Eastman slashes Q3 earnings guidance, slammed by demand weakness, energy, FX and logistics – CFO

NEW YORK (ICIS)–US-based Eastman Chemical slashed its Q3 earnings guidance and warned that Q4 will likely start from a lower base as demand weakens, elevated natural gas costs bite and the higher US dollar and logistics tangles create headwinds.

The company took down its Q3 earnings per share (EPS) forecast from previous guidance of solid growth from the $2.46 earned in Q3 2021, to around $2.00, citing in particular demand slowing down more than expected in consumer durables and building and construction, as well as in Europe and Asia through August and September.

The revised Q3 2022 EPS guidance of $2.00 would be a big step down from $2.83 in Q2 as well as down from $2.46 in Q3 2021.

Shares of Eastman plunged almost 10% in late afternoon trading on 13 September.

“Building and construction and consumer durables have been the focus spots for us, and those have continued to weaken. That’s being compounded by the fact that the European economy as well as the Asian economy being driven by the continued China lockdowns, have had an additional impact,” said Willie McLain, chief financial officer of Eastman, at a Credit Suisse conference.

“Also, you’re seeing a level of destocking… so there’s various compounding effects,” he added.

BUILDING AND CONSTRUCTION WEAKNESS
In building and construction, Eastman’s Additives and Functional Products (AFP) segment has exposure to the architectural coatings side in North America, Europe and Asia. In its Advanced Materials segment, its exposure is primarily in polyvinyl butyral (PVB) interlayers for windows.

“The European economy is in recession and getting weaker. In Asia… we’ve seen continued lockdowns [in China], and here in the US, we see rising interest rates and with the expectation of further rising interest rates, we’re seeing consumers making choices on the residential front. And then on the commercial front, projects are being delayed or pushed out,” said McLain.

On the operations side, the utility outage at Eastman’s main Kingsport, Tennessee, site in late July lasted a couple of weeks longer than expected in terms of being able to get production running and stabilised.

These factors together represent about 60% of the expected Q3 earnings shortfall, said the CFO.

NATURAL GAS, LOGISTICS ADDITIONAL HEADWINDS
“In addition to that, we’ve seen [US] natural gas hit 14-year highs in August and as we transition into September, those rates closed out at very high levels. That impact alone is $25m-30m on the cost side,” said McLain.

Eastman uses natural gas as a key energy source, as well as feedstock for acetic anhydride production. Acetic anhydride is used in a wide variety of applications including adhesives and sealants for building and construction, coatings, personal care and food and beverage intermediates.

Eastman will take another $10m hit from the currency impact of a higher US dollar in Q3, likely bringing the full year impact to just above $50m, he added.

The company will continue to increase prices “where appropriate”, including through energy surcharges.

Logistics are also a challenge with a deterioration of marine logistics at the company’s key ports of Savannah, Georgia and Charleston, South Carolina which are particularly hindering exports of its specialty products in its Advanced Materials segment.

On East Coast logistics, “we’ve seen that only worsen as we progressed from July to August to today”, said McLain.

LOOMING US RAIL STRIKE
McLain is also “definitely concerned” about the looming US rail strike and the implications for the broader economy along with disruptions to its own transportation network. The company is being proactive in activating plans to deal with a potential strike, he noted.

Eastman’s lowered Q3 earnings guidance does not include any impact from the recent rail embargo or the potential for a rail worker strike.

US chemical producers are alerting customers about certain shipping restrictions implemented by Class 1 railroads ahead of a possible strike on Friday.

Q4 TO START FROM LOWER BASE
Looking to Q4, there is little visibility as we move into the important autumn months.

“September is critical to Q3 and October is critical to Q4. Ultimately at this point, with the uncertainty of all the various factors… the level and momentum will be from a lower point,” said McLain.

“[In] the macro environment, whether it’s regionally or in some of the key end markets, the question is: How much of this we’re seeing is really destocking in anticipation of [a greater decline in demand] versus real demand?” he added.

McLain noted that in recessions, it typically takes three quarters to get from a high earnings level or peak to a trough.

In that timeline, if Q2 2022 was the recent earnings peak as it looks to be, a trough could occur by the end of Q1 2023.

On the bright side, agricultural and personal care end markets have been resilient, and automotive and OEM demand has been in line with expectations, although at relatively low levels.

Focus article by Joseph Chang

Thumbnail shows US dollars, the strengthening of which played a role in Eastman lowering its earnings guidance. Photo by Al Greenwood.

(Clarification: In paragraph 2, please that Eastman’s previous guidance was solid growth over $2.46.)