether it be in 4Q or into 2024? How should we think about this in the context of upside to earnings from the specialty businesses? Well, I think that, you know, it doesn't matter what end market we're in right now, there's a lot of destocking going on as everyone focuses on generating cash. I think there's probably opportunities for restocking pretty much across the markets. Building construction might be the one exception, where I think there's a lot of destocking still to be done, from what we've seen from our customers in that space. Everywhere else, I think there's some degree. It just gets into proportions, right? You know, where, where the destocking numbers are bigger, like consumer durables, then the potential for restocking is higher. You know, in more stable markets like personal care and, and water treatment, and medical, I think the restocking opportunities are still there, but, you know, muted because they're just not doing as much. As far as earnings opportunity for next year relative to this year, we're not gonna sort of get into that yet. It's a little early. Yeah, that makes sense. What's driving strength in acetic anhydride? I think you referenced overall resilience in acetyls. I would have expected some weakness given declining spreads and, you know, some of your end market commentary. Well, for acetic anhydride, you know, goes more into food, pharma, feed-type applications that where the demand is actually really stable. You know, acetic acid goes into, you know, polyester, where demand's, you know, down a lot in textiles. You know, VAM goes into coatings and a bunch of other more economically sensitive applications. When you think about different acetyl derivatives, you know, acetic anhydride just has much more stable end markets, and large customers that place a lot of value on security of supply of that product for those kind of applications. They tend to be, you know, more focused on supply than just what's the best price. That just allows that business to be, you know, relatively stable. I mean, we're still, you know, have some price pressure there, but it's not nearly as much as some of these other sort of derivatives or, or no olefins, you know, which is the bigger part of our portfolio, where the price pressure and spread compression is occurring, and CI is really more of an olefin and plasticizer story. Very helpful. Thank you. As a reminder, if you'd like to ask any questions, please press star one on your telephone keypad now. We now turn to Laurence Alexander with Jefferies. Your line is open. I just have two quick ones. As you think about, the, you know, the dynamics around inventories and fixed cost absorption, should incremental margins next year be above 60%? Do you think some of the inventory reduction efforts you're doing now will spill over into Q1? Laurence, this is Willie. To your point, I think we've demonstrated, through various environments, one, that we can deliver strong cash flow, and that's what we're focused on doing now. As we think about the fixed cost utilization, I, I don't expect any spillovers into 2024. The actions that we're taking will be complete this year. Also, on the incrementals, I think, you've seen the decrementals that we're talking about. The incrementals will be equally positive, I would add on to that, to your point, to get to the levels that you're talking about, that includes the mix upgrade and the high-value products as we think about our advanced materials and the more specialty nature there. Secondly, kind of now that your peers are facing kind of more pressure on from the credit cycle, you've always seemed to have a sweet spot in M&A around finding people who are underinvesting in the engineering. Has your M&A pipeline changed, or can you characterize kind of how actively you're looking at opportunities? Yes. We're, we're more focused on the bolt-on pipeline. We did a great bolt-on earlier this year in our performance films business. We're right now focused on our organic growth strategy, with our investment in the three circular platforms. Our pipeline is mostly, mostly focused in smaller bolt-ons and advanced materials and additives and functional products. We're going to be disciplined with that strategy and stay focused on executing it and executing it well. Yeah, the recent acquisition we did of a manufacturing site in China is a great example. Performance films business, you know, has been performing incredibly well in this auto market last year, in this auto market this year. It's very high-margin business, and that acquisition allows us to be domestically based in how we support customers in China, which is definitely where the China government wants to go, is things made in China. Those are great tuck-in acquisitions, very highly accretive. Those are the kind of things we're focused on right now because our real priority is growing our dividend and creating, you know, this sort of organic driven growth story around being a leader in the circular economy, both polyester and cellulose. Then just lastly, can you characterize or give a little bit more detail on what you think is going on with the agriculture chain, inventories? I guess the, the, the timing and the severity of the adjustments seem to caught a lot of the industry a little bit flat-footed. And so just curious about what you're hearing in terms of when people think it will end. Because I think you have a comment in the remarks about it accelerating it, it into Christmas. I wouldn't say it's accelerating to Christmas necessarily. What, what happened, I think, you know, is pretty well discussed out there. You know, two things really. Last year, you know, with all the Ukraine events around ammonia and other uncertainties around supply chain, you know, farmers around the world were stocking up on safety stock in their warehouses. The retailers were stocking up on safety stock. Their distributors were stocking up on safety stock all the way back to, you know, the big players, that make the products like [audio distortion] et cetera. Demand was really good. That was through the first quarter, as this chain started looking at a season that wasn't gonna quite need quite as much product because of the dry weather and the not needing it as much, you know, and feeling like supply chains were now, you know, safe to rely on, sort of in the middle of Q2, kicked in significant destocking downstream of us. We started to feel some of that destocking from our direct customers in the second quarter, and it ramped up to full destocking as we go into the third quarter and to some degree, in the fourth quarter. There's a lot of debate going on, I'd say, about just when does that destocking end and when they'd have to start ramping up on production to meet the growing season next year. It's important to realize that, you know, the, the, the final end demand of, you know, for, for, for the farmers is good this year and expected to be good next year. This really is a whole inventory management cycle we're in, and at some point they'll have to kick back into gear to make sure they have enough supply for next year. You know, whether that's in the fourth quarter or the beginning of the first quarter, you know, it has to happen sometime around then, or they won't have enough inventory for the next growing season. Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is open. Great, thanks for taking my question. I guess I just wanted to go to AM and AFP. There are some markets which we're seeing some strength in, notably, maybe the aerospace side, aviation fluid side. Is that what you're seeing as well? You know, some of those stronger markets, do you expect that to persist through the second half? How would you comment on some of your stronger markets? Thanks. When it comes to aviation, our view is that the market has really improved through the first half of the year and will stay, you know, you know, strong in the back half of the year. I don't, I wouldn't say it's necessarily gonna grow relative to the first half of the year, but because it's been pretty strong, but it'll, but it'll stay that way. The airlines are obviously very confident about their demands, and, you know, going forward and, you know, we'll track with wherever their demand goes. Right now, that's their viewpoint, and we're, you know, using their view to build our forecast. Then just as a quick follow-up, you know, some other markets, are, are, are, are notably on the weaker side. You know, you, you addressed, you know, some of the destocking that's going on in amines and, and the ag side. What are some of the other areas that maybe turned out worse than you expected? You know, you've addressed a couple on the call already, but if you were to reiterate, some of the weaker areas, what, what would those be? Thanks. From a Q2 point of view, the, you know, end market-wise, I'd say, from an end market growth point of view, I don't think much has changed in our view across all of our end markets. We haven't seen different end markets, you know, get worse or better. Auto, strong, you know, obviously, you know, discretionary markets are under pressure. The personal, you know, care, water treatment, those kind of markets, you know, are off, you know, 3%-5%, you know, as all those downstream, you know, customers of ours that you can see in the fast-moving goods and everything else, reporting that they're focusing on pricing discipline, and, and, and as a result, you know, having a little bit less volume. I, I don't think anything that's changed, really, it's been more of a. It's all about inventory management is the entire story for some of the negative surprises like medical packaging and ag in the second quarter, and, you know, and destocking dragging out into the back half of the year, right? I just think that, you know, the extremity of COVID and then the following stimulus and the supply chain crisis has just led to a lot more inventory being, you know, built throughout the world than I think any of us really understood. It's taking obviously a lot longer to pull it down, especially when the, you know, demand is, you know, soft to some degree in every market. Okay, I believe that was our last question. Thanks very much for your interest in Eastman and for joining us this morning. I hope everybody has a great day. This concludes today's call. Thank you for joining. You may now disconnect your lines.