Innovation Day 2018 Mark Costa Board Chair and Chief Executive Officer
Forward-looking statements During these presentations, we make certain forward-looking statements concerning plans and expectations for Eastman Chemical Company. We caution you that actual events or results may differ materially from our plans and expectations. Throughout these presentations, F is used to indicate projected, or forecasted, amounts. See Eastman s most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission and these slides and the remarks in the presentations for risks and uncertainties which could cause actual results to differ materially from current expectations. Non-GAAP financial measures All earnings measures in these presentations are non-gaap and exclude certain non-core and unusual items. Full-year 2017 amounts are from our February 1 and 2 public disclosures of our 2017 financial results but will be final when we file our 2017 Form 10-K with the SEC. Adjusted Net Income is Net Income adjusted to exclude the same non-core and any unusual or non-recurring items as are excluded from the Company's other non-gaap earnings measures for the same periods. Debt to EBITDA Ratio is defined as Total Debt divided by Adjusted EBITDA. Diversified Peers are BASF, CE, HUN. EBITDA is net earnings or net earnings per share before interest, taxes, depreciation and amortization adjusted to exclude the same non-core and any unusual or non-recurring items as are excluded from the Company's other non-gaap earnings measures for the same periods. EBITDA Margin is EBITDA divided by the GAAP measure sales revenue in the Company s income statement for the period presented. Information concerning use of the non-gaap measures. Projections of future Adjusted EBITDA and EBITDA Margin also exclude any non-core or non-recurring items. Free cash flow is cash provided by operating activities less cash used for additions to properties and equipment, both the GAAP measures in the Company s statements of cash flows for the period presented. Information concerning use of the non-gaap measure free cash flow is available in the Company s Form 10-Q for third quarter 2017. Adjusted Free Cash Flow is cash provided by operating activities excluding non-core or unusual items less cash used for additions to properties and equipment. Free cash flow conversion is Adjusted Free Cash Flow divided by Adjusted Net Income. IRR is the Internal Rate of Return calculated based on 10-year project cash flow assumptions. Return on Invested Capital (or ROIC ) is adjusted net income plus interest expense after tax divided by average total borrowings plus average stockholders equity for the period presented, each derived from the GAAP measures in the Company s financial statements for the periods presented. Specialty Peers are ALB, ASH, FMC, IFF, PPG. Variable Margin defined as GAAP measure sales revenue in the Company s income statement for the period presented minus total raw material costs, total purchased energy costs, and variable distribution costs divided by the GAAP measure sales revenue in the Company s income statement for the period presented. Operating Margin defined as operating earnings divided by the GAAP measure sales revenue in the Company s income statement for the period presented. 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 Appendix and in the Management s Discussion and Analysis of Financial Condition and Results of Operations sections of the Forms 10-K and 10-Q filed and Forms 8-K furnished and filed with the SEC for the periods for which non-gaap financial measures are presented. Projected future earnings exclude any non-core, unusual, or non-recurring items, and projections of future earnings per share assume that the adjusted tax rate for the most recent completed period will be the actual tax rate for the projected periods. Unless otherwise indicated, except for earnings per share, all dollar amounts are millions ($M) or billions ($B).
Agenda Mark Costa Board Chair and Chief Executive Officer 8:15 8:55 a.m. Eastman overview Brad Lich Executive Vice President and Chief Commercial Officer Lucian Boldea Senior Vice President, Additives & Functional Products Steve Crawford Senior Vice President and Chief Technology Officer 9:00 11:25 a.m. Concurrent breakout sessions 11:25 11:40 a.m. / Break Curt Espeland Executive Vice President and Chief Financial Officer 11:40 12:00 p.m. Financial overview 12:00 ~12:45 p.m. Closing comments and Q&A Immediately following Lunch / Executive availability
Eastman Executive Team Mark J. Costa Board Chair and Chief Executive Officer Curt E. Espeland Executive Vice President and Chief Financial Officer Brad A. Lich Executive Vice President and Chief Commercial Officer Lucian Boldea Senior Vice President, Additives & Functional Products Michael H.K. Chung Senior Vice President and Chief International Ventures Officer Mark K. Cox Senior Vice President, Chief Manufacturing, Supply Chain and Engineering Officer Stephen G. Crawford Senior Vice President and Chief Technology Officer David A. Golden Senior Vice President, Chief Legal and Sustainability Officer, and Corporate Secretary Perry Stuckey III Senior Vice President and Chief Human Resources Officer Damon C. Warmack Senior Vice President Corporate Development and Chemical Intermediates
Why invest in EMN? A compelling, innovation-based organic growth model Aggressive portfolio management, improving structural quality of earnings and FCF Disciplined and balanced capital deployment 9 8 7 6 5 4 3 2 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2018F 8% 1 2 % E P S G r o w t h 1350 1300 1250 1200 1150 1100 1050 1000 950 900 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Free cash flow Earnings per share
Strong value creation expected going forward Core sales revenue growth in line with end markets Specialty products growing >2x underlying markets 23% CORPORATE EBITDA MARGIN and increasing with improved product mix >$1 billion ANNUAL FREE CASH FLOW and growing 10% 15% RETURN ON INVESTED CAPITAL (ROIC) creating value above cost of capital and growing over time 8% 12% EPS CAGR 2018 2020
Advanced Materials: Transformation through innovation-driven growth and portfolio management Performance Films $660 Interlayers 26% $120 6% Aspira Tritan Volume (kg) EBITDA ($M) 2007 EBITDA margin Volume (kg) EBITDA ($M) 2017 EBITDA margin Spectar TRANSFORMATION IN ADVANCED MATERIALS >5x EBITDA GROWTH PET Note: 2007 represents the combination of specialty plastics and PET. For reference, see the Company s Form 10-K for 2008.
Success of Tritan in consumer durables enabled by our innovation-driven growth model Polycarbonate World-Class Technology Platforms Differentiated Application Development Relentlessly Engage the Market Tritan launched in 2007 July 16, 2008 Cracks after 250 dishwasher cycles SAN (Styrene acrylonitrile) Deforms after 125 dishwasher cycles After 1,000 dishwasher cycles NO cracking hazing, crazing, or distortion Tritan 2017 sales revenue ~$300M with above AM segment average operating margin
Revenue ($M) Variable margin ($/kg) Advanced Materials transformation accelerated earnings growth by leveraging assets, upgrading mix and strategic portfolio management SELLING PRICES 3,500 REVENUE GROWTH 2 ($/kg) 1 3,000 2,500 Premium revenue Core revenue PET revenue AM unit variable margin $2.50 $2.00 2,000 $1.50 1,500 1,000 $1.00 500 $0.50 PET Core Premium - $- (1) Weighted average selling price 2007 2020F (2) Performance Polymers segment PET business included for 2007 to 2011 for visibility of portfolio change Structural changes result in variable margin that is ~5x higher than 2007
Advanced Materials: Organic growth is 2/3 of the 21% EBITDA growth CAGR from 2010 2017 800 ADVANCED MATERIALS EBITDA 1,2 (2010 2017) 700 $660M 600 500 400 300 200 $170M 100 0 2010 Acquisitions Organic growth FX 2017 (1) Acquisitions are acquired Solutia and Commonwealth Laminating & Coating, Inc. businesses at first full year of ownership assuming first full year of realized synergies. (2) FX includes foreign currency translation and competitive impact on operating earnings.
Unique innovation-driven growth model delivers consistent, sustainable value World-Class Technology Platforms Differentiated Application Development Relentlessly Engage the Market Significant integration and scale enable innovation, reliability and cost advantage Advantaged growth and execution capability and culture Aggressive and disciplined portfolio management
2004 2011 2014 2017 2020F Strong track record of value-creating portfolio management EBITDA EBITDA margin $0.7B 11% $1.4B 19% $2.0B 22% $2.2B 23% $ Free cash flow $0.2B $0.3B $0.8B $1.0B Divestitures Acquisitions Integration/shift to innovation Accelerated innovation
Innovation-led organic growth and portfolio management result in >90% increase in EBITDA 2010 2017, despite macro headwinds 3000 EASTMAN EBITDA 1,2,3 (2010 2017) 2500 $2,220M 2000 1500 $1,160M 1000 500 0 2010 Acquisitions Organic growth Oil FX Fibers 2017 (1) Acquisitions are acquired Solutia and Commonwealth Laminating & Coating, Inc. businesses at first full year of ownership assuming first full year of realized synergies. All other acquisitions and divestitures included in Organic Growth. (2) FX includes foreign currency translation and competitive impact on operating earnings. (3) Oil is defined as the drop in the price of Brent over the period indicated which resulted in lower selling prices for products that have oil derivatives as a key input, narrowed the cost advantage of products produced with natural gas liquids in the U.S. compared with those produced globally.
Relentlessly Engage the Market Relentlessly engaging the market to create our own growth Sophisticated targeting in attractive niche markets Leveraging disruptive macro trends for growth Driving market activation across the value chain
Relentlessly Engage the Market ~2/3 of sales revenue from product lines in leading market positions combined with precision marketing within niches % revenue by end market 2017 Transportation (20%) Consumables (16%) Building & Construction (13%) Saflex Acoustic interlayers & V-KOOL (performance films for vehicles) Eastman Crystex TM insoluble sulfur (performance additive for tires) Eastman cellulose acetate butyrate (CAB) (car coatings) Acetate yarn (performance clothing) Aerafin polyolefin polymers (adhesives for hygiene products) Alkylamines (liquid laundry detergent) Eastman Texanol ester alcohol (coalescents for latex paints) Vanceva (color interlayers) Eastman 168 non-phthalate plasticizers (flooring) Consumer / Medical Durable / Electronics (10%) Animal Nutrition / Crop Protection (7%) Tenite cellulosics (eyewear) Eastman Tritan copolyester (consumer durables) Eastman Visualize material (films in electronics) Eastman Enhanz (animal nutrition) Metam sodium (soil fumigant) Propionic acid (animal feed)
Relentlessly Engage the Market Health & wellness Leveraging disruptive macro trends to enhance the quality of life in a material way Emerging middle class Natural resource efficiency Feeding a growing population Favorable macro trends applicable to ~80% of Eastman growth
World-Class Scalable Technology Platforms World-class scalable technology platforms provide the foundation of competitive advantage and sustainable growth Multigenerational product development for every specialty product R&D scale enables faster, more differentiated product development Creating value through integration of multiple technology platforms
Product performance BEST World-Class Scalable Technology Platforms Crystex multigenerational technology plan extends our competitive advantage 1.2 Crystex breakthrough 1 0.8 Crystex Cure Pro Crystex Cure 0.6 Crystex 0.4 Crystex Crystex Comptitor A Competitors Competitors 0.2 Competitors 0 2012 2014 2016 2018 2020
World-Class Scalable Technology Platforms Integration across multiple technology platforms delivers sustainable high margins 2017 VARIABLE MARGIN ($/kg) Multi-technology platforms Technology platform #1 Tritan Tetrashield Technology platform #2 Technology platform #3 Cellulose acetate butyrate (CAB) Cellulose acetate propionate (CAP) Specialty ketones Interlayers Single-technology platform Multi-technology platforms Performance films
Differentiated Application Development Differentiated application development embraces and converts market complexity into sustainable value Accelerates innovation by enabling deep understanding of how our products perform within the customer s product Creates demand downstream by demonstrating value of our innovation with prototypes Improves understanding of our products value capture
Differentiated Application Development Global application development capability is critical component of innovation-led growth Canoga Park, CA Kingsport, TN Ghent, Belgium Guangzhou, China Functional films Adhesives formulation Thermoplastic conversion Thermoplastic conversion Palo Alto, CA Coatings formulation Animal nutrition Shanghai, China Functional films Functional films Coatings formulation Adhesives formulation Springfield, MA Textiles Dresden, Germany Coatings formulation Functional films Thermoplastic conversion Functional films Rubber formulation Akron, OH Rubber formulation Martinsville, VA Functional films Middelburg, The Netherlands Adhesives formulation Thermoplastic conversion
Eastman innovation-driven growth model: Embracing and converting market complexity into sustainable value Relentlessly Engage the Market Transportation Building & Construction Consumables/ Textiles Consumer/ Medical Durables Animal Nutrition/Crop Protection Differentiated Application Development Thermoplastic Conversion Functional Films Coatings Formulation Rubber Formulation Textiles/ Nonwovens Adhesives Formulation Animal Nutrition World-Class Scalable Technology Platforms PVB Oxo Derivatives Modified Polyesters Cellulose Esters/ Acetyls Hydrocarbon Resins Insoluble Sulfur Alkylamines
Integration as a source of value creation on multiple dimensions Coal/wood pulp/olefins Cellulose and acetyl stream Additives & Functional Products Advanced Materials Chemical Intermediates Enables innovation Paraxylene/ olefins/ acetyls Polyester stream Fibers Additives & Functional Products Advanced Materials Chemical Intermediates Fibers Security of supply highly valued by customers Flexibility across product chain to optimize value and drive asset efficiency Propane/ ethane Olefins stream Additives & Functional Products Advanced Materials Chemical Intermediates Advantaged cost position to fund growth Stabilizes earnings volatility Methanol/ ammonia Alkylamines stream Additives & Functional Products Chemical Intermediates Delivers superior margins
Building world-class growth capabilities and culture Capabilities Significant resource mix shift in technology towards application development Large investment in commercial and marketing capabilities salesforce.com Customer Relationship Management platform World-class product development and market activation process Industry leaders in operational reliability Culture 2014 2016 2016 2017 2012 2017 2017 2014 2017
$M % Volume growth Innovation-driven growth model has delivered impressive growth at above corporate average margins $400 NEW BUSINESS REVENUE 30 HIGH-GROWTH/HIGH-MARGIN INNOVATION-DRIVEN GROWTH (2012 2017 CAGR) $300 20 $200 10 $100 $0 2014 2015 2016 2017 0 Tritan Acoustic/ HUD interlayers Paint protective films Tire resins Plant growth regulators
Revenue Unit variable ($/kg) Accelerated earnings driven by mix upgrade through innovation-driven organic growth and portfolio upgrade 5.00 4.00 2017 SELLING PRICE ($/kg) 12,000 10,000 AM revenue AFP revenue CI revenue Fibers revenue EMN unit variable margin MIX IMPROVEMENT 1.05 1.00 3.00 8,000 0.95 6,000 0.90 2.00 0.85 4,000 0.80 1.00 2,000 0.75 - CI AFP Fibers AM - 0.70 Structural changes result in variable margin that is ~50% higher than 2010
Actively driving portfolio to be ~80% specialty through innovation-driven organic growth and portfolio upgrade OPERATING EARNINGS BY SEGMENT AM AFP Fibers CI ~40% ~70% ~80% 2010 2017 Future state
Strong value creation expected going forward Core sales revenue growth in line with end markets Specialty products growing >2x underlying markets 23% CORPORATE EBITDA MARGIN and increasing with improved product mix >$1 billion ANNUAL FREE CASH FLOW and growing 10% 15% RETURN ON INVESTED CAPITAL (ROIC) creating value above cost of capital and growing over time 8% 12% EPS CAGR 2018 2020