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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 $2.46,
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.
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