Good day, everyone, and welcome to the Third Quarter 2021 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman's website, www. eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company Investor Relations. Please go ahead, sir.

Thank you, Mary, and good morning, everyone. And thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; William McLain, Senior Vice President and CFO; and Jake Laroe, Manager, Investor Relations. Yesterday after market closed, we posted our third quarter 2021 financial results news release, and SEC 8-K filing, as well as our slides and the related prepared remarks in the Investors section of our website, www. eastman.com. Now, before we begin, I'll cover 2 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 2021 financial results news release. During this call in the proceeding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for Second Quarter 2021. And the Form 10-Q to be filed for Third Quarter 2021. 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 third quarter of 2021 Financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight Q&A. Mary, please let's start with our first question.

Thank you. We'll now take our first question from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you. And good morning, everyone. And thank you for the updated outlook on 2022. And to that affect if I could just ask you Mark, what are you assuming for auto production 2022 versus 2021?

Good morning, Vince. And what we're assuming is that the auto production situation remains pretty challenged as it has been the back half of this year as we go into next year. But things get modestly better through the year especially in the back half but there's no heroic assumptions about auto recovery next year versus this year in the forecast. So depending on everyone's view, you can adjust up or down relative to that assumption.

Okay. And if we just look at the third quarter, can you help us bridge how the specialty portfolio volume would have performed if you ex out the impact from auto. So what's your -- what the other businesses are doing on an underlying rate?

Good morning, Vincent. What I would highlight, first of all, is again, we have mix included in that for the quarter. And specifically in our enhanced materials which is more exposed to the OEM. And if you back that out, volumes would have actually been down because we had very favorable mix in the quarter as we think about year-over-year performance especially. But sequentially, it was definitely down in the premium areas. If you think about it, the first half of the year, mix was incredibly strong and driving a lot of variable margin growth and margin improvement. And there was a mix shift a bit in the third quarter. It wasn't just autos, it was also outbound logistics constraints on our specialty plastics business are getting high-value products like Tritan to the market. Demand is incredibly strong out there, but logistics, as you all know, are also indulging, so the earnings could've been considerably better with those two factors, if they were a bit better.

Thank you very much.

And we can now take our next question from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Good morning. And Mark, again, thank you for this '22 guidance. On that guidance, could you just walk through the segments and what how you expect them to perform in '22 versus '21?

Sure. And good to hear from you, David. When you think about the overall segments, obviously when you start with the specialty businesses, as we've noted here, there's just tremendous growth that we see possible on a number of factors. We've got volume mix that should be significant driver with the economy to some degree growing with the markets in it. And there's also a lot of pent-up demand out there to drive additional growth versus GDP as consumers fulfill desires that they can't get due to supply chain constraints. And we're restocking inventory, which has not at all happened yet in this year. So that's all quite positive. And when you think about that, especially the pent-up demand part, I think that's more significant in the AM segment. So we've given you a breakdown of AM being about 70% of that several margin improvement versus AFP. The innovation is also incredibly strong especially in AM where we're going to continue to outperform the underlying markets in significant way you've seen this in this year. You saw it last year and AM, you've seen it for the last decade. The circular offerings are also accelerating a lot of growth for us in the AFP business. You've seen $600 million new business revenue from innovation. So that's a good momentum that we take into next year. So again, those are a bit more biased towards the AM as AFP businesses also getting traction. And then market segment strategies, we continue to focus on the markets that are growing. Whether it's luxury EVs, water treatment, care chemicals where we pick up a lot of just natural market growth. And importantly to keep in mind a lot of growth I just described, all of it's high-value mix, both within the segment and certainly…

Perfect. And just on buybacks Mark, could buybacks approach a billion dollars next year?

Let Willy take that one.

Well David, thanks for the question and maybe a little bit, as we think about every year, we're focused on growing free cash flow to that billion dollars level. As we go into 2022, obviously we'll have the impact of the divested EBITDA but we believe fundamentally with the working capital abating given the raw material assumptions that Mark just outlined. And right now, year-to-date, we've had roughly $450 million of inflationary pressure on working capital. We see that reverting. Also as we continue to invest in circular and growth in our capacity assets, we think excluding the dividend that being backlog of 600 million of free cash flow. Then if you take proceeds from our divestitures on top of that, it definitely is possible.

Very good. Thank you very much.

We can now take our next question from Kevin McCarthy of Vertical Research Partners. Please go ahead.

Yes. Good morning. Mark, you announced a nice deal to divest the adhesives business and of course the Crystex deal is still pending. I was wondering if you could just walk us through, at a high level, what your thoughts are on capital redeployment and just the portfolio composition moving forward. Does this bring the Company to a reasonably steady state in 2022 or is there more work to do in terms of the mix in the portfolio over the next couple of years?

And so, we certainly like the portfolio we now have. We think that [Indiscernible] businesses are very well-positioned to deliver strong growth in earnings, and increasing -- improving margins, and the fibers and the Olefins part or the CI part of the business is integral part of our integration scale, cash flow, etc. So we like the portfolio as it's configured right now as we look at -- deploying capital to your question, Kevin, on delivering more growth from the total Company. When it comes to capital deployment, obviously, our free cash flow remains incredibly strong, and our balance sheet now is also strong with delivering being in our rear-view mirror. So as we look forward, I think we should think about how we deploy capital on multiple fronts. First, you should expect capex to increase a bit next year as we have the combination of specialty growth and the first methanolysis plant that we're building here in Kingsport. So normal capex growth to support our specialty strategies in that $500 to $600 million range. And then of course, you've got a good portion of that $250 million of the Kingsport plant being spent next year. Now we're balancing some of the specialty capex between next year and pushing some of it to '23 to keep this in balance across the 2 years. capex will be a bit higher for that. Then after that, you look at how am I going to deploy my balance sheet and cash? And there's really 4 buckets. The first is the potential to continue investing in the circular economy. We're pursuing multiple projects beyond this first plant. If we can achieve the conditions that we've talked about in the past about those being very attractive investments and very stable sources of earnings, those projects could be very accretive to earnings and our ROIC. They're very attractive from a return point of view, and that could be a use of where we go with our balance sheet. The second of course, is bolt-on M&A, where we like to ramp up that level from where we've been in the last couple of years. There's returning cash to shareholders which I think will be significant as we move forward. And of course, our growing dividend. So, it'll be a balance of capital deployment I think, like we've always had across these areas. There's a lot of attractive investment opportunities for us right now, and so we're really excited about how we can deploy capital and create growth for our shareholders.

Great. Thank you very much.

And we can now take our next question from Frank Mitsch with Fermium Research, please go ahead.

Hey, good morning and congrats on the divestitures. And just a follow-up Mark, you did talk about uses of cash and possible bolt-on M&A s. What are the current valuation levels like? And what does your current pipeline look in that regard?

And so the bolt-on M&A pipeline, there's a number of ideas that we have that can be attractive and advanced materials in AFP as we try and buildout our additive portfolio in AFP. And accelerate our access to additional markets in advanced materials, especially in Specialty Plastics. But as you've noted, Frank, you have to be careful, there is a lot buy-side interest in pursuing M&A right now, as everyone has improved balance sheets and cash. So, we're going to be disciplined as always. We're proud of the fact that we don't overpay for assets whether its at the -- the large ones we've done in the past for the bolt-ons we're focusing on now. And so we'll see. And there may be some constraints because we're just not going to run around overpay.

Got you. Got you. And if I could come back to the automotive piece, you referenced that you are doing better than you had in -- back in 2018, and obviously, with builds being off, where do you stand in the interplay between your sales into the automotive space versus where the build rate is today, and how should investors think about that interplay going into next year?

With advanced materials, our OEM exposure is bigger than AFPX [Indiscernible] one of the difference is AFPs ' -- their automotive exposure is about half-refinish and half - OEMs. So they're a lot more balanced in the OEM production drama as [Indiscernible] -- just continuing to improve. But on the OEM side, the supply chain is really short between OEM production and the production of our interlayers. So that actually happens pretty quickly. So as they're adjusting their production rates weekly, we're adjusting right there with them. So, we're realizing that in a pretty quick, faster. The performance films business has actually done really well through the third quarter because Companies, the dealers, the auto dealers are out there trying to upgrade the value they were getting on each car. And so selling our paint protection films, window films was a nice adder to few cars that they have to sell. But even that, it seemed to start to catch up to us on what they have to sell right now. So we're feeling a bit of that as we go into the fourth quarter. But I think that as they have more cars to sell or produced more cars, you're going to see that pickup in sales happen pretty quickly for us because there's really no inventory in the channel between us and the primary market. That I think is good news as supply chains at some point are going to start mocking or getting back in control and production will be there. Clearly in-market demand is quite strong, so there's plenty of pent-up demand of people who want to buy cars. When you look at just how much they're paying for used cars right now. They are clearly -- there's a lot of demand out there. So, I think if we have recovery, it'll be pretty fast. It's -- and it will be a little slower in AFP because that supply chain is longer.

[Indiscernible] Great. For me is going to do is part to increased car sales. So, just so you know and looking forward to December 7. Thanks so much Mark.

You bet.

We can now take our next question from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Great. Thanks. I just wanted to I guess, talk about '22 initially or what's your initial comments there. What are you expecting on the last question as far as global auto production? And it appears to us that many Companies in your position are actually assuming rates below the IHS recovery. So maybe you can just comment on that first. Thanks.

Yeah. So on a 4Q basis, I think our view is below IHS. I think IHS is from what I can tell monitoring their view downward for the fourth quarter. So production, obviously, what we're assuming is similar to maybe a little bit better than third quarter but not any significant change to help in the quarter. When it comes to next year, let's be honest, it's anyone's guess, right when the supply chain on components is going to improve and production is going to improve. I think we are being cautious and not assuming much improvement in the first half of the year. But we do assume that eventually these issues are going to get addressed and so there will be some modest improvement in demand in the back half of the year. But our guidance is not based on some substantial improvement in order demand.

Thanks for that. And then I just wanted to also ask about strategy. I guess going forward, following the sale of Crystex here. Are there other properties within the portfolio that you think are non-core anymore? Thanks.

No, not at this time. So, we're very happy with the [Indiscernible] portfolio. The two obvious questions that come up in the past is fibers and Olefins. On the fibers front, I remind everyone that it is deeply integrated into our overall [Indiscernible] business. We have a lot of biopolymers and especially as we're selling off of the stream and advanced materials and the AFP and with the significant change in the world's view around waste, plastic, and climate, we just have tremendous growth opportunities in front of us in both AM and AFP with that integrated stream. You'll learn a lot more about that at innovation day where we're going to identify a bunch of new opportunities we're pursuing that can be quite substantial. And textiles growth in itself in Fiverr has been actually quite strong. It's incredible how the textile growth have been 80% up year-over-year. Obviously, on the challenge market that still tremendous growth, offsetting not just tow market decline, but also that discontinued product. So, that's business as well is at the position now where textile growth will offset tow market decline or better

and where in fact, demand is exceeding our expectations where we're having to pull forward conversion of total assets to making textiles. So that business is on track and it generates a huge amount of cash flow that supports all the investments we're making in growth in AM and AFP. Olefins, it's bit of a similar story where we're dramatically improving the quality earnings in that business. Obviously, it's doing really well. But we've been taking a lot of actions over the last 3 years to improve what is the new normal for this business, which is more likely probably around 300 million. And there are things like closing the Singapore plant where we had a very disadvantaged raw material energy position, that's a big upgrade in the quality of that business with it closed. A lot of operational cost transformation work that we're doing across the Company does flow into the big assets that flow into chemical intermediates. The [Indiscernible] investments, giving us flexibility to reduce ethylene when it's not attractive and make it when it is, that reduces volatility around that. And we've got a new investment, we'll tell you about it in innovation day, for modest capital that will significantly improve our Olefin production flexibility. And mix is getting better. It means business inside that overall portfolio is great, growing, and stable. And we have a lot of our businesses on cost pass-through Tong contracts that give us a certain amount of stability, probably about 40% revenue. There's a lot of things in the Olefins space we've done to improve it. We're obviously disciplined about our portfolio. But as you look at the significant growth opportunities we have in front of us. And that Balance Sheet strength that we want to leverage to deploy and grow the Company, the cash from both fibers and Olefins creates a lot of value. So when we look at the portfolio today for what we want to do now, this is the right portfolio to grow.

And we can now take our next question from P.J. Juvekar of Citi, please go ahead.

Excuse me. Good morning, Mark.

Good morning.

You know, congrats on being named into Fortune Magazine. I think you're one of the few chemical Companies. Also you're creating this specialty brand with circular economy -- in the circular economy products like Tritan, on one hand and then you have to fight commoditizing businesses on the other hand, like additives and [Indiscernible] And so like many other chemical companies, you have to constantly fight that battle between businesses commoditizing and then innovating. So, what -- would -- the one that you think you have the right portfolio, to move that portfolio solidly into specialties, would you look at making a big specialty acquisition or would you look at just continuing more bolt - ons?

It's fair question, P.J. We're always looking at how to enhance our portfolio and obviously, we did significant portfolio change way ahead of many with the addition Solutia, Taminco, and divesting a lot of commodity business. It's easy to forget history sometimes, but we moved out about 3.5 billion of commodities and added 4.2 billion of revenue. And in specialties out of 10 billion is a huge portfolio change, so we do really like the portfolio we have now. And yes, we had optimized it around some underperforming businesses. And I'm proud of our teams delivering on that restructuring activity, which is never easy, to get to where we are. We don't really feel the need to get a lot bigger. We think we're at a good scale to continue to invest in fundamental R&D, product development, as well as application development to grow. And I think that the circular economy on top of very attractive specialty growth, anywhere we can take that with multiple plants is a game changer for how we can grow the Company and how it could be valued. So we really are focusing a lot on how we focus on circular. We've got two extremely advantaged streams in the polyester, and the way we can do circular economy is a very advantaged stream to grow in this current macro-environment that want to get rid of plastic waste and improve our impact on climate. And in the cellulosic stream is also incredibly compelling. There's just a tremendous amount of opportunities when you've got a polymer that 60% biopolymer, with our new recycling technology there, 40% recycled from plastic waste. And the biodegradability of the product is tunable for different applications. And that last part about biodegradability is increasingly important, and we'll tell you more about that in Innovation Day and some of the opportunities in front of us. So we see a lot of growth in capital deployment in that direction to deliver a lot of organic growth from the portfolio we have right now where we don't really feel the pressure to run out and do some large M&A and at the prices today for large M&A, that's really attractive. You're going to have a challenged situation in getting a good return. So, we're not really focusing on that.

Okay, great. And then you made more propylene in the quarter using your refinery propylene investment and you had to buy less propylene as a result, appropriately net spiked. So when you look back, it looks like that refinery investment made a lot of sense. But when you look back, what kind of returns do you think you achieved on that? And can just talk about that? Thank you.

Yes, P.J. this is Willy. That paid off in less than a year and we're at multiples now. So it is a great investment and we're going to be excited to tell you about some additional options that we had to further raise the floor as we think about the long term because of our ability to optimize our Olefins at the Longview side. So again, the modest investment that Mark talked about is another option that we think is similar to RGP that will be multiples. And again, most of our capital, as Mark just highlighted, is focused on the specialties and the new vector of circular, but we're still going to make the right optimizations to improve the quality of the portfolio long term.

Great. Thank you, Willy.

We can now take our next question from Alex Yefremov of KeyBanc. Please go ahead.

Thank you. And good morning, everyone. Could you discuss free cash flow conversion? What kind of conversion in terms of percent of EBITDA? What percent of net income do we see next year?

Alex, this is Willy. What I would say is, if again, at a growing EBITDA number, we strive to be around that 50% level. If you think about a billion dollars, $1.1 billion and $2.2 billion of EBITDA, pre -divestiture, and we're going to grow back to that level is our focus based on our [Indiscernible] bridge that we gave you earlier. So think around that 50% level.

Thanks Willy. And Mark a question for you on circular polymers, business, feedstock availability is a major issue as you know. Could you discuss what progress you're making this year in securing access to necessary waste streams to grow that business?

Sure. Yeah, we're making great progress. The advantage we have right now is we're pretty much ahead of the industry and going to commercial scale in building the largest molecular recycling plant on the planet I think at this point. So that gives us an advantage on how we show up with different suppliers for what we need. There is no doubt that there's plenty of plastic waste. I mean, when you look at polyester, just in the U.S., you've got over 20 billion pounds of possibly waste a year. About 40% of that is packaging and only about 25% to 30% that can be recycled today. So when it gets recycled, frankly, most of it goes into textiles, not bottle to bottle. And so as you tap into that stream and then it vanish to methanolysis [Indiscernible] if they can use, what can't be mechanical recycled from packaging but it can also use carpet textiles which almost all end up in landfill. So accessing a 100,000 tons of feedstock out of that significantly large number when you're the first showing up to secure it, it is challenging but doable. And the infrastructure out there clearly needs to improve in the U.S. as we get consumers to recycle more and policy to support it and infrastructure in place to recycle it as we look at plants 2, 3, and 4. But as we look at the first one, we're confident that we can do this and we will provide more detail in Innovation Day. You hear that a lot today about you'll get more detail in Innovation Day, but it's a better forum to provide more detail on this question, which is incredibly important and we're very focused on it.

And we can now take our next question from Mike Sison of Wells Fargo. Please go ahead.

Hey, good morning, guys. I didn't know you had a lot of material on Fermi and Ferrari. But in terms of your -- or for AFP, can you maybe talk about the businesses you noted in the prepared remarks that you felt these are businesses that are well-positioned to grow. And maybe just talk about some of the growth prospects for each of the remaining businesses in AFC.

For next year, Mike?

Yes, for next year.

So, when you think about it in the Specialty Plastics world, we have just tremendous growth in frightened. Market demand exceeding our logistics capability, serving the market, and we're even capacity constrained into the second quarter, which is why we converted a line over to serve Tritan. And now we got that capacity came online through the third quarter and positioned to serve growth next year. And it's coming from a range of markets. There is the traditional markets that are being driven with accelerated growth with our renewed recycled content, like hydration that's delivering a lot of growth and housewares are those traditional markets that we've always grown in are being accelerated. And then on top of that, we are getting access to new markets that we wouldn't have normally had. The [Indiscernible] we shared with you, it's generally black conductors are great example and it's a power tool. We're not normally in power tools. We normally go into optical clarity kind of applications with Tritan. But this is the housings for power tools. And that customer adopted us because one, they're committed to addressing their skilled three climate from suppliers and recycled content was a way to start making progress on that, especially as our technology has a lower carbon footprint in a meaningful way relative to a normal fossil fuel process. And they wanted to maintain their quality. So a lot of these applications, you can't use mechanical recycling at all because when you're just blending mechanical recycling with virgin, the quality of the product goes down on multiple dimensions. And you can't have that kind of a compromise in the power tool. So we were able to provide recycled content, carbon footprint improvement, and zero compromise on the performance of the product. And that's an incredibly…

Hey Mike. You might want to do something similar to that for Additives and Functional Products as well?

Sure. Yeah. Question for my own team. That's a new one. So Greg, on AFP, I think it's the same thing. Coatings has had tremendous growth this year and that growth will continue. And there's a lot of pent-up demand in Coatings as you all know, with our customers struggling significantly with supply chain challenges. So odd to them ramping up just to build inventory to serve the seasonal demand next year is good, as those supply chain issues continue to get resolved on a availability point of view. So I think we'll continue to see very strong growth there. The Care chemicals business has great steady growth, same with water treatment, that'll continue going into next year. And then [Indiscernible] is really accelerating their growth in higher-value formulated solutions through the 3F acquisition. And there is of course, recovery in the aviation business. So, there's a lot of different vectors across the entire segment that remains -- that's well-positioned for growth in the markets that it serves. And of course, we've got innovation like [Indiscernible] in the packaging. That'll be a vector of growth, and continued growth in some of the care chemical opportunities and some really exciting new ones. That I will tell you about on Innovation Day.

Right. And just a quick follow-up on chemical intermediates. EBITDA margins have been in the high teens for last couple of quarters. It sounds like it will stay maybe in that range for maybe the next three quarters. And then I think in the prepared remarks you mentioned that you felt it would normalize in the second half. So just curious what normal means these days, but any thoughts on where that level settles in versus much, much lower levels in the past?

Yeah, Mike. I think that when we think about normalized, we think that's going to be around $300 million. Obviously, there's a path to normal as we go through next year where we expect at least in the first half market conditions to stay relatively tight. Obviously, there's some loosening of those markets even as we go into the fourth quarter based on our guidance. A lot of it is -- we had tremendously high spot -- high-value spot sales and incredibly tight market conditions when you look at the second and third quarter. As supply and demand gets a little bit more sort of balanced, those spot sales go away and that's a bit of that headwind you're going to see from 3Q to 4Q for CI. But the overall fundamental dynamics of these markets, the derivative level in particular, I think we expect to remain reasonably tight as we go into the first half of next year. And then assume normalization towards that $300 million level in long term. So -- and I already went through all the details of how we've raised that, what is normal up in the actions that we've taken. I don't want to repeat it, but there's a lot of things we've done to improve this business and there's new investment -- will be another step change improvement when it comes online.

Thank you.

And we can now take our next question from Matthew DeYoe with Bank of America. Please go ahead.

Good morning, thanks. I want to hammer in a little bit more on the strategy to offset dilution, given all these sales, will you look to paid-off any debt given the lost earnings there and if this is all or sorry, is it all buyback? And if it's the latter, I guess why not execute more aggressively on a buyback now ahead of proceed collection just given your cash balance?

Thanks for the question. Let me frame it this way, which is we expect total proceeds to be about 1.8 billion from these transactions and actually 1.7 that over the next few months. So as we look ahead also, this was about 8% of our EBITDA. So, as you think about the flow of the market cap, we're looking at roughly 1.2 billion. I'll look at that as probably the floor. As you think about offsetting dilution and paying taxes, that'll raise the number up to roughly 1.5 or so. We're going to put that money to work starting here in Q4 with the tires closing week, which we expect here in the near term. With that, also given our Balance Sheet on the tires position, we don't expect to pay down any debt related to that. Obviously, as we look at 2022, we'll see at the timing of getting the proceeds and also managing our debt matter. As we look at '22, we'll have a refinancing in the August time frame and have plenty of time to optimize that when we get there.

Okay. And I know COVID obfuscates this a little bit but if we were to look between 2015 or 2018 and 2021, what would proforma growth for AFP had been acts -- he problem child of Crystex and adhesives, just given. Maybe even a better question that is, what do we expect that the pickup in organic growth in the next 5 years versus the last 5, given the collapse in these businesses?

Yes. So if you looked at, and we will be providing a recast so you can see it in specific numbers. But roughly what you'd see between 2018 and '21 is a roughly flat similar to EBITDA from '18 to '21 when you have excluded the 1/3 of AFP as we've been discussing it. So I think that's quite stable when you consider that China trade war and then pandemic and recovering out of it. And that is based on when you look at it relative to '21, an improvement in volume and mix that's been meaningful. Spreads are probably a bit challenged relative to 18, just as pricings are -- pricing is still catching up to raws. But, overall, very well-positioned segment to deliver pretty strong earnings growth next year relative to that recast number. And that volume mix comes from everywhere. It's coatings, it's animal attrition, it's care chemicals, water treatment, even specialty fluids except for aviation in 21. So, but that will obviously start correcting itself as well as you go into 22 on that front. So, it's an across-the-board, it's our volume mix story.

We can now take our next question from Edlain Rodriguez of Jefferies. Please go ahead.

Thank you. Good morning, guys. Mark, quick question on your portfolio. I mean it has definitely changed over years, but you still have a mix of specialty and non-specialty businesses. So if you look over the course of 12 to 18 months are higher raw materials good or bad for you? Or is it neutral overtime?

If you look at it on a combined basis, from a raw material point-of-view, I would say you got to then convert that to spreads. Prompters were up everywhere, but obviously prices are up more than raw materials and CI where we're lagging price-wise in the specialties. Those too do hedge each other out. That actually provides earnings stabilities. If you're focused on earnings stability, a bit of a balance when you've got CI, just 20% of your earnings actually provides some benefits in times like this as your prices are catching up to specialties. And the opposite will be true next year as the price in spreads will improve in the specialties. Obviously, you're going to have some spread normalization CI. The important part of our strategy and our story is not spread, right? We've been very clear about this, right? Our strategy is growing volume and high-value mix in that volume against of an asset base that we continue to upgrade with that mix to deliver, increasing our OIC, as well as deploying more capital for that high-value mix. And that's how you drive value long-term, right? It's not they have spreads bouncing up and down. And so, they actually sort of hedge each other out and provide some balance. And that will be true of next. Like it is -- had -- has been this year.

Okay. Thank you. And a quick one follow-up on -- I mean, you've talked about that bolt-on M&As, like is the focus mainly in the U.S. or other opportunities ex-U.S?

As we look at the pipeline, we're focused globally and as Mark highlighted previously, obviously, looking at our Specialty Plastics business and across the new AFP portfolio. And we're focused on that and also on our circular projects from a growth standpoint. So, it's about focus now that we've completed the 2/3 action or the action on the 1/3 so that you can see the value of the new AFP.

Okay. Thank you.

And we can now take our next question from Bob Koort of Goldman Sachs. Please go ahead.

Thank you very much. Mark, I was just observing that over the last six months, the 21 earnings for you guys seem to have climbed about 14% or 15%, at least the estimates and the stocks gone the opposite. It's down about 15%. You've had that this [Indiscernible] -rating that seems very consistent with commodity companies, commodity chemicals like a [Indiscernible] They've sort of seeing that same de -rating. And yet you've been on this evolution upgrade the portfolio. And so there seems to be a pretty stark dislocation from the market perception or appreciation of those efforts and what I would guess are the internal expectations and perceptions there. So I guess, at some point does the board decide to get more aggressive or consider an LBO or maybe as Matt suggested, do an ASR before the market catches onto what I would suspect you guys believe internally?

Well, I'm not going to answer that question, Bob, but what I can tell you the board's incredibly excited about our strategy and the value creation opportunities that it presents. In the end, you, the market decide what the Company's worth, not us. But, as we focus on what we're doing, the specialties as you noted, I think we're going to demonstrate incredibly strong growth next year relative to this year in that part of the portfolio. I think we're going to manage capital deployment in a responsible way to deploy it in ways that create a lot of very attractive ROIC growth, leveraging the core technologies and platforms that we have. And then you pile on the circular, where we could deploy significant capital. If we can get these projects done under the conditions that we have, that they provide stable earnings is a significant vector of new growth that isn't remotely factored into our evaluation from what I can see at this point. So there's a huge amount of upside as you were pointing out and where I think our stock price can go from today. And as that all plays out, and our balance sheet strength that is quite significant now going forward gets deployed, there's a huge amount of upside. And we're confident investors are going to see it that value and invest in the Company and that's why we're doing our Innovation Day in December is to say we lay that all out for you to make sure all of you can see how that can create compounded growth in earnings and cash flow as we go forward.

Got it. You mentioned in Advanced Materials, a decent chunk of contracts that reset annually. I was wondering if you could give us a more description there. Is that typically are exclusive with the automakers? Is there any opportunity to shorten up those contract durations, so you can have more market-based pricing or give us some sense of that? Thanks.

These contracts are between us and the glass Companies. So we don't sell to the OEMs. We're selling to the glass Companies that use our films for laminating that glass. It's been a traditional structure in this market since we bought it with these annual contracts. We are looking at how we negotiate both price and structure to these contracts going forward. Obviously, in years of declining raw materials we like them. In years where raw material spike up especially when they spike up like this, it's a problem. It's the same issue in fibers where you've got these annual or multi-annual contracts where the prices are locked in. And so when you had that huge spike up in energy and raw materials in the back half of this year, you're going to have to wait until January to recovery. But we are aggressively going out with price increases in both interlayers and fibers [Indiscernible]

Great. Thanks.

And we can now take our next question from Paretosh Misra of Birenberg. Please go ahead.

Thanks. Good morning. With regard to your [Indiscernible] startup next year, it sounds like there's a big demand for recycled plastic. Can you give us a sense as to what percentage of volumes are already booked or contracted,? And would you announced an expansion if you say are 70%, 80% booked?

So the uptake in engagement from brands has far exceeded our expectations on the Specialty side. We were thinking we have swing assets where we can make our Specialty Plastics or PET for packaging. And we thought we'd actually be selling a lot of PT for packaging and that's looking like that, so not going to be the case

because the Specialty demand is so strong. So I think we're in very good position for loading the asset pretty quickly into the markets. We're not going to disclose the specific percent number, but I think it's going to be quite robust and quick. As regards to demand that goes beyond our first plant, yes, the demand is very much there. And that's why we're working so diligently right now with countries and brands around the world, especially in U.S. and Europe right now, who want to solve those challenges. With the brands, look at this situation. They've got two goals. They got to address packaging waste, and specifically, plastic waste is getting a lot of attention. But if we switched to plastics, somebody else is still going to manage that waste. So if you look at this, they've committed to very high recycled content targets and there isn't remotely enough mechanical recycling product out there to supply that need reliably. In addition, the price of mechanical recycled, PET is going up dramatically in Europe and now as well in the U.S. And the brands are worried about how that -- how much that's going to keep going up. And they are also doing lifecycle analysis on the carbon footprints and not just plastic, but alternative materials that they could consider. And unfortunately, you run into a problem which is all the alternate materials have a worst climate footprint. You recently saw Wendy's switch from coated paper cups to plastic because plastic has got a much better climate footprint and can be recycled where the coated paper cannot be recycled. So the brands are very focused on how to recycle plastic for a lot of applications and realizing that molecular recycling is the only way forward, especially long-term, if you want to keep your product quality the same, then mechanic recycle is limited on how it can be used. And it degrades over time. So if you want an infinite solution, you've got to have molecular recycling as part of the solution. So engagement strong, the need to build more plants is there. And we're driving to find a way to do that under the right conditions. And they are attracted to us because our scale -- our technology scalable now, where the startups are still piloting and trying to figure out how to scale up, so that's also drawing a lot of attention to us. So we feel good about where we're at. We're excited about doing this. But to be clear, we're not going to build additional plants unless we get the contractual commitments for off-take that give us stable earnings.

Got it. And then just as a follow-up, because CIP process can take a lot more different types of plastics than PRT. So how should we think about the PRT versus CIP mix as both these processes start ramping up in the years ahead?

Yeah. Well, first of all, they're actually a great compliment as technologies together at this site because we have a unique proprietary way to separate unsorted waste plastic that just separates it from polyester to everything else at a much lower cost. So that's one of the feedstock sourcing advantages that we have that I should have mentioned earlier. Then that allows us to take that mix waste plastic in the CRT, take it into our asset yields stream and make cellulosic biopolymers that gives us a lot of sourcing flexibility. So, we see both technologies creating a lot of value and the CRT is also through the cellulosics drawing a lot of attention. We've always have -- we've had a biopolymer for 100 years going to go back to acetate films with Kodak and we've created this huge spectrum of applications off of that core technology in AM, AFP, and fibers. But with the recent change in focusing on climate, focusing on plastic waste, in our recycling, you can also have biodegradable products as a way to have circular life. And that's drawing a lot of attention around the cellulosic stream. We can take back polymer and put it back in the CRT, or we can also provide ones that biodegrade based on the application. So lot of interest in growth there as well, that we're really excited about.

Thanks, Mark.

We can now take our next question from John Roberts of UBS. Please go ahead.

Thank you. I thought the formic acid business was also in the underperforming category. I maybe confusing underperforming with non-core but has that improved a lot now and is part of the core operations?

Hi, John, this is Willy. On the formic side, yes. It's a much smaller component. It's a fraction of the size of the 2 businesses that we sold. As we've taken operational and transformational and the operations there, we think we've got the results that we need and the performance is adequate.

Okay. And then are automotive Films in automotive Coatings ingredients being impacted equally by the automotive curtailments.

So from a film's point-of-view and advanced materials, the interlayers and the aftermarket Performance Films, they're more impacted, they're more OEM exposed than our coating additives where about half of it goes into refinish, and therefore that's obviously a lot more stable in the current situation. And so we feel more of the impact on the film side.

Thank you.

Let's make the next question the last one, please.

Thank you. We can now take our final question from Jade Pangea of On-field Research, please go ahead.

Thanks a lot. Just one question really is on your guidance for 2022. I mean, hearing in the call and hearing you talk about so many factors that are going to catch up and be beneficial. Just wondering, are you being just very conservative with regards to your EPS range of 9.5 to 10, because considering all the catch-up on raw material and the volume leverage that you were talking about in your specialty businesses. I'm just trying to understand what is the conservative and if there is. Thank you.

Look, I wouldn't call it conservative or optimistic at this point. I think what I'd say is we're sharing our best thinking with you right now of what we know. Obviously there's a lot of uncertainty in the future. Things we are certain about is we know we can control our costs, right? And we have a very aggressive transformation program going that -- when you look at operational transformation cost-cutting plus variable comp tailwind, that's about $200 million of tailwind that offsets about $80 million to $100 million of inflation. We know that we're going to invest in the growing of this business. We have tremendous growth opportunities right there across our portfolio, and so we have growth investments in that $50 million to $75 million range. That is controllable. We can control the pace of that based on how the market is doing, and that does include some pre -production expense on starting up. [Indiscernible] some other plans when you think about that number. But those are controllable. Obviously there is uncertainty about where CI is going to go. I think we've got a reasonable assumption, but we'll defer to the to some other companies on that and where the markets are. And then on the specialty side, what I'd say is we do feel good about the growth potential, the innovation to create leverage growth on -- along these markets and that spreads will be a tailwind. But there's still a lot of uncertainty about -- automotive demand has many of these questions I have highlighted, there is uncertainty about where raw materials are going to trend and how they progress from where we are now in next year as well as distribution costs. So there's a lot of uncertainty out there that none of us can frankly predict. So what we're confident is if you look at it in 3 buckets, you've got divested earnings offset by share repurchases. You've got a bucket of CI spread normalization offset by cost reductions and then you're asking a question which is, can specialties grow next year relative to this year in a variable margin? And I think we've laid out a case where we think the answer that is very much yes, but I'm not going to get into trying to be more precise about that until we get to January and have a better look at the world we live in at that point.

Great. Well done on the [Indiscernible]. Thank you.

Thank you.

Thank you.

Just to wrap up, what I'd like to say is deeply appreciate the questions, the interest in the Company. We're incredibly excited about Innovation Day coming up in December. It's been a while since we've had that kind of opportunity to really get more into the detail with investors on how we're going to grow this Company and deploy our balance sheet to create a lot of very attractive growth. And we're excited. When we look at the Board and I, we're having this conversation in our last meeting in the beginning of October and this is the most exciting time I think we've had, when we think about all the different ways we can grow this Company

and create value. So we look forward to sharing that with you in December, hopefully. It will be virtual, but I hope I will get as many people as possible show up in person as well as be available online so we can have a better chance to interact with all of you. Thank you.

Thank s again for joining us this morning. I hope everybody has a great day. That's the end of the call.

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