Eastman Chemical Company - Earnings Call - Q3 2025

Executive Summary

• Q3 revenue $2.20B (-11% y/y, -4% q/q) with adjusted EPS $1.14, both modestly below Street, as volumes fell on consumer discretionary weakness, tariff-related inventory unwinding, and lower asset utilization; price-cost remained stable in specialties while Chemical Intermediates (CI) spreads compressed.
• Adjusted EBIT margin compressed to 9.5% from 12.0% in Q2 and 14.9% a year ago on lower utilization to prioritize cash generation; operating cash flow was strong at $402M aided by ~$204M inventory reduction.
• Management introduced FY25 adjusted EPS guidance of $5.40–$5.65 and now expects FY25 operating cash flow to “approach $1B” (down from ~$1.2B view in April); reiterated >$75M net cost takeout in 2025 and ~$100M additional in 2026.
• Circular platform momentum: Kingsport methanolysis operating well; management sees a “meaningful” 2026 EBITDA lift as ARPET and specialty Renew ramp, with 90% yields and a feasible ~30% capacity “bottleneck” expansion; Pepsi baseload contract restructured to pull forward volume into 2026.
• Near-term stock catalysts: slight miss vs consensus and lowered OCF framework vs April could pressure shares, while evidence of Q4 destock completion, Q1 rebound, ARPET contract conversions, and cost-down execution are potential upside drivers.

What Went Well and What Went Wrong

What Went Well

• Cash generation: $402M operating cash flow (vs. $396M y/y), with ~$204M inventory reduction; $146M returned via dividends and buybacks.
• Price discipline in specialties: price-cost stable despite softer volumes; AFP delivered 17.9% adjusted EBIT margin in Q3 (up vs. 17.5% y/y).
• Circular platform execution: Kingsport methanolysis plant running well with 90% yields; management confident in a feasible ~30% capacity expansion via bottlenecking and growing ARPET specialty demand; “meaningful” EBITDA uplift expected next year.
  • “We expect a modest increase in revenue from the Kingsport methanolysis facility”.

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What Went Wrong

• Demand/volume: Sales -11% y/y on 10% lower volume/mix as consumer discretionary softness and tariff-related inventory unwinding weighed, notably in Advanced Materials and Fibers.
• Utilization headwinds: EBIT down to $188M (from $329M y/y) with adjusted EBIT margin 9.5% (from 14.9% y/y) given deliberate underutilization to drive cash; CI spreads pressured.
• Fibers/CI weakness: Fibers sales -24% y/y with lower acetate tow and textiles into China; CI sales -16% y/y on 8% lower volume and 8% lower prices as commodity fundamentals remain unfavorable.

Transcript

Speaker 3

Good day, everyone, and welcome to the third quarter 2025 Eastman Conference Call. Today's conference is being recorded, and this call is being broadcast live on the Eastman website at www.eastman.com. I will now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir.

Speaker 2

Thank you, Becky. Good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake Laroe and Emily Alexander from the Investor Relations team. Yesterday, after market close, we posted our third quarter 2025 financial results news release and SEC 8-K filing, our slides, and the related prepared remarks, and this is in the investor section of our website, 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 third quarter 2025 financial results news release during this call, in the preceding slides and prepared remarks, and in our filings with the SEC, including the Form 10-K filed for full year 2024 and the Form 10-Q to be filed for third quarter 2025. Second, earnings referenced in this presentation exclude certain non-core 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 2025 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we'll go straight into Q&A. Becky, please let's start with our first question.

Speaker 3

Thank you. We will now take our first question from Vincent Andrews from Morgan Stanley. Your line is now open. Please go ahead.

Thank you and good morning, everyone. Mark, could you help us with the bridge to 2026? In particular, is it just as simple as taking your full-year EBIT from this year, adding the $100 million of cost savings and the $50-$75 million of asset utilization reversal? I am wondering, you are talking about recycling being a good news story next year, but you kind of just mentioned that there will be a revenue lift, so I am not clear whether that revenue lift is being offset by weakness somewhere else in the portfolio or if there are other puts and takes that we need to put in that bridge to get to sort of what you are expecting at this point for 2026.

Speaker 4

First, good morning, Vincent. Thank you for the question. Obviously, it's an extremely important question for us as we think about working through the back half of this year and building earnings growth for next year. I think you named a lot of the components. The way I'd start this conversation first is what you said. You got to look at a full-year number. When you look at the back half of this year, you can't annualize the back half for three reasons. One is there's always normal seasonality in the back half of the year, especially in AFP through the back half and advanced materials having a normal material drop from Q3 to Q4.

Second reason, obviously, is we've discussed in the prepared remarks, the trade disputes have exaggerated this dynamic with all the pull forward of material that happened in the first half of the year to get ahead of tariff risk. Now, with consumer demand being sort of weaker than was expected in the first half, for the back half, it's taking them a lot longer to unwind that inventory. That's exaggerating the sequential decline. The third, of course, is we started the year believing we'd have volume and growth and stability in the first quarter, which we did have, and then a lot changed, obviously, through the second quarter. We had volume that was sort of built for that scenario that was no longer needed as demand was softening more than expected.

We had that $100 million asset utilization headwind in the back half of the year relative to the first half. Those three things really distort the back half of this year. You're right. The best way to think about and build a base case scenario for next year is you have to look at the full-year volume numbers, especially in advanced materials and AFP, which would be AM being down around 4% and AFP being down around 2% on a full-year basis. You sort of start there. When we then look underneath of that, we think about the stable markets, which is about a third in AM and two-thirds in AFP, are going to have sort of low single-digit growth that is just normal from these kind of stable markets.

It's coming from a bit of a soft year, so I think it's even more credible that there'll be some recovery and growth in those products. The discretionary markets are where the sensitivity and the impact of the trade war is really felt. For now, we're just going to assume, let's just say the baseline volume is stable. Now, with lower interest rates and tax legislation, etc., you could believe there'll be upside to that, and that's for every investor to make their decision. On CI, I would say we'll have more volume. That's really due to less shutdown time that we expect next year versus this year. We'll have more volume to sell. In fibers, we intend to try and keep that volume stable to this year. You've got a baseline that's stable, some sort of modest growth throughout the portfolio. It gets to, okay, that's the underlying assumptions.

What can we do with that scenario, and how do we create earnings growth above that? Starts with the cost reduction, right? We've done $75 million of cost reduction this year. A lot of that's in the back half, so that annualizes and helps with the $100 million cost reduction target we've told you we have for next year on top of this year. We're focused on that. A lot of action going on with that. With the volume scenario I gave you, the utilization tailwind for next year relative to this year is somewhere in the $50-$75 million range, depending on what happens in the volumes, right? If volumes are flat, go more towards the $50. If volumes have the modest growth that we're talking about, go more towards the $75 million. Then you've got innovation.

That is the center of our strategy, and it couldn't be more valuable than it is in this market environment. We actually expect a meaningful increase in revenue in the circular polyester methanolysis plant, as we've discussed in the prepared remarks, and we'll have a tailwind with better utilization and cost, so you'll have a meaningful impact in EBITDA from this year. It'll be the normal innovation that we always have in HUD growing in cars as well as EVs and the interlayers business. Aventa is gaining traction. NAIA textiles recovering. East of peer semiconductor solvents. A lot of places where there's innovation growing. We're going to be focusing on how we can win share in a number of markets. There's some where we're already regaining some share that we lost, in architectural and coalescence in architectural markets and interlayers.

There's also some places in tariffs helping us, like in specialty polyesters and ARPET in the US. The tariff is significant for our competitors to compete in the US. We're following our customers around the world as they're moving out of China. Underneath all this is our commercial excellence to defend and keep price steady and stable. Only slight declines will probably be expected, and that preserves a lot of cash flow. We continue to be focused on cash. We continue to be focused on innovation. We're adding on aggressive cost management at the same time. All that comes together for a meaningful earnings increase under this scenario.

Speaker 3

Thank you. We will move on to our next question from David Begleiter from Deutsche Bank. Your line is now open. Please go ahead.

Thank you. Good morning. Mark, a lot of good things happening at Kingsport. He discussed two things: the conversion to the ARPET capacity, how much is being converted, what does it mean for next year, the bottlenecking, how much will it cost, when we'll be on stream, and your plans for the second plant. You mentioned three locations. Where do we stand on that? Is Longview now off the table? Thank you.

Speaker 4

Those are all great questions. I'm a little limited on how I can answer some of them. To start with Kingsport, first, the plant continues to run well. We're still on track to hit our production target. We've had great confidence built about our ability to bottleneck the plant, as well as our yields are turning out to be better than expected. We've hit 90% yields, which is extraordinary when you're taking garbage and turning it into first quality, perfectly clear, high-quality polymer. We're really, really excited about what we're learning, what we're doing on that project. We believe that 30% expansion of the capacity is very feasible. The capital to do that, which would be done over a series of our normal shutdowns, is relatively modest capital. We're not disclosing that number at this stage, but it's not significant.

Excited about stretching that plant, getting a lot more value out of it, and that giving us more continuous earnings growth while we work on the second project. When it comes to the revenue for the project, obviously in this market environment, especially in consumer durables, where a lot of the renewed content goes in our specialty Triton products, it hasn't been growing as fast as we wanted in the end market, which means product launches aren't that fast. As we look towards next year, two things: we continue to get more wins on the specialty side and continue to build confidence there where customers are committing and buying and paying premiums. The ARPET is a significant step up.

We told you last year that we were, with adding 80,000 tons of new Triton capacity, we could take an existing Triton line and switch it back over to making ARPET, along with a couple of other lines that we have that are able to do that. It gave us a decent amount of capacity to make ARPET. We've been really encouraged by several customers, very interested and committed to growing their ARPET in different applications. The commitment and the strength of their interest is really driven by the challenges they're having in mechanical recycled content, where the color is not great. The appearance on the shelf is not what they want for their high-end products on the shelf that need to look pristine. Our product sense is identical, basically, through the chemical recycling and the purification allows us to provide virgin quality product on the shelf.

We expect a very significant step up in volume to go a good distance in filling up that capacity. That revenue, which is also the attractive margins, combined with specialty, will give us a big step up in revenue versus where we are this year. Those commitments are close to complete. We feel very good about where we are on that. When it comes to building the second plant, the great thing about the devolved neck is it gives us time to work on a much more capital-efficient way of building that plant. It also allows us to delay a step up in capital right now in this economic environment. We are making great progress on three different options of where we could leverage existing assets very effectively in combination with our methanolysis technology to build the plant in a much more affordable manner.

We know the value of vertical integration, which we do in Kingsport with everything we do, and that applies when you're building something new too. We are excited about that. We are not going to get much more in the details on that. Hopefully, we will have more to say in January.

Perfect. Mark, just on Q1, looking to next year, how should earnings ramp from Q4 to Q1? I assume most of the asset utilization headwind should be gone by then. Is that fair?

Yeah. The asset utilization headwind turns into a tailwind as you look at Q1. That is one of several factors. You have the normal seasonality of Q4, where demand is just always low, especially in advanced materials and AFP. That snaps back. Seasonal paint, lots of things being made for holiday season. You do not get orders for that in the fourth quarter, but they start doing that in the first quarter. In fact, in our specialty plastics business, we have a number of our customers already talking to us about their plans on buying more volume relative to where they are today. That is encouraging. I think you have that.

You also have this exaggeration of this demand, this inventory that was built in the first half of the year being used up in the second half of the year, which is also artificially pushing demand down in the fourth quarter beyond normal seasonality. Our belief is that there is a good probability that will be fully depleted, hopefully by the end of the year. It is very hard to know. We have learned our lesson about guessing on what happens with inventory depletions back in 2023. There is a big difference this time, which is in 2021, 2022, there was a huge amount of inventory built on the expectation of a lot of growth. This year, no one expected a lot of growth. You can see in the retail data or the consumer brand data, they did not build that much inventory.

They moved around the planet a lot to get it in the right places to avoid tariff risks, including our products into China and Europe, but they did not build a lot of inventory. They do not have that much, actually, to unwind. We should get some relief on that as well, we hope. Of course, the revenue we just talked about in methanolysis starting to kick in, and the ARPET really ramps up in Q1. We have our normal innovation that is always driving some growth. The cost actions is the last part that should also help. As you have ramped up the cost actions through this year, that should annualize into an advantage for Q1.

Thank you.

Speaker 3

Thank you. Our next question comes from Alexei Yefremov from KeyBanc Capital Markets. Your line is now open. Please go ahead.

Thank you. Good morning. Mark, could you just discuss this dynamic with Renew? Your customers seem to be interested in the specialty applications for the polymer, but they're not actually buying the volumes. How do you gauge their real interest and sort of ability to pay for the price that you're charging for Renew?

Speaker 4

That's a great question. It's come up a number of times. The value of Renew is to put it in a product as a way to differentiate that product and being different on the shelf, right? And they do that to get a better price point, to get some volume growth. That's how any of these, especially on the consumer durable side of things, think about the value of this content. There was extreme strong interest in this in 2021 and into 2024 as they saw this opportunity. The economic determinant of seeing the value and realizing the value depends on the market and consumer actually being there to buy it. When you have consumer durable markets being soft and not growing very much, last year, they were a little hesitant on how much they wanted to try and launch new products in that soft environment.

You have to remember that building construction demand—I mean, sorry—consumer durable demand in 2024 is probably 5-15% below 2019, depending on the product. It's connected to home sales. You got to remember, home sales. All home sales are a triggering event for durables, right? That's down 20% in 2024 versus 2019 in the U.S. and Europe. China's even worse. The underlying market of triggering events to buy new products is weak. In that context, while it's great to see we still have over 100 customers, we only have one cancel their commitment to Renew. The rate at which they're launching that Renew into new products and getting volume from the consumers is just limited by the end market constraints. The good news is the pent-up demand is accumulating. These appliances are all getting really old for one's body and coat it.

You expect that at some point, with some stability in the economy, you're going to see a pretty significant resurgence in demand because it's adding up under the curve from 2022 to now. The trade war, of course, just made the challenge even worse this year, as I described earlier. It doesn't change our confidence.

Thanks, Mark.

I mean, the brands, if they're really not interested, they cut the orders, and they're not doing that.

Makes sense. Second question on fibers. Why are volumes just stable next year in terms of your expectations? I thought we had some weaker textiles this year, and also you had some customer destock. Could you just talk about these dynamics, how you see them evolving next year?

Yeah. There's a lot of moving parts inside the fibers business. And as I mentioned in the second quarter call, about 40% of the challenges in fibers is not associated with the tow business, right? To your point, textiles, which was a source of growth to offset tow market decline up through 2024 and had done it nicely, suddenly flipped. This whole tariff issue that we've run into, where we had modest growth year-over-year in the first quarter that then flips to a good single-digit headwind, whether it's housewares or textiles or appliances. In May, after the sort of tariff announced in April, created a headwind there. It's turning out to be a bit more than we thought. We told you $20 million headwind. We think it's more closer to $30 million headwind for the back half of this year as we sort of go through the back half.

That is a real headwind in textiles. Now, the good news about textiles, this is a cyclical demand change. It's not structural. When we think about recovery, we already can see some places where we're gaining some share. We're trying to move outside of China, where the reciprocal tariffs are hurting us, into China with our product to other markets. We're confident we can rebuild that business, and we'll start doing some of that next year. The whole stream had less demand, so we had a $20 million headwind out of asset utilization across the stream. In the back half of the year, that's the part that's impacting fibers. We had some higher energy costs that probably doesn't become a tailwind. The textiles and the asset utilization can reverse and become a tailwind as we go into next year and the following years.

That takes you to the remainder, which is tow. Obviously, there was a pretty significant step down in tow volume this year that was driven by the destocking. The more we dig into it, the more we learn the amount of inventory our customers built in tow was pretty significant due to all the concerns they had about reliability supply when the market was so tight. Now that the market's a bit looser, they're feeling, because of the capacity out in China, they can take that inventory down. That's the vast majority of what the drop is. I mean, we don't expect it to get worse next year, but we do expect it to continue into the next year and, to some degree, lessen, but a little hard to call. It's a bit like what we went through with the medical destocking. It's not a single-year destock.

There was some share that was lost by the industry to the new entrants, and we're adjusting to that dynamic from China. As we look at that, we think that the share situation is stabilizing. Destocking will continue but not get worse. When you put that together, if we manage our positions correctly in the marketplace, we should have stable volume.

Thanks, Mark.

Speaker 3

Thank you. Our next question comes from Patrick Cunningham from Citigroup. Your line is now open. Please go ahead.

Speaker 0

Hi, good morning. Apologies if I missed this, but on the Pepsi contract, can you remind us in rough terms what the initial agreement looked like and what is prompting restructuring of that agreement?

Speaker 4

The Pepsi contract was a very important foundational baseload contract to give us confidence in building the second plant. The volumes, which we've not disclosed due to confidentiality with Pepsi, are sufficient to baseload a second plant at 100,000 tons of scale, which is similar to the one we currently have built here, which will now be 30% greater than that with our development capability. That contract provided provisions to give us confidence in the revenue that would come from it, both in price stability that would move with the changes in our key variable costs on feedstock and energy, and it would give us committed volume in that contract. That contract was obviously designed around when that second plant would start, which is obviously even back then a couple of years out.

The change when we say restructuring is we've been very successfully working with them on how to move that volume into next year, start the volume next year. They are one of the companies that certainly see a lot of value in ARPET and recycling content, want to have high-quality products on the shelf. They are interested in volume next year, and that's the restructuring, pulling forward the start of that contract.

Speaker 0

Great. Just at a high level, how should we think about CI earnings next year? You have some asset utilization, tailwinds, cost reduction. Is there anything encouraging you are seeing from either trade regulations or perhaps planned asset rationalization that maybe helped pull forward an inflection point there?

Speaker 4

Yeah, that's a good question. I mean, first of all, obviously, we're in a manufacturing recession across the entire business that started in 2022, and we're now in our third, actually going into our fourth year of being in a recession. There's no precedent in the history of this, right? In 2009 or 2020, you have a sharp drop and then a sharp recovery, and everyone sort of goes and moves on. It's hard to look at the current situation for a precedent. You also have a lot more capacity out of China being sort of dumped on the planet at very low prices. The CI dynamic in the whole commodity industry in large is going through a fairly unique situation. To answer your question, I do think there is a lot of rationalization of capacity going on in Europe, and it's expected that will continue.

I think the Chinese government is trying to make some impacts on rationalization, but it's unclear how much and how far they will go on that. Without a doubt, capacity is coming out of the marketplace. The market's loose, so it's a little hard to know exactly when that's going to tighten the markets up and get back to some more stable conditions. That's one dynamic, and it's a little hard to call. I can definitely tell you the back half of this year is definitely at the bottom from a competitive cash cost point of view with how the Chinese are pricing into these markets from outside the U.S. The tariffs are providing a bit of protection to the margins to us in North America.

The second challenge we have is that the North American market, which is where we predominantly want to sell everything we make if we can, always has higher margins and is an attractive market. When the trade war impacted demand in building construction, in consumer durables, or we didn't get a lift in recovery in housing that everyone expected at the beginning of this year, the demand of those products in this market came down. That's a mixed hit because margins here are a lot better than the export markets, which have become very challenged with the Chinese capacity being sort of put on the global market. Recovery and demand on housing, interest rates causing housing recover and durables recover will immediately start improving the mix and earnings value of CI.

I believe it will help next year because I think odds are some of that demand will get better than where we are right now. We also, as I mentioned, just have a lot more volume to sell next year, so we'll have that benefit. Then we have a lot of aggressive cost structure, as you know, going on to reduce the cost here in this year as well as next year, and CI picks up a good portion of that cost. There are a number of reasons CI earnings can get better. At this stage, I think you would be cautious on just how much spreads would improve until we see more insight on the sort of broader market dynamics.

Speaker 3

Thank you. Our next question comes from Salvator Tiano from Bank of America. Your line is now open. Please go ahead.

Yes, thank you very much. Firstly, I want to ask, you brought up fibers as a business that's facing cyclical and not structural headwinds. I'm just wondering, in the past few quarters, we've been hearing, whether it's from you that you lost some share in China in coating additives or from other players about interlayers, etc., that there has been competitive pressure in China. I'm wondering, are there any chemical chains where you are actually seeing more structural supply coming in China and where earnings and volumes could go lower in the next few years? In the case of films or coating additives, is the issue you've been having this year more cyclical or structural?

Speaker 4

Yeah, there's a lot of questions buried in that question. I'm going to try and hit them. First, I just want to clarify. When we talked about what's going on in fibers, the cyclical part is textiles. Where that demand, and a lot of it is sold into China, has come off. We don't really have much competition in that product, in a direct-like product that we make in our Naya yarn. Obviously, there's constant substitution going on across different chemistries of textiles, which is where we're winning all of our share because our product is so much more sustainable than the other markets that we sell into. That's why we're confident long-term in that product. I mean, when you have a 60% biopolymer with recycled plastic as the other feedstock, and the microfibers are entirely biodegradable environment, you have a lot of growth opportunities.

We're feeling great about that market and our ability to grow in it. When you ask the question around where we're losing some share, the lower value part of interlayers is the architectural business, and we lost a bit of share more than we expected this year, which we are regaining back in contracts for next year. Coalescence is a competitive product where the Chinese have equal coalescence, and competition within China is pretty intense. We've walked away from some share there. They're now starting to pick up some share in some other parts of the world. Those dynamics exist. For the vast majority of what's in AM and AFP, we are fortunate where innovation is strong and our competitive positions are strong. We don't really face that much direct competition from China capacity at this point.

The dynamics by far in what's going on from 2022 through 2025 is more about in-market volume demand that's associated first with out-of-control inflation that led to out-of-control interest rate hikes to a trade war just to make things more interesting. Those are the key things that are driving the situation up to this point. We don't have any signs of significant capacity being built in our specialties that would be coming online that we can see at this stage.

Perfect. And one quick one on buybacks. I think I may have missed it, but I think last quarter there was a comment about committing to more buybacks next year than this year. Is this still the case?

Speaker 0

What I would say is, obviously, we're always disciplined when it comes to capital allocation. We've bought another $50 million in addition to our dividend in Q3. We've completed the buybacks that we expect to do this year with keeping our net debt flat on a year-over-year basis. What I would say is, as we think about the scenarios that Mark described, obviously, we're confident in our dividend in 2026 and going forward. Obviously, we don't let cash sit on the balance sheet, but making sure net debt is aligned with, and moving back towards our two and a half times goal, we'll put the rest of the cash to use. We'll update you in January on what the range of buybacks could look like.

Perfect. Thank you very much.

Speaker 3

Thank you. Our next question comes from Josh Spector from UBS. Your line is now open. Please go ahead.

Yeah, hi, good morning. I want to go back to the initial questions around the bridge to 2026 and just really clarify the basis for when you're thinking about what we should be bridging off of. Because I think in your comments, you were adding back inventory actions from the second half, but we know you overproduced in the first half. Should we be thinking about that additive to the full year or that additive to the second half? I think that's kind of the difference between getting to $5.50 versus something like $6.50 in EPS as a base expectation for 2026. Hoping you can clarify that. Thanks.

Speaker 0

Yes, Josh, this is Willie. On the utilization front, obviously, we've been talking about first half, second half. As you also look at the volume and the demand outlook that Mark described, we've more than offset the inventory build that we had in the first half and expect to do that by the end of the year. That should give us utilization benefits as we're going through a more normalized year of stable demand that's growing on a year-over-year basis. As we think about utilization, you had a minimum half $50 million due to the absence of inventory depletion on a year-over-year basis. Ultimately, upside comes from there to the $75 million, depending on how much other demand drops to the bottom line.

Speaker 4

Yeah, and I think that just on the underlying volume scenario, just for volumes, what I tried to be clear about is. Do not use the first half or do not use the second half, but put them together. That is a better assumption about what the volume decline for this year is because of all these dynamics going on. Which would be around a 4% decline in AM and, as I said, around a 2% decline in AFP. From a volume point of view, you are building off of that volume base into next year. Then you have to overlay all the things I keep the first question on for things micro.

Yep, no, I appreciate that. That makes sense. I guess, I mean, a related point, I guess, on combining the volumes. I mean, your first half volumes were down low single. Your second half is maybe down high single. I guess when you look at customer order patterns and what they're talking about. Do you expect that to grow over the first half basis or because of the exit rate or volumes actually down in first half in terms of your base thinking and then it's easy comps in the second half?

For sure, back half is going to be easy comps. We can answer that question. On the front half, I think it's a little complicated to know exactly how we entered the front half of this year and how that plays out, especially Q1, right? You got to remember in Q1, our view of the economy along with everyone else in the industry and our customers was pretty positive, right? They thought demand was going to be relatively stable. They thought there would be some modest growth here and there. They thought there would be lowering interest rates at some point. Our volume, the underlying market volume, was up about low single digits when we look at some of the places that we sell into, especially in advanced materials.

Our whole strategy and volume build and manufacturing is built around that will continue for the rest of the year. That is why things flipped so much on destocking. In the back half, when you think about that change and exactly how much of all the inventory is depleted from all this pre-buy in the first half and the sum of that drag into the first quarter, we just do not know. We are confident Q1 will be better than Q4. It is a little hard to say exactly how it will compare to Q1 of last year. We are going to have to just wait till we get to January to answer that question.

Understood. Thank you.

Speaker 3

Thank you. Our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is now open. Please go ahead.

Yes, thank you and good morning. Mark, with regard to your Pepsi contract, is there any downside financial risk to Eastman now that you're rethinking the second plant? Or is it the case that there's really no downside risk because you're either protected contractually or you can perform against the contract through supply from Kingsport?

Speaker 4

First of all, we feel great about having them as a partner. We feel great about them seeing the value of recycled content, the importance of recycling their packaging in the market, and creating our closed loop. They have been a true leader in the industry on this front. We are proud to have them as our baseload. When it comes to the contract, we believe the way the contract is structured, we can reliably supply them from Kingsport and the bottleneck that we are doing to get that extra 30%. The different ways we can configure polymer lines to support what they need. Clearly, we want that baseload contract to support our second plant. With the actions that we have taken, we are in a position to support them from the different existing lines and how they can be configured.

The margins are attractive and give us a good return on investment around renews. We are happy to support them.

Great. As a second question, I think you've raised your dividend every year since 2010. With the actions you've taken, it looks like you've really supported the cash flow. I think you've said approaching $1 billion. Given that's the case, would it be reasonable to expect that streak of annual dividend increases to perpetuate? I realize it's a board decision, but it does seem like you're generating enough cash to do that. Any thoughts along those lines, Mark?

Speaker 0

First, thanks for the question and bringing up how solid and attractive our dividend is, which is well covered by our cash flow, as you also recognized. To your point, it is a board decision, and we're not going to get in front of that process. We do have a record of 15 consecutive years, and I think that speaks for itself. Also, as you've seen our most recent dividends, they have not really significantly impacted the cash flows that are required to ultimately fund the dividend going forward. We do have a strong cash flow that we would expect in 2026.

Thanks.

Speaker 3

Thank you. Our next question comes from Frank Mitsch from Fermium Research. Your line is now open. Please go ahead.

Thank you so much. If I could get a little more granular on the outlook question. Going back, beginning of August, the expectation was 4Q would be in line, if not better than 3Q. In September, Willie indicated that 4Q might be a little bit weaker than 3Q. Obviously, with last night's guide, things got even weaker. I am wondering if you can speak to the pace of activity that you've seen in the past couple of months and what your order books are suggesting here for November. How confident can you be that this is the bottom?

Speaker 4

That's a good question, Frank. As you may suggest, we spend a lot of time trying to understand all the market dynamics that we're in right now. It is a very chaotic time. It's hard to even get high-quality data to know what's going on in the marketplace. We are doing everything we can to understand it. The dynamic, whether it's from the Q2 call to September to now. What's changed is demand. Nothing else has changed. Our cost plans are on track. In fact, we're probably being a bit more aggressive in cost management with the challenges that we face. The price-cost relationships on spreads and everything else are holding up as we expected. It really is just a question of in-market demand and how it's trending.

It really connects back to this question, which is just where exactly is consumer demand right now and how it's changed after April, as well as just how much inventory is out there that was built in warehouses all over the country in the U.S. or warehouses with our Triton and other cellulosic, etc., in China that was bought ahead of potential risk on those retaliatory tariffs getting worse, etc. We don't know exactly how long that's going to take. Clearly, with the way that order patterns have evolved, where we thought it was going to be relatively short back in July, it is dragging out through the back half of the year. The thing that gives us comfort is they just haven't built that much inventory, as I said earlier, in total from what we can see from all the public companies that we sell to or the retailers.

There's a limit on just how much they can do this. It depends on where consumer demand goes. All those dynamics are in play. The fourth quarter is always a wild card, especially as you go through the quarter. October revenues came in as expected. We feel good about that. We're just going to have to see how things trend. We are encouraged, for example, in specialty plastics with these customers that are in a very long supply chain to make consumer durables talking to us already about planning for higher orders in Q1. That's encouraging. It's way too early to sort of call exactly how this is going to play out from a precise timing point of view.

Okay, understood. You did mention that you're becoming a little bit more aggressive on the cost reduction front. You announced the 7% headcount reduction. Can you talk to the locations, the geographies, and how much of that is embedded in that $175 million in cost cuts that you're expecting between 2025 and 2026?

Speaker 0

Frank, on the cost discipline, it's a fundamental part of who Eastman is and our strategy. I would also say that the cost reductions that we set out, and it's a very aggressive level of cost reductions for both 2025 and 2026, both offset some of the declines in fibers and our chemical intermediates that may not be recovered. It's also been foundational to our ability to basically support our growth and our growth spend for innovation. As I think about this year, our net savings is going to exceed the $75 million target that we set out at the beginning of the year. The momentum that we've gained in the back half gives us confidence now that we can raise next year's net number to $100 million on top of that. As you think about gross numbers, that's in excess of $300 million of cost reduction actions.

It's really driven by three core areas. It's effectively productivity. It's also being competitive on both the manufacturing and functional standpoints. Now, with the acceleration of AI, how do we bring that to scale within Eastman, both in our commercial as well as our manufacturing areas? As you talked about the 7%, the 7% is our headcount that we started at the beginning of the year, where we expect to be at the end of the year. We've been doing that effectively across our enterprise, both in response to the environment that we're in, but also as we think about how do we compete in a world that's only going to continue to raise the bar as we think about excellence. As we think about reclaiming productivity, I think there's been studies post-COVID that have demonstrated a loss of productivity of at least 8%.

That also was compounded with the impacts of retirements that both happened at Eastman as well as across the chemical sector of a lot of knowledge. This is not just normal productivity of offsetting labor. It's going above and beyond to recapture productivity more broadly. The only way that you get that, we've been investing in capability, training, structure, and how we get work done. As you think about areas beyond just productivity, part of this, we just announced optimizing our footprint. We've continued, like we have in the past, to look at how we should manage these supply chains. Supply chains have, I'll call it, put an inordinate amount of cost both through tariffs, through logistics over the past several years.

The example that we optimized here in Q3 was the announcement around how we're going to run our films business, basically from a regional asset footprint, which is resulting in some restructuring here in the U.S. of our assets. We will continue to transform how we do maintenance, also how we think about reliability. You've got to have the right partners. We've gone through transformations this year of changing out partners across. A couple of our large assets, both here in Tennessee and Texas. As you think about it, we're getting that benefit run right here in the back half. That gives me confidence that we're going to deliver the $100 million as well as we go into next year. From there, it's AI. This is where it gets really exciting.

As you think about in our technology space, right, this is where we can ultimately reduce the cost of innovation, the speed to market as we look at predicting what formulations are going to be the right formulations to take to market. Also, as we think about the capacity that we need and where we need that. Finally, I would just give the example on the commercial front, right? Ultimately, as we think about commercial, commercial excellence that Mark has highlighted on pricing, we're using AI when it comes to setting up compelling offers, how we generate returns off of those offers, and also how we build off of that and win new business. Those are a spectrum. We're right-sizing the cost so that we can invest in innovation for the long term. We're on track to deliver both here in 2025 and in 2026.

Thanks so much, Willie.

Speaker 3

Thank you. Our next question comes from Mike Season from Wells Fargo. Your line is now open. Please go ahead.

Hey, good morning. Mark, when you think about the portfolio that you have now, I think the hope over the last decade was to move it to more specialty-type areas. Your multiples compressed a lot. When you think about what to do for the next five years or so, do you think you need to make any changes? The results, granted, unprecedented times. Has been difficult. When you think about things to do to improve the portfolio, any thoughts there?

Speaker 4

Hi, Mike. Thanks for the question. We're always thinking about our portfolio, and we're always thinking about where we want to go in the future. I want to emphasize that the core strategy we put in place that really goes back over a decade to be an innovation-centric company is absolutely the correct strategy, especially as one to get through all this chaos. You defend value and market share because you have differentiated products in the market that customers need, right? You find a way to launch new products. You create your own growth. We fundamentally believe that strategy is the correct strategy. We've now added on a much more aggressive cost management program to go with it, right? It used to be pre-COVID, we had productivity that offset inflation.

We're clearly going way beyond that now because we realize that we have to be more competitive in these market situations. That concept, that strategy allows us to get our normalized EBITDA back towards what we talked about at the deep dive in November, and we're still operating on that strategy. Portfolio has been important for us, right? We've shown a lot of discipline to sell parts of our portfolio when they didn't make sense, like tires, adhesives, the Texas acetic acid plant. If you go back even further, we demonstrated a willingness to really convert our portfolio to be specialists. We sold off a huge amount of commodities, about $3.5 billion, leading up to 2012. We then did a series of acquisitions that were quite large, like Solutia, Taminco, and some bolt-ons, to really change the quality of our portfolio in a pretty dramatic fashion.

We know how to do M&A. We know how to do integrations. We know how to buy assets at a rational price. We're always thinking about these kinds of opportunities. Without a doubt, the industry is going to be going through a lot of significant change right now with all that you see going on across the peer set. Of course, we're thinking about how our portfolio should evolve in this context. I mean, we're not going to say more than that.

Yeah. In terms of the quick follow-up, when you think about the normalized EBITDA, you talked about a year ago, a little over $2 billion or so. Is it less volume to get there now, given your cost savings? Is there any major changes to the walk, or is it still fairly similar and we need some volume to get there?

I think that without a doubt, volume is the story and the challenge that we've had since 2022. We need volume to stabilize. We just need economy to stabilize and volume to get a bit better. In that context, innovation accelerates when customers are confident and think there's a stable environment. They want to launch new products to try and gain share and win. Volume, not just from the market, but from innovation, accelerates. The cost reductions that we're doing that Willie discussed are significant and lower our cost structure in a material way. A lot of that is being masked this year because of the $100 million sequential headwind of utilization that we've encountered in managing our inventory because the world didn't grow as expected. You can't really see the cost benefits this year.

As you move into next year with the volumes, if we're in a scenario where volumes are stable this year, economy is stable, you get the acceleration of all that cost cutting as well as that utilization tailwind kicking in. You do get a benefit from volume, but you also get a benefit from leveraging a much more competitive cost structure. It's important to keep in mind that a lot of that headwind that we've encountered with volume this year is because we have these large sites like Tennessee that has a lot of vertical integration and fixed cost. It's painful when the volume goes down like you've seen. It's also extremely attractive when the volume comes back. The incremental margins will be very attractive.

Thank you.

Speaker 3

Thank you. Our next question comes from Aaron Viswanathan from RBC Capital Markets. Your line is now open. Please go ahead.

Great. Thanks for taking my question. Most of my questions have been answered. I guess just wanted to maybe you could elaborate on some of the choices you're making between giving up some maybe lower-value business and the market share losses and what that kind of means for the future as you look into 2026. Does that set you up for maybe some improved margin performance, or how should we think about that? Thanks.

Speaker 4

We're always optimizing our asset base. This has been a core part of our strategy since we started on this, right? If you think about just the simple idea that Eastman made PET, not got competitive, we moved into a whole set of copolyesters that we made with some proprietary monomers that upgraded that value. Then we came out with Triton, which really upgraded the value in a very proprietary product and how it's been so successful. On the same PET assets that we started with. In fact, the Triton line we're adding right now, that 80,000 ton line, it's the first PET line we've added in decades because we're constantly valuing up the asset basis we have. Same is true in interlayers, whether it's a standard interlayer to one that had acoustic, to the one that has HUD, etc.

This idea of optimizing our asset base to drive returns and move to higher ground is embedded in our strategy forever. There's always choices you're making where you look at some of the lower-value products and replacing them with higher-value products and upgrading the mix. We have lots of charts we've shown you in past investor days on how that's worked, and we're always doing that. Right now, with the market being soft, the other value of some low-value applications is asset utilization and running the assets full. You want to make sure you're always keeping that balance in place. With all the drama we've been through in the end markets, we've freed up some capacity just because demand is off, and we're trying to reassert and add some of the lower-value applications back into the mix to drive asset utilization.

As the economy recovers, we'll value up that mix again like we always do.

Thanks.

Speaker 3

Thank you. Our next question comes from John Roberts from Mizuho. Your line is now open. Please go ahead.

Thank you. In PET bottles, do you expect Renew to be used in a consistent way, or is it going to be maybe blended at different levels? Do you expect any differentiated marketing around Renew in bottles?

Speaker 4

We do, John. I think different brands, both on the specialty side, by the way, as well as on our pet packaging, are making different choices about what percentage of recycled content they want to put in the bottle. And it can be 50% recycled content. In some places, it can be 100 in another place. It ties to what they want to do on marketing on the label, and it ties to what they want to do in achieving corporate goals of recycled content for the company overall versus what they put on a package. So it's a full spectrum out there on how companies are doing that. We provide, because of the way we can flex. Our assets, we can put whatever level of recycled content they want into the product. Very seamlessly. So.

We flex to whatever is most valuable to the consumers, and we have good prices for different levels of value.

Is there an average level in your plan?

I would say that at the moment, our expectation is when you look at the specialties and the RPEC combined together, it's probably going to be around 50% for a while. You'll have products that are going 100%. You'll have some that are 50%. You have products that in some cases might be lower. Somewhere on average, I'd say when you look at somewhere in the 50-75% range is sort of where the recycled content will land. It's really evolving. What I expect to see happen is people go with a lower level of recycled content when the economy is as stressed as it is because there's a premium they're paying for it, but they want to make progress on their goals. They want to demonstrate commitment to the consumers.

As the economy stabilizes, they'll start ramping up to a higher level of recycled content when they have better economics to afford it.

Thank you.

Speaker 3

Thank you. Our next question comes from Duffy Fisher from Goldman Sachs. Your line is now open. Please go ahead.

Yeah. Good morning, fellas. We've had a number of announcements from your Ag Chem customers about difficulties they're having in the market. A number of consultants are talking about pretty big structural changes there with the Chinese pushing harder into those markets. When you look through the view of your intermediates chemicals into the Ag Chem industry, do you think you have the right position, or do you see changes that are going to affect you and cause you to have to change your business model there?

Speaker 4

Yeah. We're very fortunate to have a very strong relationship with a lot of the top Ag companies. And the vast majority of our business is in North America, where we make these intermediates and they're sold here. We're also very fortunate to be aligned with winners in the marketplace like Corteva when we're providing the sort of key ingredients of the endless product. We're in a better position because we're just not as exposed to all the competition and battle that's going on in South America, which I think is what you're probably getting at. And the tariffs, of course. Again, the U.S. are sort of helping manage some of the pressure here. I think we feel relatively good. We're not having any conversations with our customers at this point, at least, where they're concerned about their position in North America.

Great. As you've seen some weakness in your downstream Tow business and the textiles business there, does that mean you're going to run your kind of acetyls chain at lower operating rates, or will you have to push into more acetyls derivatives upstream from those markets?

That is the beauty of having an innovation-driven company. A long time ago, we knew that the demand would not be forever there for tow. We've been lucky that it's declined at a relatively slow rate. We've been building a whole innovation portfolio, as we discussed at the deep dive last November, around how to take cellulosic polymer into a wide range of new applications, right? Textiles was one of those applications which was doing its job to sort of offset that, as I said earlier. The Aventa program is still having great progress going forward. This is the foamed cellulose polymer that can replace expanded polystyrene food trays, go into straws, etc., and all these food service areas where you can't really do recycling because of the way the product is contaminated and it completely biodegrades.

We have a lot of growth opportunity, huge markets in Aventa that we can serve. We've got some great IP positions around some of those products. We also have some specialties that are very high-value microbeads that are made out of nylon acrylic being replaced by a biodegradable cellulosic for cosmetic formulations that we can replace polyethylene coating on paper cups and paper wrappers around candy bars, whatever. The biodegradable polymer. Our whole portfolio is in action. Obviously, the volumes are still relatively low and building, but we have great traction with our customers. That's how you drive overall company stream utilization because the stream has always gone into specialties in AM and AFP as well as tow and generate a lot of value in those segments. We're going to keep growing and expanding through those to keep the whole stream vital.

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

Speaker 3

Perfect. The last question comes from Lawrence Alexander from Jefferies. Your line is now open. Please go ahead.

Good morning. Thanks for squeezing me in. Just very quickly, can you give a sense for how much of a shift is happening in terms of reshoring of appliance capacity in the U.S., maybe as a possible catalyst for 2027 and 2028? I'm just thinking about the GE Louisville announcement and things like that. Secondly, with the Chinese five-year plan, is your initial read on the kind of first drafts being circulated that it's a net positive because they're emphasizing innovation and more formulated products, or is it a negative in the sense that they're emphasizing profit sharing to encourage and incentivize consumption, so lower return on capital for the chemical industry there and everything that entails?

Speaker 4

On the reshoring question, I think that you will see people reshoring to the U.S., and we will see the benefit of that. There are companies that have been leaders in doing that, like Whirlpool and Newell. I think after all this pre-bought inventory that happened the first half gets exhausted, they will see benefits to their position in the U.S., and we will see more of that. If USMCA gets preserved, I think you will see it not just in the U.S., but also in places like Mexico, where that will continue to be built, as well as people still moving to other places like Southeast Asia, where the tariffs are still quite a bit lower than doing it in China these days. We are following our customers wherever they go, but it takes a while to build plants. It does not happen overnight.

We will see how that plays out over time. Regarding the latest Chinese five-year plan, I have to admit, I am not an expert on that plan, so I do not want to get into territory of details I do not really know. What I would say is, from what we see in the China market, it is uniquely challenged as part of the global challenge, where they do not have consumer demand growing very much there because of the stress of the collapse of the housing market. They are adding a lot of manufacturing capacity and aggressively exporting it, and that is creating strain in the country, and it is also creating strain around the world, which is leading to these tariffs that you start seeing happen, not just here, but you are going to see them in other countries.

I think the China government has got a lot of complexity to manage there, and their excess capacity is not helping their local economy or the world's economy. Hopefully, some of the actions they are talking about to sort of rationalize capacity to be more appropriate, they actually do. We are just going to have to wait and see what they do on that front, and hopefully, they stimulate some consumer demand in China, which would certainly help their economy a lot.

Thank you.

Speaker 2

Thanks again, everyone, for joining us. We appreciate you taking time with us, and I hope that you have a great day and great rest of your week. Thanks again.

Speaker 3

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