Eastman Chemical Company Stock

Good day, everyone, and welcome to the Second Quarter 2026 Eastman Conference Call. Today's conference is being recorded. 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.

Thank you, Lucy, and 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. Yesterday after market closed, we posted our second quarter 2026 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors 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 second quarter 2026 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-Q to be filed for second quarter 2026 and the Form 10-K filed for full year 2025.

The Second, earnings referenced in this presentation exclude certain noncore 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 second quarter 2026 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will go now straight into Q&A. Please let's get started with our first question.

Of course, the first question is from Patrick Cunningham of Citigroup.

Just on Advanced Materials, pretty solid volume and mix growth in the second quarter. You mentioned some offsets from lower OEM production, weak aftermarket durables I guess, how should we think about the recovery trajectory of these weaker end markets heading into '26 and the sustainability of this volume growth and confidence in ultimately a stronger second half?

Sure, Patrick, I have to say I'm really incredibly excited to be talking about the company today and the tremendous execution our teams are doing across all businesses has really been a great result in Q2. And now we're looking at how we move forward in Q3 in the back half, I think, is an important conversation. What I'd say, when you think about the back half of the year, we're not expecting any improvement in the end markets when it comes to sort of the weak discretionary markets, auto B and C, consumer durables we're certainly benefiting from modest growth in what we call our stable markets across the entire portfolio.

And so we're not really seeing any sort of changes there. And we're not seeing any impact in the Mid-East one yet on sort of hurting end market demand in a material way across the world as far as we can see it right now. So in that context, I think we're really well positioned to grow earnings, not just for Advanced Materials, but for the corporation as we look at the back half of the year.

Starting with Advanced Materials, what you can certainly see is the volume growth has been strong into Q2, which is driven by a lot of wins in the marketplace, innovation-driven wins and the growth that we're having in the circular business is still somewhat modest and will ramp up into the back half of the year. So you'll see the renewed volumes continue to ramp up you'll see we'll continue to win in marketplaces through innovation, which would offset what is an oral volume decline in the back half for AM. We won't see that.

Volumes are more likely to be similar to the first half. So that's actually a good solid base to build from. And then on top of that, with Advanced Materials, you've got asset utilization and tailwinds that are coming from all the actions we took. And we mentioned in the prepared remarks, where we reduced finished goods in the front half to offset some of the raw materials we're buying, like paraxylene to make sure we had secured supply. That created a bit of a utilization headwind in the first half. that will sort of flip around to being a tailwind as these markets remain solid, and we have to ramp up production.

In fact, we're really excited that Triton line is coming online now because we are pretty limited on capacity with the volumes we had in Q2 and how we've switched one of our Triton lines to serve the PET growth. So that's coming on just at the right time. And now we're taking our paraxylene that we bought in advance for supply reasons and converting into finished goods in the back half of the year. So it gives you a tailwind on utilization, but not a headwind on cash. So that's all going well.

And then on the price cost side, the team has done a phenomenal job of getting prices up with raw materials. And as they've caught up, that will now flip into a tailwind in the back half of the year also helping AM have solid earnings growth into the back half of the year, which is not our typical pattern. So that's great to see that strength build. The second driver I would just mention to finish off the story is fibers, the tow volumes will increase in the back half of the year, materially as customers are increasing their orders to meet their annual minimum volume commitments with us. So that's coming through and there'll be some textile recovery we see as well as volumes quite low in the first half of the year and some of the wins we're having will start bringing us back to sort of full volumes relative to last year.

There will be some offsets, obviously, in Chemical Intermediates and how those margins may moderate with the state of the Mid East conflict. What I'd say on that front, though, is it's pretty uncertain what's going to play out right now. But right now, we're expecting some moderation. And the [indiscernible] products will have some seasonal decline like normal. So when you put it all together, we're really in a good position to deliver a good strong earnings improvement relative to last year. We basically had a strong beat in Q2. We're talking about a very solid Q3 and so when I think about our view on earnings for the full year today, I would say that it's better than where we were in April and certainly feel like we're on a good track to very strong earnings growth in this context.

Got it. And then maybe just a follow-up on chemical intermediates. I think the direction and magnitude spread changes is anyone's guess at this point. But you had a pretty robust volume increase in the quarter. I guess what sort of dynamics drove this volume surge? And how much of it was realizing some of those durable share gains you alluded to last quarter versus maybe some temporary pull forward there?

Yes. So on Chemical Intermediates & Volumes, the vast majority of the volume increase was driven by -- on a year-over-year basis, lack of significant shutdowns this year relative to what we had last year. Last year, we had planned shutdowns and some unplanned shutdowns. And so we lost a lot of capacity to sell the market. This year, the volumes are running at normal capacity, which is a lot better than where we were. That does include some pickup in share due to the supply tightness in the marketplace. That's a quality of earnings comment, which is we're always going to sell the volume.

It's just where do we sell and what the margins are. In North America, we picked up some share where the margins are much more attractive than the export markets. Obviously, at the moment, the export markets are also very attractive. We picked up some volumes in some attractive spots around the world where we saw opportunity to capture that value given the disruptions in the marketplace. So the volumes are very good, but it's more about mix quality and the tightness and the spreads that stacked on top of that.

We also into the cavern on ethylene at very attractive prices. So it's a store of ethylene that we sold off in the marketplace.

The question comes from Josh Spector of UBS. Please go ahead.

I wanted to follow up on Advanced Materials volumes. So I mean, obviously, a solid quarter this quarter with the 5% growth you had I'm wondering, one, can you split that between what you call the base business versus the methanolysis PRT contribution?

And then in your comments on 3Q, it seems like you're talking about volumes flat, but the comp is really easy. So I'm not sure what you're baking in there versus a year ago and why volumes wouldn't be up. I'm obviously missing something. So if you can help me there.

Let me just start clarifying what I said, volume slide is a sequential comment, Josh. It will be substantially higher than last year. So we were just talking about volumes will be similar to Q2 in. So in that context, which is much higher than last year, the volumes. A lot of it is wins we've had. On the renew side, it's important to note that the growth we're seeing is greater than $100 million, which is incredibly strong in the first half, double revenue compared to last year is evenly split roughly between specialty growth and [indiscernible].

So we are seeing continued wins and growth in the specialty side of the house. And we are also seeing the PET wins happening as well, ramping up. And I would say more of the front asks on the specialty side, the back half is more on the PT side as we're ramping up those capacities to serve the market. We've been a bit challenged on some of the production capability and getting it fully lined out, which is part of why we reduced revenue outlook is capacity constrained a little bit of slowness in the market, but still incredibly strong growth relative to last year. So we don't really break out in detail by quarter what is going to be renewed versus the rest of our business.

But what I can tell you is when you look at the full year about half the revenue growth in the Advanced Materials segment is going to be from renew and about half is going to be from specialty growth. So that also says great that circular is kicking in, great that it's delivering additional growth with that growth platform but also the specialty businesses are healthy.

And through innovation, not in market demand, we're creating our own growth and success across the marketplace. One of the great stories in that is actually performance films. So in the first quarter, earnings were quite challenged in the segment level. That was mostly due to films and in particular, performance films. And we took a series of actions that we're very successful. So we launched a better broader market strategy to win share in China that's been incredibly successful as we move from Q1 to Q2. And also, we took out an optimized a bunch of capacity to optimize what we make in North America and ramp up our asset in China, which is a much lower cost asset. So big improvement in cost structure.

So that led to pretty a big part of the improvement in earnings from Q1 to Q2. It also means when you get to 2027, we're going to have an easy comp and probably do $25 million to $30 million better in Q1 next year relative to this year. So good or for next year as well.

Okay. That's helpful. And I apologize on the sequential vers year-on-year here. I guess you made an interesting comment on the PRT side or some of the RPET wins you're trying to go for. You talked about it being more capacity and a ramp-up I guess in your comments, in your prepared remarks when you updated on the circular growth, you seem to talk more about consumer demand. I guess, which is the bigger factor to your adjustment of your growth? Is it the consumer demand? Or was it your ability to supply?

I'd say it's a bit half and half. So there were some limitations on production on the RPS side, we're not changing the outlook that much. We've just brought the revenue outlook to be a bit below the range we gave you earlier. And then I would just say it's a little bit of slowness everywhere about the rate at which customers are ramping up on specialty and some of the RPD purchases. I mean, the economy is incredibly weak right now. We're not seeing anyone back away from their commitments to recycle content and seeing the value of it.

But all of our brands, as you guys know, from earnings calls are struggling out there, whether it's on the consumer durable side or on the consumer packaging side, economy is tough. People are very focused on managing costs. So they're being extremely disciplined on what premiums they pay. And I find incredibly encouraging that we've held on to our specialty customers who are paying premiums in this marketplace and that we're still growing it I feel very good that we see a ramp-up in ARPD in this kind of market context, which says people will see the value in the need of it because we have a superior product and quality and clarity.

And that's clearly important for durables always, but also important for these consumer packaged goods companies. So we're very encouraged about the confirmation of our value proposition, and we're all just stuck in a weak economy waiting to find ways to keep growing.

The next question comes from David Begleiter of Deutsche Bank.

Mark, just on Additives & Functional Products, very resilient margins in the face of really challenging end markets. Can you talk to what's underpinning those resilient margins and maybe view in the back half of the year for those margins?

Sure. Yes. So Additive Functional Products has been a phenomenal success story for us. And it's a tribute to a phenomenal team, a great set of products and markets. and just great execution every day. So the benefit that as a functional products versus a the stable markets that we serve or 2/3 of our revenue. So with stability, it becomes much calmer behavior by everyone involved. And so in that sense, whether it's in pharma, whether it's in water treatment, ag, personal care, these series of very stable markets aviation. We've got great industry structures. We've got very strong competitive positions and a lot of cost pass-through contracts associated with some of these businesses that give you a lot of margin stability.

So the CPTs will fluctuate quarter-to-quarter on headwinds and tailwinds to some degree. But on an annual basis, it provides a lot of margin stability. So you've got these businesses that have solid moderate growth. You've got great industry structures in the products we have in this business and their stability adding to that margin stability on top of it. And where we don't have CPTs, seems to have done very good work in raising prices consistent with rosin and materials as well in this environment as we went into sort of Q2 and holding those margins in the back half of the year. So it's just been a great solid business.

Very good. And just on Kingsport methodalysis, do you have an early view on revenue growth in 2027 from that plant and product line.

Well, I'm not going to give you a specific number, Josh, but I mean -- David, sorry, the -- but what I would say is we're building up [indiscernible] through the year. So Q4 will be the strongest revenue quarter. When you think about that $100 million this year, of course, that was an annualized into next year. And then we will build on it. And I would expect the same kind of build next year on the specialty side of the revenue. as we continue to win in this environment. And the PT side, I think, is well positioned for strong growth next year, but we need to see how that all plays out. as we go through the back half of the year. But I would expect it's another strong performance next year on top of this year.

The next question comes from Frank Mitch of Varium Research LLC. Please go ahead.

Thank you. Mark, one of the more impressive things about the quarter is what you've done on price costs in the specialties businesses. I mean, typically, we think of those as being priced for value and use and so forth. But obviously, this is a somewhat unusual environment. Can you talk about what's been going on, on the cost side in the specialties business and how you're able to get price ahead of that?

Well, Frank, thanks for the question. And I think one of the strengths Eastman's had for a very long time is our discipline around price cost management. I think we've done an excellent job through the years, whether it was catching up to raw material increases in '21 or maintaining great price discipline when markets are softening and holding on to value in those contexts.

I'm real proud of our teams and how they did it. And as always, once the were started, they moved immediately into action into taking the price increases necessary across the markets in both of the specialty businesses. What I'd say is that we succeeded to getting the prices in. We weren't greedy. We just put in price increases to cover our raw material and energy and distribution costs because we want to be fair and reasonable to our customers. And we're not going to sort of eat those costs, but we're also not going to try and take advantage of a lot of other companies, I think, get aggressive in these times. We had some feedback where we are being disciplined in how we did.

That gives us a lot more credibility and durability in those price increases not just in getting an increase, but into -- holding on to them. the business is centered around driving value through volume growth and mix uplift in our innovation. And but we do a very good job of keeping our variable market per pretty consistent and attractive. In fact, through all this chaos, that's been relatively stable since 2019 to now.

And it's a testament just to the quality of products and the innovation that we have in the marketplace. You can only do that if the value of your products are meaningful to your customers. And so when we can increase prices like this, it's a good proof point around -- these are specialty products that have value. The customers will pay a higher price because they need them because of what we do in their products and how we create value for them. And so I think that's a great way to test your portfolio, and I think we are passing that test really well in Advanced Materials and AFP.

So -- so certainly, loss have been fairly volatile -- and every time there's a piece proclamation, you tend to see it go down and then it reverses the other way. Can you talk about the sustainability of that price/cost into the third quarter or probably said another way, how do you compare your July margins with the second quarter average, if you could offer us that.

Sure. And Frank, you're asking about the specialties just to clarify.

Yes. That's exactly the specialty yes.

Chemical [indiscernible] is a very different conversation. So on the specialties, our intention is to keep the prices in place. The raw material costs and energy costs as well as distribution costs are still flowing through. And so we would maintain good price discipline in these businesses. As we -- as those higher costs flow through. So what will happen is prices will hold. The raw material costs are probably a little bit less than we were in March at this point. Obviously, if you go look at things like paraxylene but we still have a lot of flow through. But on a year -- I mean, on a first half, second half basis, the price discipline we have in July and expect to continue as we go forward. will give us a tailwind on price/cost in the second half relative to the first half.

The next question is from Jeff Zekauskas of JPMorgan.

Mark, over time, Eastman has really been focused on investing in methanolysis in Kingsport, [indiscernible] in Europe. And those plans have altered in part because of what customers want, what the government wants, what capital costs are like. And so when you look at the trajectory of your capital expenditures, your R&D, your investments, I would imagine that those have really shifted because of delays or obstacles that have been put in place that have inhibited investment in methanol is this over a longer period of time. So maybe if you could sort of briefly talk about the redirection of Eastman over a longer period of time.

Yes. So I actually wouldn't support your characterization. So the way we look at it is, I think, considerably different. Methanolysis I think, has been a great platform and a great investment. We see a lot of long-term potential for the platform. Without a doubt, when you start a platform like this in a very strong economy, like we had in '21 and the beginning of '22, and then you get to a much weaker economy, it's easy to sort of look back and sort of review did we make the right set of choices.

At the same time, you can't just sit here and look at the world you live in at this moment, you also have to look at the future. And I think we believe that at some point, the economy will be healthy again. And in that context, where there's some health in the economy, and everyone is not just focused on cost reduction, we'll see pretty significant acceleration in demand for new products when it comes to the revenue side of this question, both recovery in the consumer durable market will naturally give a huge lift to renew as well as -- like I said earlier, we're not seeing anyone back off on the value of recycled content. I mean, the plastic waste is an issue in the world is not going away.

And it's not bipartisan issue for the Democrats versus Republicans, everyone hates plastic waste. No one likes it. No one wants it in the environment, people are worried about its impact on their health. This issue is not at all going away and every brand knows it. They're just trying to figure out how they manage taking responsibility for the polymers that they put in their products relative to cost management here in the short term. So our confidence in revenue here, both on the specialty side and on the RPT side is great even greater on the RPT side because we're proving that we have superior quality and clarity to mechanical every day in a pretty significant way that's being recognized in the marketplace.

So actually, my point of view about the value proposition on the RPA side is much stronger today than it was a year ago. And what we're seeing in our relative value recognition in the marketplace. I mean think about how much RPT increases are going on this year with our key customers in this market context. So Revenue-wise, we feel good. It's frustrating to be in this current economy for everything in the chemical industry. But it doesn't question the value proposition of why we got into this. And then when it comes to the capital side of the equation, first of all, on the technical side of the equation, that the plant is running phenomenally well. So we've got a technology running that no one else on the planet can do as well as we can.

I mean with our yields above 90%, with the operations running reliably now with our ability to see that we can debottleneck the plant by 30% to get more volume out of this plant and improve ROIC says that we have an operational and technical advantage to anyone in this world. And then on the capital efficient side, without a doubt, capital costs have gone up a lot. That's what we were sort of facing as we looked at the project in Texas. And we -- with a loss of DOE grant and us having to rethink how to approach the marketplace, we start developing a much more capital-efficient option about how to go forward and we're getting close to talking to all of you about how that looks like in specifics, but we're not quite there yet.

But we feel like we have a great path forward on a much more capital-efficient option in doing this. And because we can develop that Kingsport, it allows us to push out the need to spend that next chunk of capital until '28 so that we have time for the market to recover and align with that investment.

And for Willie, receivables, I think, for the first 6 months have been a use of cash of $370 million. Why is there a ballooning of receivables? What might be the penalty this year? And how much impact can you get back next year?

Thanks, Jeff, for the question. Yes, I think as Mark has already highlighted, our commercial teams have done trends job on both managing price and price/cost as well as volume. Our revenue is expected to be $500 million higher due to the pricing actions that we're taking this year. And ultimately, we're focused on delivering earnings and solid cash and strong cash flows in any environment. So as we look at it and as we highlighted when we talked in Q1, we expected the pathways to be narrowing.

Actually, on an overall working capital, we're actually consumed a little less here in the first half than we did last year. You've heard us being disciplined on inventory, as Mark also highlighted. But as we look at that and having a stronger back half, we actually will not get as much working capital back this year as we did last year. So that's where we're seeing around roughly -- call it, roughly $75 million reduction on a year-over-year basis in our, I'll call it, multiple scenarios that we're looking at. so going from 170 to approaching the 900. And we feel confident that we can do that.

The next question comes from Vincent Andrews of Morgan Stanley.

Mark, some moving parts in both in fibers in both tow and textiles for the back half of the year. I wonder if you could just unpack those a little bit and help us understand how much of that we need to follow through into 2027?

Sure. So when it comes to the back half of the year for fibers, there's -- as we've talked about, I think, extensively on the tow side, we have these annual contracts with customers, but they have the right to vary what they buy quarter-to-quarter. So we -- they're not that good at ratability. So we had in the front half, customers on the tow side, not buying that much. But now to hit their minimums, they're going to step up their purchases in the back half of the year to hit the what we consider sort of the low end of the volume bands that they have in their annual contracts.

So I mean, that's what's happening on that front. Then of course, is a little bit of risk around Middle East. That was an area that we -- our customers thought they were going to grow last year didn't have that much success as we explained, they thought they're going to grow this year, not having as much success with all the Mideast disruption, highly determined to keep growing and do what it takes. So there's a little variability on that front. But I would say the to volumes on an annual basis will turn out by the time we're done to be sort of relatively stable to last year. But that is a meaningful increase in total purchase in the back half of the year, which we'll see a benefit of.

On the textile side, it's a bit of the same thing. We thought that this year would be recovering from a very difficult year last year, we told you that we had a $30 million headwind last year relative to '24 with the drop in the textile business, which was a combination of a weak market, maybe even weaker by tariffs impacting demand and our price point going into China. And so that created a lot of sort of headwind for us in -- we had a bunch of actions we were taking to improve it this year, but they have not so far been successful because the market just continues to be weak. So the first half was pretty challenging.

The volumes were relatively low and a very tough comp to last year because volumes in tech sales were high in the first half of last year and then really came off in the back half of last year with the tariffs. So tough comp to last year. But we are seeing some success, and we believe we'll build volume growth back in the back half of the year, which really would just get us to be even with last year. So we were thinking we gone a $15 million tailwind this year, and it turns out to be pretty much nothing relative to last year. But it is good momentum on textiles in next year. that the wins that we're starting to sort of build on in the back half of this year. So that to play out from this year on sort of what's going on there.

Prices are not changing. They're pretty much consistent with what we thought from the beginning of the year. Energy costs were a headwind. So there's that spread compression there. And utilizations are a headwind as we manage our inventory and capacity relative to this demand environment this year. So those are all sort of factored into sort of our point of view right now. When you get to next year, it's important to remember that a lot of this earnings decline from '24 to now is not actually tow.

It's textiles, it's -- utilization hits about slow demand across the corporate stream that sort of flows into fibers on the cellulose, higher energy costs. But what we do think is plausible as we look at next year is there's a set of actions that we can take that are in our control to try and sort of stabilize business. the demand drop isn't market related. It's -- the market is declining 1% this year in the range of a typical 1% to 2%. The drops in demand have been destocking have been some share shifts that were principally in -- and as we look at where we are right now, we have, by far, the lowest cost position in this industry in the tow business, in the cellulosic business. And it's a very integrated advantaged cost structure at our Kingsport site.

And something about this stream is that it needs to run really full to have a positive effect on economics and overall site stability. So we do see us recovering some of our market share that was sort of lost in balancing the stream in that sense. And we have all these growth programs that start kicking in. So it's recovering textiles I just mentioned. There's things like [indiscernible] that are moving slowly, but picking up momentum. There will be some additional volume for next year. There are some other programs we're working on that we can't really talk about right now that could be quite material to the stream.

So there's a lot of -- a lot going on right now on actions that we're taking to make sure that the business is as stable as possible next year relative to this year.

If I could just ask you, I think in AFP, maybe a little more so than the other segments, but there's been some share gains that have come on account of maybe some competitor dislocation, given the Middle East situation. What's your assumption in terms of the durability of those gains, whether it's for the back half of the year or into next?

I just want to clarify your question. Were you asking a volume question or a spread question?

Volume question in terms of market share, you had some volume share gains I think some competitors maybe didn't have the ability to produce to the same extent. And so you've picked up a little bit of share that way. I guess, is that correct? And then if so, what's your assumption on the durability of that?

Sure. So in Chemical immediate, I think our assumption where we've had some share gains is that it will be relatively durable volume gains in the back half of the year. I mean not gains, but we'll hold on to it in the back half of the year. I mean there may be a few places where in our export markets, we see some change of positions and where we're selling our material. But our volumes overall will hold up. It's just a question of spread.

So obviously, there's a question around just how the back half of the year may moderate in spreads in chemical intermediates relative to first half with all the dynamics going on. And it's anyone's guess at this point, it's treaty a box of chocolates out there where every day, it's a different story, and we can see things softened are we, frankly, could see things stay tight depending on what happens, and especially in the next couple of weeks. When it comes to the specialty side of the question, we expect to hold our market shares. We didn't see any market share losses in the first half of the year as we increase prices.

We're not expecting any market share losses in the back half of the year with how we're managing our positions in our markets. And that's being disciplined in holding our price relatively well in that context. The places where we picked up share on the specialty side is pretty modest in when we look at where we thought we could get a lot of share from companies being disrupted, that hasn't played out that much yet. Companies are really holding out and using whatever inventory they have. to try and hope for lower prices in the future, both on the commodity and the specialty side.

That's a big part of why markets on the commodity side weakens everyone's leaning on inventory. China is dumping inventory that they've built up over the last 2 years. Customers are holding -- using inventory to hold out for better market conditions. At some point, all that inventory is going to run out. And if it hasn't been replaced by a lot of stability in the world in the Midle East, in particular, things could get pretty tight here in the back half of the year. So there's a wide spectrum of how this may play out. But right now, I'd say the teams are doing a phenomenal job of holding share, nominal job, a great job of holding price. But we're not in the specialty side picking up a lot of market share yet.

The next question is from Abigail Eberts of Wells Fargo.

Just a quick question on your cost reduction targets of $125 million to $150 million. Can you just remind us how we should be thinking about that weighted across your segments?

Thanks for the question, Abigail. And the Eastman team has done a tremendous job delivering on $125 to $150 million net of inflation. I would also say I'm confident with what we've delivered here in the first half and actions implemented that we will deliver the second half and also shift our focus into 2027 and focused on at a minimum, offsetting the inflation. As we think about the split across the businesses, I would highlight Advanced Materials as well as chemical intermediates as being the two largest benefactors and to a lesser extent, fibers and Additives & Functional Products.

Next question comes from John Roberts of Mizuho.

Lots of new product discussion in the prepared remarks. Could you back it up to an overall company level, where are you on your innovation index, new products as a percent of sales, however you want to define it?

So first of all, John, good to talk to you. we're incredibly proud of our innovation growth model. And at times like this, when markets are weak, I think we've proven we can create growth above underlying markets across the portfolio. and in particular, in the Advanced Materials segment where we've made the most investments. So overall, we see, as you've noted, great growth in Triton, we're picking up new growth at Dragon because Europe has put a ban on BPA that's driving more conversion into our product, which is great.

We launched a new cosmetic product that's recycled code 1, and that's a big deal for the cosmetic industry. So we're seeing great growth there, including renewed content being in it. We've got the HUD growth, you've got this new performance film strategy we just talked about in China that's given us significant broader addressable market growth that's been incredibly helpful.

So there's a lot of things going on there, and ASP not as significant, but still meaningful when it's ultra high-purity solvents for semiconductors, which is growing very high rates right now with the market at good margins. You've got aviation continue to roll, and we've got some new products coming out soon that are a big deal for the industry. So [indiscernible] biodegradable polymer coatings on paper for cups and packaging and things like that.

So there's a lot going on. We don't really provide a revenue percent of innovation as a public statistic. But I would -- it's roughly in the sort of mid-teens to 20% range when we look at it from -- in the specialty world. So we feel very good about the innovation curve that we're on and we have a lot of metrics in which we measure it. It's just we don't make those all public.

Okay. And then the Kingsport coal gasifier has been a pretty valuable asset here in this high oil price environment. when is the next major plan maintenance downtime for that unit?

We just did it. So we had a massive shutdown of that stream in Q2, which was a big headwind from Q1 to Q2 for fibers as well as chemical intermediates in that sequential results. And what I'd say is it was a very large cost. So it will not repeat next year. So there will be a tailwind next year relative to this year with that significant shutdown, helping the whole cellular stream.

Next question is from Matthew DeYoe of Bank of America.

Good morning, everyone. I have two, but I'll start with like -- can you just bridge us a bit on some of this shift from 2Q to 3Q with all these outages and then like strategic inventory management decisions, I guess, I'll call it that. In general, it seems like you're able to destock your raw mats. And then conceptually, it seems like you're restocking at levels in 3Q that doesn't net penalize you versus the gains from better utilization rates. Is that right? And like how much outage headwind was there ultimately in 2Q?

So Matt, thanks for the question. I think what Mark alighted in the beginning, Advanced Materials is Obviously, we were making trade-offs with the timing of plants coming online, the Triton facility that we highlighted as well as the escalation of the impacts in the Middle East. So we ultimately were able to bring down some finished goods inventory within our Advanced Materials business. That created a utilization headwind as we did that.

And we did that to ultimately secure key feedstocks to enable us to deliver with confidence into the second half. Mark just highlighted that we had major turnarounds in Q2. As we think about from Q1 to Q2, that was around $40 million to $45 million headwind sequentially. Our original guidance was we expect it to benefit about $30 million sequentially. But with the Advanced Materials pulling some turnarounds into Three, we now expect that to be, I'll call it, closer to the $10 million to $20 million for the overall company.

So those are the big shifts as you think about shutdowns and turnarounds I would also say on a year-over-year basis, we will have substantial utilization benefits in the second half compared to last year as we had inventory corrections enhanced materials and across the company in the back half of last year. And you've heard Mark today talk about the strong demand outlook that we see here and we'll continue to update you on that. But I think the big drivers of the turnaround that I just described sequentially.

Yes. Just when you went to locate it from a segment point of view, there's two different things that Will described. there was the finished goods impact on Advanced Materials. The cellulosic shutdown that we just talked about that was very significant and actually a couple of other smaller shutdowns, but the big impact there was in Fibers and in Chemical immediate. So it shows up in different places, depending on which topic.

That's helpful. And I guess, can you talk a little bit about volumes through the quarter? And really even just like if you want to bridge march into this, right? There's a lot of discussions around panic buying, downstream, not how that might have ebbed and flowed into June. And obviously, we when we talk to investors, there's just concerns around customer destock in 2H, given what's happened more recently over the last few years. So how do you get confidence around this 2H volume profile and were things trending better as you exited.

So great question. And certainly, volumes trended well through the quarter in Q2. So almost like a normal way, which is it's sort of built from April through June. And in that sense, things actually felt quite normal despite all the cash that surrounded us in what was going on. It is a very fair question and one that we constantly are debating internally around demand, especially after last year, where you saw that build to get ahead of tariffs and then the decline in volumes in the back half.

So far, we're not seeing that same dynamic. So July orders are holding up well and on track to what we would expect and consistent with what you would expect relative to Q2. So that's a good sign. When it comes to a lot of the sort of buying in CI, it's a more dynamic question. So with whatever is going on in straight. But when it comes to the specialties, which I think is really where your question in the center. We're not seeing any end market demand declines or customers talking to us about that as a main concern.

The customers had -- are balancing two things at the same time, which I think is different than last year. Right now, they're very -- because of what happened last year, they're very disciplined through February of this year in destocking inventory and getting inventories to be really low, right? So when you got to March, obviously, there was concerns about access to raw materials, and so you saw some pickup in demand. But at the same time, worries and concerns around what could happen to the end market demand in the back half of the year, I think, has kept a lot of discipline in everyone's mind about just how much inventory they want to build.

And you can debate whether they're building inventory right now or using up inventory right now hoping for lower prices. So there's a lot of mixture going on that is very different than last year so far, where they want to have inventory, but they also want to hold out for lower prices, maybe if this rate normalizes and everything gets more stable. So you've got a lot of opposing forces where we don't think that people are sitting on significant inventories right now. in this dynamic. And if they were going to really destock, it could have started, frankly, in June when people were really optimistic in May about the straight opening. And we didn't see that happen in June.

So I think things are better positioned to be more stable. The wildcard here, of course, is if things really get out of control of the Middle East, oil prices go up dramatically, you can have a global impact on consumer demand. That's not in our forecast, that sort of extreme scenario.

The next question comes from Kevin McCarthy of VRP.

Mark, a question or two on your circular platform. I think you indicated in the prepared remarks that you expect sales to grow by $100 million or more this year. Can you comment on what a good contribution margin would be against that sales growth?

We're not going to talk about contribution margins on this business. What I can tell you is the revenue growth is attractive. The margins are certainly above company average. When you think about this business, so it's a value and a mix upgrade to the company and to AM when you think about variable margins. When I think about the business and its long-term EBITDA potential, we still very much feel we're on track for this first asset to get to $200 million. We're not seeing any reasons why that's not going to happen. It's going to take longer than we'd like with the state of the current economy. But the value proposition, the contribution margins, we see is still very attractive.

Okay. Maybe related to that, my general impression is that the engineering team has done a great job. And if anything, you've proven out the capacity to be higher than originally expected. Obviously, the demand has trended as previously discussed. But is there a way to give us a sense of what the capacity utilization is? And I'm thinking back to your deal with Pepsi as well. How much headroom do you have to kind of load that asset moving forward?

So I think with what we've shared with you last year is we were around 50% utilization on the asset, and we've stepped that utilization up with improvement in demand this year. We've also run tests to run the plant as hard as possible to understand what we think the effective capacity of the plant is and feeling very confident we can get up to 100% in running the plant to support demand growth as it comes. And then, of course, as we said, there are sort of targeted incremental capital projects to do in the plant to sort of debottleneck it up to 130% of design capacity or 130,000 tons.

So in that sense, I think we feel really good about where we're at and continue to gain more insights on how to optimize the performance of the plant and its cost structure. When it comes to polymer, that's where the constraint is on the PET side because this plant was originally built for specialties. And as the market sort of weakened on the growth in specialties. We obviously flexed our polymer lines, which is a great advantage we have is this flexibility to flex them from Triton to copolyester to PET, who took a trite line in flexed it to PET because we knew a new big line of Triton was about to come on to serve the market that we are building.

And so that was a great way to balance it out. But there's still limits to what that PET capacity is. And so we're now looking at some other polymer lines that we can optimize and to continue making our pet that have some additional capacity in this current market conditions. And so that work is going on right now to enable us to keep growing the PET in a significant way next year. And then there's other things we're doing about our sort of capital efficient model, we'll talk about in future calls about how that can support more polymer growth.

The last question today is from Laurence Alexander of Jefferies.

Can you touch on or give some detail on how you're thinking now about your M&A pipeline? How active is it? What are you seeing in terms of valuations? Are there strategic directions that you'd be open to considering -- just what's your positioning on that?

Well, first, what I'd say is, I think Eastman has had a great disciplined history when it comes to portfolio management. So there are times where we divested a bunch of underperforming businesses, if you go far back in time, then there is a period of time where we got out of these underperforming businesses and did large acquisitions like solution Taminco and bolt-ons that have been incredibly successful, and we did the in times when valuations were actually rational.

So those big acquisitions we paid roughly 9x EBITDA for and have been huge value contributors to the company. And then we've been in a phase of optimizing and growing organic growth. through innovation, which I think has been successful and proven itself in good times and bad. And we've also shown we're willing to continue to be very disciplined on divestments, right? So when we had some other businesses underperforming like hires in adhesives, we divested them as well as optimize our [indiscernible] footprint.

So great discipline there and divesting things when it made sense, 10x EBITDA. So I think we've got a good track record in M&A of being very successful with it, being very disciplined when things are not working well. We definitely believe our company is at sort of minimum scale to be effective in our innovation and our balance sheet to support all the growth potential the company has. So as we look forward, we'll always be disciplined about businesses that are not performing and dealing with it. And we're always looking at M&A and considering it.

Clearly, that M&A market has picked up activity this year, as you would expect in this market condition. Valuations have improved to being more rational than they have been for quite some time. So we're out there considering all of our options, like I think every company in the industry is doing today, as I think we can all acknowledge that we're probably going to see a lot of change over the next several years in this industry with all the dynamics that we face. But I'm incredibly confident that we'll remain disciplined and make good choices on both sides of the fence as those opportunities come up, but I'm not going to get into details on it.

Okay. Thanks again, everyone, for joining us. We appreciate you taking time to talk about Eastman this morning. Please have a great day.

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

[Audio Gap]

U.S. Chemical Research team. Welcome to our 17th Annual Basic Materials Conference. With us today is Mark Costa, Board Chair and CEO of Eastman Chemical. I'm going to lead off with some questions for Mark, and we'll go from there. So Mark, welcome to our conference.

Great to be here. Look forward to the conversation.

Excellent. Maybe you can walk us around the world from a demand perspective by region, by business, by end market, how are things progressing through the second quarter?

So I'll start with end markets first, and then I'll come back to regions. On an end market basis, if you look at sort of roughly half of our revenue is exposed to what we call consumer discretionary. So that's autos, which is the largest end market and then building construction and consumer durables and consumer durable parts, which includes a lot of appliances, TVs, things like that, are obviously connected to the state of the housing market because that's a big trigger for purchases of those kind of products.

And in that world, what I'd say is there isn't anything dramatic in its change relative to last year. So the building construction market, we expect to be similar to last year. There's obviously the hope for interest rates dropping and stimulating demand. That's obviously not happening. The auto market, I think, is a bit softer this year, and that's been the one change, I think, for the whole industry from what people thought in January to where we sit today, where that global market will be off low single digits. It's not a significant change, but it is going to be a bit weaker this year from what we can see so far.

And I'd say on consumer durables, it's a little bit better than last year, but similar, right? So you could see demand getting a bit better sequentially out of Q4 into Q1. We're seeing seasonal demand that you would expect on those kind of products being purchased to be made into things that show up for Christmas, et cetera, things like that. So put it all together, it's sort of stable when you look at it.

On the -- what we call the more stable markets, so that's personal care, consumer packaged goods, medical, ag, all those kind of more stable markets, I'd say we're seeing modest sort of low single-digit kind of growth in the market for this year versus last year. We're not seeing any headwinds. We're certainly not seeing any snapback, and that's all those markets is relatively stable. So that is sort of the way it's playing out. Ag, I'd say, is so far looking like a normal year, lots of conversation about what ag will look like next year given the straight disruption. But this year, I think it's in the normal category.

Geographically, I think it's what you all know. I mean Europe and China are certainly worse off economically than here. The economy here is obviously not strong. And even though affordability is a big issue, I think what's defied everyone's logic, including mine, is that demand has held up relatively well compared to like consumer confidence. And the biggest way to explain that, I think it's just employment is still really good, right? So while people are worried about what's going to afford, they still the job. And so they're still buying things. They're certainly stretched, and we're worried about that as a back half kind of question around where consumer demand goes.

But right now, we're seeing demand hold up well in this quarter across the portfolio. We're not seeing any signs yet of demand destruction associated with what's going on with the Gulf and the impact it's having on prices. But it takes a while for those impacts to actually show up in the final price of a consumer product. So we're just going to have to see how this plays out.

So relative to your guidance of $1.70 to $1.90 for the second quarter, are we tracking a lot of those expectations?

Yes, we feel good about where we are on our guidance. So on the Specialty side, Advanced Materials, we're seeing the sort of sequential improvement in demand that we expected. If anything, it's a little bit stronger than we expected on the consumer durable side, a little softer on the auto side for the comments I just made. But overall, I would say demand is on track and the quality of the demand is good. So the mix value of what we're selling are some of the higher-margin products. So that's good stability there on the price cost side of it and the innovation is coming through as we expected. So the ramp-up of the recycled PET ramp-up of some of the consumer durables using our new content is on track. So we still feel good about that 4% to 5% revenue growth this year versus last year for the Advanced Materials segment driven by the circular economy.

And it's not just that, right? You've got the heads-up display interlayers that are very high value that are growing faster than the underlying auto market. You've got some good solid growth in the performance films business. But I'd say that's more in line with the market than growing faster than it because aftermarket products are not exactly a priority when people can't afford a car, they're not going to put film on it, right? So that's a bit more challenged. But overall, I think it's in good shape on the price/cost side. You've got the benefits of price increases we put in place. We've got them all in place as we said we would do. I'm feeling confident about that. Because of the speculation that maybe the trade will open and oil prices come off, raw material headwind is probably not quite as strong as we expected and things like PX, which have moderated a bit. So helpful.

And then when you look at that volume increase, and you put it together with operations running hard to keep up with demand relative to lower -- relatively low utilization we had in the first quarter in Advanced Materials as we are still managing inventory and uncertain about demand. So we got a pretty helpful utilization tailwind going from Q1 to Q2 in Advanced Materials. So that segment is on track. [indiscernible] which is rolling along, demand is holding up solid. They have a lot of cost pass-through contracts. 2/3 of their demand is in stable markets, so it's stable. And then the cost pass-through contracts are working as it should to keep up with raw materials, energy distribution costs. So that business is on track for a good quarter.

Chemical Intermediates is obviously feeling fine. I'm sure we'll come back to that in a more detailed question. So I'll just keep it short here. It's doing fine. And its earnings are probably going to be a bit better than $50 million, which is what we originally sort of estimated with the tightness in the market. And then I would say fibers is going to be potentially a little bit light. It's -- as we told you, Mid East demand, how to get [indiscernible] in and more importantly, cigarettes out is the bigger issue that they're solving, but it just takes time to sort of work our way through it, right? That's about 10% of the fibers demand revenue is the Mid East in tow. And so that was a bit of the challenge.

But overall, the customers are committed to their contracts on a full year basis. We're not seeing any divergence there. We'll come back to that, I'm sure, in another question and what that means for the back half.

Would you say the bias is to the upper half of the guidance range?

I would say where I sit today, you could see potentially we're in that zone, but June is an extremely important month. And you just don't know on how demand will play out in June. The order books in invest Materials are solid through July right now, which is good and not typical, right? But at some point, if the straight opens, people are going to say, oh, maybe if I just hold off buying, the price will get cheaper, right? There's going to be a month like that at some point. I don't know which month that's going to be. Clearly, none of us do, but I don't think it's going to be June at this point. So I feel good about sort of how volume should be trending. But it's war on multiple continents. I mean, there's a lot going on.

And just on that prebuy question, you -- there has been some prebuying across the portfolio. Is that fair?

I don't think there's been much prebuying in Chemical Intermediates, just to start off the easy thing. We can sell whatever we can make because other people can't make it, right? So everyone focuses on oil, but naphtha and methanol and things like that is what you should really be focusing on for this industry at the moment. And it's short, right? A lot -- 15%, 20% of the naphtha for the world comes out of the Gulf, it's not coming out. There isn't a bunch of refineries sitting around empty outside of the Gulf to be ready for the scenario. So when you're dumping all the strategic reserves into the world, you're depressing oil prices because there's no refineries to use it, right?

And so that's the part that I think people are missing is you got to do the supply-demand balance at every step in the chain. And you've got an artificially depressed price in oil, I think, and it's partly because demand is coming off on fuel. But it's also partly because there's no refineries to turn in India. And so that naphtha situation is going to drag on for a long time. We were just talking about in the last meeting. I met with the CEO of one of the biggest chemical tanker companies. And they're like, look, there's a clear priority of what's coming out of the Gulf. And it starts with A gas and urea and sulfur because we need transportation and people not starve next year, right? So that gets prioritized, then oil, then chemicals.

So we are not in the priority rank of getting things out of the Gulf. So when you open this thing, if they have -- I don't understand how they do this, but apparently, they can prioritize what goes through it, I'm told. And if that's true, it's going to take a while to reestablish naphtha and other refined chemical products for very good reasons for the state of civilization, right? So I think things are going to stay tight. Certainly, people who are far more qualified like the Dows and Lyondell can give you a better detailed explanation of it. But I've had conversations with those guys and they're of this view. Without doubt, China is adding some capacity, but we'll have to see how it plays out.

There may be some prebuying in AM. Is that fair or at least some...

On the AM side, there could be a little bit of prebuying, and there could be a little bit of prebuying in AFP, certainly not. We have the opposite going on in fibers. You have to keep in mind that the back half of last year, which was brutal, as you all know, involved a huge amount of destocking. The good news is we saw that destocking come to an end because we saw a very substantial recovery, right? Sequentially, our volumes in AM and AFP came back 10%, right, from Q4 to Q1, which was encouraging. But the underlying demand hasn't improved a lot. January and February were relatively weak. So no one was ramping up plants, including us, right, for some expectation of growth this year. People are being cautious.

So suddenly, you get to the war where now people can't make things as easily as they used to. People may want to buy forward, but they can't because it's not there to buy. So I think that there's just constraints on what's out there to be prebought because we certainly had stock outs in places as we got to the end of March, constraining what we could actually allow people to build, and we're still running hard just to keep up with demand right now.

So I think that, that inventory situation is quite a bit different than obviously, when we were in '22 or even in '25. Because in '25, everyone thought the economy is going to get better, is present. This is all good. People like us, we were building inventory for growth for the year in the first quarter. That did not happen this year.

Back to the conflict, how long do you think it will take for supply chains to normalize once the conflict ends and the straight reopens?

There's 2 different camps on that out there, and I'm guessing the answer is in the middle. So one camp is China is going to make everything and ramp up their coal assets and the other, but 70% is naphtha, 15% to 20% is coal. I can't ramp up the coal that much. And they certainly have plenty of reserves. But again, they didn't have a bunch of idle refinery sitting around. They're all running relatively hard. So they don't have a lot of swing up in what they can do, right, to solve the gap in the world. So I think I'm in the camp that things are going to be constrained. It's going to take a while to reestablish the supply chain, just like shipping explanation. You got to fix the things that are damaged in the Mid East. You've got to reestablish -- just starting these plants are not like light switches, right? It takes a while to start them up.

And there's some we know got shut down hard, which never come back well. And so there's all of that, that's going to sort of drive this out at least 6 to 9 months and really getting back to some stability. I don't think we're ever going back to where we were. in the back end of last year or the beginning of this year, whether it's oil or naphtha or everything else, I just think it's going to be structurally short for quite a long time. But it's not going to stay as extreme as it is here, right? So our expectation is there's some moderation of spreads in the back half of the year, and we'll see how it plays out.

And just the ACC, the American Chemistry Council annual meeting. What's the mood -- what was the mood in Colorado? And maybe what's the divergence of opinions if you mentioned them a little bit on the reopening?

What I just said is there's -- things will remain tight versus it's going to loosen up faster than people think. And normally, at ACC, by the way, you have all these meetings like this, right, back-to-back meetings. And by the time you get to the end of yesterday, everyone has the exact same point of view about the world. And that is not the case right now. People have very divergent views about how this is all going to play out. And as I said a moment ago, I think the answer will typically end up being somewhere in the middle of the extremes.

But I would say uniformly, the opinion is what I said, demand is holding up. We're not seeing any signs of demand destruction. I think that's sort of a consistent point of view out there. Everyone is worried about inflation impact on consumer demand in the back half of the year is only rational. But the consumer continues to fly that concern every year and holding -- to be clear, it's not like markets are good. Let's just not overstate, right? End market demand is bad, but it hasn't gotten worse. But we're -- housing is 20% lower than 2019, right? Same in Europe, 20% lower. China total disaster, there's nothing good about that. It's just not getting worse.

But there's a huge amount of pent-up demand when you think about just how many housing transactions have not happened now for 4 years, right? The age of a car is getting 14 to 15 years old on average, right? That's a lot of really old cars that are just going to start hitting into life. Appliances, right? They were massively bought in 2020 and '21. Now they last 5, 7 years, and then you got to replace them, right? So you're getting to replacement cycles at a minimum, let alone maybe some demand recovery. So the area under that curve is significant. It needs to be unlocked, which is, in my opinion, not probably going to get unlocked this year, right, unless interest rates come down, you're not going to sort of unlock the housing consumer durable side of things.

So I'd say demand-wise, everyone is nervous about the future, but not seeing it yet in their orders. People aren't seeing a lot of pull forward consistent with the comments I made earlier. So there's maybe a little bit of that going on, but not significant for the reasons I've already mentioned. And the big question about China and what they're going to do, I think, is they're just going to keep doing what they've been doing, right, which is add capacity and take global market share on the commodity side of the world, where it's just about price and subsidies they have to go do it.

On the specialty side, we still don't have a lot of direct Chinese competition yet. I mean we always assume we're going to have it. That's why we have an innovation-driven company to innovate and stay ahead of that challenge. Circular economy should be a regional business. And so that's another way to sort of disconnect from Asia if we're going to have actual circular economy. So we're always looking for all the moats that we can build around that threat. And so far, everything is holding up reasonably well.

And longer term, you're thinking and the group is thinking about benefits to U.S. suppliers, your heavy U.S. asset base. Is there a premium on U.S. supply, security of supply? Is there less dependence on virgin Gulf supply or the long-term benefits beyond 6 to 12 months of this conflict to you and your U.S.-based peers?

Yes. Without a doubt, that's true. On the commodity side, we can sell whatever we make, right? So that's clear as markets are shorted from what I said earlier about naphtha and everything else around the planet. On the specialty side, I think for sure, part of the reason orders are holding up as they have is we're viewed as much more secure supply. Most of our competition is not in China, but it is in Asia. It's typically Japanese or Korean competitors who are in the best spot right now on the specialty side of things. And so that's holding up reasonably well. They're under more cost pressure than we are when it comes to pricing.

I think that being a North American asset-based company, 80% of our volume is made in the U.S. 60% of our revenue is outside the U.S. We're highly levered to North America always happen. And now it's a really good thing, right? So our energy costs are advantaged. Our -- obviously, our olefin cost structure with ethane and propane are advantaged. And we're viewed as having a much better position to be secure in our supply and reliable supply to customers. And that's always a good thing.

We will come -- the North American chemical assets will be winners in this long term. The Mid East is, it's going to be hard to recover the straight being safe completely, I think, forever, right, at this stage because the Iranians now know they have a huge leverage point. And while the Chinese are certainly adding massive amounts of capacity and massively subsidizing it and getting discounted oil to run it, one, they're not getting the discounts anymore. And two, all their assets from a cost position point of view are in the third quartile. So you can add it, but they're not cost advantaged in doing it, right? So if they want to subsidize forever, then that's a long-term problem for the industry. But there's also just a limit on how long you can do that.

Segue into Chemical Intermediates, which has been the biggest beneficiary for you guys in this conflict. Where are spreads today versus where they were pre-conflict, expectations for the back half of the year? And longer term, the role of this asset in your portfolio and the company?

So there's 2 elements of what's going on in Chemical Intermediates before you get to the war, right? There is a structural element and there is a cyclical element to what's going on. The cyclical side is North American markets are far more attractive than the export markets for anyone who makes these kind of products, whether it's acetyl or olefin. So demand came off because that also goes into housing and goes into consumer durables and cars and everything else for the intermediates that we make. So that has that same sort of market exposure. So we had a mix hit when that demand is lower than normal.

And so -- and those margins are much better than export, right? And then on the export side is where the structural part showed up because that's -- the Chinese aren't really penetrating our market because we have tariffs and things like that. And logistically, it's easier to go to Latin America and Europe for them or Southeast Asia than it is to come here. So that export market got crushed in '24 and '25 by all the exporting done by China, right? So those values basically got down to very low values. Those values are not very high, right? So that benefit on the export side of thing is obviously helping us.

So while that comes off, if there's stability that comes back in the North American market, you can offset some of the decline in export values with higher value mix in North America and some demand recovery. Those can stabilize out a little bit. That will be helpful. But the margins right now are certainly higher than what I would call normalized in the world that we now live in, given the structural dynamics out of China. But I also think because of everything I've already said, it's not going back to where we were last year, somewhere in the middle. I mean anyone guess on where that is.

And long term, it's important to roll in the Eastman portfolio?

Look, the olefin business, first of all, acetyls is part of the integrated complex in Tennessee. That's not going anywhere. It's all big pilot spaghetti there, right? So you can't disassemble anything with cellulosics or polyester from that side. But when it comes to the Texas side, we've been clear that's not a strategic asset to us. It carries a lot of cost. A lot of cost is spread by revenue and it has a lot of revenue. So it carries a lot of cost structure. So you got to keep that in mind when you're trying to think about its own portfolio for its assets.

It provides -- half of the output does go into our specialties. That gives us a nice secure raw material position that's made in Americas. So that's a good thing to have. So -- but at some point, does it fit the portfolio as we're growing the specialties and building up the circular economy, probably not. But right now, it's doing its job. And it's providing some earnings stability, right?

The nice thing is it's a small percentage of the portfolio. But when raws go really up like '21 or now, where you have pricing trying to chase it on the specialty side, the margin expansion here actually offsets that. It gives you a bit of a stability hedge. But you don't want to be too big. Otherwise, you're going up and down with it. But it's small enough where it just helps offset some of that and gives you more stable margins. So there's this thing going on with our stock where people know how to trade this, right? I want to trade on the commodity side or I want to trade on the specialty side. So you can see that word debate in the investment community going on daily. The reality is it provides stability, which is a good thing in this world, right, stable cash, stable growth. That's what you get out of this portfolio.

Talking about stability, fiber, at say tow, we have seen some destocking in the last few quarters. Where we stand on that journey? And where we stand on that destocking journey in tow?

So the destocking is not a few quarters. It's -- unfortunately I have to think about this in years. So tow is a critical part of a cigarette. It's about 5% to 10% of the price of a cigarette. If you run out of tow, that is super bad when you have 65% gross margins, right? So security supply is always the priority in history for this industry. When we had all the shortages and we had some operational problems in the beginning of 2022 with our site, the customers became especially the big multinationals who are very well run, built inventory because they want to secure supply. They built it in '21, they built it in '22, they built in '23, a little bit every year because we have these volume band contracts that they stay in. They don't buy a lot extra each year, but they bought a bit extra each year. So they accumulated a lot by the time they got to the end of 2024.

And of course, no one ever tells you when they're building inventory ever. Because they're worried to put them on allocation and not give it to if the market is relatively tight. So you just don't know what's happening. That's what happened across so many marketplaces in '21, not just tow and everything, right? But they didn't -- everyone else started to destock right away in the end of '22. These guys, because they're so worried about secure supply, didn't start destocking anything until last year. And they're all under contracts, especially the big ones that have a min max. So they went to their minimum commitment, which allows them to chip away at the destocking, but they can't solve it in a year because we hold them to the minimum contract to keep stability in the business on the volume side.

So it's just -- it started last year. It's going through this year. It's going to keep on going to some degree into next year. By then, it will be done. I mean there's an age limit on this tow, right? So it will sort of resolve itself, but it's a journey. But that's the primary drop in demand. I mean why it got enabled was a Chinese player came on with some capacity that made it available to the Western world. Historically, they've just been selling into like Russia, Venezuela and Iran, places that we can't sell. But they added some capacity so they could actually take some of the risk out of the marketplace about supply, which is what enabled the destocking.

The asset that's being shut down by Celanese is pretty much equivalent to what they added. So that helps sort of on the balance side. But there's still a lot to go. And the margins are very high, people get tempted into chasing volume because the value is so high. So that's why you get these dynamics where prices come off. And we had really high prices in some places, really high. And so it was not a surprise that they were going to come off.

Underlying decline rate is still the same 1% to 2% or...

It was 0% to 1% between -- it turned out between 2014 and 2024. It's moved more into that 1% to 2% range. There's some more excise taxes in places like I and the other that's going to impact demand to some degree. But historically, demand despite all the drama around cigarettes has just not changed a lot over time. But it will definitely decline a little bit more than the last decade.

And the non-tow portion of fiber, is that still progressing?

So the textile business was a great opportunity to keep the assets running full. The margins were actually pretty good. I mean, not exactly tow margins, but not that far off. So as that business was growing, it offset some of that tow market decline. As we told you, about 40% of the earnings decline has nothing to do with tow from '24 to '25. And this was about a $30 million decline in '25 relative to '24 with all the draw of the trade war, the retaliation tariffs on our products going into China that slowed sort of demand for us.

And I'd say that we thought demand would be coming back meaningfully this year at the beginning of the year. It's a lot slower than we thought because of all the economic drama going on right now. So there's still that $30 million recovery out there, but it's more in the future than it is this year at this stage. I mean it's coming back a little bit, but not a lot. So that will help.

I want to touch on M&A. It's been picking up in the space here and there. You've been one of the least acquisitive companies in chemicals. I think you've earned a right to do something, but you've chosen to focus organ internally. What role does M&A play in the growth of Eastman Chemical?

Yes. So historically, by the way, we're one of the more acquisitive companies in a different time frame. So we went through this huge portfolio optimization, if you know our history from 2006 to 2011, where we got rid of a lot of commodities and really upgraded the quality of the portfolio through a series of divestitures. And then we flipped around in 2012 through '14, we did $9 billion of acquisitions, right? So we were very acquisitive, right? So we bought solutions, we bought Taminco. We bought a bunch of bolt-on businesses, all of which have delivered great returns. And very successfully integrated into our company.

But yes, when we hit 2014 after we bought all this stuff, we went into an organic phase, say, well, we have all these products, all these specialty businesses. The ones that we bought had a lot of potential, but had not been properly invested in from an R&D point of view. So we were working on that and ramp that up successfully and built a pretty good business. And through all that, and we had a lot of leverage that came with it, the economy wasn't exactly great. So the rate of delevering wasn't quite as fast as we'd like. And so it took us a while to get to the balance sheet back to where we want it to be. And then you had COVID hit and then you had supply chain crisis. And then you had a complete another drop of manufacturing consumer-related demand, right? So it's been a little chaotic in the last...

Yes, it just never stops. And by the way, I joked a year ago that we're running out of terrestrial problems. So we'll have an alien invasion. And apparently, that's true, too. So who knew? But the good news is they've been walking among us for decades, and so they must be peaceful. So maybe we don't have to worry about a disruption, but maybe he'll tax other galaxies as well for inputs. We have to think about all that chaos and being responsible, your balance sheet and your cash flow and being stable and reliable. So running around doing M&A didn't seem like a great idea. But the real choice that we made getting your question, but I think history is important. The real choice we made in 2021, which is we could go really aggressive with the strength of our balance sheet at that point and the strength of earnings right back then on the M&A side or we could go on the circular economy side.

We couldn't do both. And we decided that the circular economy had far more upside and organic growth gets a far better valuation if done well, that, that was the right choice because we're unique in what we could do in something at that scale of platform level relative to anyone else in the industry. And we still believe there's a lot of value there, right? Go look at PureCycle, right, negative $140 million of EBITDA, $2 billion valuation, right? And we've got very significant revenue. We actually have a significant profit, and it's not in our stock at all because people are worried about the core. You stabilize the core and you start getting that valuation on top of the portfolio creates a lot of value. So we still believe our organic strategy has a lot of value despite all the chaos.

Having said that, the world is going to speed up on M&A, as you said. The world is definitely going to, I think, in our industry, consolidate to some degree. Certainly, that seems to be the going theory. And so we're looking at all options at this point. But there's nothing, just to be clear, going on at the moment. But you have to realize the world is changing and change with it, right? So M&A probably play a role in our portfolio too, both ways, both things you could divest or things that you could buy or et cetera. So we're starting to consider those things, but there's nothing imminent.

The pipeline filling small bolt-ons at least? Or how is the pipeline today?

The pipeline -- I mean there's always the bolt-ons out there. But the thing about bolt-ons is they take a lot of effort relative to the value they bring. And so if you've got a machine going like [ Roman ] -- has did a long time ago where they're rolling up like competitors in coatings, it's really compelling. And we've done that well in performance films where we rolled up competitors and built that business to be more robust than what it was. And we're always open to doing it. But it's not as robust as any of us would like it to be.

Right. Okay. You mentioned methanolysis organic growth. Where do we stand in that journey today?

Well, certainly, it's a little slower than what we thought in 2021. So the current status is the plant is running great. The yields are fantastic. We've got clear insight on how we can debottleneck to at least 130% of design rate, right, to stretch the asset and give us time before we have to have the next big capital spend. On the specialty side, the volumes are growing with some of the recovery in the market, but you're going into blenders. You're going into reusable water bottles. You're going into those products that are discretionary, right, where the market conditions aren't great. So it's going to grow with the rate of the market because people don't want to just add recycled content in an existing product. They want to put it in a new product launch, right, where they get people paying attention, you get the value for it, et cetera. So if you're not launching products, then you're not growing a lot of renew.

So we are seeing half our revenue growth, which would be that 4% to 5% I mentioned on AM is in the specialty, where they are starting to launch some products, they are picking up some volume there. The other half, which is the rPET, demand has improved considerably for that side of the business in the last 9 months, as we've talked about on the calls, principally because the mechanical is degrading faster than they thought. And then we blend it with the mechanical and make it look good again. So there's more recognition of our value proposition about how our product is identical to virgin where mechanical really is not and going to be less so every year. So that's creating a lot of opportunity for us.

At the moment, we're capacity limited, not demand limited. So it's -- our assets are flexible, but they're not that flexible, right? You have to take some effort to sort of swing them back to making PET, which is what they originally did before we turn them into specialty assets. And so we're in the middle of sort of making some of those adjustments. We told you about one line we're switching over, and we're looking at another one right now. So things are good on the demand side. Premiums are holding.

And what's Pepsi? Pepsi is a big customer for you guys. What's been their feedback on the material and what do they want from you going forward?

They've been extremely happy with the product. They actually have a whole thing on their website around Eastman and how we're enabling them to sort of address the environmental challenges of packaging. So they've been great and a few other big package companies are engaged as well. So they're pulling forward the volume even in this economic environment.

And you think about the stress test and the value proposition, things are not good if you're in the consumer package world, right? They have demand challenges because pricing got so high. They're lowering pricing right now to rebuild volume and they're still buying our material it's a good value proposition to us in this context, right? They could easily just say, I really care about the environment. I'm going to care a lot more about it in 2027 than '26. And a number of the brands are doing that, right? That is certainly happening. But the ones who really take the environment seriously like Pepsi, like P&G as 2 examples, are very much sticking with their plans.

Then you have your home state, California putting in place recycling laws, that can only help matters, I presume.

Depends on how the rules get written. So there's always 2 camps out there in the environmental community. One is they really want to solve the problem, which is recycling and supporting all those types of initiatives, whether it's recycling or the biodegradable cellulosic polymers we have that we're taking into foodservice now. But there's also a contingency that just wants the world to have no oil on it ever, right? And so the only way to get rid of oil is you have to get rid of combustion engines, you have to get rid of plastic. So that group, the more extreme NGOs just want to ban everything, right?

So there's that war going on, which is totally unrealistic. It sounds good, raises money, but they can't actually ever accomplish their goal. But -- so that creates a lot of policy volatility. But yes, in general, the recycling rates being required, EPRs, which are enhanced producer responsibility, also known as a tax on packaging waste, those drive behavior. Colorado, I would say, is the best example of a pretty thoughtful design that I wish more countries -- or not countries, but states would adopt. Of course, California is going to be more extreme about everything. So we'll see how it plays out.

So what's next here for methanolysis? Texas has obviously didn't work out initially, but what's next from a capacity standpoint?

So the Texas project was a very capital-intensive design because we're building everything new, right? Polymer line new, methanolysis new, all the infrastructure around it new. And that's led to what the capital cost was so high and also helped us when we got that DOE grant of $375 million to bring the number back down to sort of more targeted rational range. So when we lost that grant, it actually forced us to step back and say, well, is there a different way we can approach this to be a lot more capital efficient. And at the same time, you have so much stress in the commodity markets, including PET, a lot of assets being effectively abandoned. That creates the opportunity to leverage existing facilities and infrastructure and focus really the capital down to the methanolysis unit, right?

So we've been looking at multiple options of how to do that. I believe we have a couple of different pathways. But we haven't finalized exactly what we're going to do. And so we're not going to talk about the details until we've got it all sorted out. But there is a capital-efficient way to go forward.

Could we hear about that in 2026 or...

We could not start in CapEx but a pathway more clarity and precision in '26.

Would that be only U.S. or Europe as well?

Be both. The issue -- we're in a tough environment. We're going to be very disciplined about our capital allocation, and we're not going to be ramping CapEx up a lot until we feel like the economy is stable, certainly not the moment. And because we can debottleneck the first plant, it buys us, let's say, 2 years of grace and how we want to sort of build out this facility and stretch its capacity and then add on the next plant. So -- and that allows us to be capital efficient, allows us to be disciplined about the market demand, making sure it's building as strong as we believe it will and therefore, higher confidence around a good return on investment for the second plant.

My last question is you've always been hard to value, [indiscernible], what is Eastman Chemical. And I think people fault to a lower valuation they can't really figure out what you are and where you're going. How do you address those concerns and issues? You have Greg here as well. The Angel question, why is Eastman and how do you value Eastman Chemical?

Well, look, the core of Eastman is it is a specialty chemical company, right? It's not a commodity company. Yes, it has a little commodity tail on it, which actually stabilizes earnings and cash. And we can debate how it impacts the valuation. But the reality is Advanced Materials and as the Functional Products business are the sort of the core of where all the capital goes and where the growth happens or where the acquisitions will occur or whatever else. Circular economy is completely not valued in the current stock price, right? I think we can 0. I agree. But we have a company that can't make any profit that has a $2 billion value.

So as a reference point, I'm feeling pretty good that we're worth a lot more than that on the circular economy since we've got the largest asset in the world that's doing chemical recycling. It's up and running. It's up and running at high yields, right? So the technology is totally proven. We have an established customer base with a reasonable -- a serious amount of revenue now. We were paying premiums in the worst economic environment we could imagine, right? So I think that platform has value, right?

So I think that what's being missed is the margin challenges, the earnings challenges are all volume driven. It's not about some sort of collapse in margins in the specialties. It's just asset utilization, right, because demand is low. So you've got all this pent-up demand on the upside in the core business. You've got circular -- not just on the polyester side, but on the cellulosic side. So we got the Aventa products and things like that coming on foodservice. Obviously, we got to stabilize fibers and take that uncertainty off because I think that's a bit of a hang up. But we're in an earnings known range now where it's going to start stabilizing. I mean it's not stabilized yet, but we're working on it.

And then I think CI gets back to a more stable level, right? So call it, $150 million, $200 million of EBIT on a normalized basis. And you've got the [indiscernible] investment that adds $50 million to $150 million of earnings depending on the market conditions on the ethylene propylene investment that will be online in the summer of '28 that further strengthens that, which is just great cash flow. Now whether it stays in the portfolio or not is debatable based on how we're growing the specialties.

But I think that people are missing about the quality of the portfolio and how well it's holding up in this context because so much of our demand is exposed to discretionary consumers. So that is the issue, right? We are going to have exposure to discretionary demand. That is the one demand volatility on that side is real, but we're at the bottom of the market when it comes to consumer construction demand. So there's never a better time to get into the stock because the incremental margins are at least 30% to 40% of Advanced Materials when that volume comes back, if not higher. So it really hurts on the way down. It's really good on the way back, not just on the earnings, but on the cash flow, right? Because the margins on those products are high. And AFP is really holding up well through the things. So you got a nice stable base there, and then you've got all the upside in AM. I just -- I think they obsess too much on the tail risk, which is a very small part of the company.

Do we get a circular segment at some point to highlight its value relative to the company you mentioned, your own circular segment?

We've had that debate. I mean with the first plant, that's not going to happen because it's so integrated into making all the specialties. As you scale up to a second and third plant, that's more stand-alone, if there's -- we perceive value to making sure that's called out as a separate segment, we'll do that. But that's a problem for a different year. Right.

Our time is up. Mark, Greg, thank you very much.

Thank you. Thank you all.

Good day, everyone, and welcome to the First Quarter 2026 Eastman Conference Call. Today's conference is being recorded. 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.

Thank you, Becky, and 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, Senior Manager, Corporate Analysis and Investor Relations.

Yesterday after market closed, we posted our first quarter 2026 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors section of our website, eastman.com.

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 first quarter 2026 financial results news release. During this call, in the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-Q to be filed for first quarter 2026 and the Form 10-K filed for full year 2025.

Second, earnings referenced in this presentation exclude certain noncore 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 first quarter 2026 financial results news release. As we posted the slides and the accompanying prepared remarks on our website last night, we will now go straight into questions.

Becky, please let's start with our first question.

We will now take our first question from Vincent Andrews from Morgan Stanley.

Mark, I'm wondering in methanolysis, given what's going on, the run-up in crude oil prices and virgin plastic prices running beyond that, if in methanolysis, this is providing an opportunity for more customer trial or adaptation, whether it's in the U.S., potentially some export opportunities because I seem to remember over the last year or so, we've been talking about customers not wanting to spend or try things that are different, but it would seem to me now your product probably offers some significant relative value beyond just its recycled nature. So if you could comment on that, that would be really interesting.

So we certainly are very excited about the strength of revenue growth or associated with the renewed platform around methanolysis, both on the specialty side as well as the rPET side we need to keep in mind that the end markets here, even though there's a lot of stress in the marketplace right now with Middle East conflict. The end market demand situation hasn't really changed dramatically. Consumer discretionary on durables is still relatively challenged or cosmetics, et cetera. So we're not seeing an uptick in any market demand in this context. And the customers are still fortunately very focused on the value of renewed content and interested in buying it.

So on the specialty side, I don't think anything has really changed. We are getting a bunch of wins. We're seeing a great build in specialty customers. You saw some of that volume growth happen in Q1. It will continue into Q2. and into the back end of the year. And it's happening with Tritan sales and cosmetic packaging, where we're seeing the most adoption.

On the rPET side, I think there is more of a question around just relative value of our rPET relative to the where virgin PET prices are going with the increase in oil. And certainly, that improves the price position of our material relative to those materials that are going up in a considerable way. And so we see strong demand there. But obviously, the demand was strong before oil went up, and we're running our capacity to serve that. And so that 4% to 5% revenue growth that we've talked about in January, we still think that's probably accurate. There may be some upside.

The real upside, I think, sits relative to the underlying market sits more in the Middle East related issue than it is just on the new value proposition across the portfolio, but in particular, specialty plastics since we're talking about Advanced Materials right now, has some upside there. As our competitors in Asia, principally are facing a much higher oil costs, much higher natural gas cost they're having to raise prices like we are aggressively in this context. But they're also facing security supply issues. There are shortages out there that's driving all this price increase.

So there's -- people are going to start running into the inability to actually make product polymers, whether it's great competition or indirect polymer competition. So we're just seeing signs of it, but we expect to see more potential volume upside driven by that operational constraint that's going to be occurring in Asia in particular. So there's a combination of renewed growth for sure. What's impressive in this entire environment is even with the challenges that our customers are facing economically, we're still building, they're still paying premiums for these products, which is a really impressive test of the value proposition.

Our next question comes from Patrick Cunningham from Citigroup.

Sort of a related question just on the volume upside as being a reliable supplier here. Have you seen tangible market share gains, particularly in CI at this point? I know you kind of touched on this, but how would you sort of handicap the potential for share upside in other parts of the specialty business as a result of the conflict?

Yes. So it's a great question, and we're certainly paying a lot of attention to this issue, as I just mentioned. So on the Chemical Intermediates side, certainly, we can sell everything that we can make. And the good news about this year because we had such large cracker turnarounds last year is we have a lot more volume to sell this year than last year. So we have more volume to sell.

Remember, we sell a good amount of that in North America, where we have good margins always. And then we had the export market that we would send material into from Chemical Intermediates to run the assets well. But those margins have been significantly compressed last year. So those margins now with the shortage out of the Middle East have gone up significantly. And so we're going to see the benefit of that.

So we see the benefit of bought more volume than we expected in North America with the tightness in the overall markets from the imports that would have come from Asia that are not coming as much -- as well as the spreads expanding and a lot more volume to sell. So we're definitely seeing share benefits as well as being explored to higher-value markets like Europe than Asia where markets are being shorted by material that's not coming from Asia as readily. So lots of different benefits going on there.

When it comes to the specialty side, I already hit the point, I think. But we definitely see the potential for volume and market share upside in AFP and Advanced Materials. But it has -- we haven't seen any significant amount of improvement yet. So we think that's still to come. A lot of people are very focused on the price of oil or the price of global natural gas which is certainly raising the cost structure of our competitors around the world much higher than us.

But the quantity shortage, I think, is an impact to the world that we haven't actually seen yet. The people are living off of a certain amount of inventory, whether it's customers or competitors in serving the market, but that's going to start running out and they're going to start seeing more shortages impacting the markets in addition to just the sort of direct oil or natural gas dynamic.

Understood. Very helpful. And then just on fibers, you specifically called out reduced customer shipments, some forward-looking volume risks. Can you elaborate what you're seeing there and why the implied second half earnings run rate should still show some improvement year-on-year?

Sure. So just to sort of go back just a moment to sort of what we're dealing with in fibers. When the earnings came off last year relative to '24, it was really multiple components. The tow volume is part of the story, but it's important to remember that about $30 million of the decline was textiles, $20 million was sort of stream utilization due to weak demand across the company and about $15 million in energy.

So when you move to this year, what we told you in January was we thought that the tow volume would be moderately up relative to last year, which was a combination of locking in our contract business with everyone. So we had a modest price decline to lock in our contracts. But our Middle East customers were expected to grow a bit because they were the ones that were missing their contract commitments last year due to the issues we explained about the not realizing market share growth in their markets. And so we were expecting some modest growth into from that.

Obviously, with the Middle East war happening, the -- those customers have been impacted. We actually have towed there to serve their demand. in some warehouses. So it's not an issue of us getting material to them. It's an issue of their ability to operate in this environment. and be able to export their cigarettes to other markets because a good portion of their production isn't just for the Middle East, it's for exports to other markets. And so how they get that material out is a bit of a constraint.

So Q1 was fine. We see a little bit of risk in Q2 where they're not going to buy quite as much in that quarter as we expected. And the real question is how do they come back in the back half of the year to meet their contract commitments.

When it comes to your back half question -- and the other thing that's going a little bit slower and why we lowered earnings about $20 million in our guide here is the yarn business is not growing as fast in this market context. So we don't see that volume pick up -- and as a result, we don't -- we're not getting as much of an asset utilization tailwind as we expected. So when you think about that, we still feel really good about how the business is doing. And then when you look at it from a second half point of view, have several drivers that will make the second half much better than the first half.

First is these contract commitments. So even with our large customers who have signed annual contracts that holds to relatively constant to last year. The contracts allow flexibility in how and when they buy it. And a number of them have chosen to buy less in the first half and buy more in the second half. So you have a pretty significant ramp-up in volume with our core customers around the world, just meeting their contract minimums, which is sort of what we have in this outlook. So that's happening.

The second is you've got some continued build in the Naia yarn and film side of things. You will have a little bit of energy tailwind as the energy gets cheaper from a flow-through basis from the winter storm in Q1 to lower natural gas prices going forward. So a number of these factors come together to enable this. And of course, our cost reductions are sort of back-end loaded as well across the company, and some of that flows in here.

Our next question comes from David Begleiter from Deutsche Bank.

Mark, on CI, if you were to hold spreads steady at today's rates, and layer in that $50 million of maintenance tailwind for Q3, what will that mean for Q3 EBIT? Could we see EBIT $100 million in CI in Q3? Or is that too ambitious?

Well, I think, Dave, we sort of guided you that in Q2 would be around $50 million in EBIT with a pretty tight market situation that's going on, obviously, right now. As we look at and what the trends could be, I would think it's going to be more similar than to be substantially up. I mean, without a doubt, the margins are tight right now and there will be a tailwind from Q2 to Q3 on the shutdown side.

But it then comes to your assumptions around when the Strait is going to get open. If the Strait gets open in the next months, obviously, some pressure is going to come off in the marketplace, and you'll have spreads moderate a bit. So that makes it a little more complicated to sort of say it's going to be up. I think it being similar is a reasonable expectation. But it really comes down to how this whole straight situation plays out and how long the market tightness goes.

When you think about it, the price of oil, price of global natural gas are obviously incredibly high right now. and that gives us a very significant advantage in how we make a lot of products, not just olefins, but everything because a lot of our customers are also -- or competitors are based on natural gas, not just for energy, but for feedstock.

But if you think about just the cracker side of things on olefins, which is the vast majority of the improvement for us, you've got maps that are offline, and you've got methanol off-line, that's 15%, 20% of that, not just the oil, but these derived products, a lot of time for these refineries to restart. Then you got to get the derivatives restart, then you got to fix the logistics question. And then you've got damage in places that have to be repaired. All of this says the moderation isn't going to go all the way back to pre-conflict in our minds on oil or for the derivatives.

But certainly, when the Strait opens, some of that pressure come off and factor into sort of how the margins trend in the back half of the year. But we feel great about how the business has improved. We're happy to have the cash flow that comes from this business. And we certainly think that it lets us to reset better.

Very good. And just on the potential volume upside and specialties from these disruptions in Asia, how do you go about making these permanent rather than just temporary?

That's a great question. So I mean I think it's going to -- it's unfortunately at the patent's answer, David, on where we pick up the volume. In some places where it's a like competitor the shares may normalize back a bit. But customers are learning painful lessons about exposure and reliable suppliers.

And I think one thing to keep in mind is this is an excellent proof point about the advantages of being a North American chemical company and in particular, being a very vertically integrated chemical company with 80% of our assets in the U.S. gives us a huge cost advantage but it also gives us a huge security supply advantage to our customers, and there's value to that. And certainly, one we intend to take full advantage of in supplying our existing customers but also picking up new ones that we will intend to hold on to.

When we pick up customers, by the way, from other materials, then the chances are we can hold on to them because the value proposition of our product is better once they once they start using it. Typically, they're using some cheaper polymer like polycarbonate or SAN that doesn't perform as well, but it's cheap. When they switch over to our polymer they're going to see it perform far better with their consumers and then that should provide some stickiness in how we hold on to that share once they've realized it.

So we're going to be doing everything we can. And of course, we're going to be trying to lock business in on contracts for a longer-term commitment where we can as well in this environment to sort of give us resilience on the volume and the price side.

Our next question comes from Josh Spector from UBS.

Just curious around your visibility around any pull forward or not. I mean I think in your prepared remarks, you said it's not pulled forward, but how are you validating that? I guess, all the conversation around potential supply risks from some of your competitors probably makes your customers a bit more nervous and probably build a little bit of inventory. So curious there.

And then related with that, just how does this impact your production plans? I think you kept your asset utilization tailwind kind of the same. I would think if you're anticipating their demand, maybe there could be some upside there. So curious if you could talk about that as well.

So when you think about the demand pull forward, we're operating with the underlying assumption that end-market demand this year is going to be similar to last year, which is the same assumption we gave you at the beginning of the year. And it's the same thing we're using for how we think about planning and assessing what's going on.

And in that context, what we're seeing in volume growth in the second quarter sequentially is strengthened growth in the AM business, really in specialty plastics which is associated with all the methanolysis wins, which is associated with clear wins of new applications and market share we're getting in our core and Tritan business, our cosmetic business that doesn't have anything to do with pull forward.

We don't see a big spike in demand like last year where people are just trying to buy stuff ahead of tariff risk. I think part of what's going on is customers see the risk and want to get ahead of price increases or want to have security supply, but they're also being cautious about what they do when it comes to building too much demand with market uncertainty that we all can recognize in the back half of the year in this context.

And the other factor in this too is inventories are really low at the end of last year. So you also have to keep that in mind. That's part of the strength of recovery you saw from Q4 to Q1 as people just starting to rebuild some inventories or, if you will, end of destocking that was going on in Q4. But we don't see a lot of inventory out there in the supply chains at this stage. It's always difficult to see it.

To be clear, we certainly, along with the entire industry, have not been experts in understanding the supply chain inventory. But we don't see a lot of build of that, certainly not in March. And as we go through this quarter, our order books are really strong. So we had a good March, a strong March and we see that continuing in April and May. But June is a wildcard in this market context. We don't see any problems, but we just don't have that much visibility all the way out to June.

But overall, there's just a sign of given market pull-through in the specialties. As I said, in CI, we can sell what we want to make and probably can do that through the end of the year.

Our next question comes from Frank Mitsch from Fermium Research.

I was struck by the $500 million of price increases that you have started to implement. I'm wondering if you could talk about how you see that phasing in. What has been the initial reactions from your customer base? And how does that match up in terms of your expected inflation in raw materials?

Frank, what I would say is, as Mark has already highlighted, in Chemical Intermediates, we were reacting in the moment and driving price increases and volume growth as we think about what's required to supply. In the specialties, obviously, our pricing philosophy has been around the value of our products. And as we pace that with our partners over time.

What we expect sequentially is in our specialties, mid-single-digit price increases from Q1 to Q2, when you think about our chemical intermediates, those are phasing in. I would say they're in the high teens or approaching 20% as we see that sequential momentum. So we were -- our teams across the world reacted in the moment in Q1 when March occurred, and we have good progress out of the date.

Yes. So just to answer the question around the sort of market competitive dynamics around this. Clearly, everyone is raising prices, whether it's polymers or chemicals across the entire industry. So you have that momentum to leverage being cautious on price increases will accomplish nothing when you're trying to worry if you think about consumer demand, except you missing out on margin, I think everyone understands that. That's point one.

Number two is the competitors we have, especially in the specialties, especially in Advanced Materials are Asian based. They've got significant increase in oil, and they have significant increase in natural gas prices. So their cost structure, their energy cost structure has gone up more than us. And so they're feeling a lot of pressure to manage their prices, and we're seeing the price increases from our competitors similar to us. across the markets. So in this context, we feel pretty good that we can get the price up, hold our volumes.

And we've got great commercial teams. We've shown the value of innovation by holding on to price incredibly well in '24 and '25 in very weak market conditions. And now we're in a hyper inflated market condition, and we're showing we can increase our price in our specialties and keep track with our raw material and distribution costs, which is just further proof that we have a specialty business that has differentiated value propositions. And -- but we're always close to our customers. We'll always be keeping an eye on competitive activity and make adjustments if we have to, but we're not seeing the need to do that at this stage.

That's very helpful. And if I could come back and get a clarification, when talking about fiber is getting better in the second half of the year, part of that is you have contract commitments from Middle East customers that you're anticipating they're going to meet their contract minimums, et cetera, et cetera. But wouldn't this qualify as force majeure? I mean wouldn't they be able to say, "Hey, look, I mean, this -- to me, it seems like the very definition of force majeure. How should we think about that?

First, to frame it, the Middle East customers are about 10% of our revenue in this segment. So the other 90% is predominantly tow as well as some yarn customers. And in that 90%, the real dynamic here is just they all have contracts -- they all have volume commitments. Our forecast is based on them buying at the bottom end of the volume range in those contract commitments. And so that's global, it has nothing to do with the Middle East. And they bought less in the first half of the year and going to buy more in the back half of the year. And that is the principal driver of the increase in earnings in the second half relative to the first half.

And when you get down to the Mid East part, these customers have made a lot of investments in new capacity, and we're winning in the marketplace, but not quite as fast as they wanted. And that's where sort of their volume draw last year sort of came up short. They had taken a bunch of actions and start gaining market share this year and are very focused on doing it. They just have a logistics issue of getting it out. And so we've adjusted our expectations for the risk of that challenge by sort of lowering the earnings expectations segment to this $210 million to $240 million range, which is about a $20 million drop.

And part of it is just a bit less volume from them, a bit less yarn growth a bit less asset utilization benefit and you put those 3 together, and that's how you get to that $20 million versus where we were originally. And that's really sort of the dynamic. So it's about customers meet their contracts. Those customers historically have always met their contracts under any situation, and they don't have a force majeure excuse on that 90%.

Our next question comes from Matthew DeYoe from Bank of America.

I can't remember now if it was the slides or the release, but you talked a little bit about the EPA tariff refunds. Wondering if that was a tailwind to 1Q or if it's more 2Q, if it was, how much are you expecting to get back there?

Matt, on the IEEPA tariffs, obviously, with the Supreme Court ruling and the Court of International Trade, we recognized about $20 million within Q1. That wasn't a tailwind that the EPA recognition of the refund was basically in line with the winter storm impact. So you can think about those 2 as being neutralized in Q1. Also, that is the recognition. There's no further IEEPA refunds to recognize and we would expect to get the cash related to that sometime in the second half of the year.

Just to clarify, that's been like included in the 1Q results then.

Yes, both the winter storm and IEEPA in the Q1.

So if you think about it, they neutralize each other out. So when we gave you our guide in January, we said this is our outlook excluding the winter storm impact that we are in the middle of. But by the time we got to the end of the quarter, IEEPA tariffs neutralized the winter storm it turned out to be about the same. So it was just a clean quarter relative to how we guided in January.

All right. That's helpful. I'm jumping back in. So context is helpful for me. And then on methanolysis, Right. I just wanted to kind of square some of the commentary because you talk a bit about new wins. And at the other side, you're saying demand hasn't really changed much. So can you just kind of refresh where we are on kind of the upscaling here?

Sure. So when it comes to the revenue of circular, there are 2 components to it, right? There's the core business we have where we're adding recycled content to our Tritan products, our cosmetic products. in our specialty businesses and growing those businesses. Obviously, those end market businesses have been very challenged economically from '22 through '25 as a discretionary spend where consumers have pulled back.

So the rate of growth we've seen on the specialty side has not been as good as we would have expected in the last couple of years in '24 and '25 in particular, as we were ramping up this plant. The good news is we've been winning some more applications through the back half of last year that are showing up as additional revenue that you saw some of the benefit in Q1, you'll see it build in Q2 and even more so in the back half. on that specialty side with those wins.

So to be clear, we're not saying that end market is improving. We're just picking up more market share in durables or in cosmetic packaging with our value proposition. So that's happening. Then on top of that, we swung a line that can make Tritan back to making PET that we've explained to you guys a year ago so that we could make PET and serve that our pet market because Pepsi and some others wanted to start buying sooner than their original contract obligations because they saw the value proposition we have with our renewed products.

So our superior clarity, our superior quality our superior performance and how the product actually performs was recognized and they wanted to start building and use that material this year. So when you put those 2 together of selling more rPET with Pepsi and with some other packaging companies, brands, you get that 4% to 5% revenue growth that we talked about in January.

And when I was answering Vincent's call, I was just confirming, we still see that 4% to 5% growth. But the Middle East conflict hasn't yet significantly increased that to be more than 4% to 5% growth. We're going to pick up volume for other reasons, as I described, due to sort of impact on competitors. But in this case, we're going to sell what we can make and we're ramping up our PET capability to sell even more, but it takes a bit of time to do that on the capacity side to continue supporting that growth, not just this year, but also additional growth next year on the rPET side.

Our next question comes from Jeff Zekauskas from JPMorgan.

You talked about earnings $50 million, perhaps in the second quarter and in the third quarter in Chemical Intermediates, but propane prices have really been pretty volatile. Sometimes they're $0.75 a gallon and sometimes they're $0.90 a gallon. How are you handling your propane values? And can you reach these numbers that you're talking about if propane is at $0.90 a gallon.

So Jeff, obviously, we're buying propane at the market prices. that you're referencing. We do believe here in Q3 -- I'm sorry, in Q2 that we believe that we've appropriately taken that into consideration as we look at the supply-demand balances and how we've priced into the market with our price increases. So yes, there's some range or, as we say, approaching $50 million for the quarter, but we think we've taken that into the appropriate context for $0.75 to $0.90 range.

Okay. And you talked about for the year, perhaps approaching the cash flow that you generated last year. What are the parts of working capital that are sort of holding your operating cash flow back? Are they payables or receivables or something else?

Yes, Jeff, what I would say is, as always, the Eastman team does a great job of generating and managing our cash flows, and that was demonstrated again here as we think about the level of consumption of cash actually being lower than the prior year. So for Q1 out of the gate, I believe, but we've got things well managed and under control.

As we think about sequentially, we know that we built some inventory in Q1 for our large turnarounds, and we expect to deplete that. That's going to be offset with some of the inflation that we've described and I've been talking about through the call. At the end of the day, the pressure will come as you think about there's pressure on the inventory and on the receivables account, but we also think that, that will be mitigated by higher accounts payable at year-end. And we're just trying to look and see what's the second half scenario when we get to midyear as we then think about managing all of the various levers.

So under control, the range is narrowed because of the level and magnitude of inflation overall. And as you think about net working capital, you've got 2/3 in your assets and 1/3 in payables. So net tension on that front. That's all we're highlighting at this point.

Our next question comes from Kevin McCarthy from VRP.

Mark, can you speak to the expected quarterly earnings cadence in Advanced Materials? It seems like we have a fair number of moving parts there. I'm curious about how you're dealing with paraxylene inflation here and whether you think you can recover or possibly over recover those sorts of input costs, whether there are any lag effects we should be keeping in mind and I think you called out some auto production variances there.

So maybe you can kind of just kind of walk us through some of those moving parts and think about whether you would expect earnings to do better in the back half versus the second quarter and that sort of thing.

Sure, Kevin. So when you think about Advanced Materials, there's a cadence, as you said. So first of all, it was a great recovery out of Q4 into Q1. Obviously, we had some mass utilization headwinds with some choices we made there. So as you go into Q2, you've got the benefit of seasonal increase in volumes, these application wins we've talked about, starting with rPET and renew specialty product selling, but other products growing, that's going to give us a lift into Q2.

The automotive market, relative on a year-over-year basis for the year, we're expecting to be sort of down sort of low single digits. So that's on a year-over-year basis, it's a bit of a headwind. On a sequential basis, it's a tailwind because the performance film business always has a big ramp-up in volume from Q1 to Q2 that we'll also see helping us on that front. So you have all those factors coming together on the volume side.

And then you've got the actions we're taking on price, as you mentioned. So teams have moved incredibly quickly to start implementing prices on either April 1 or May 1 to cover the expected increase in raw material costs, paraxylene, VAM, the key raw materials that go into this segment. And we believe we're very much on track to sort of keep pace with those as we go through the quarter. And then you've got utilization benefits coming in underneath of this that also start to help out. So a number of reasons why we'll certainly have a better sequential quarter in Q2.

And then as you look forward into the back half of the year, what you'd expect to see here is continued volume growth because a lot of the build in the circular side is back-half loaded. You're going to see continued improvement and just wins in general. So the back half we won't have a normal seasonal decline in volume because of all those wins that will offset what is still a normal seasonal decline. So you get volumes that could be flat to a bit better in the back half, which would be not normal, but it makes sense with all the innovation we have in this market context.

So you've got that happening. You've got the prices having fully caught up. So you've got a first half to second have sequential tailwind in price cost as that plays out as well as energy coming off a bit. And then you have the cost savings and a lot of the utilization benefit is going to be in the back half, too. So a number of reasons where AM will be stronger than normal in the back half of the year, which is also true of the fibers business being stronger than normal.

And just to finish out the strength since we're on the topic, AFP would be normal, right? So it will be normal seasonality in the back half of the year. And then as we just talked about Chemical Intermediates, margins are going to be better in the back half of the year relative to the first half of the year, especially on a Q1 basis, relative to the back half. So when you put all that together, that definitely drives earnings to be very attractive in AM to be as we expected as well holding similar in AFP, CI a lot better this year. Fiber is a bit off. So the overall number means that our earnings per share should be above $6 a share.

Very helpful. And then secondly, with regards to your Chemical Intermediates segment. How much harder can you run your assets in the second quarter and moving forward relative to the first quarter. Is there a meaningful uplift from utilization? Or is it really all about the more favorable spreads there?

So I would just highlight, obviously, we were impacted by some of the winter storm on operations as well. So as we think about going from Q1 to Q2, we'll have -- definitely have that as a tailwind. And also as we look at our olefins and the Oxo's from that perspective, I would highlight that we did build some inventory in Q1 for our planned asset till turnaround. So our asset till, I'll call it, upside here in Q2 is limited. But for us, we see most of that margin growth coming in our olefins at this stage.

Our next question comes from John Roberts from Mizuho.

Within the automotive weakness, are you seeing better performance in your coatings ingredients than you're seeing in the films area?

So no, we're not really seeing a difference. You have to remember, a lot of our demand is driven by the refinish market as opposed to the OEM market on the coating side. Obviously, that market has been a bit challenged just like the performance films, the aftermarket in general is more discretionary in consumers' behavior that's been through in '24, '25, and we expect that to continue here the overall auto market, as I said earlier, is expected to be a little bit soft.

And I'd say our demand will be in line with the market on the coating side. And certainly, I think that's not as -- not true in the AM side. So we'll continue to do a little bit better than the market with our innovation like HUD and even EVs still take 3x as much material per car versus ICE where there is growth in EVs. And I think some growth in EVs will certainly come back with -- especially in places like Europe and China with a high price of gasoline you're going to see some people moving back to EVs for economic reasons, maybe even in the U.S. But I would focus more in Europe and China for that.

So I think that there's -- those kind of advantages will help us do a little bit better on the interlayer side, performance film side will be like coatings more in line with where the market goes.

And then was the winter storm impact in the tariff refund benefit largely booked in the same segments?

On, what I would highlight is, obviously, those aren't going to be uniform and -- but I would say there's not a material difference that I would highlight for you.

Our next question comes from Mike Sison from Wells Fargo.

For Chemical Intermediates, can you give us -- can you give us a thought what pricing needs to be year-over-year in 2Q to get to the $50 million? And just curious on the delta there in terms of the improvement year-over-year.

Yes, Mike, what I highlighted earlier is you can think about the sequential price increases approaching 20% for Chemical Intermediates overall.

And while we're adding in the specialties, it's about mid-single-digit price increases going on the specialty side that gets you to that $500 million.

Got it. And then it seems like Advanced Materials margins are going to continue to -- will improve sequentially in 2Q. This is a segment that I recall it used to be at 20%. Is that still the potential for that segment longer term?

Absolutely. The business is a great business. The main issue that's affecting the margins in Advanced Materials is volume relative to fixed costs. It's not a price variable cost issue. The price of variable cost has been good, held up and been incredibly stable, frankly, from 2022 to now. And even now with incredible inflation that we're facing in the business and across the company, we're implementing prices to keep up with it.

So this really -- when you think about AM is more of a utilization-based issue, right? So you've got the underlying cost structure, then we added $100 million of the cost structure for the methanolysis plant and you've been stuck in a really weak economic environment that hasn't improved since 2022 where volumes in housing, consumer durables are still well below 2019 levels. and even auto is now dropping probably below 2019 levels with the trend this year, we sort of got back to 19% last year.

So a lot of opportunity and a lot of pent-up demand of cars 15 years old appliances getting to their end of life that's in our future. So we feel very good about demand coming back when we get past 1 crisis after another and driving utilization benefits, and we're creating our own growth and filling out the methanolysis plant in a weak environment, proving innovation is a critical success factor for our company and how to win in this industry.

And we're holding our price cost stable through all that. So that starts translating into materially improving margins as well as a utilization better than last year without the inventory management of last year. and cost reduction activities that have been pretty significant in '25 and '26. So no, we feel that we can get the margins back. We just need a stable economy.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

I guess a few questions. So first off, just on the spreads environment in CI, you noted some strength, and I guess, obviously, that should continue into Q2. I guess, are you seeing any supply issues for your competitors or anything out there that could lead to maybe some permanent rationalization of capacity and I guess, what are you seeing on the supply-demand side for some of the markets in CI?

It's a great question. I mean under this sort of economic stress, there was a lot of assets in Europe in the Chemical and Immediates world that we're on the edge of being rationalized, shut down for economic reasons. And obviously, the economic situation has gotten worse for them. And I think that's also true of some assets in Japan and South Korea, where there's a lot of discussion around rationalizations.

So I think it's reasonable to expect that some people are going to look at the current situation, say, if I was going to planning on shutting that asset down 2 years maybe I just do it now in this context. I don't have a lot of evidence of that because we're 60 days into a crisis. So everyone is just managing their way through this dynamic, and we don't even know how long the straight will stay close. So a lot that will factor into that.

But I do think global natural gas prices, for example, will likely stay higher for some period of time because even when Strait opens, Qatar has got to repair all the damage that was done to their fields and their processing capability. You've got oil fields that could get permanently shut in Iran right now if this goes on much longer, a lot of debate around that. You've got just -- it's hard to imagine oil production globally and natural gas production globally suddenly coming back to pre-conflict levels. Not to mention, turning oil and natural gas into methanol and naphtha and ammonia and everything else, it's just -- it would be very surprising for just a snap back to those low levels.

So I think all of that then just creates more economic pressure on the people on the far right side of the cost curve. Those locations I just mentioned, they're going to have to start considering some rationalization. For sure, we're the low-cost winner in this kind of context. China has got its own dynamics, where we will probably be fine. So I wouldn't expect a lot of rationalization there except for some maybe they're old assets that are not competitive anymore as well, I guess. So yes, we expect to see it, but I can't quote you a bunch of plants that have announced in the last 60 days.

Okay. I appreciate that. And then just as a quick follow-up. Obviously, historically, your spreads have expanded after inflationary cycles like this. Maybe you can just contextualize the magnitude that we should expect on maybe AM and AFP spread expansion in Q3 and the durability of that. I guess just wondering if you think that these feedstock levels will allow for some more durable pricing power as you move through the year?

I think we've talked previously around high oil environments being positive for Eastman. And as Mark has just highlighted cost curves over time. In our specialty businesses, obviously, we price off of the value and the relative value and Mark has highlighted the tension and, I'll call it, price increases and lower-value products within the polyester business and how ultimately that can lead to share and other opportunities as we continue to grow.

As we think about the momentum, obviously, we're making the price increases so that we're pricing through the quarter to ensure that our margins are stable. And we'll look to continue to do that into Q3.

One thing you have to watch out, we run our business on a dollar per kg basis, on a percent basis. So when you get these kind of significant increases like '21, you also have a denominator math problem. So the prices go up a lot that goes into the denominator, not just the numerator when you're calculating margins. So you've got to watch out for that. But we'll be very clear about trends around how dollar per KG is going in our margins.

Our next question comes from Laurence Alexander from Jefferies.

A short term and a long term. In the near term, how are you thinking about the rough magnitude of working capital as an impact on your free cash flow conversion this year?

And secondly, you mentioned kind of the sort of hitting the quantity limits or the outright shortages. Do you have a sense from your customers where kind of they are expecting or kind of where everybody is waiting to see this actually crack in terms of which end markets feel the outright shortages first? And then which ones if shortages do develop, take the longest to fix.

So on the working capital front, as we think about the full year impacts, obviously, we built some here in Q1. A lot of that was around planned turnaround. But just as a proxy, I would use the $500 million increase in revenue. And you can take 1/3 of that as I think about how things could balance out and that could be the full year headwind. And obviously, that could go up or down depending on the timing of the freight opening, et cetera. But I think $150 million, $200 million roughly.

Sure. When you think about where shortages are likely to develop first, when you speak with your customers and they say kind of where are the most -- where they're warning you or if they do warn you about potential plant shutdowns, where they're flagging kind of -- that may happen first or which end markets or -- I mean, obviously, Southeast Asia seems most likely. And then kind of which ones are saying, well, if we shut down, it's going to take us a long time to come back up and fix things because it snarls up the downstream chain too much.

Yes. So those are great questions. I mean there's a question about our competitors, and then there's a question about our customers and then the whole supply chain. We're not seeing any disruption yet at the customer level. where they can't get something to finish making the product. It's like the semiconductors back in the auto situation back in the 2021 time frame.

We are keeping an eye on that, but we haven't had any customers come to us with that problem yet. So it will be sporadic, and it will be customer specific. It won't be something you can really foresee is my guess and how that plays out. But we're keeping a very close eye on it.

I think that the dynamics around this is obviously pretty volatile, which is why we're not giving full year guidances. You've got a lot of potential upside as we've been talking about. There's obviously end market risk with inflation that has to be all sort of weighed together. But what I'd say overall is we feel really good about our team and how well they perform.

When you think about all the dynamics thrown at them all the way back to COVID to this inflationary environment to total collapse and sort of discretionary demand in '22 that stayed with us until now. And then mid East crisis. And it's a lot to manage. So I'm incredibly proud of how our team manages through all this and find a way to extend our value propositions. I think the innovation strategy is one that is being proven out to have been a very good choice we made over a decade ago to have ways to defend our value to grow in markets where they're flat or challenged and send our value in weak times or supply shot times like now, and it's creating a lot of strengths in this company. And the circular platform certainly is turning out to be a very good choice that's delivering a lot of growth in this market context. And then, of course, translating all that into cash flow and having a strong balance sheet.

So we feel good about how we're navigating with this. We think we have a very meaningful improvement in earnings this year relative to last year. And we're going to focus on what we can control in this chaos to keep delivering for our shareholders every day.

As that was the last question, I'll say thanks again for joining us. We appreciate you spending time with Eastman. I hope everybody has a great day.

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

Hi. Good morning. I'm Jeff Zekauskas. I analyze chemicals here at JPMorgan. It's my pleasure this morning to introduce the management of Eastman Chemical. Representing Eastman is Willie McLain, who's been Eastman's Chief Financial Officer since 2020. Willie in the old days, took his MBA from the University of Chicago, and he's done a wonderful job of managing Eastman's cash flows over time and their tax position and assisting Eastman in its different attempts at transformation. In the audience is Greg Riddle, who is the Head of Eastman's Investor Relations department and is always a helpful individual.

The form of our presentation today will be a fireside chat. Welcome, Willie, to our conference. There's a conflict in Iran. How has this touched Eastman? Or when the conflict broke out, were there certain steps that Eastman took in order to preserve its competitive position or limit its vulnerabilities?

Well, Jeff, thanks again for hosting us this year at the Industrial Conference. And given your question, it's also appropriate that we're here in Washington, D.C. this year versus New York.

As you would expect with Eastman, I told Jeff as we started the discussion up here today, the year is off to a normal start. We've had winter storms, we've had Supreme Court rulings on trade, and we've got a war in Iran with the Middle East.

And Jeff, as you asked that question, Eastman is well positioned. We've had events in the past where oil has been above $100. I remind our business teams that every day. We've got playbooks for this. I would start by where you were, which is, one, we're financially sound, right? We've been in the debt markets as soon as we filed our K early this year. We've taken our refinancing risk off the table. We've extended and amended our revolver, and that's well positioned with the covenants that we need to ensure these different scenarios play out.

But our business teams right now are focused on, what are the appropriate price increases for the cost to serve. Also as we think about over 75% of our asset base basically being here domestically and be an advantaged from a cost curve, not only in our Intermediates, but how that flows through to our Specialty businesses in Additives & Functional products and Advanced Materials. You're seeing that immediately occur in the responses because, obviously, the crude and feedstock prices are immediate here in the quarter. Many of our specialty price increases in Additives & Functional Products will be through cost pass-through contracts.

In our Advanced Materials segment, we have cost increases that we're looking at here in April, for April 1. And we're assessing the market. Greg's favorite word is dynamic and dynamic has become normal. But the Eastman team is on this. And as I think through, Eastman is focused on delivering cash, right? And I would say, in this dynamic environment, the cash flows that we're seeing here in Q1.

But maybe I could pivot it also back to what we were seeing sequentially, right, as we go from Q4 into Q1. As we guided on our year-end call, we were expecting normal seasonal momentum. We weren't expecting any substantial movements in the discretionary markets for us, transportation, building and construction, durables. And I would say that's pretty much playing out as we had expected. I think here recently, we're seeing similar to the consultants on the auto, where that may be just a little bit weaker. We'll see how that continues to play out through the year. I would say as we had guided also for Q1 specifically, we said that it was excluding the impact of the winter storm effect. Obviously, that was significant, with our sites in Texas as well as Tennessee in February specifically.

And I would say now, also with the emergence of the Supreme Court ruling and the International Trade Court, we would expect the benefit of recognizing the IEPA from 2025 to offset that winter impact. So as we see that playing out, that's positive. I would say, as I described on the demand front, substantially playing out as expected. It's -- as we think about Chemical Intermediates, some of the cost and our ability to recover that, we expect there to be additional pressure on the margin. And the additional pressure on the margin in CI and maybe a little bit weaker demand within autos, we expect Q1 to probably be more around the lower end of the range.

This is $1. Is that right, $1 to $1.20 is where you are?

That's exactly right, Jeff. But as we look into Q2, we see both demand. Our cracker turnarounds occurred during 2025. We turned around 2 of our 3 crackers, and that's giving us additional demand, and as you would expect, we'll be running those harder in this environment as, I would say, customers, both in North America but around the world as they're looking to serve the market, be reliable. We see increased demand, and also as we're putting those price actions in place, we actually see, I'll call it spread improvements in Chemical Intermediates, and we're taking the appropriate actions to manage price cost in our Specialties.

All right. So maybe to take one step back, if you look at the durable goods PMIs for January and February. They were both over 50, whereas in late in 2000 -- in November and December, they were negative, sharply negative in December. Do you notice a change in durable goods demand? Or is there a more positive change in some of those parts of your business? Or is it really undetectable that is when you put together some negatives and some positives, it all flattens out?

Jeff, I think, one, yes, we are noticing what I would also say is, if you think of the trajectory of Q4, and the level of de-stocking that happened from October to November to December as many supply chains, especially, I'll call it, in manufactured goods. To me, we expected seasonal uptick. The question is, does the seasonal uptick in January and February actually become increased demand in March and April, and that's what we're watching closely.

Right now, it's hard to distinguish between the seasonal of what happened to more severe Q4 and what we're seeing here in Q1. We are seeing that sequential improvement. Also, the question will be here in March is how much of this demand is people trying to get ahead of price increases as we think about broader metrics versus what is true real demand. So the war in Iran, we're 3 weeks into it. We're going to have a lot more information between now and when we do our conference call at, I guess, released earnings at the end of April.

So it sounds like your level of business for the very end of March is important in determining exactly how the quarter will come out?

And I would say the order books have improved from January to February to what we see here in March. And again, we'll give an update on where things stand in April on the conference call. But watching it closely. We're seeing the appropriate momentum. The question is, again, how much is -- of that continues because March will be critical. It's always critical to Q1. This is probably more important from how does this set of metrics in PM -- momentum actually and for the middle of the year in the back half.

I know that you plan to generate about $1 billion in cash flow this year. Do you think that, that's becoming harder or easier? Because I would imagine there might be inventory pressures that you could feel. But at the same time, maybe some of your commodity businesses will do little bit better.

Well, I think you're laying out the scenarios. So first, I would say, in Q1, we're on track to be similar to last year, right? And as I look through that, then there's a couple of scenarios, right?

One, price cost in our Intermediates. The more of that, that drops through to the bottom line here in the first half and into the second half, that will be upside to the cash flow. I think your point is valid, which is, okay, we're raising prices, input costs, so both inventory and receivables could be higher at year-end than we had planned on the first part. And I think it's how does that acceleration and, I'll call it, growth of earnings counterbalance that. It's too early, I'll call it, to be definitive on that. Our focus at Eastman is always on turning the results into cash and doing that through any environment. And these events in the Middle East are no different. We're going to manage to deliver on the cash and the cash commitments.

In the fourth quarter conference call, Eastman tried to point out both its strengths and some of its vulnerabilities for 2026. And when it pointed out its vulnerabilities, it talked about different patches of price pressure. And some of the price pressure, I think, was in Intermediates, in the Chemical Intermediates business. There was some in Advanced Materials. Is that price pressure all dissipated because of the changes in energy values now?

I think the global dynamics, right, of U.S. assets and the ability to serve in a -- our crude assumption was $60 to $70 this year, right? So at $80, $90, $100, those are prices that we've experienced in the past, and Eastman has performed extremely well in the past when those prices have risen and stabilized at those higher levels.

I think with the events and how does ultimately, the war and the Middle East conflict put a premium for a longer period of time. Whether this is -- the war is resolved near term or continues, I think there's a level of premium and Eastman can perform well in that higher crude and energy environment. And we've got the playbooks, and we're implementing those playbooks today and expect to see that benefit in Q2 in our Intermediates business as our cost position has improved on the global stage.

And also, Eastman is, I'll call it, a reliable producer. Our specialties depend on our intermediates. So as you think about something that we bring to the market is being reliable on an ongoing basis. So that's also an advantage of our customers partnering with Eastman, and we've demonstrated it over the long term.

Are there parts of Eastman's business that are in the Mid-East that make a difference to the company that are now hard to access or to supply at the levels that wish to supply at?

What I would say is we have limited incremental revenue overall. And honestly, from a segment perspective, it would be incremental in our Fibers business. So -- and the filter tow is where there's limited impact, and we would expect to see some of that limited impact in Q1 as well, which was in my update.

So my memory is Eastman, maybe it makes 1.1 billion pounds of ethylene, something like that. And maybe the ethylene price in the United States has gone from $0.18 to $0.26. And I get it. Propane is up a little bit, but that should be a benefit for you in the second quarter, yes?

I think you're using ethylene as a factor. I view Eastman as a propylene derivative. We have...

We can do propylene. Propylene is up $0.08, right? Propane, though has moved up. So you've got a propane upward movement and you've got a propylene upward movement and that should be positive for you?

Exactly. So as we think about our Chemical Intermediates business, it will be the first to benefit and there is immediate benefits that we would expect sequentially from Q1 to Q2 that are improved compared to what we expected at the beginning of the year. As we think about the magnitude of those movements, we'll provide a more quantitative update to that on Q1 call.

So you make 500 million pounds of propylene and you buy 500 million pounds at cost, right? That's the lever that you've got.

That's correct.

But why did you [indiscernible] the 1.1 billion pounds of ethylene? Shouldn't you also get a benefit from that as well?

We will get a benefit from ethylene and ethylene derivatives as well.

And then on the negative side of the ledger, you buy Paraxylene. Is that right?

That's correct.

And why do you buy Paraxylene? What do you use that for?

Paraxylene supports our Specialty Plastics business. So -- and I would say we're well diversified from a supply chain standpoint and don't expect any disruptions to that supply from both Asia as well as North America and the Middle East. And we move those around to ensure the security of supply.

I would also say some of our competition that's based in Korea, Japan also will be impacted by higher input cost as we think about on a relative competitive position standpoint. I think there, again, as we thought we would see some of that pressure, that was because we expected lower raw material and energy costs this year. That has changed. Our Advanced Materials business has price increases on tap for April 1, and we will continue to reevaluate those as market conditions continue to develop and unfold. So on that front, the business case has changed. We feel that the value that we will be providing to our customers and that reliability of supply will continue to be key, and we're taking the appropriate actions from a margin standpoint.

So you buy 325,000 tons of Paraxylene. It's up $300 a ton in Asia, something like that?

So you've watched the spot markets go from $900 to roughly $1,200 just as we have. And we're taking, again, pricing actions to offset that.

So what you've got is you've got your ethylene going in the right direction, you've got your propylene going in the right direction. You've got your Paraxylene going in the wrong direction or offsetting part of that benefit?

So Jeff, the way I would summarize it is, in environments where crude is higher, you've seen CI be closer to mid-cycle numbers. And then it depends on supply/demand. You've also seen our Specialty Plastics manage price cost extremely well from '21 to '22 to '23. You can expect that to continue here in 2026. We will manage the price/cost position. We will, I'll call it, get the returns that we should in our Chemical Intermediates at these cost curve positions. And we're doing that here in March to set the tone as we move forward into Q2 and the back half of the year.

Will the Paraxylene penalty hit you before the benefit of ethylene and propylene widening out?

I would expect.

Would it be to more concurrent?

Well, I would expect it to be more concurrent. I would expect the speed at which our Intermediates team is moving, you'll see benefits in Q2 immediately. I think there could be incremental headwinds as we start Q2. But I think by the end of Q2, we've taken into account everything that's already been seen in the market in our Specialties.

So order of magnitude, if no prices changed from where they are today, maybe you'd earn $50 million more in 2026 than you thought you would before?

Yes. Well, we didn't guide 2026, Jeff. I'm not going to guide that today.

Well, your unguided -- if you had your -- take your unguided number, you would add $50 million?

I think there's upside, and I think supply/demand will determine the amount of upside.

Okay. Can you take a step back and help us think through the methanolysis initiative at Eastman in that at a point in time, there was a tremendous amount of capital that was being directed to this effort and the tremendous amount of future capital that was going to be toward it. And now I think Eastman's capital expenditures this year will be below depreciation and much below what they were a couple of hundred million below where they were last year. Can you take us through how Eastman thought about this opportunity, say, 3 years ago and how you think about it now?

So the way I think about it is Eastman has a unique set of technologies, know-how and capability to take waste and turn that waste into a valuable feedstock, that is unique to the globe. We've taken that capability and have a world-scale facility that is fully operational, meeting its technical performance expectations as well as we're finding ways to grow and expand that.

Obviously, Eastman is responsive to the organic and the macro demand environment, geopolitical trade, which has ultimately, I'll call it, paced the affordability and the transition. But sitting here today, I would say there's still across aisles, as you think about the political side of this, people do not want plastic in the waste stream, right? That conviction is still not there.

The great thing that we're seeing actually is in CPG, we're seeing an acceleration and pull forward of contracts that we have to supply those because mechanical recycling wasn't meeting the needs. So as we see the Circular Solution for the packaging model, we see that case still being there. But me as CFO, I'm sitting here saying, well, we have to have a cash velocity that matches the demand environment, the trade environment and also, I'll say, the regulatory environment. I think we're making progress on smart regulation. That's taken a little bit longer. So as we think about filling out. We talked about our Specialty Plastics and our Advanced Materials business growing 4% to 5% in revenue this year, driven by that investment in our first facility. If you take that, that's somewhere between $100 million and $150 million of revenue growth, and we expect that to accelerate through the year, and that will be both durables to a lesser extent, but also the packaging solution.

So to me, we're taking this time in this environment to set the plan for the future with an asset-light model as we look at I'll call it, mixed plastic processing plants in the mechanical space that we can look at leveraging as well as existing polymer capacity so that we can actually have a second facility that is at lower capital than what we had planned for our Longview, Texas facility with the DOE. So I think that platform and option is there. It can be more capital-efficient because we're looking at expanding from 100 kt to something that can be 130 kt or 150 kt. So it's still real, viable, and we're actually being able to invest in it with better information from both market as well as capital that's not the plan that we had envisioned, but nor has the world played out as everyone had envisioned over the last 3-plus years.

What happened to the French plant?

The French plant, we're still in discussions.

So it's still alive, yes?

Well, it's still breathing.

There's a pulse.

Ultimately, there is still a project. But it needs to move at the speed at which trade and imports into Europe as well as, I'll call it, the feedstocks and the waste stream that they're managing as well as regulation. What has happened is there's more imports of Asian plastic, that's having an impact on I'll call it, domestic recycling. And at this point, the French are supporting a path forward.

We are there and we can serve that market and that demand. But ultimately, we also said we were going to be disciplined, and we can't move forward without regulation and the structure to be supportive and conducive to recycling and sustainable investments that drive strong economic returns.

In your Advanced Materials business, you're now pulling forward volume from Pepsi. Is that a significant part growth that you expect from Specialty Plastics in 2026?

Well, again, we very much appreciate the partnership with Pepsi, but it's not just Pepsi. There's a broader set of CPG companies that are contributing to the growth this year. And ultimately, we're pleased because it's also demonstrating the quality of our product relative to what they can acquire mechanically in the U.S. and around the globe.

So to me, it's another confirmation of Eastman and the platform to invest in methanolysis and a circular economy is differentiated, and we have a unique capability that I think many thought that the CPG companies could provide and support, but we're seeing the flaws in that both ultimately and the impact that it can have on the brand on the shelf, but also just functionally how it functions with consumers. And that's resulting in the acceleration, not just with one of our key partners, but across a class that are looking for that Circular Solution. So we're testing that now with the capability and capacity we have in Kingsport, Tennessee with our first facility, and that enables us to continue to learn as we look forward to projects for the second plan and beyond.

So as Chief Financial Officer, you were looking at Eastman 2 or 3 years ago as having, I don't know, $700 million in capital per year, and now you're at $400 million. So -- and I don't think that as a base case, there's a large step-up for 2027. So you're going to have the ability to change your balance sheet, to change your investment priorities. Is Eastman more in a pay-down debt steady state approach? Or is it leaning more towards share repurchase? Or how do you -- how does the company change now that its capital demands are so much smaller?

So to your point, we made a commitment that we did not see significant capital expenditures between now and '27. So that would be '28 and beyond for larger capital expenditures for the Circular platform more broadly.

As I see it right now, Jeff, ultimately, the economic environment has been more challenged and difficult. We've appropriately adapted. Our target is roughly 2.5x net debt to EBITDA. As we see things right now, we're comfortable with the debt levels that we have even in a more stressed environment. We're comfortable at the 3x in a slower or more challenged environment. We've always said we will put cash to use. The question, does the crude and energy environment create an opportunity for U.S. assets and U.S. operations to grow. We've invested in the ability for discretionary markets to improve, and we don't have to invest a lot to achieve economic growth over the next 2 to 3 years.

So to me, it's okay, balancing returning cash to shareholders versus the debt environment. And ultimately, we'll see how this year plays out, to set a tone for that. But we have flexibility, and we will adapt to maximize shareholder returns.

One of the areas -- so Eastman innovates in many different areas. And one of it -- one of the areas is you have a fiber-based material. I think it's called Aventa. That's in your Other segment. And I think your Other segment's revenues were $17 million. Is that the Aventa revenues?

So to your point, Aventa is part of the cellulosic stream, and there's benefit across that stream. The answer is yes, Aventa is still within our Other segment.

Yes. And it's the only revenue-generating item in the Other segment, yes? Or there's a little bit of something else?

To your point, there's incubation, but it's primarily Aventa.

Okay. Can you talk about your Fibers business in that the Fibers business is very, very profitable. And often, what you do is you set prices for the coming year or for the next year out. Where is price setting for Fibers these days?

What I would say is the commitment level this year is similar to what we had as volume last year in the Acetate Tow business specifically. Also, as we think about pricing, we had expected some modest headwinds in pricing, and we'll ultimately see where price/cost plays out overall.

Also, in 2025, we had significant impacts in our Textiles business related to related to the trade environment and also as ultimately, the Textiles business was relocating across Asia, even to places like Turkey as well. So also, we expect growth in the Textiles as we start to recover, both the applications as well as the market has continued to adapt to trade and tariffs and to the pricing overall. So as we see that, ultimately, we see that, that can be -- Textiles can be the positive. Pricing ultimately will be slightly lower year-over-year with volume and Acetate Tow being similar.

So your outlook for that segment is flattish for 2026?

Well, again...

You don't do outlook. Okay. But a little bit of volume, a little bit of negative price?

What we expect we said in Q1, obviously, is to be similar to Q4, just to be specific. And ultimately, with some of the modest impacts on our customers, ultimately, that it will be around that number or a little lower.

In Advanced Materials, there were some challenges that came up in the Interlayers business in 2025 and in your Performance Films business. In the -- a few years ago, those had been more growth engines. And now it seems that the growth has abated there. Was that a function of 2025? Or what's the outlook for those businesses?

So I would say in the Interlayers business, obviously, a weak architecture market and the European economy was a key piece of that. We talked about on our year-end call about going back and ultimately winning back share and that application within the European market.

On the Performance Film side, I think, one, we're optimizing our global asset base with the investments that we've made and the small acquisition that we made in China to run locally and take a lot of cost out. The other thing is affordability in the auto aftermarket and how much of that -- and we're introducing new products and continuing to streamline that cost structure as well to get that business back on the growth track here in '26.

So maybe in conclusion, if you look at Eastman's prospects at the beginning of 2026 and you look at its prospects for the year now, are they somewhat stronger, somewhat weaker or the same?

Well, Jeff, we're sitting here in the middle of, I'll call it, an escalating impacts in the Middle East and just 3 weeks into it. I think that presents opportunities in our Intermediates business, that's potentially materially different than what we had thought at the beginning of the year. I think the open question that no one knows right now or can know is what does all of this ultimately do to consumer demand.

And so for me to sit here and paint a scenario as we wrap up, we'll have more context that we'll share on Q1. But I actually think from an asset position, from a cost curve position and from an innovation position this year, Eastman is in a better position overall.

Thank you very much, Willie. It's always nice to have you.

Thank you, Jeff.

Good day, everyone, and welcome to the Fourth Quarter and Full Year 2025 Eastman Conference Call. Today's conference is being recorded. 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.

Thank you, Becky, and 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, Senior Manager, Investor Relations.

Yesterday after market closed, we posted our fourth quarter and full year 2025 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors section of our website, eastman.com.

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 fourth quarter and full year 2025 financial results news release. During this call, in the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2024 and the Form 10-K to be filed for full year 2025.

Second, earnings referenced in this presentation excludes certain noncore 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 fourth quarter and full year 2024 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we will now go straight into Q&A.

Becky, please, let's start with our first question.

Our first question comes from Josh Spector from UBS.

I wanted to ask 2 things on fiber here to start. First, can you talk a bit more about the actions you're taking, how the shutdown impacts earnings through the year? And second, if you could talk about cellulose a little bit and your ability to pass through costs there, if prices go up due to changes in supply behavior?

Sure. Josh, so fiber obviously is a top priority for us as we've been focusing on how we manage that business and stabilize it after what happened last year. Before I get into some of the actions we're taking in context of matters, and so I'm going to just remind you something we said before, where tow is certainly the largest driver in the drop in the volume and we held prices actually relatively well in spreads last year.

But that -- about 40% of the EBIT drop is actually not tow, right? So you've got about a $30 million decline that was tariff-driven in the textile business. While normally that's growing to offset market decline in tow and said it reversed in the negative direction with all the tariff pressure and consumer pressure.

The second was the overall stream slowed down because of reduced demand across the company using cellulosics and that was about a $20 million headwind. And utilization and energy costs for about $15 million higher. So there are multiple levers tow plus everything else in this portfolio that matter. When it comes to the tow side of things, we feel good that we've stabilized the volume situation this year relative to last year in our contracts with our customers. It did include a bit of a modest price decline to make that happen. And what that price decline really is about is, there were some customers that had higher prices in the marketplace, and they pulled in to be more in line with the broader market into where we are today. So stable and the volume we're assuming when we say stable is assuming our customers are at their contract minimums because we do expect destocking will continue through this year like it did last year.

As a reminder, we have contracts last year, too and we started the year thinking people will be buying in their normal range of the contract. And then as we told you through the year, they moved to their contract minimums, but we held them to that. That's why they have to continue destocking this year to get to where they want to be. And so -- and Q1 is starting out a little bit light. The contract commitments [indiscernible] our annual contracts, but they have some ratability flexibility around the quarters, and we expect the first quarter start off a little soft, hence our guidance and then they will ramp up as you go through the year. And normally, the back half is a little bit stronger anyway as a load channels ahead of the tax increases [indiscernible] happen every January. So we feel good about that.

Obviously, there are a bunch of actions in addition to stabilizing that business directly that we're taking. So the cost reduction actions across the company that significant cost reduction goal that we have this in the $125 million to $150 million range to build on $100 million last year, a decent portion of that goes towards fibers with some of the actions we're taking specifically on how to optimize how we operate our assets more efficiently.

The growth in textiles, we're seeing growth start to come back slowly, but it's coming back. We expect that to build through the year. We are expanding our efforts. So today, we've mostly focused on selling Naia filament, which is a very high-value product in the textile market. There is another product which is Staples, short fibers that you use. It's a more economic product. It typically goes into things like denim and fleece and it's a huge market. And so the margins are not as good, but they're still reasonably attractive. And so we're ramping up our effort, already got sales for this year, and we're going to try and ramp that up as another way to drive asset utilization.

And then on the broader stream question around cellulosics, we have the Aventa product, currently lives in [indiscernible], but that product is moving forward. We're going through a lot of product qualifications last year, and we expect volumes to build this year, especially in food trays and cutlery and straws. And so that will drive stream utilization as well.

So a lot of different actions that we're taking. They will build through the year. So how we get to the number this year and stabilize it, will sort of build through the year so we build on all the different actions we're taking. When it comes to price on the tow business, most -- some of the prices do have CPTs in them and allow for adjustment for changes in raw material and energy costs. So a number of those contracts will adjust if you won't and the textile prices are market-based. So we can raise prices. But in this weak environment, I would not assume we're raising prices a lot outside of the CPTs managing some of the headwind.

So that's sort of where we're at. We're pulling every lever we've got. This is incredibly important source of earnings and even more important source of cash flow, and we take this business very seriously in what we're going to do.

Our next question comes from David Begleiter from Deutsche Bank.

Mark, looking at Chemical Intermediates, are there other actions or options you're looking at to reduce the earnings volatility of this business?

Absolutely, David. And first of all, the biggest action we're taking, we've already told you about, which is the ETP project. So we have a project to take our bulk ethylene, which is the biggest driver of earnings challenge in the segment, given how that ethylene market is challenged. And that's not a new topic. It's been a topic for us for a long time. We have a project where we can take the ethylene and turn it into propylene and that dramatically improves the earnings in the segments. It allows us to not sell bulk ethylene, allows us to replace higher cost purchased propane -- I'm sorry, propylene and so we improve a loss as well as -- reduce the -- and eliminate the loss on the bulk ethylene, and we also improved the margins on the propylene side of the equation at the same time.

So that's worth, if you look at all the different ranges and scenarios of how the industry spreads can change, it's similar to $50 million to $100 million improvement in earnings and the payback on that is less than 2 years from a capital point of view. So that project we're driving forward as one that will definitely structurally improve the business.

When it comes to how the business also, it thrives and improves, frankly, is there's a cyclical nature of this, which is more demand-driven in the business. So the North American market is much more profitable than the export market, especially with all the Chinese dumping going on that's really impacting the market outside the U.S., the tariffs are helping to some degree, protect the North American markets. So as demand comes back within the segment in North America and building construction durables, et cetera, that's a big mix upgrade.

Also remember, more than half of the product we make in this segment goes into our specialty. So as demand recovers there, you're replacing very low-value exports on the margin with much higher value specialty sales. So that also helps improve the stability in the earnings when we get back to a more normal demand situation in the core CI business.

Of course, there's the broader question around the overall market and how it gets better with the current pricing and a lot of the products out coming out of China right now, the cost models we have, they're at their variable cash costs. We don't know how long that's sustainable, that's certainly impacting high-cost assets around the world, especially in Europe, South Korea, Japan. So you see assets are going to get rationalized. I'm not about to guess what the time frame is on that relative to how China is adding capacity.

But I do think the market structure around the world will continue to get better over the next few years. We're not banking on any of that this year, to be clear, with the uncertainty that's in the current market situation. But there are a lot of actions we're taking to improve this business in long term.

No, very helpful. And just on Q1, can you help us with the bridge versus the prior year to get to that decline you're forecasting on an EPS basis?

Could you repeat that question again? You were just broken up a little bit.

Can you help us with an earnings -- an EPS bridge from Q1 last year to Q1 this year for that decline that you are forecasting?

Year-over-year decline. I just want to make sure I understood the question correctly. So as we look at where we are today, obviously, we went on a journey through last year, right? Q1 was relatively strong, and then it evolved over time to where we finished Q4. In Q1, it's important to remember, as we told you on the third quarter call, that was actually a year-over-year growth scenario, right? So the end markets and the consumer discretionary, for example, were up 2% to 4%. And so if we had that year, we would have had growth -- normal seasonality for the rest of the year we had growth for the year.

So the evolution of the market after the April Liberation Day, causing markets to sort of go from being modestly up to down in meaningful ways, changed and altered the rest of the year. So Q1 is a tough comp because it was actually a growth quarter. Now where we are today, I think it's much more important to think about the progression of how we've gone through the year and how we come out of the back half of this year into Q1 and build from Q1 through this year. And so when I look at where we are now, we feel good about how Q1 is progressing. I think that we wanted to and are seeing a return in volume from fourth quarter to first quarter.

So you're seeing strong improvement in volumes in AM with seasonality sort of coming back to some degree, although I'd say customers are still being cautious. We're definitely seeing the lack of destocking of pre-tariff inventory that we told you about in the third quarter call, which obviously was a big driver of the volume decline in Q4 relative to Q3, I think most of that's abated. So we're seeing good recovery in the volumes there, seeing good recovery in the volume seasonally in AFP, as you would normally expect. We've already talked about [indiscernible] cover being a bit modest in fibers and we'll build through the rest of the year. And even CI is going to have volume recovery as a function of just less shutdowns, so more volume to sell as well as some of the seasonality and destocking that was pretty aggressive in CI abating.

So overall, we feel like we've got a meaningful amount of volume recovery coming our way. I wouldn't -- it's by no means taking us back to last year, Dave, but it's making good progress from where we were in Q4. On top of that, you've got utilization benefits that come with the volume and some of the cost benefits and actions we're taking that continue to build as we go from the fourth quarter to the first.

There will be some offsets. Obviously, energy costs are higher even in a normal period before we get to the winter storms. We expected energy headwinds in our guidance. And we expect prices to be a bit off in CI with some contract resetting. And then fibers, as we already told you, we'll have a modest decline in price. So when you put it all together, we feel good about that guidance and starting the road to recovery.

But all the things we're doing that we've talked to you about build over time, right? The innovation builds over time, [indiscernible] builds over time, cost reductions build over time. We're assuming we get back to normal seasonality, which will certainly help Q2 and Q3. So while Q1 is not where we want to be relative to what we think is possible for the full year, we're really encouraged to see the strength of the recovery out of Q4, and we see a lot of levers on how we can build and improve and deliver a strong meaningful earnings growth for the year.

Our next question comes from Patrick Cunningham from Citigroup.

This is Rachel [indiscernible] on for Patrick. So the earnings contribution from methanolysis seems to imply maybe less than 25% incremental margins on additional volumes this year. So is this the right way to think about incrementals for some of these noncore applications? Or is there any additional fixed cost or mix drag impacting 2026?

Thanks for the question. What I would highlight is, obviously, as we think about the benefits of our circular solution for the packaging model as well as the combination of the specialties with Triton Renew and the end markets that we're going to into those applications. To your point, Rachel, there's a, I'll call it, a spectrum of drop-through margins. As we think about 2025 to 2026, volume growth is a key aspect of that, and we've highlighted that with the contracts that we have across a spectrum of key brands that we're growing with in the packaging space and that being the substantial driver.

So as you think about that growth rate, what I would say is, for the fixed or I'll call it the -- the model that we've talked about for packaging, where we have volume commitments as well as cost pass-through, we believe that, that is reasonable outcomes and delivers the returns that we've been talking about. What we will also have is upside to that as we have additional mix upgrade and sell into our specialty markets. And as we get momentum in the consumer discretionary markets over the long term to drive those returns that we've committed to previously in the circular economy.

Great. And I know you haven't guided to fiscal 2026 for the full year, but given your expected growth across [indiscernible]. Can you help size your latest view on your price cost trends for your specialty businesses in 2026? And just one follow-up there, you often talk about defending your value of your products, but now it seems like you're giving some price back in AM. So I guess what's driving that?

Sure. So it's -- there's a lot of that question, right? So I'm going to try and answer as best I can. Just to start off with around sort of how we look at 2026 and think about it, we're very clear that the macroeconomic scenario is highly uncertain. I think everyone is pretty much in the same bucket. And so we're not trying to call the macro economy. The biggest driver of our company in earnings and performance and cash is volume. And that's been true for the last 4 years and it will be true for this year. But right now, we're assuming the markets and our planning scenario are relatively stable last year. And then what are all the different things that we can do to drive value.

And so we start with the focus on cost reduction since that's immediately in our control. And as you've seen, we delivered $100 million, which was 25% over our target. Last year, great momentum and that we think we can get another $125 million to $150 million on top of that. That's $225 million to $250 million in 2 years, which for our size of the company is pretty significant and really demonstrates our accountability to our shareholders with a great value in challenging times.

But the biggest thing is around growth, right? So we have lower costs and a lot of that cost will flow into Advanced Materials, then it's how do we grow volume. And on the volume front, there are several things that we're doing. We are more in our control than waiting for the macro economy to get better. First and foremost is always innovation to create growth above your underlying markets. The cellulosic -- I'm sorry, the circular economy in polyesters is a key example of that, that incremental $30 million of improvement over '25 is significant with a revenue growth of 4% to 5%. A lot of it being driven by the ARPC customers that we talked about in the third quarter that are already ordering and ramping up with us in the quarter.

So we feel very good about that and building -- starting to build in Q1 will create more value as we go into the rest of the year. You've got the classic innovation in the films business with HUD in luxury cars and EVs growing around the world. You've got the EastaPure, ultra high-purity solvents and semiconductors in AFP. We have all the cellulosic growth I just talked about and how we're trying to drive growth in the fibers business.

We're also expanding our aperture and how we think about volume growth across the company, but especially in Advanced Materials and in Fibers is how do we target these applications that are outside of our normal core specialty businesses. You don't really want to aggressively go after market share in your high-value products because you just erode your value in those applications in a weak market, that's a bad choice. You want to win on your value proposition, you want to maintain your margin. So we're targeting areas where we can grow, that adds volume and utilization to the overall cost structure of the company.

One we've already done, which is we gained some of our architectural interlayers where we lost some share last year. As I talked about, we're doing the Stifel product in fiber to drive growth. We have the Aventa. We also in polyester, just with the actions we're taking in our core business have a lot of volume growth already but there's still space to look for more volume. So we're expanding some efforts in some markets like heavy gate sheet and shrink packaging, where the margins are not as high as Triton, but they're still attractive and allow us to drive asset utilization.

So how do we really ramp up volume and utilization and leverage that cost reduction altogether. And the segment that will for sure benefit the most from these actions is in AM. Now to your question around prices, there are some price declines. We already mentioned Fibers and CI. In Advanced Materials, we do expect some modest decline in there too, as we share our raw material costs advantages. We can't offset energy headwinds in this market condition and our competitors are outside the U.S. but we certainly have done a phenomenal job of managing our price relative to our costs over the last 4 years. But after you get it in 4 years of doing a great job, you have to start sharing some of that raw material benefit with your customers. And so we're doing that.

But in the context of the volume growth we're getting, the overall variable margin is increasing. So those are all the actions that we're taking to try and drive value and create very meaningful earnings growth for the year.

Our next question comes from Vincent Andrew from Morgan Stanley.

This is [indiscernible] on for Vincent Andrews. I'm just wondering if you could help with some of the bridge items for advanced materials ex methanolysis? I believe that you've commented that innovation reversal of the asset utilization headwind from last year and FX or tailwinds, while you should see some price cost headwinds. Curious if you could provide some more color or help put a finer point on what you might see on a year-over-year basis in that segment?

Yes. I think I just hit on a lot of it just in the last answer, but the great thing about Advanced Materials this year is it's got a lot of leverage to work with, right, to grow earnings this year relative to last year. The first and foremost is that volume growth, right? It's volume growth delivered by [indiscernible], which is one of the bigger drivers. It's finding volume growth in weak markets through our innovation and on the levers that we're trying to pull there. So you've got some core recovery and you got circular.

On top of that, you have a good portion of the cost reduction flowing into AM that is part of that overall corporate program. You've got the largest amount of utilization headwind last year was the aggressive inventory actions we took in managing Advanced Materials. And so as these volumes come back, we start getting a meaningful tailwind on utilization in this segment. And then you do have some FX tailwinds and benefits as well.

So when you put all those 4 levers together, they're quite material. Now there are some offsets like a bit of higher energy costs this year, that modest price decline I just mentioned, relative to the energy cost. And then you've got the -- I just forgot what the other part was, -- the other headwind is -- that's it. I don't think there's another headwind. Oh, variable cost. That was it, variable cost is the other head.

Our next question comes from Aleksey Yefremov from [ KeyCorp ].

Just looking at various bridge items you provided for this year was sort of crudely came up with about $5.50 to $6 in EPS. So I wonder if you could comment that range is close to what you were thinking?

So I never imagine getting that question. So look, as I already said, the macro economy is incredibly complicated right now. There's a lot of uncertainty. In that context, we're taking a huge amount of actions that are in our control from costs to trying to create our own volume, leveraging asset utilization and certain things like FX, that's a tailwind. So there's a lot that helps. Clearly, there's a few headwinds. The rate at which CI recovers from last year and how we moderate and stabilize the fibers business as well as things like variable comp going back to 1x.

So when you put it all together, we've said there's a meaningful improvement in earnings that's possible. What I would say is when you think about the sort of upper end of what you're talking about around $6 a share, that's very much in the range of what we're thinking as possible. But I have to emphasize there's a wide range here around what could happen. And it is macroeconomic that we're talking about and where the uncertainty is.

If you look at GDP and everyone's talking about how great GDP is and it's growth last year were expectations of this year. If you back out data centers, AI, health care, GDP is sort of flat. And the consumers, I think, has been well understood through last year, especially the 80% of our consumers out there are really struggling with the economic challenges they have and the affordability, the fear of what tariffs are going to do, fear about can I get a new job if I lose mine, et cetera. So there's a lot of caution out there that's been there for the year, all last year. I don't think it's materially changed. That's why we think the economy could be stable. But it's challenging out there. And there's any number of things, geopolitical works, et cetera, that could make things worse.

On the flip side, there's a lot of potential upside here too relative to sort of that 6%. Right now, demand has been incredibly weak since 2019. We've told you housing, and you all know, total home sales down 20%, not just here, but in Europe, China is worse. You've got consumer durables down 5% to 15%. You've got cars barely getting back to 2019 levels. A lot of pressure in accessories in the auto market because people can barely afford the car. There's a lot of pent-up demand since 2019 to now, not to mention normal market growth being missing, that can recover at some point when consumers get confident and stable.

And especially for the U.S. economy, more than China and Europe, I think the current administration is very focused on getting the economy to grow for the consumers, not just data centers and health care because the midterms are coming up. And so lower interest rates, obviously, will help a lot of the tax policy may get more money into the pockets of that 80%. There are a bunch of housing policies that they're considering that could be helpful. So I'm very hopeful that they take those actions and the consumers get healthier and buy more, and that would be upside. So we're very focused on controlling what we can control, very aware that the economy could go any direction, so we're not going to take our eye off the ball and everything that we can control. But there's just a lot of uncertainty. And right now, we're just focused on making sure we get a good start to Q1 and build from there.

Our next question comes from John Roberts from Mizuho.

It wasn't very long ago that you had a young tick featured on the cover of your slides. What's going on with the ag products you're just continuing?

We had a couple of Crop Protection products in Europe that had a regulatory ban going for since we had to stop selling them. So that's what happened. It's just a European specific thing, but there were profitable products, and we felt the impact. We will see it to impact this year.

Maybe I could get a second one then. What's going on with the decline that you cited in rPET from mechanical recycling?

Decline?

Decline in quality. I think you cited [indiscernible] rPET.

Yes, yes, absolutely, John. So the decline in mechanical recycling quality. What happens is -- and we've been -- we've known this from the beginning of our platform and why we're so excited about chemical recycling is, mechanical recycling has a major flow, which is when you melt plastic, you break down the bonds of the polymer chain every time. And as you do that over cycles, the polymer integrity chains get worse and worse. And so the quality of material degrades, and you get impurities also in the polymer because you have to remember, mechanical cycling has no purification. So you take waste plastic, you select the cleanest, clearest bottles you can find in the plastic waste stream and then you wash them and then you chop them up and then you melt them back into pellets. So there's no purification.

So also if there's any contaminants in that bottle, it doesn't necessarily get removed from the polymer. So the polymer starts to get yellow, it starts to get gray. You will see that on the bottoms on the shelf that's already starting to show up. You also have some integrity issues around the strength of the polymers. So if you're stacking cases, the bottle start to collapse a little bit. And so there was always a belief that in understanding that the mechanical integrity would degrade with mechanical recycling. And but they thought it would take many years before that impact would actually show up in the polymer, and it's showing up a lot faster. It's already showing up.

And that really confirms our value proposition because we have none of those problems, right? Chemical recycling, we -- as we told you, before we unzip the polymer back to the building blocks, we have a big purification step. So the intermediates that we produce out of it that we then turn back into a polymer are perfect. They're exactly the same as [indiscernible]. In some cases, we're finding it's actually -- has a little bit better clarity than a virgin polymer. So -- and we can do this infinitely like aluminum.

So we are really the long-term solution in chemical recycling. Mechanical is a good thing to do and it's energy-efficient, but its yield is incredibly low because -- they can only clean up 25% to 35% of the really clear bottles. The rest of it gets downgraded into low end markets or landfill. That's why long term, we're very confident about the value of this whole platform having a lot more demand, and it's already being confirmed with our customers now recognizing how much our quality is better. And that's why you see some volume being pulled forward with Pepsi and some other brands into buying our bit from us next year -- [indiscernible] this year relative to when the second plant was going to come online.

Our next question comes from Frank Mitsch from Fermium Research.

Mark, I wanted to get a sense -- I wanted to get your sense of where you think inventory levels are at your customers. Obviously, you spoke a little bit about the volume decline that we saw in 4Q, kind of reminiscent of the great destock back in '22, '23. So I mean you might make the case that inventory levels have to be bone dry at your customers, but I'm curious as to what your thoughts are.

So I think that a lot of very painful lessons were learned back in '21 and '22 when customers and the retail channel massively overbuild inventory. And then demand corrected, obviously, with inflation, interest rates, et cetera, and people got caught holding on a lot of inventory that took a very long time to destock. I would say this year is very different or 2025 was very different than '23. First of all, people learned their lesson and we're not building inventory for some expected high growth scenario. Everyone was at the beginning of '25, pretty cautious about the economics earn for the year. So customers and retailers were being disciplined on that.

Now what was different was April changed everything, right? So when the tariff trade sort of situation escalated, that caused everyone to go into action mode to try and mitigate their exposure and they bought more than they needed for the moment where they were trying to get ahead of those tariffs. And then demand slowed down a bit, as we described from Q1 to Q2 with the consumer. So you ended up with some excess inventory, not just for us because we were doing the same thing, building some volume with the expectation of modestly improving sales in the back half of the year, and obviously, that didn't happen. So we had to do our own destocking in Q3.

Same was true of our customers, right? They were sitting on more inventory than they needed with the consumer demand not improving materially and had to sort of take action on reducing that inventory. But the inventory levels they started with were much lower than where we were back in '23. And the change in the market demand is not significant, right? The market demand has moderated a bit. But it didn't sort of collapse like it did in the back half of '22 and '23.

I think the other test of it, Frank, is back then, we had a huge and difficult Q4, where volume really dropped and then it dropped even more in Q1 of '23, right? Whereas now we see orders picking up in January, February relative to last fourth quarter, right? So that also gives me that comfort that they wouldn't be ordering more right now if they hadn't managed their inventory.

Okay. Got you. Okay. And so that feeds into my next question. I'm trying to just reconcile a couple of different items related to this. The asset utilization headwind in 2025 was $100 million, running your plants lower because of -- because you want to meet demand. So that's $100 million negative in '25. Now for '26, you're guiding $25 million to $50 million benefit from utilization, lower shutdowns and volume growth. So it's $25 million to $50 million for that. Is that directly comparable to that $100 million negative for [indiscernible] is also the $20 million benefit from lower maintenance in '26 versus '25. So if you can reconcile those numbers, that would be very helpful.

All right, Frank. Just at a high level, what I would highlight for you is, as Mark just highlighted, we had to do some of our own destocking. So first half to second half, we basically had $100 million headwind as we look at the way we run our plants, the demand that we had in the first half and with the tariff, I'll call it, initiated pre-buying ultimately in the back half as things got more cautious, we turned our plants down to deliver the $1 billion commitment that we made on cash flow. As you think about on a year-over-year basis, we highlighted in '24, we actually built inventory as we were planning for the strategic transitions to serve our circular economy footprint, including the RPET, and we built inventory in advance of the transition.

I would say our Advanced Materials business did a great job of bringing that inventory back down, but it was really the build of inventory in '24 and the implications. So that's why there's a more modest utilization tailwind as we go into '26 from '25 is it's really those lower planned turnarounds as well as the benefit of not planning to build or deplete inventory. We expect to hold it pretty stable in our baseline assumptions starting the year.

The other thing I'd add is, we have plans to drive a lot of volume growth in the things that we can control. We're appropriately cautious like everyone else in the industry right now, but with the underlying market demand is going to be [indiscernible], we get -- and we can deliver on all the volume that we're trying to achieve. The tailwind is going to be more than $25 million to $50 million of utilization benefit for this year. But we need to prove all that, right? So we're going to be a little conservative on how we think about that number until we see all the volume come together.

And also, just as we highlighted on Advanced Materials and while we -- the reason to believe, obviously, a large portion of the benefit will show up in Advanced Materials from utilization.

Our next question comes from Kevin McCarthy from VRP.

This is Matt on for Kevin McCarthy. Could you size the opportunity for your high purity solvents in the semiconductor end market within Additives and Functional products? What does that growth rate look like? And how do the margins compare to the rest of the segment?

The [indiscernible] is a great business. The margins are definitely above segment average in that business and it's always great to be connected to semiconductors right now and being on that growth. It's not a huge product line and we don't break out those kind of numbers in our portfolio. But it is a meaningful contributor to sort of how to drive earnings growth, how to offset some of these discontinued products as we think about how we keep ASP stable this year. And the growth rates are higher in the 20%, 30% range and how we're growing it, but it's not a huge number when you apply that 20% to 30%. So they'll go overboard and how you think about it.

But it definitely is helpful as we think about that lower HTF sales and a couple of the discontinued products being a headwind this year and -- I'm sorry, in AFP and how we offset it.

And then in your prepared remarks, you mentioned that the EPS guidance you gave for 1Q does not include the impact from winter storms. And I appreciate that's hard to predict, but could you maybe give us an idea of how you're thinking about that, given how the winter has progressed so far?

To your point, it's too early at this point. We still have freezing temperatures here in Tennessee as well as our site in Longview, Texas. And there's more snow that's getting ready to come. We've seen limited impact on our facility so far. As you might expect, I'm sure you've been watching the natural gas markets. So the main impact is on the energy and natural gas. And where does that actually play out and influence. As Mark highlighted, we expected the higher natural gas in Q1, but this could also be an additional tailwind. Ultimately, we're taking actions to ensure the safety [indiscernible] as a headwind in addition to what we had already forecasted.

We're taking actions on sort of the safety of our team members and reducing rates to also limit the amount of natural gas headwind that would come from this event. And obviously, we have a hedging program, and we're -- about half of that is hedged as we go through the quarter. We will provide, I'll call it, more information as we talked to you throughout the quarter.

Our next question comes from Salvator Tiano from Bank of America.

Yes. So firstly, I wanted to go back to the fibers volume. I know it's been a pretty long discussion, but I still do not really understand getting that, obviously, the textile part was down a lot, how given the volume balancing tow the volume was down 19%, setting aside the EBIT that you addressed in the first question of the call. So what are typically the volume bounds in your contracts? Like is the minimum actually 20% below, for example, the normal level?

And secondly, as we think about this year's volume, you do mention in the call that you secured flat volumes year-on-year, but there will be continued destocking. So I don't really understand what that leaves us on a net basis for the Fibers volume year-on-year. Should we just assume flat? Or does this mean the [indiscernible] to the downside?

On a full year basis, you should assume that the tow volumes are stable to last year. So that -- just to get that question on the table. And then we have some volume growth we're pursuing in textiles on top of that sort of stable volume situation. The way -- you think about the contracts last year relative to the contracts we have this year. So we started the year last year with volumes that were obviously better in Q1 and then they were became less each quarter. Q1 started largely with customers buying in their contract ranges, but not all at the bottom of the ranges. And that's where the volume sort of was sort of normal in that sense, outside of a couple of things that we started the year with under destocking, but a lot of customers were normal. And then as the year went on, more and more people started taking actions and going to their contract minimums to try and destock.

And we had also had some growth commitments from a couple of customers last year that was -- that they had plans on assets in the ground. We're buying the volume for their growth, that they thought they were going to have and winning some share from some competitors and that growth didn't materialize for them. So suddenly, they're sitting on more material they needed and started but really reducing their demand, too. And that's sort of how the volume evolved to where we were, where most people are focused on destocking at the end of the year.

So in that context, we then sort of pursued and achieved a bunch of contracts that have volume ranges to them. And when we look at those contracts that we have in place now and the actions that we've taken, we believe, on an annual basis, the volumes when they're at their minimum will be stable to the volumes we realized last year. But those contracts, while they're volume commits on an annual basis, they're not -- they have flexibility quarter-by-quarter and how much they buy in the annual commitment. And so they're modestly lower in Q1 on their commitments. So they have to buy a bit more to stay in their contact zone as we go through the year which also coincides with, I think, less destocking that they need to accomplish this year relative to last year.

Okay. Perfect. That's very helpful. The other thing is a little bit on the variable compensation. I mean you are working very [indiscernible] trying to make sure that earnings will grow this year, as we said in the guidance -- in the outlook. So -- and you're cutting costs by, I believe, over $300 million in terms of the gross cost reductions, right? So in this context, why would the variable [indiscernible] compensation will be such a big headwind then I guess if you do not deliver on earnings growth because of whatever happens in the macro environment, how should we think the headwind -- like will the [indiscernible] be a headwind? Or could it actually end up being neutral year-on-year?

So what I would highlight is, obviously, as we set out with our business plans in 2025, the expectations at the start of the year were much higher than what was realized. Obviously, we reset commitments, but the plan was in place and we're accountable to shareholders for that plan. As a result, you're going to see lower -- there's lower variable comp expense in our P&L in 2025 and there will be lower cash payments here in '26 for those plans. As we're resetting the business scenarios that Mark's outlined today, we expect to deliver on those. And if we deliver that stable cash and also deliver on all the actions, net of some of the headwinds, we would expect that the variable comp would reset and would be a headwind year-over-year of about $50 million to $75 million, depending on where we see those scenarios play out.

Our next question comes from Jeff Zekauskas from JPMorgan.

This is Lydia [indiscernible] on for Jeff. How much have you spent on the second methanolysis project? And what would help you make a go or no-go decision? And are you looking for another baseload contract given [indiscernible] has been pulled forward?

So as far as the second project is concerned and expense, obviously, we've already done some engineering expense around building the facility in Texas, and then we lost the DOE grant, and we put all that work on hold. So we're not spending any money on engineering at this stage until we've lined out and developed a compelling project to be a lot more capital efficient and how we're approaching it to restart the project and go forward. So right now, we don't have any engineering expense or headwind from a capital expense point of view. Obviously, there's a team working on the [indiscernible] economy across all platforms around the globe. And we're taking that cost down to some degree, too, as we adjust the rate at which we're progressing.

But -- so that's where we're at. But I would say though, around the second project, one, we're really excited that Kingsport can be debottlenecked by 130%, which allows us to grow more from the first plant, have better ROIC from the first plant before we get to the second plant, and that's what's enabling us to be confident that we can grow the especially economic recovery and serve the rPET market with some of our customers who are coming back and wanting to buy from us a lot sooner, as I described earlier, due to the degradation of mechanical material that they can buy. So that's all really good.

And it gives us time to work on this idea of more capital-efficient second plant, which we very much want to build. And so we've got 3 different options going on there where we're looking at different locations and assets we could leverage that already exist that we feel very good that at least one of them will be quite viable to move forward. But because of the debottlenecking, that means we can avoid ramping up significant CapEx around this platform. this year and next. So it's a great solution to moderate our capital in a very difficult economic environment and make sure we have good strong free cash flow right now.

But keep on track with the circular platform, which we believe, is still going to be incredibly successful over time. I mean, without a doubt, people are buying a little bit slower in the specialties right now because not because of recycling just because there's a lack of demand for their products, right? The consumer durable guys are under loss stress. So this all lines up and works out quite well to have a great platform, manage cash in the short term, be responsible to our shareholders on return on investment.

And is the Pepsi contract, the main contributor? And this is for the Kingsport project, is that the main contributor to the $30 million incremental earnings in '26? Or is that later in the year?

So the revenue growth for the Kingsport project in '26 running '25. Certainly, there is a significant amount of revenue coming in from rPET. Pepsi is one of the contracts that we have in place. We also have several other strategic leading brands, ramping up volumes with us on rPET as well. So that is a big part of the 4% to 5% revenue increase. To what degree the specialties play a role in the final outcome for the year? It goes back to the macroeconomic question we talked about. If the world stays stable, we expect some growth in the specialties especially in consumer durables, where we're [indiscernible]. We still have 100 customers committed and buying specialty Triton Renew and some cosmetic new products, et cetera. They're just not ramping volumes up as much as we'd like because the economy is so challenged.

Once they start -- once you have a stable economy, that starts -- they start launching new products to try and accelerate their growth and our volumes will grow with them. So as the year plays out, we expect some of that specialty business, hopefully, will start coming in and being a bigger part of the mix, but a very good portion is rPET, but it's not just Pepsi, it's several other customers.

Our next question comes from Mike Sison from Wells Fargo.

Mark, when you think about sort of restoring earnings -- Eastman's earnings power back to where it used to be, is there anything structural, do you think, in either the end markets or competition or China or something that could prevent that? Or -- and then just a quick one on your outlook for AM and AFP for sort of underpinning the significant earnings growth. What is kind of the range of volumes that you need? I know you have a lot of that volume with new products and within your control. What's sort of the variable on the volume growth that you need to get that sort of significant EBIT growth?

Thanks, Mike. And yes, we spent a lot of time on this question, and we talked a bit about it at the deep dive and how we thought about getting back to what we said was normalized earnings and you can go back and look at some of that material because I think most of it is still true in what we said then to where we are now. Without a doubt, when you think about the driver of where our earnings are today, it is primarily due to lower volume from economic demand that's impacting AM and AFP to some degree as well as CI.

So it's -- that demand, whether it's high-value specialty growth in AM, very attractive growth in AFP or even just North American high value relative to exports in CI, has all been impacted by the economy. And it's been weak, as we all know, for over 4 years, which is pretty unprecedented in that kind of a time frame, like 2009, 2020 were short blips, really steeped down and snap back. This is a long duration.

So as we look at all that, and I said this earlier, there's a huge amount of potential pent-up demand to recover. Cars are 15 years old. Appliances are getting to their end of life when they bought them back in 2020. The housing market being 20% down. And for us, total housing is what matters, not new builds to be clear. The total housing, which is now down 20%, starts to recover, that's a lot of pain. That's a lot of appliances that go with people moving into a new or an existing home.

And so there's a lot of upside in demand that can recover a lot of our earnings. So that's sort of the key, is that innovation, you've got the circular platform driving a lot of growth on top of a core market recovery. And what's been impressive over the last 3 years, we've done a phenomenally good job of maintaining our price and our variable margins while defending our share because of our innovation, giving us differentiation.

So if volume comes back, the incremental margins, the volume recovery and the utilization benefits that go with it, I think, are quite significant to bring earnings in AM and to some degree, AFP back in a meaningful way and even help CI recover in their earnings. So I think that's all really good.

Now obviously, the structural -- so I don't think we have a structural problem in AM and AFP. We have a cyclical market demand problem. That has been our challenge. And to some degree, that's also true in CI. Now there are structural challenges in the [indiscernible] world, in the [indiscernible] world from excess capacity in China impacting some of the chemical intermediate margins. And there's a debate, obviously, going on in the industry around to what degree did that structural pressure change. I mean right now, we are for sure at the bottom of the market when the prices are at the variable cash cost of the Chinese. So I don't think that's sustainable.

But to what degree it fully recovers, is unclear on CI. Now with CI, when you think about it, the actions we're taking on ETP provide a big lift the margin recovery and demand recovery in North America will provide a lift. So there's a way to get the earnings back from where they are today to probably $150 million, $200 million in a normalized place. Now that's probably below where we were in the past, trying to reflect some of the structural challenges that we expect, but a significant improvement from where we are today.

Fibers, as we've already covered, I think, we're trying to stabilize in this year. What's interesting is if you look at the EBITDA in 2020 -- 2019 for CI and fibers together, it's around $520 million. If you look at last year and put EBITDA together, it's about $100 million less. So from a structural question, which is more of a fiber CI question, just ETP can get you back to where we were in 2019 and then we have the specialties building on that. And we're taking a lot of cost out to -- $225 million to $250 million of cost is also coming out to offset structural challenges to enable us to get back to normalized earnings. So we still think it's possible to get back to that $2 billion kind of number.

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

No problem. Our last question comes from Laurence Alexander from Jefferies.

Laurence, are you still there? Becky, may we go on to the next one.

[indiscernible] Laurence' line.

Okay. So I think that's -- go ahead. Go ahead, Becky.

No, that's okay. Sorry, I was just going to say that was our last question.

Perfect. So thank you, everyone, for joining us today. We appreciate your time, and hope you have a great rest of your day.

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

So for our next fireside chat, we have Eastman Chemical here, and I'm pleased to be joined by William McLain, EVP and CFO. As many of you know, Willie has served as the CFO since 2020 and has served several high-level finance and accounting roles throughout the organization in the U.S., Asia and Europe and has worked with business teams on strategic planning and portfolio optimization since joining Eastman in 2000. Willie, thank you for joining us here today.

Maybe we'll just start with your overall state of the union, given limited visibility on demands, broader concerns on consumer industrial activity, it would be helpful if you could frame how you're thinking about the demand environment quarter-to-date entering next year across your end markets.

Okay. Patrick, thanks. Great to be here today and appreciate everyone here in the audience. As we think about -- I guess, we're now 4 weeks out from when last reported. I'll start with the press release. In Advanced Materials and Additives & Functional Products, as we had talked about in the quarter, October was a very good month. I think there's a bit of elevated caution as we've continued to progress through the quarter.

And really, the question is how the customers and the supply chains end the year here, right? So to your point, I think the lack of transparency in the supply chain and end markets, a couple of weeks of visibility, and people choose to push things into January, they could still do that. But I think you've got a little bit of positive and potentially a little bit of choices of where they choose to push things out.

I would say demand overall is probably a bit lighter than we expected, but that's being offset by great cost control and utilization as we look at the quarter. So all in all, for Advanced Materials and Additives & Functional Products, we expect earnings to be in line with how we guided at the conference. As I look at Chemical Intermediates, I would say it's a bit more challenged in the chemical intermediate space. Demand in North America, I'll call it has deteriorated a bit as we've gone through the commodities, especially here in the Intermediates space.

Additionally, during the quarter, we also had one of our large crackers being turned around. It's taken us a bit longer. It's normally almost a 60-day turnaround from a plan perspective, but it's taking us longer to get that back up to full rates and with the North America deterioration, I think everyone can see that the olefin spreads are also contracted a bit more.

So for the Chemical Intermediates business, we had said that it would be positive for the quarter. We actually think it will be a bit below breakeven as we combine all of those factors together. And as we think about fibers on the earnings, we continue to see the destocking. It's probably a bit worse overall. But as I take all these factors together, we gave a range for the quarter.

I think we're going to be a bit below the range here in Q4, and it's primarily due to the Chemical Intermediates, both the demand side and the prolonged turnaround, which is really a fixed cost absorption issue on that front. Pivoting to the cash front, I would say we're still well on track to approaching $1 billion with the actions that we took during Q3 on the inventory front. On the inventory, if you take the action in Q3, you're not going to turn it into cash this year, it will be next year. So still confident in approaching $1 billion of cash for 2025.

Got it. And just for clarification there, the range there you had, I believe, was $0.75 to $1 or what was it?

That's correct. So we think we'll be a bit below $0.75.

Understood. And maybe just a good segue to specifically on sort of inventory side, both your own management and customers management. I think like you had called out while your customers hadn't built that much inventory. There was some inventory built ahead in the first half that's been pushed into the second half. So any progress on how that's developing and how customers might be positioning for 2026?

Yes. So to your point, I would call -- there were 2 items that fundamentally led to taking decisive actions in midyear. So one was obviously in our Fibers business, the level of destocking and our multiyear contracts, our customers going to the low end of the ranges as they destock the ambition. We course corrected on that in Q3. Also in the long supply chain that we have within our Specialty Plastics business.

So we're bringing up Tritan facility, and we built some inventory into '24 that we needed to ultimately make those asset conversions. Obviously, that was pre-liberation day. And post-liberation day, the demand has been impacted at the same time, we needed to take inventory down. So that has taken longer, but it's still the right strategic decision to ensure, I'll call it, the seamless transition of those assets.

And that's been evidenced and I'm sure we'll talk about it later by the demand in the packaging sector that we're seeing for 2026. We will have the right balance of Tritan as well as copolyester as well as recycled polymer capacity. So we're working ourselves through that, and we substantially, I'll call it, corrected that here in Q3.

Then it's just the overall supply chain for our Specialty Plastics being long and multistep. We've made investments and we continue to make investments in transparency and using digital technologies to better plan our assets and demand around the world. This is -- as we saw in Q3, I think over half of the impact of the utilization was in Advanced Materials and Specialty Plastics. We will continue to work through that to make it better. But at the current levels, assuming demand played out as we've highlighted, we think our inventory will be at the right levels that we wrap up 2025.

Got it. That's helpful. And a question I had on AM segment more broadly is just -- obviously, you talked about the inventory shifts, negative fixed cost absorption. But even looking at other times where volumes declined sort of mid-teens, even like you were still able to hold the margin profile relatively well. So I just want to unpack whether there's additional sort of mix headwinds or areas of business where you may have seen additional challenges beyond just the inventory position.

As we think about ultimately the discretionary in our markets. What we said is we're roughly 50% exposed to discretionaries today. Previously, that was 6%. So discretionary end markets to us equal, higher corporate average margin and margin profiles. You've also seen what I'll call it, the impact here currently of decremental margins.

I'll remind you, it's equally as good on the way up. And if it's also incremental margins that have the positive mix, it's EBITDA. We've invested through the, I'll call it, the extended downturn and trade war to have the right asset position. So I view it as we're coming out as a position of strength to one, we can get back to normalized EBITDAs with the assets that we had pre plus we've made investments that give us upside as demand recovers in both discretionary as well as with the circular solution and our methanolysis facility.

So we can do that and invest in lower CapEx in 2026. So this year, we're going to wrap up around $550 million in CapEx. You can think about us starting the year at a $400 million run. That gives us additional operating and free cash flow. Should this be a stable environment or should there be some restocking? Obviously, as we outlined on the call, we're doing and focused on the controllables which means if it's a stable market, we have upside that we've created and can return that cash that Eastman has for our shareholders.

Got it. That's helpful. And maybe just on one of those discretionary end markets. I think there's been different -- there's been different views on what auto builds do next year. There's obviously some regions doing better than others. So I'm curious to know how you're thinking about sort of Eastman's exposure to that auto production environment as well as how the sort of premium subsegment has performed within that as well.

Great question. I would say, I don't know that we have a unique perspective. Obviously, we follow the stats as well. I would say we've got a footprint around the world. So for those that don't follow Eastman as closely, roughly about 1/3 of our transportation is in the Americas, 1/3 in Europe, 1/3 in Asia and we actually have assets that are in each of the regions.

I would say that we're more leveraged to the higher end. And as you would expect, we produce specialty products that enable brands to have multifunctional uses. So as you think about cars today, they have more glass. More glass means more in layers for Eastman. And with higher technology acoustic, as an example, you want your cars to respond quickly and appropriately when you're giving voice command.

Also with more glass, you need more solar. And it's also more the energy footprint as you think about heating and cooling. So we have solar rejection. Also on top of that, we can add color and other applications in addition to heads-up display in your front windscreen, 1 of 2 or 3 in the world that can produce all of that functionality. So obviously, naturally, that's in the higher premium, but that is starting to look at itself into the mid-tier as there's more application and as people look for increasing the standards of their cars.

That's an example of how we can also win and flat to declining markets they've had over the last several years within our Advanced Materials segment. Now on the other side, in the performance films space, that's been impacted by affordability of cars, right? So as we think about people financing that into the car or buying it aftermarket, we've seen some impact here in the back half of the year as the prices of cars seem to continue to rise and that additional option is has been impacted.

Got it. And maybe just in terms of overall, whether it's housing of affordability or auto payments, like we're obviously waiting to see on Fed rate cuts. And so just wondering how you would frame potential cyclical recovery to volumes. If that moves fast enough across any of your businesses and sort of any impact from that environment?

Well, it's -- I'll use the auto example first and maybe built move to B and C right? The up part is approaching 15 years. At this point, in many cases, if we can get interest rates to go down, the price of maintaining, upkeeping an older car with more mileage at the right rates, if you can get them low enough then the breakeven point starts to actually be within vision or that point that someone would be convicted to make the purchase.

So that's one positive in my view, as you think about positive and more auto sales. On the B and C front, our exposure is much more leveraged to existing homes resales. It's a much bigger size to the market. People paint their houses when they put it up for sale, others repaint it when they buy it. That's in the coatings space. And so as you think about on that front and affordability, if rates are key. We rather talk about rates than 50-year mortgages, right? So -- but ultimately what on leases -- the demand we'll see what plays on that.

Yes. That's good. And maybe just like anything on the durable side whether and I'm sure we'll get into sort of the recycled content a little bit later, but just how do you see durables responding like -- how much of that is what do you want to call it, existing home sales adjacent, whether it's large appliances or other sort of large discretionary items?

For us, I think it's more the existing home sales but also you do get it with new builds. I mean both ways people want to upgrade what they have to bring something new or rushing the kitchen, et cetera. For us, it's less about large appliances. You can think about your blenders, your Ninjas, your Cuisinarts, et cetera are either on your countertops or ultimately and the kitchen area.

So as we think about that, also, as you think about with affordability, when that stabilizes or is under control, that then opens up at aperture for more purchases that people are willing to make within those spaces. What we've seen right now, people are even -- it's difficult to introduce a new brand i.e., that's what is, in some cases, slowed down in the durable space, us bringing renewable products to the shelves.

At the same time, we've got headwinds there. We're actually seeing the acceleration in the packaging space of where mechanical recycling is not meeting the fitness for use criteria, and that's being accelerated, and we have demand in '26, that will be growth on top of our 2025 business. So if we can get that on top of unlocking at some level of demand growth above '25, that would be upside to what we've been talking about in our base scenarios.

Understood. And then maybe just on A&FP. I think just you have 2/3 of your end markets there relatively stable year where performance has held up pretty well. Price costs were working according to plan. I mean, can you help us get a sense of if there's some natural normalization in those earnings levels into 2026. And where are you seeing that sort of core stability holding up into the '26 outlook?

Yes. So as I think about AFP, it's a combination of stable markets to highlight 2/3 of personal care, cosmetics. Also as we think about [ Ag], we provide solutions that have cost pass-through contracts that give us that stable margin over time. And we deliver it within the regions that our customers located to their plants in a safe manner because some of the amines products do not transit well, which is also a great business and a great business model.

That, on top of our coatings business, which is we provide high functionality in our products there, whether it's in auto aftermarket or as we think about the B&C, we're actually, in my belief, exposed to more upside in the future versus there's a normalization. Honestly, it's also all the actions that we're taking that aren't controllable of how do we continue to deliver these business models high customer satisfaction and engagement in a manner that's even more cost effective than we have in the past.

We're on track for -- at the company level for $75 million of over cost structure this year. That's net of inflation. And we've been enacting here in the back half of the year, another $100 million that we think will net fall on the bottom line in '26. AFP will actually benefit from that as well. I actually see it as -- it's a great business structure and model. We're leveraged to B and C existing home and new builds on top of getting cost actions and savings to the bottom line there in '26.

And then maybe just in fibers, just understanding there's been some prepositioned inventories in Europe and China to mitigate tariff impacts. And then there were some pretty healthy destocking on the back of that. How can we get confidence that your core volumes there are in that sort of low single-digit secular decline range on a go-forward basis and that we may not just see further industry capacity share shifts from there?

Yes. I mean, sitting here today, we're probably 80% contracted with our multiyears and as well as what we've negotiated to date for 2026. So as I think about that and we think about the types of volume bands that we have. What we see today is the buy and the acetate tow business should be relatively stable year-over-year at those ban levels. Also, as we think about the impact that we've had this year on an earnings basis, roughly 40% of that has been because of our textiles business, the tariffs as well as our broader stream utilization across all the businesses.

So we're already gaining momentum on winning business outside of China as customers move and as we compete in different markets. So that should be a tailwind we can go into next year. Additionally, obviously, it took a while to, I'll call it, streamline how we manage supply chain means and as we think about some of the direct costs that we had in fibers, that will be a tailwind as we can do that more efficiently now that we've got that structured. Along with the other utilization benefit that orders will pick that up as well.

If you've got positive momentum there, you've got stable in acetate tow, and you're going to get the Fibers portions of our cost actions. That's why we believe our base case is that this will be somewhat stable with 2025 as we progress as a base case.

And maybe just a follow-up on the textiles. It seemed like a lot of the tariff impact was here this year, but maybe just comment on how sort of underlying demand environment is as well as adoption for some of your more innovative Naia product as well?

Well, what I would say is, obviously, the supply chain has been a distracting factor to the progress on the Naia growth. But again, that's how we're winning in the new market. So that's also compelling and exciting that we're seeing that momentum. As I think about how we're winning the circular and the aspects of that is a positive appeal and that's why we were gaining the momentum.

So to me, as long as we can get back into stabilization of the supply chain. There are pathways that can efficiently move materials also from going into China and back out of China from a duty standpoint, that can also take advantage of there. So both innovation, now we're getting to more normalized supply chains. I think we will get back to growth trajectory, albeit at the lower point. So it may take a year or 2 to recover fully what we're seeing and seen as an impact in '25.

Got it. And maybe just closing the loop on the businesses with CI. I mean, curious what you -- how you see the next few years in terms of earnings power for the base business there. Propylene chain has been underwhelming to say the least. I think what do you need to see for spreads to improve, start to move towards mid-cycle and you have a lot of self-help on the table, but is there more you need to do in terms of asset rationalization or decisive actions there?

Yes, to me, one, obviously, we've looked at our business, it was a strong cash flow generator as we were building the Kingsport methanolysis facility. Two, we've passed in the past looked at it from a strategic option standpoint. And what we continue to believe is still we need to take the appropriate action. We always have the highest and best owner mindset. That being said, we also are sitting still.

We are making modest investments in the CI business to actually ensure across any margin environment that we raised the floor, and we see $50 million to $100 million type of investment that we can make to take our excess ethylene and convert into propylene and we're doing that and moving that project forward now. So we're positioning it both strategically and in the near term for the best outcome for our customers and our shareholders.

Got it. And maybe just pivoting to recycled content methanolysis facility. How should we think about this 30% that you've announced starting to move a bit into the packaging side of the space? Like -- and I guess is it possible to service the Pepsi contract you have at Kingsport alone through these further debottlenecks?

Well, the first thing is the plant is running extremely well with every turnaround with every, I'll call it, set of improvements that we make based on our earnings. We're more and more confident that we're going to achieve the 130%, and it could lead to even future further improvement.

The optionality that gives us right now and with the plan that we had already made to convert some of the polymer assets, it gives us the ability to ramp up the specialty side, at the same time, prove the circular solution. Obviously, with the Longview project being put on pause, we're still working with the DOE on that. We even modestly received some more cash here in we're not done yet, but we're not -- we don't have a time arise.

That will allow us -- to me, we're in a great position because now we can improve both models and then with the capital pause generate the return and the business model that then gives the confidence in Project 2, 3 and beyond. And we're doing that, obviously, in a tough macro environment. Ultimately, this will be the investment cases for all of us. And we're looking to make that investment case become a reality, but we're doing it in a capital-efficient manner and while we're still filling up those options.

That's what you need to understand is the business model will be sound. The capital velocity will be sound and that we're balancing shareholder returns with that long-term outlook in mind.

I mean it sounds like there's -- I imagine you're a little limited in talking about the options for the second one, but it sounds like there's a little bit of a naturally longer time line just based on the state of the consumer right now, uncertainty with funding environment at this point.

Absolutely, right? I mean the goal is to need the second plant to fulfill our partner contracts and beyond. It's not just, I'll call it, a fulfill one project. That was never the vision. And ultimately, the pause gives us time to do that and ensure economic returns and ensure the business model.

In one case, we're getting positive momentum. And this is due to the mechanical recycling can't fully serve the model. You need circular recycling at a molecular level to get the same attributes. They're seeing it as they be, I'll call it, the molds on the shop floor. They're seeing it as it affects their brand on shelves across many of our packaging partners. And in some cases, it just can't be used as a fully mechanical to meet also the criteria.

So our solution can be brought and blended. It can be brought as the full solution. And what I see is that it lets us do these low capital options as we think about those models, there's polymer assets available in the world. And as we think about combining our technology with that, we will look for the right business model to drive shareholder returns.

And maybe just given the ongoing consumer weakness, like can you give us some color on appetite levels for Tritan Renew, to weather maybe as well as some of the packaging applications into next year? I think obvious pushback has been the lower retail sales volumes, consumer weakness, plenty of uncertainty heading into next year.

What I would say is, I mean, the example is we are not losing customers, right? Substantially all of our customers are still with us. It's just at the velocity that they're introducing new products or they're growing their footprint on the shelf. So to me, that's a testament to the quality, the value that they see and different their brand on the shelf and how we can deliver that solution.

So this is, in my belief, is more about the consumer demand, the discretionary segment. But we're also looking at how do we grow into new end markets. And it's easier to introduce it in a new product in many cases than it is an existing product that's being branded as an example. But we're staying close to our customers. We're investing in those partnerships to make sure that we're ready when they're ready. And we want to hit those windows in 2026. And the positive that we see is that's incremental growth at '26 in the core markets with Tritan and durables on top of the packaging. And any upside, again, we're not going to build that in, and we'll talk more about our base case in January as well for '26.

Got it. And maybe just a follow-up there on the packaging side. Beyond what the macro side, it's generally somewhat more resilient. But in terms of -- you've had one large customer partner go private, does that change the sort of innovation question for them in any way? Has that changed the compensations there with some of your packaging or even perhaps some of your other customers?

I'm not going to comment on specifics. I mean, ultimately, the choice of going private is finding the best solution to do business is my view. And if that enables ultimately, the path of the strategy to be accelerated, I believe as we partner with brands across the spectrum, we look to do business and make their strategy and their model successful.

As you would expect in this environment, I'm sure lots of people are looking at whether it's private or what strategic partnerships are required to be successful to have the most efficient because we all know consumers are stressed right now when it comes to affordability. And I think innovation, though, is critical to our sector because fundamentally basic products are not going to be as highly valued and others can produce them over time.

Got it. And maybe just coming back to CapEx expectations, free cash flow, how that's shaping up for 2026. So I was hoping you could give us some directional puts and takes on operating cash flow, working capital expectations as we frame 2026.

Yes. I think building off of what we said on the conference call for Q3. And we talked about end markets being stable and our discretionaries. And as we think about maybe some modest growth for the stable end markets. Obviously, that with the self-help of $100 million, and I'll just stop there on the cash.

To me, that's a flat to growing cash flow. As you think about before bringing in taxes and everything else. So with that basis, you can think about the dividend is a little bit less than $400 million. So let's use $400 million. And we're starting out at a CapEx of $400 million. So to me, if we're building at $1 billion or flat to building, and then we have $200 million. We're not going to let cash sit, we're going to put that to use. And I think that's the base that we're going to build off of as we think about where are we right now and building for our January call.

And I mean, just for -- it doesn't seem like this 2026 or perhaps in 2027, but is the expectation that CapEx comes back to a more $700 million, $800 million range if you decide to go forward with a second facility methanolysis?

Yes. What I would say is let's start with where we are, right? So we've taken our CapEx and adjusted by over $200 million this year. We're down to $150 million now. That was also on expectations of building a large circular planet had integrated with the thermal batteries. It had energy solutions from a solar standpoint and utilities beyond.

So right, that was a pretty expanded scope, and that was in a partnership. As we think about CapEx, we expect the capital to be at or below the net DOE, right? We're going to reduce the scope. We're going to change the time horizon. So as I think about it as base capital for us will be $350 million, right? In a recession, can we take it more? Absolutely, but $350 million is the base. And so if we're starting at $400 million run rate, let's say, the range is $400 million to $500 million for now for this discussion. We're going to have capital and bandwidth. My view is when we prove out the first, we'll talk about what the capital is in the future, but we can be over the next couple of years, I would say, in the $400 million to $500 million range.

And then maybe just wrapping up with some of your cost reduction efforts, $75 million on track 2025, another $100 million in 2026. You talked about that briefly. But can you just walk through some of these actions, which sites it's may be more concentrated in as well?

I think earlier in the year, you saw us optimize some of our films product lines as we serve and optimize each asset in each region to serve the regions appropriately. Additionally, as we've gone through the year, we've continued to let attrition run ahead. The numbers that we gave to you was almost 7 -- at 7% head count reduction from the beginning to the end of the year, and that's accelerated in the back half. So as we think about the momentum which we're entering the year, much of those actions are behind us, and we'll just continue to let that momentum run ahead.

And I would say those are broad across the company, they are business specific. The asset, the product lines in Advanced Materials, those are business specific. Additionally, we've looked at our MRO and our partnerships with both providers on maintenance, reliability we have turned over contractors. We've gone through a transition this year that, in some cases, added costs.

Next year, that will pay dividends as we've completed the transitions now and both with the contract terms and the efficiency measures and the incentives, that will result in year-over-year benefit. So from I'll call it, structural benefit plans, the headcount, the partnerships, it's across the spectrum in addition to optimizing assets.

Great. Well, that's all the time we have. So please join me in thanking Willie from Eastman.

Thank you. Appreciate it.

Good day, everyone, and welcome to the Third Quarter 2025 Eastman Conference Call. Today's conference is being recorded. This call is being broadcasted 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.

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 closed, we posted our third quarter 2021 financial results news release and SEC 8-K filing, our slides and the related prepared remarks and this is in the Investors section of our website, eastman.com.

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 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.

[Operator Instructions] We will now take our first question from Vincent Andrews from Morgan Stanley.

Mark, could you help us with the bridge to 2026? And 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 million to $75 million of asset utilization? Reversal, but then I'm wondering you're talking about recycling being a good news story next year, but you kind of just mentioned that there will be a revenue lift. So 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're expecting at this point for 2026?

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. And 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 3 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, as 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. And 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. So that's exaggerating the sequential decline.

And the third, of course, is we started the year, I believe, 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. So we had volume that was sort of built for that scenario that was no longer needed as demand was softening more than expected than we had that $100 million asset utilization headwind in the back half of the year relative to the first half. So those 3 things really distort the back half of this year. So 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 should be AM being down around 4% and AFP being down around 2% on a full year basis. Can you sort of start there. When we didn't look underneath that, we think about the stable markets, which is about 1/3 in AM and 2/3 in AFP are going to have sort of low single-digit growth that is just normal from these kind of stable markets. And 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 wars 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, et cetera, you could believe there will 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. So we'll have more volume to sell. And then Fibers, we intend to try and keep that volume stable to this year. So you've got a baseline that's stable, some sort of modest growth throughout the portfolio. And then 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? It starts with the cost reduction, right? So 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 told you we have for next year on top of this year. So 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 million to $75 million range, depending on what happens in the volumes, right? So volumes are flat for more towards the $50 million. Volumes have the modest growth that we're talking about going more towards the $75 million.

And then you've got innovation. That is the center of our strategy, and it couldn't be more valuable as 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 costs. So you'll have a meaningful impact on EBITDA from this year. There will be the normal innovation that we always have in HUD growing and in cars as well as EVs in the interlayers business, our event is gaining traction, Nitextiles recovering, Eastman semiconductor solvents, a lot of places where there's innovation growing and then 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 colescence in architectural markets and interlayers.

And then there's also some places in tariffs helping us like in specialty polyesters and RP in the U.S., the tariff is significant for our competitors to compete in the U.S. And we're following our customers around the world as they're moving out of China. Underneath all of this is our commercial excellence to defend and keep price steady and stable. Only slight declines probably expected, and that it preserves a lot of cash flow. So 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 of that comes together for a meaningful earnings increase under the scenario.

We will move on to our next question from David Begleiter from Deutsche Bank.

Mark, a lot to good things happening at Kingsport. Can you discuss 2 things, the conversion to the RPC capacity, how much is being converted? What does it mean for next year, be the bottlenecking, how much will cost will be on stream? And your plans for this -- the second plant. You mentioned 3 locations. Where do we stand at a long view now off the table?

Those are all great questions. I'm a little limited on how I can answer some of them. But to start with Kingsport. First plant continues to run well. We're still on track to hit our production target. We've had great confidence dealt 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.

So we're really, really excited about what we're learning, what we're doing on that project and 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. So we're not disclosing that number at this stage, but it's not significant. So excited about stretching that plant, getting a lot more value out of it and that giving us more continuous earnings growth where we work on the second project.

When it comes to 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. But as we look towards next year, 2 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. But the RPD is a significant step-up.

So we told you last year that we were -- with adding 80,000 tons of new train capacity, we could take an existing Triton line and switch it back over to making rPET, along with a couple of other lines that we have that are able to do that. So it gave us a decent amount of capacity to make rPET. And we've been really encouraged by several customers, very interested and committed to growing their rPET in different applications. And 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.

And so our product sense is identical basically through the chemical recycling and the purification allows us to provide virgin quality product on the shelf. So we expect a very significant step-up in volume to go good distance in filling up that capacity. And that revenue, which is also at attractive margins, combined with specialty will give us a big step-up in revenue versus where we are this year. And those commitments are close to complete. So we feel very good about where we are on that.

And then when it comes to building the second plant, the great thing about the debottleneck as it gives us time to work on a much more capital-efficient way of building that plant. And it also allows us to do a step-up in capital right now in this economic environment. But we are making great progress on 3 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. So we're excited about that. We're not going to give much more in the details on that. Hopefully, we'll have more to say in January.

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

Yes, the asset utilization headwind turns into a tailwind as you look at Q1, that's one of several factors. You have the normal seasonality of Q4, where demand is just always low, especially in Advanced Materials and AFP. So that snaps back seasonal paint, lots of things being made for holiday season. Just you don't 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 are already talking to us about their plans on buying more volume relative to where they are today. So that's encouraging.

So I think you have that. You also have this exaggeration of 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. And our belief is that there's a good probability that will be fully depleted hopefully, by the end of the year. It's very hard to know we've wondered a lesson about guessing on what happens with inventory depletions back in 2023, but there's a big difference this time, which is in '21-'22, there's a huge amount of inventory built on the expectation of a lot of growth. This year, no one expected a lot of growth. And you can see in the retailer data or the consumer brand data, they didn't build that much inventory. They moved around the planet a lot to get it in the right places to avoid tariff risk, including our products into China and Europe. But they didn't build a lot of inventory. So they don't have that much actually to unwind. So we should get some relief on that as well, we hope.

And then, of course, the revenue we just talked about in methanol is starting to kick in and the rPET really ramps up in Q1, over normal innovation that's always driving some growth. And then 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.

Our next question comes from Aleksey Yefremov from KeyCorp.

Mark, can you just discuss this dynamic was renew your customers seem to be interested in the specialty applications for the polymer, but they're not actually buying the volumes. So how do you gauge their real interest and sort of ability to pay for the price you're charging for renew?

It'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. So that's how any of these -- especially on the consumer durable side of things, think about the value of this content. So there was extreme strong interest in this in '21 into '24 and they saw this opportunity. But the economic determinant of seeing the value and realizing the value depends on the end market and consumer actually being there to buy it.

And 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. I have to remember that building construction demand -- I mean, sorry, consumer durable demand in '24 is probably 5% to 15% below 2019 depending on the product. And it's connected to home sales. If you remember home sales -- all home sales are triggering event for durables, right? And that's down 20% in '24 versus '19 in the U.S. and Europe and China is even worse. So the underlying market of trigger events to buy new products is weak. So in that context, while it's great to see we still have over 100 customers, we won't 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.

Good news is the pent-up demand is accumulating. These appliances are all getting really old for one [indiscernible], and so 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 '22 to now. And the trade war, of course, just made the challenge even worse this year, as I described earlier. So it doesn't change our confidence. If they're really not interested they cut the orders and they're not doing that.

And 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 have some customer destock. Could you just talk about these dynamics, how you see them evolving next year?

Yes, 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? So to your point, textiles, which was a source of growth to offset total market decline up through '24 and have done it nicely, something flipped in 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 mid-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. So -- and it's turning out to be a bit more than we thought. So 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. So that is a real headwind in tech sales.

Now the good news about textile is, this is a cyclical demand change. It's not structural. So when we think about in 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 their product to other markets. And so 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 impacting -- that's the part that's impacting Fibers. We had some higher energy costs that probably doesn't become a tailwind. But the textiles and the asset utilization can reverse and become a tailwind as we go into next year and the following years.

So that takes you to the remainder, which is to 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 and the more we learn on inventory, our customers built in tow is pretty significant due to all the concerns they had about reliability supply when the market was so tight. And now that the market is a bit looser, they're feeling because of the capacity out in China, they're feeling they can take that inventory down. And 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 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. And then there was some share that was -- lost by the industry to the new entrants, and so we're adjusting to that dynamic from China. And so as we look at that, we think that the share situation is stabilizing, destocking will continue, but not get worse. And when you put that together, if we manage our positions correctly in the marketplace, we should have stable volume.

Our next question comes from Patrick Cunningham from Citigroup.

I apologize if I missed this, but on the Pepsi contract, can you remind us in rough terms what the initial agreement looks like? And what is prompting restructuring of that agreement?

So the Pepsi contract was a very important foundational baseload contract to give us confidence in building the second plant. So the volumes, which we've not disclosed due to the confidentiality with Pepsi, is 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 debottlenecking capability. So that contract provided provisions to give us confidence in the revenue that will 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. And that contract was obviously designed around when that second plant would start, which is obviously even back then in 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. So they're one of the companies that certainly see a lot of value in rPET and recycling content. One have high-quality products on the shelf. -- so they're interested in volume next year. And that's -- the restructuring is pulling forward the start of that contract.

Great. And then just at a high level, how should we think about CI earnings next year? You had some asset utilization tailwinds, cost reduction. And is there anything encouraging you're seeing from either trade regulations or perhaps planned asset rationalization that maybe help pull forward an inflection point there?

Yes, it's a good question. I mean, so first of all, obviously, we're in we're in a manufacturing recession across the entire business that started in '22, and we're now in our third -- actually going into our fourth year of being in a recession and there's no precedent in history of this, right? In '09 or 2020, you have a sharp drop and then a sharp recovery and everyone sort of goes and moves on. So it's hard to look at the current situation for present and you also have a lot more capacity out of China being sort of dumped on the planet at very low prices.

So the CI dynamic in the whole commodity industry and 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 is 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. But without a doubt, capacity is coming out of the marketplace. But the market's lose. 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. So 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 the Chinese 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. So 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.

So 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, and that's a mix hit because margins here a lot better than the export markets, which have become very challenged with the Chinese capacity being sort of put on the global market. So recovery in demand on housing, interest rates causing housing recovery and durables recover will immediately start improving the mix and earnings value of CI. So that, I believe, 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. And then we have a lot of aggressive cost structure, as you know, going on and reducing the costs here in this year as well as next year and CI picks up a good portion of that cost. So there are a number of reasons CI earnings can get better, but 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.

Our next question comes from Salvator Tiano from Bank of America.

Yes. So firstly, I wanted to ask, you brought up Fiber as a business that has -- that's facing cyclical and not structural headwinds. And 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 quoting adits or from other players about interlayers, et cetera, that there has been competitive pressure in China. And I'm wondering, are there any chemical change where you are actually seeing more structural supply coming in China and where earnings and volumes could go lower in the next 3 years? And in the case of films or coating additives, is the issue you've been having this year more cyclical or structural?

There's a lot of questions buried in that question. So 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 naive yarn. But 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, and 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 it's -- the microfibers are entirely biodegradable environment, you have a lot of growth opportunities. So we're feeling great about that market and our ability to grow in it.

When you asked a question around where we're losing some share. There is -- 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. And then colescence is a competitive product where the Chinese have equal coalescence. And so competition within China is pretty intense. And so we've walked away for some share there. they're now starting to pick up some share in some other parts of the world.

So those dynamics exist. But 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. And the dynamics by far, in what's going on from '22 through '25 is more about end market volume demand that's associated first with out-of-control inflation that led to out-of-control interest rate hikes to then a trade war just to make things more interesting. So those are the key things that are driving the situation up to this point. And 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 the -- 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?

So what I would say is, obviously, we're always disciplined when it comes to capital allocation. We 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. And what I would say is, as we think about the scenarios that Mark described, obviously, we're confident in our dividend in '26 and going forward. And obviously, we don't let cash sit on the balance sheet, but making sure net debt is aligned with and moving back towards our 2.5x a goal. We'll put the rest of the cash to use. But we'll update you in January on what the range of buybacks can look like.

Our next question comes from Josh Spector from UBS.

I want to go back to the initial questions around the bridge to '26 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 in the second half, but we know you overproduced in the first half. So should we be thinking about that additive to the full year ? Or is that additive to the second half? I think that's kind of the difference between getting to $550 million versus something like $650 million and EPS as a base expectation for 2026. So hoping you can clarify that.

Yes, Josh, this is Willie. So 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. and 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. So 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. and hopefully, upside comes from there to the $75 million depending on how much other demand drops to the bottom line.

Yes. I think just on the underlying volume scenario just for volumes, what I tried to be clear about is don't use the first half or don't use the second half, but put them together and that's 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 the 2% decline in AFP. And so from a volume point of view, you're building off of that volume base into next year.

And then you have the over label things like first question for things micro.

No, I appreciate that. That makes sense. And 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, are volumes actually down in first half in terms of your base thinking and then it's easy comps in the second half?

Well, for sure, the back half is going to be easy comps, so 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? Because 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. There be some modest growth here and there, that would be lowering interest rates at some point. And so 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.

And our whole strategy and volume build and manufacturing is built around that will continue for the rest of the year. That's why things flip so much on destocking. So in the back half. So when you think about that change and how -- and exactly how much of all the inventory is depleted from all this prebuy in the first half and does some of that drag into the first quarter, we just don't know. We're confident Q1 will be better than Q4. It's a little hard to say exactly how it will compare to Q1 of last year. We're going to have to just wait till we get to January to answer that question.

Our next question comes from Kevin McCarthy from Vertical Research Partners.

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?

Well, 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. And they've been a true leader in the industry on this front, and we're proud to have them as our baseload.

And when it comes to the contract, we believe the way the contract is structured, we can reliably supply them from Kingsport into the bottleneck that we're going to get that extra 30% and the different ways we can configure polymer lines to support what they need. So clearly, we want that baseload contract to support our second plant. But with the actions that we've taken, we're in a position to support them from the different existing lines and how they can be configured and the margins are attractive and give us a good return on investment around Renew. So we're happy to support them.

Great. And then as a second question, I think you've raised your dividend every year since 2010. And with the actions you've taken, it looks like you've really supported the cash flow. I think you said approaching $1 billion. So 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?

Well, 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. But we do have a record of 15 consecutive years, and I think that speaks for itself. Also, as you've seen in our most recent dividends, they haven't really significantly impacted the cash flows that are required to ultimately fund the dividend going forward. And we do have a strong cash flow that we would expect in 2026.

Our next question comes from Frank Mitsch from Fermium Research.

And 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. And then in September, Willie indicated that 4Q might be a little bit weaker than 3Q and then, obviously, with last night's guide, things got even weaker. So I'm wondering if you can speak to the pace of activity that you've seen in the past couple of months? And what are your order books suggesting here for November? And how confident can you be that this is the bottom?

That's a good question, Frank. And as you may adjust, we spent a lot of time trying to understand all the market dynamics that we're in right now, and it is a very chaotic time. It's hard to even get high-quality data to know what's going on in the marketplace. And so for doing everything we can to understand it. The dynamic, whether from the Q2 call to September to now and 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. So it really is just a question of end-market demand and how it's trending. And 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 the -- 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, et cetera, in China, that was bought ahead of potential risk on those retaliatory tariffs getting worse or et cetera.

So we don't know exactly how long that's going to take. Clearly, with the way the order patterns have evolved, where we thought it was going to be relatively short back in July, is dragging out through the back half of the year, but it's -- 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. So there's a limit on just how much they can do this. But it depends on where consumer demand goes.

So all those dynamics are in play. And the fourth quarter is always a wild card, especially as you go through the quarter. October even as expected. So we feel good about that. And 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. So that's encouraging. But it's way too early to call exactly how this is going to play out from a precise timing point of view.

Okay, understood. And you did mention that you're becoming a little bit more aggressive on the cost reduction front. You announced the 7% head count reduction. Can you talk to the to the locations, geographies and how much of that is embedded in that $175 million in cost cuts that you're expecting between '25 and '26?

So 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 '25 and '26, both offset some of the declines in fibers and our chemical intermediates that may not be recovered. And 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. And 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 3 core areas. It's effectively productivity, it's also being competitive on both the manufacturing and functional standpoint. And 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. So 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. So 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%. And that also was compounded with the impact of retirements that both happened at Eastman as well as across the chemical sector have a lot of knowledge. So this is not just normal productivity of offsetting labor, it's going above and beyond to recapture productivity more broadly. And 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. And the example that we optimized here in Q3 with the announcements 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. So we will continue to transform how we do maintenance, also how we think about reliability and you've got to have the right partners. So we've gone through transformation this year of changing out partners across a couple of our large assets, both here in Tennessee and Texas.

And as you think about, we're getting that benefit run rate 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. And 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 and 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? We're -- 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. So those are a spectrum. We're rightsizing the costs so that we can invest in innovation for the long term, and we're on track to deliver both here in '25 and in '26.

Our next question comes from Mike Sison from Wells Fargo.

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 5 years or so, do you think you didn't make any changes? The results granted unprecedented times has been difficult. So when you think about things to do, to improve the portfolio, any thoughts there?

Mike, thanks for the question. So 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.

So we fundamentally believe that strategy is the correct strategy, and we've now added on a much more aggressive cost management program to go with it, right? So 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. So that concept, that strategy allows us to get our normalized EBITDA back towards what we talked about since the deep dive in November, and we're still operating on that strategy. But -- and 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. But if you go back even further, we demonstrated a willing to really convert our portfolio to be specialty. So 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 solution, Taminco and some bolt-ons to really change the quality of our portfolio in a pretty dramatic fashion. So we know how to do M&A. We know how to do integrations. We know how to buy assets at a rational price. So we're always thinking about these kind 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. So of course, we are thinking about how our portfolio should evolve in this context. But I mean, we're not going to see more than that.

Yes. And then in terms of the -- a 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's still fairly similar? I mean we need some volume to get there?

Well, I think that without a doubt, volume is the story and the challenge that we've had since 2022, and we need volumes to stabilize. We just need economy 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. They try and gain share and win. So volume, not just from the market, but from innovation accelerates.

The cost reductions that we're doing that Willie just start significant and lower our cost structure in a material way, a lot of that is being masked this year because of the $10 million sequential headwind of utilization that we've encountered in managing our inventory because the world didn't grow as expected. And so you can't really see the cost benefits this year. But as you move into next year with the volumes, if we're in a scenario where volumes are stable to this year, economy is stable, you get the acceleration of all that cost cutting as well as that utilization tailwind kicking in. So you do get a benefit from volume, but you also get a benefit from leveraging a much more competitive cost structure.

And it's important to keep in mind that a lot of that headwind that we've encountered with volume this year because we are -- had 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.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

Most of my questions have been answered. I guess I 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?

So 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 may PET got competitive, we moved into a whole set of co-polyesters 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 lines the first PT line, we've added in decades because we're constantly valuing up the asset bases we have. Same is true in interlayers, whether it's a standard interlayer to when that had acoustic, that the one that has hit, et cetera. So this idea of optimizing our asset base to drive returns and move to higher ground is embedded in our strategy forever. So there's always places you're making where you look at some of the lower value products and replacing them with higher-value products and upgrading mix. We have lots of charts we've shown you in the past Investor Days on how that's worked. And we're always doing that.

But right now, with the market being soft, the other value of some low-value applications is asset utilization and running the assets full. So you want to make sure you're always keeping that balance in place. And with all the drama we've been through in the end markets, we've freed up some capacity just because demand is off and so we're trying to reassert and add some of the lower-value applications back into the mix to drive asset utilization. Then as the economy recovers, we'll value up that mix again like we always do.

Our next question comes from John Roberts from Mizuho.

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? And do you expect any differentiated marketing around renewing bottles?

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 a bottle and it 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 in the rPET 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%. And then you have products that, in some cases, might be lower. But somewhere on average, I'd say, when you look at somewhere in the 50% to 75% range is sort of where the recycled content will land. But 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. And then as the economy stabilizes, they'll start ramping up to a higher level of recycled content when they have better economics to afford it.

Our next question comes from Duffy Fischer from Goldman Sachs.

We've had a number of announcements from your Ag chem customers about difficulties you'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 which are going to affect you and cause you to have to change your business model there?

Yes. 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 list products. So 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 the tariffs, of course, to get in the U.S. are sort of helping manage some of the pressure here. So I think we feel relatively good. We're not having any conversations with our customers at this point, at least on where they're concerned about their position in North America.

Great. And then as you've seen some weakness in your downstream tow business and the textiles business, 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. So a long time ago, we knew that demand would not be forever there for tow. We've been lucky that it's declined at a relatively slow rate. But 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? So textiles was 1 of those applications, which was doing its job to sort of offset that. So as I said earlier, but the event program is still having great progress going forward. This is the foamed silos polymer that can replace expanded polystyrene food trays, going to straws, et cetera, and all these food service areas where you can't really do recycling because of the way the product is contaminated and completely biodegrade. So we have a lot of growth opportunity in huge markets, an event that we can serve, and we've got some great IP positions around some of those products.

And 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. We can replace polyethylene coating on paper cups and paper wrappers around any bars, whatever, the biodegradable polymers. So our whole portfolio is in action. Obviously, the volumes are still relatively low and building, but we have great traction with our customers. So that's how you drive overall company stream utilization because the stream has always gone into specialties in AM and AFP as well as to and generate a lot of value in those segments. And we're going to keep growing and expanding through those to keep the whole stream vital.

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

The last question comes from Laurence Alexander from Jefferies.

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 '27 and '28. I'm just thinking about the Louisville announcement and things like that.

And secondly, with the Chinese 5-year plan is your initial read on the kind of first draft being circulated, that it's a net positive because they need -- they're emphasizing innovation in 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?

So on the reshoring question, I think that you will see people reshoring to the U.S., and we'll see the benefit of that. There are companies that have been leaders in doing that, like Whirlpool and Newell. And I think after all this pre-bought inventory that have in the first half gets exhausted, they'll see benefits to their position in the U.S., and we'll see more of that. If USMCA gets preserved. I think you'll 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. So we're following our customers wherever they go. But it takes out bill plans. It doesn't happen overnight. So we'll see how that plays out over time.

Regarding the latest Chinese 5-year plan, I have to admit I'm not an expert on that plan. So I don't want to get into territory of details. I don't really know. What I would say is, from what we see in the China market is uniquely challenged as part of the global challenge where they don't have consumer demand growing very much there because of the stress of the collapse of the housing market. and they're adding a lot of manufacturing capacity and aggressively exploring it. And that's creating strain in the country and it's also creating a strain around the world, which is leading to these tariffs that you start seeing happen not just here, but you're going to see them in other countries.

So 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 economy. And hopefully, some of the actions they're talking about to sort of rationalize capacity to be more appropriate that they actually do, but we're 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.

Thanks again, everyone, for joining us. We appreciate you taking time.

Thank you, and welcome. I'm pleased to introduce our next fireside chat, which is with Eastman Chemical, and we are thrilled to have the Chief Financial Officer, Willie McLain, with us today. And before we get started, I'm going to read some important disclosures and invite you to see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures and advise you that if you have any questions, you should please reach out to your Morgan Stanley sales representative with those questions.

And with that, we can begin the fireside chat. And Willie, what I thought we'd do is maybe you could walk us around the world a little bit and just talk a little bit of how current business conditions have been trending versus where we were about a month ago when you reported the quarter.

Okay. Great, Vincent. I appreciate being here again this year. And as we think about where we are in the quarter, right, what I would highlight is the consumer and customer confidence is still challenged, both from an economic lens as well as we think about the current trade environment. And that's being reflected in the order books.

The visibility in the order book is a couple of weeks at best at this point. And as you think about a more normal or stable environment, that would typically be about 6 weeks. So customers right now are buying smaller quantities more frequently. As you think about what we had outlined is we expected progression through the quarter on the order books.

And the way I would summarize it right now is we're a little bit behind in the order books, and maybe I can go end market by end market. So as you look at the automotive, we had guided that second half would be below first half. And I would say that's actually performing a bit better than we had expected. And Q3 looks a lot like the first half.

As I look at the durables market, I would say that's lagging a little bit compared to our expectations. It's a little slower based on the momentum that we're seeing today. And building and construction, what I would highlight in the last discretionary market for us is it's basically stable, but it's stable at current low levels.

Obviously, we're doing everything that we can in the quarter on the cost front as you take that into account. Also, I would highlight that our Chemical Intermediates, the margins there are probably a little bit behind as well. So taking that cost actions to offset as much as possible the demand as well as the spreads in chemical intermediates.

Also, as we think about September, it's always important in the quarter to achieve the full results and our businesses are focused on closing out the quarter strong. But as we summarize that and take it all together, I would expect Q3 to be a bit lower than the approximately $1.25 for the quarter.

While we can't -- as we talked about, have a little bit of low visibility, as we think about Q4, we can give some directional comments. As we think about Q4, we should have positive tailwinds with reduced impacts from both utilization as we're taking inventory actions here in Q3 and also as we have reduced planned maintenance into Q4.

As we look at Q4, typically, primary demand is lower compared to Q3, and we think that's going to -- more than offset the tailwinds that we're seeing sequentially. So in Q4, the way I would summarize it is, we're going to be slightly below our Q3 expectations sequentially.

Okay. And just to clarify a few things there. Are there incremental actions that you're now taking at this stage in the quarter, Q3 that will carry into Q4? Is that what you were saying?

So what I would say is, obviously, we're doubling down on making sure that not only the cost actions that we've implemented to more than offset inflation and deliver the $75 million of net benefit. We are taking shorter-term actions, as you would expect in this environment. But I would say those are not structural. It's just more to offset the impacts of reduced demand.

Obviously, we're focused and have pivoted to cash and cash is critical as we're driving towards that $1 billion of operating cash flow this year. So I would say those are the key highlights.

Okay. And just on the durables and the building construction, I mean, I think we all see the building construction data, and it's been a soft third quarter to say the least. I think that's easy to understand. I would assume durables is sort of part and parcel of that because if B&C isn't happening, there's less incremental durables demand as a function of that? Or is it related to something else?

No, I think you've drawn the connection that I would make. I would highlight there's a strong correlation with the building and construction. I would also say existing home sales. A lot of our durable sales are connected to existing home sales and turnover. So as we think through those lenses, we get the benefit of when sellers paint the houses as well as the buyers repaint.

And when the buyers come in, they're upgrading their durables. And in our case, that's typically more small appliances that you would find in the kitchen and other areas of the home.

Okay. But maybe just one last piece on this. I think it was a few weeks ago that court came out and said that the President Trump's tariffs were not -- they overruled them right now, they got to go to the Supreme Court. Did that ruling change at all the order patterns of your customers, good bad or indifferent? Is that a factor in this at all? Did it create any more uncertainty?

It is creating, I'll call it, a heightened level of uncertainty, and I'll draw comparisons, right. There was pull forward into Q4 compared to Q1. Again, as we had April 2, there was timing at the implementations of trade and trade, I'll call it, agreements with our partners. Here again, there's that opportunity for supply chains to optimize.

I think all companies with interest rates still at high levels are focused on the incremental cost. So there are those choices as people finish the year that they're making -- do you have it in inventory? Are you going to be able to sell it this year.

Okay. So it sounds like customers are also shifting to working for cash as well. Okay. Are there any areas -- this is a question that's come to me a few times since you reported the second quarter, where within any of your segments or businesses where you're losing share, are there any structural changes taking place that are also having a negative impact on 2025?

So as I think about share and as you think about an innovation-driven growth strategy, I would highlight that upgrading mix and volume is key to our success as we think about Advanced Materials and Additives & Functional Products. Actually, as we look out and benchmark ourselves every year to our peers, we would actually say that we've outgrown in the volume mix compared to our specialty peers in both Advanced Materials.

But I would say even in Additives & Functional Products with our stable end market, it's been in line with peers. So why is that? I would highlight an example would be as we've gone from PET to copolyesters to Tritan to Tritan Renew. And now we're actually even working on next generation copolyesters that can move us up the pyramid.

The pyramid is focused on temperature, chemical resistance clarity. And now we can bring recycled content and potential higher across those 3 factors with a new technology. That's how we continue to upgrade. Now that's taking us to higher ground. So obviously, those lower value applications, you're giving some of that up.

And we're doing that also in interlayers and performance films and across the Additives & Functional Products. Where we've actually made choices to give up volume, I would call it, is in our chemical intermediate space.

There, you've seen us, I'll call it, shut down our Singapore facility. You saw us divest our Texas City facility and continuing to value up what's important to the portfolio of taking action when action is required.

Maybe just closing the door on '25 and starting to think a little bit about '26. Maybe just let's finish up '25 on cash flow. You gave us some wide brushes on what Q3 and Q4 will look like. But you also mentioned, obviously, the pivot after 2Q to managing for cash and running the business to generate cash this year.

Does what's taken place so far in the third quarter and the sort of follow through into 4Q, does that impact the cash flow number you're going to get to? Is that going to come down a little bit as well? Or do you still think you can manage to that cash flow number?

Well, we still have our eye on delivering $1 billion and taking every action that achieves that. What I told the team is we need to leave every action on the field to deliver that because at the end of the year, we need that momentum for cash into '26 at this point in time. So higher cash earnings. Obviously, that's moderated with part of our guidance update.

But as we think about working capital and achieving those outcomes, we're still highly focused on doing what it takes.

Okay. And then as we think into '26, I mean, maybe my first question would just be, because '25 or 2H '25 have come in a little bit shorter than what you thought at 2Q, are you -- will you be done with the inventory normalization and the asset utilization reductions by the end of '25? Or will some of that have to continue into '26 now?

My expectation is we'll be substantially complete with the actions that we're taking to deliver greater than $200 million, we'll take our DIO from roughly $105 million at midyear to somewhere around, I'll call it, approaching the 90-day. There's obviously, I'll call it, a level of efficiency that you can gain as economic recovery, but I think that is at a good position.

As we think about '26 in the back half, I would also highlight that some of the actions you can't annualize the back half. So first, we're taking $75 million to $100 million of impact from the inventory actions. So in a '26 environment, at a minimum, we would expect to get $50 million improvement if it's at second half levels. If it actually is at first half levels, that could approach $100 million. So as I think about baselining and normalizing, you've got $50 million to $100 million depending on your demand environment.

Additionally, we've been working through this year to implement another $75 million to $100 million of cost actions above inflation. You can think about those being focused in our operating disciplines as you think about third-party purchases and our indirect materials and our MRO. Additionally, we have been RFP and looking at the partners that we want to go into the future with as key contractors at our major operating sites.

So that's on the operating front, and that structural change where we're making fixed cost variable or in some cases, lowering those contractor partnership costs. On the commercial front, we're looking at what should be done in our segment and division levels versus the enterprise and looking to continue to optimize and honestly take advantage of digital investments that we've made in our commercial processes.

So that applies also to the functions in the back office. So we continue to believe that we can take technology, our one platform of having a global ERP system and transforming that into effective and efficient processes.

Okay. And you did mention before that Chemical Intermediates, the margins were coming in a little bit below. I think there -- we were thinking, I think, before that there was going to be a benefit year-over-year of CI in '26 over '25, just I think you had some outage issues in '25 that ideally won't repeat in '26.

But is it the case now that the spread levels are going to come in at a lower level in the back half that that's going to chew away maybe some of the benefit of not having the outages in '26 or?

What I would say is there's a couple of factors that are in play as we think about maybe more of the -- I'll start at the macro and then go through the segments and get to your CI. So one is what is the fundamental market momentum. We're sitting here with the Supreme Court taking up the tariffs. On top of that, we're seeing the jobs reports and okay, does that lead to interest rate and the rates starting to decline.

And if that decline is either in bigger tranches, i.e., instead of 25, you get a 50-basis point and what is the velocity that this takes place. So under those backdrops with our -- the background of the cost savings and the normalization of fixed cost with inventory, we actually see our Advanced Materials business growing on a year-over-year basis as we think about our methanolysis investment and growing in the durables, and we've also highlighted accelerating momentum in packaging.

They'll also get the cost benefit from both utilization and our fixed cost actions. So as I look at that segment, it could approach, I'll call it, the 2024 EBIT levels. And Additives & Functional Products with that backdrop, I could see the stable end markets, which is roughly 2/3 of it. You've got our ag business, water treatment, personal care and also our exposure to the building and construction with declining rate.

I see that being stable and improving from a year-over-year growth. I'll have [indiscernible] next, so I can get specific to your question. A lot of chemical intermediates is exposed to North America and that North American footprint. 70% of our exposure is to North America with most of our assets sitting here.

So we've got that exposure to nat gas and NGLs, and we've got one of the lower cost positions as we compete on a global basis. So as tariffs get clarified and less of that is imports of products that are getting impacted by trade and tariffs, we actually think that, that can help the North American footprint.

And then as you continue to have capacity being taken out in Europe as well as Asia broadly, Korea, also as we think about China and what they're doing with aging assets. That could ultimately stabilize and improve pricing because right now, they've been putting product that we believe is at below cash margins. That's not sustainable in any environment, and that should be improving on the CI front.

So margins in that case should improve. They may be improving from a slightly lower starting point is what I would say.

So CI would clearly be the segment that would benefit the most from anti-involution or what South Korea is doing. But are there any collateral consequences downstream to AM or AFP if some of these raw materials get more expensive?

I would say from AM and AFP, most of our competitors are in Japan or they're in South Korea. We're not competing with products with multigenerational technologies in those 2 segments.

Okay. Why don't we shift to methanolysis. You've had the plant running since March of last year. You've kind of worked out all the kinks in it. It's been operating at very high levels, I think, since November of last year when we were all down in Kingsport, which is great. We're coming up on a year of that. So you've been seeing the benefit of the improved operations and fixed cost absorption. Maybe the revenue hasn't been as accelerating as fast as you'd like. So how do we think about the phasing now for this plant to get to, I think, the original target for EBITDA generation was about $200 million.

Is that a '27 event? Is that a '28 event? When do you think we can get there?

Great. Thanks for the question. What I would highlight is, as we think about the commitments that we made here in 2025, right, incremental EBITDA of $75 million. And what I would say is we're on track to achieve that. The first $25 million was in Q1 of this year as we removed the costs that were associated with the start-up and have ultimately taken that cost out of the company and/or it's being included in normal operations.

The additional $25 million was going to be spread across the year on the cost front, and we're achieving that. So the maintenance cost, the cost of operations of this facility continues to be refined, and we're taking that cost out of the company as well, and we're getting the utilization benefit. So on track for the $50 million of cost.

As you referenced, the key factor as we think about going forward is about revenue and revenue growth. In the environment that we've just discussed, it's been tougher for our partners to introduce new products as consumers and their customers are concerned about inflation and new product launches going on to the shelf in this environment.

What I would say is we're still winning with those customers. There has been very minimal impacts of not moving forward with customers. So we're continuing to advance on product trials on getting specs in so that when new product launches occur, that we are ready in those durable markets and other markets as we try to grow into medical, cosmetics and personal care.

The positive thing is, I would say, while those are a little slower on the packaging front is we're gaining momentum. So we both have these bottles up here today. And what's becoming more and more evident is that in the packaging space, using, I'll call it, a broad spectrum of feedstock is leading to degradation in the finished products and the fitness for use for mechanical recycled products.

It's also impacting the brand value on the shelf. So as you think about the discoloration, whether it's graying or yellowing of a product on the shelf with a quality brand, they do not want to have that occur. So we're gaining momentum with large packaging, including Pepsi as we think about using the chemical recycling that has the advanced ability to also purify to a level that you can't tell the difference between fossil fuel, which is -- this is what this is, is highly purified fossil fuel and bringing that back to the shelf.

Also, there's applications that we're finding with our brands and partners that they can't use mechanical. It fails in the process. And what's even worse is when it fails in the process as they're producing their products. So that leads to waste, it leads to yield issues. And in many cases, there's a market that's being -- that's emerging that is only the high-quality clear and it's specially segregated, and that's driving premiums into the market because of the cost it is to get to that level of purity through mechanical recycling.

So that's positive from the momentum as we think about the circular solution profile going into the future. And as we think about the mix upgrade that we'll be focused on in the coming quarters around durables replacing packaging and then packaging leading and already having a robust profile for the next facility.

Does -- I think it was this week that the PET imports were taken off of the tariff exemption list. Does that have any immediate impact to the business or any change in your thought process there about how to market some of the more commodity grades?

Well, first and foremost, it was interesting that I think it was 3% of the PET market is what drove the exemption. So we advocated for this outcome along with other partners. And we think that's right for developing a regionalized and an economy that is focused on recycling versus bringing content in that's been potentially mechanically or otherwise recycled in the rest of the world.

So those fundamentals are supportive and conducive with those tariffs having to compete against domestic produced and recycled content. So the short answer is yes. I think it takes time. Obviously, we're advocating, and we need, I'll call it, more certainty on overall tariffs and that we can move forward and that this is sustained as we go through the next set of milestones as this is reviewed both with the Supreme Court and other freight.

And then from an overall capacity perspective, I guess there are 2 lines. One is that at 2Q, you mentioned that you sort of found a way to debottleneck at this point, the first Kingsport plant and maybe add about 30% capacity there over time. And then you're obviously still contemplating a second facility in Texas, still maybe trying to work on the DOE grant getting that to come back to life. Are there any updates there on the thought process?

What I would say is, obviously, as a CFO, you want the ROI and the cash velocity. So ultimately, when we did the rate test of our Kingsport facility, we identified the bottlenecks within the process and saw that there was not only 30%, but the potential for more. That's exciting as we think about taking this to scale and as we think about two different business models, one for advanced materials and the specialty growth, the other for, I'll call it, circular packaging and a circular set of solutions.

So as we think about the DOE and the DOE grant, what I would say at this point, obviously, we're advocating to get fully reimbursed for the contractual obligations, which is, I'll call it, in the $30 million to $35 million. And we've gotten roughly $25 million of that so far.

But since they canceled the project, obviously, we're advocating for more as we go through that political process. Also, as we look at how can we take the technology that we have with methanolysis and combine that with infrastructure and/or polymer lines that have been impacted by the ongoing amount of material coming out of Asia and China, along with trade, how can we find a set of solutions.

So we're also looking at alternate sites along with Texas of how can we optimize and actually come to a capital that's somewhere between the DOE level and the Kingsport level as we think about the circular solution model going forward. The teams are working on that. We'll update you as there's more of details and milestones with that.

But obviously, as we think about being forced into a situation where trade is being impacted, the DOE is looking at how does it -- or the government is looking at how does it pay for the tax. Bill. Now this is forcing us to be creative, which is what the Eastman team does each and every day.

And I think this will lead to even more capital efficient with the expansion of methanolysis and the scale that we can build it on the initial conception, along with assets that are being impacted by the global environment.

Okay. And then I think the only segment we didn't touch on at all in past or present was Fibers. So is there any update on how that's progressing for the third quarter? And then maybe just help us understand the bridge into next year, just given there were some tariff-related interruptions this year and some new capacity. So will that even itself out next year? Or how should we think about it?

Thank you for the question. As we think about Fibers in 2025, I'd highlight that roughly 40% of the impact this year has been related to our textiles business. So textiles has ultimately been impacted by trade and tariffs as well. On top of that, we've been impacted in a year in which we expected growth with April 2, that has further impacted the demand for textiles overall.

Additionally, and that's been roughly $20 million plus that we expect on a full year basis. Also, as we think about our cellulosic stream and the acetyl stream overall, the impacts on the utilization, roughly $20 million of that is flowing into the fibers business downstream.

Also, as we think about 2024, the benefits of lower natural gas turning into higher natural gas this year, the cost pass-through contracts, that's about a $10 million to $20 million headwind as well. So we think that obviously will stabilize and will come back as we grow with our customers, both in Asia and as they move their production to different locations. And we think that can come back in the nearer term.

In 2026 in acetate tow, what I would say is on a year-over-year basis, we expect less impact from destocking. This year, they couldn't complete it all because of our contract and contract structures. But we do expect that, that's coming to a close also as we're seeing the additional capacity from Asia being fully absorbed into the market.

So the takeaway as we take the cost actions, we get the utilization benefit back and some growth in textiles in the near term, in the medium to longer term, we also have our growth projects like with Aventa that is gaining momentum. We look to stabilize the fibers business at that $300-plus of EBIT level in '26 and beyond.

Okay. Great. I think we'll leave it there. Thank you so much, Willie.

Okay.